Operationsmanagement PDF

Chapter 1-17
Operations Management
Roberta Russell & Bernard W. Taylor, III
Organization of This Text:

Part I Operations Management
Intro. to Operations and
Supply Chain Management:
Quality Management:
Statistical Quality Control:
Product Design:
Service Design:
Processes and Technology:
Facilities:
Human Resources:
Project Management:
Chapter 1 (Slide 5)
Chapter 2 (Slide 67)
1 -2
Organization of This Text:

Part II Supply Chain Management
Supply Chain
Strategy and Design:
Global Supply Chain
Procurement and Distribution:
Forecasting:
Inventory Management:
Sales and
Operations Planning:
Resource Planning:
Lean Systems:
Scheduling:

1 -3
Learning Objectives of
this Course
Gain an appreciation of strategic importance
of operations and supply chain management
in a global business environment
Understand how operations relates to other
business functions
Develop a working knowledge of concepts
and methods related to designing and
managing operations and supply chains
Develop a skill set for quality and process
improvement
1 -4
Chapter 1
Introduction to Operations and
Supply Chain Management
Lecture Outline
What Operations and Supply Chain
Managers Do
Operations Function
Evolution of Operations and Supply Chain
Management
Globalization and Competitiveness
Operations
Strategy and Organization of the Text
Learning Objectives for This Course
1 -6
What Operations and

Supply Chain Managers Do
What is Operations Management?
design, operation, and improvement of productive

systems
What is Operations?
a function or system that transforms inputs into outputs of

greater value
What is a Transformation Process?

a series of activities along a value chain extending from

supplier to customer
activities that do not add value are superfluous and
should be eliminated
1 -7
Transformation Process
Physical: as in manufacturing operations
Locational: as in transportation or
warehouse operations
Exchange: as in retail operations
Physiological: as in health care
Psychological: as in entertainment
Informational: as in communication
1 -8
Operations as a
Transformation Process
INPUT
Material
Machines
Labor
Management
Capital
TRANSFORMATION
PROCESS
OUTPUT
Goods
Services
Feedback & Requirements

1 -9
Operations Function
Operations
Marketing
Finance and
Accounting
Human
Resources
Outside
Suppliers
1-10
How is Operations Relevant to my

Major?
Accounting
Information
Technology
Management
As an auditor you must

understand the fundamentals of
operations management.
IT is a tool, and theres no better
place to apply it than in
operations.
We use so many things you
learn in an operations class
class
scheduling, lean production,
theory of constraints, and tons of
quality tools.
1-11
How is Operations Relevant to my

Major? (cont.)
Economics
Marketing
Finance
Its all about processes. I live

by flowcharts and Pareto
analysis.
How can you do a good job
marketing a product if youre
unsure of its quality or delivery
status?
Most of our capital budgeting
requests are from operations,
and most of our cost savings,
too.
1-12
Evolution of Operations and

Craft production
process of handcrafting products or

services for individual customers
Division of labor
dividing a job into a series of small tasks

each performed by a different worker
Interchangeable parts
standardization of parts initially as

replacement parts; enabled mass
production
1-13

Supply Chain Management (cont.)
Scientific management
systematic analysis of work methods
Mass production
high-volume production of a standardized

highproduct for a mass market
Lean production
adaptation of mass production that prizes

quality and flexibility
1-14
Historical Events in
Era
Industrial
Revolution
Events/Concepts
Dates
Originator
Steam engine
Division of labor
Interchangeable parts
Principles of scientific
management
1769
1776
1790
James Watt
1911
Frederick W. Taylor
Time and motion studies

Scientific
Management Activity scheduling chart
Moving assembly line
1911
1912
1913
Adam Smith
Eli Whitney
Frank and Lillian

Gilbreth
Henry Gantt
Henry Ford
1-15
Operations Management (cont.)
Era
Human
Relations
Operations
Research
Events/Concepts
Dates
Originator
Hawthorne studies
1930
1940s
1950s
1960s
1947
1951
Elton Mayo
Abraham Maslow
Frederick Herzberg
Douglas McGregor
George Dantzig
Remington Rand
1950s
Operations research
groups
1960s,
1970s
Joseph Orlicky, IBM

and others
Motivation theories
Linear programming
Digital computer
Simulation, waiting
line theory, decision
theory, PERT/CPM
MRP, EDI, EFT, CIM
1-16
Era
Events/Concepts Dates Originator
JIT (just-in-time)
TQM (total quality
management)
Strategy and
Quality
Revolution operations
Business process
reengineering
Six Sigma
1970s
1980s
1980s
1990s
1990s
Taiichi Ohno (Toyota)

W. Edwards Deming,
Joseph Juran
Wickham Skinner,
Robert Hayes
Michael Hammer,
James Champy
GE, Motorola
1-17
Era
Events/Concepts
Internet
Revolution
Internet, WWW, ERP,

1990s
supply chain management
E-commerce
Dates Originator
2000s
Globalization WTO, European Union,

1990s
and other trade
2000s
agreements, global supply
chains, outsourcing, BPO,
Services Science
ARPANET, Tim
Berners-Lee SAP,
i2 Technologies,
ORACLE
Amazon, Yahoo,
eBay, Google, and
others
Numerous countries
and companies
1-18

Supply Chain Management (cont.)
Supply chain management
management of the flow of information, products, and services across

a network of customers, enterprises, and supply chain partners
1-19
Globalization and
Competitiveness
Why go global?

favorable cost
access to international markets
response to changes in demand
reliable sources of supply
latest trends and technologies
Increased globalization
results from the Internet and falling trade

barriers
1-20
Globalization and
Competitiveness (cont.)
Hourly Compensation Costs for Production Workers

Source: U.S. Bureau of Labor Statistics, 2005.
1-21
Globalization and
World Population Distribution

Source: U.S. Census Bureau, 2006.
1-22
Globalization and
Trade in Goods as % of GDP

(sum of merchandise exports and imports divided by GDP, valued in U.S. dollars)
1-23
Productivity and
Competitiveness
Competitiveness
degree to which a nation can produce goods and

services that meet the test of international
markets
Productivity
ratio of output to input
Output
sales made, products produced, customers

served, meals delivered, or calls answered
Input
labor hours, investment in equipment, material

usage, or square footage
1-24
Productivity and
Measures of Productivity
1-25
Productivity and
Average Annual Growth Rates in Productivity, 19951995-2005.

Source: Bureau of Labor Statistics. A Chartbook of
International Labor Comparisons. January 2007, p. 28.
1-26
Productivity and
Average Annual Growth Rates in Output and Input, 19951995-2005

Source: Bureau of Labor Statistics. A Chartbook of International
Labor Comparisons, January 2007, p. 26.
Dramatic Increase in
Output w/ Decrease in
Labor Hours
1-27
Productivity and
Retrenching
productivity is increasing, but both output and input

decrease with input decreasing at a faster rate
Assumption that more input would cause

output to increase at the same rate
certain limits to the amount of output may not be

considered
output produced is emphasized, not output sold;
sold;
increased inventories
1-28
Strategy and Operations

Strategy
Provides direction for achieving a mission
Five Steps for Strategy Formulation

Defining a primary task

Assessing core competencies

What qualifies an item to be considered for purchase?

What wins the order?
Positioning the firm

What does the firm do better than anyone else?
Determining order winners and order qualifiers

What is the firm in the business of doing?
How will the firm compete?
Deploying the strategy

1-29
Strategic Planning
Mission
and Vision
Corporate
Strategy
Marketing
Strategy
Operations
Strategy
Financial
Strategy
1-30
Order Winners
and Order Qualifiers
Source: Adapted from Nigel Slack, Stuart Chambers, Robert Johnston, and Alan
Betts, Operations and Process Management,
Management, Prentice Hall, 2006, p. 47
1-31
Positioning the Firm

Cost
Speed
Quality
Flexibility
1-32
Positioning the Firm:

Cost
Waste elimination
relentlessly pursuing the removal of all waste
Examination of cost structure

looking at the entire cost structure for

reduction potential
Lean production
providing low costs through disciplined

operations
1-33

Speed
fast moves, fast adaptations, tight linkages
Internet
conditioned customers to expect immediate responses
Service organizations
always competed on speed (McDonalds, LensCrafters, and

Federal Express)
Manufacturers
time-based competition: buildtimebuild-toto-order production and

efficient supply chains
Fashion industry
two--week designtwo
design-toto-rack lead time of Spanish retailer, Zara
1-34

Quality
Minimizing defect rates or conforming to
design specifications; please the customer
Ritz
Ritz--Carlton - one customer at a time
Service system is designed to move heaven

and earth to satisfy customer
Every employee is empowered to satisfy a
guests wish
Teams at all levels set objectives and devise
quality action plans
Each hotel has a quality leader
1-35

Flexibility
ability to adjust to changes in product mix,
production volume, or design
National Bicycle Industrial Company

offers 11,231,862 variations

delivers within two weeks at costs only 10%
above standard models
mass customization:
customization: the mass production of
customized parts
1-36
Policy Deployment
Policy deployment
translates corporate strategy into measurable

objectives
Hoshins
action plans generated from the policy

deployment process
1-37
Policy Deployment
Derivation of an Action Plan Using Policy Deployment

1-38
Balanced Scorecard
Balanced scorecard
measuring more than financial performance

finances
customers
processes
learning and growing
Key performance indicators

a set of measures that help managers evaluate

performance in critical areas
1-39
Balanced Scorecard
Balanced Scorecard Worksheet
1-40
Balanced Scorecard
Radar Chart
Dashboard
1-41
Operations Strategy
Services
Products
Capacity
Facilities
Human
Resources
Sourcing
Process
and
Technology
Quality
Operating
Systems
1-42
Chapter 1 Supplement
Decision Analysis
Lecture Outline

Decision Analysis
Decision Making without Probabilities
Decision Analysis with Excel
Decision Analysis with OM Tools
Decision Making with Probabilities
Expected Value of Perfect Information
Sequential Decision Tree
Supplement 11-44
Decision Analysis
Quantitative methods
a set of tools for operations manager
Decision analysis
a set of quantitative decisiondecision-making

techniques for decision situations in which
uncertainty exists
Example of an uncertain situation
demand for a product may vary between 0 and 200

units, depending on the state of market
Supplement 11-45
Decision Making
Without Probabilities
States of nature

Events that may occur in the future

Examples of states of nature:

high or low demand for a product

good or bad economic conditions
Decision making under risk

probabilities can be assigned to the occurrence of

states of nature in the future
Decision making under uncertainty

probabilities can NOT be assigned to the

occurrence of states of nature in the future
Supplement 11-46
Payoff Table
Payoff table
method for organizing and illustrating payoffs from different

decisions given various states of nature
Payoff
outcome of a decision
States Of Nature
Decision
a
b
1
Payoff 1a
Payoff 1b
2
Payoff 2a
Payoff 2b
Supplement 11-47
Decision Making Criteria Under

Uncertainty
Maximax
choose decision with the maximum of the

maximum payoffs
Maximin
choose decision with the maximum of the

minimum payoffs
Minimax regret
choose decision with the minimum of the

maximum regrets for each alternative
Supplement 11-48
Decision Making Criteria Under

Uncertainty (cont.)
Hurwicz
choose decision in which decision payoffs are

weighted by a coefficient of optimism, alpha
coefficient of optimism is a measure of a
decision makers optimism, from 0 (completely
pessimistic) to 1 (completely optimistic)
Equal likelihood (La Place)

choose decision in which each state of nature is

weighted equally
Supplement 11-49
Southern Textile
Company
STATES OF NATURE
DECISION
Expand
Maintain status quo
Sell now
Good Foreign
Poor Foreign
Competitive Conditions
$ 800,000
1,300,000
320,000
$ 500,000
-150,000
320,000
Supplement 11-50
Maximax Solution
STATES OF NATURE
DECISION
Expand
Maintain status quo
Sell now
Expand:
Status quo:
Sell:
Good Foreign
Poor Foreign
$ 800,000
1,300,000
320,000
$800,000
1,300,000
320,000
$ 500,000
-150,000
320,000
Maximum
Decision: Maintain status quo
Supplement 11-51
Maximin Solution
STATES OF NATURE
DECISION
Expand
Maintain status quo
Sell now
Expand:
Status quo:
Sell:
Good Foreign
Poor Foreign
$ 800,000
1,300,000
320,000
$500,000
-150,000
320,000
$ 500,000
-150,000
320,000
Maximum
Decision: Expand
Supplement 11-52
Minimax Regret Solution

Good Foreign
Poor Foreign
$1,300,000 - 800,000 = 500,000

$500,000 - 500,000 = 0
1,300,000 - 1,300,000 = 0
500,000 - (-150,000)= 650,000
1,300,000 - 320,000 = 980,000
500,000 - 320,000= 180,000
Expand:
Status quo:
Sell:
$500,000
650,000
980,000
Minimum
Decision: Expand
Supplement 11-53
Hurwicz Criteria
STATES OF NATURE
DECISION
Expand
Maintain status quo
Sell now
= 0.3
Good Foreign
Poor Foreign
$ 800,000
1,300,000
320,000
$ 500,000
-150,000
320,000
1 - = 0.7
Expand: $800,000(0.3) + 500,000(0.7) = $590,000 Maximum

Status quo: 1,300,000(0.3) -150,000(0.7) = 285,000
Sell: 320,000(0.3) + 320,000(0.7) = 320,000
Decision: Expand
Supplement 11-54
Equal Likelihood Criteria

STATES OF NATURE
DECISION
Expand
Maintain status quo
Sell now
Good Foreign
Poor Foreign
$ 800,000
1,300,000
320,000
$ 500,000
-150,000
320,000
Two states of nature each weighted 0.50

Expand: $800,000(0.5) + 500,000(0.5) = $650,000 Maximum
Status quo: 1,300,000(0.5) -150,000(0.5) = 575,000
Sell: 320,000(0.5) + 320,000(0.5) = 320,000
Decision: Expand
Supplement 11-55
Decision Analysis with

Excel
Supplement 11-56
Decision Analysis with

OM Tools
Supplement 11-57
Decision Making with

Probabilities
Risk involves assigning probabilities to
states of nature
Expected value
a weighted average of decision outcomes in

which each future state of nature is
assigned a probability of occurrence
Supplement 11-58
Expected value
EV (x
(x ) =
p(xi)xi
i =1
where
xi = outcome i
p(xi) = probability of outcome i
Supplement 11-59

Probabilities: Example
STATES OF NATURE
DECISION
Expand
Maintain status quo
Sell now
Good Foreign
Poor Foreign
$ 800,000
1,300,000
320,000
p(good) = 0.70
$ 500,000
-150,000
320,000
p(poor) = 0.30
EV(expand): $800,000(0.7) + 500,000(0.3) = $710,000

EV(status quo): 1,300,000(0.7) -150,000(0.3) = 865,000 Maximum
EV(sell):
320,000(0.7) + 320,000(0.3) = 320,000
Decision: Status quo

Supplement 11-60

Probabilities: Excel
Supplement 11-61
Expected Value of
Perfect Information
EVPI
maximum value of perfect information to

the decision maker
maximum amount that would be paid to
gain information that would result in a
decision better than the one made
without perfect information
Supplement 11-62
EVPI Example
Good conditions will exist 70% of the time
choose maintain status quo with payoff of $1,300,000
Poor conditions will exist 30% of the time

choose expand with payoff of $500,000
Expected value given perfect information

= $1,300,000 (0.70) + 500,000 (0.30)
= $1,060,000
Recall that expected value without perfect
information was $865,000 (maintain status quo)

EVPI=
EVPI
= $1,060,000 - 865,000 = $195,000
Supplement 11-63
Sequential
Decision Trees
A graphical method for analyzing
decision situations that require a
sequence of decisions over time
Decision tree consists of
Square nodes - indicating decision points

Circles nodes - indicating states of nature
Arcs - connecting nodes
Supplement 11-64
Evaluations at Nodes
Compute EV at nodes 6 & 7
EV
EV((node 6)=
6)= 0.80($3,000,000) + 0.20($700,000) = $2,540,000
EV
EV((node 7)=
7)= 0.30($2,300,000) + 0.70($1,000,000)= $1,390,000
Decision at node 4 is between

$2,540,000 for Expand and
$450,000 for Sell land
Choose Expand
Repeat expected value calculations and decisions at
remaining nodes
Supplement 11-65
Decision Tree Analysis

$2,000,000
$1,290,000
0.60
Market growth
2
0.40
$225,000
$2,540,000
$3,000,000
0.80
$1,740,000
6
0.20
$700,000
$1,160,000
$450,000
0.60
3
$1,360,000
$1,390,000
0.40
$790,000
$2,300,000
0.30
7
0.70
$1,000,000
5
$210,000
Supplement 11-66
Chapter 2
Quality Management
Lecture Outline
What Is Quality?
Evolution of Quality
Management
Quality Tools
TQM and QMS
Focus of Quality
Management
Management
Customers
Role of Employees in
Quality Improvement
Quality in Service
Companies
Six Sigma
Cost of Quality
Effect of Quality
Management on
Productivity
Quality Awards
ISO 9000
2-68
What Is Quality?
Oxford American Dictionary
a degree or level of excellence
American Society for Quality

totality of features and characteristics
that satisfy needs without deficiencies
Consumers and producers

perspective
2-69
What Is Quality:
Customers Perspective
Fitness for use
how well product or
service does what it is
supposed to
Quality of design
designing quality
characteristics into a
product or service
A Mercedes and a Ford are
equally fit for use, but with
different design dimensions.
2-70
Dimensions of Quality:
Manufactured Products
Performance
basic operating characteristics of a product; how
well a car handles or its gas mileage
Features
extra items added to basic features, such as a
stereo CD or a leather interior in a car
Reliability
probability that a product will operate properly
within an expected time frame; that is, a TV will
work without repair for about seven years
2-71
Manufactured Products (cont.)
Conformance
degree to which a product meets pre

preestablished
standards
Durability
how long product lasts before replacement; with

care, L.L.Bean boots may last a lifetime
Serviceability
ease of getting repairs, speed of repairs, courtesy

and competence of repair person
2-72
Manufactured Products (cont.)
Aesthetics
how a product looks, feels, sounds,
smells, or tastes
Safety
assurance that customer will not suffer
injury or harm from a product; an
especially important consideration for
automobiles
Perceptions
subjective perceptions based on brand
name, advertising, and like
2-73
Services
Time and timeliness
how long must a customer wait for service,
and is it completed on time?
is an overnight package delivered overnight?
Completeness:
is everything customer asked for provided?
is a mail order from a catalogue company
complete when delivered?
2-74
Service (cont.)
Courtesy:
how are customers treated by employees?
are catalogue phone operators nice and are
their voices pleasant?
Consistency
is same level of service provided to each
customer each time?
is your newspaper delivered on time every
morning?
2-75
Service (cont.)
Accessibility and convenience
how easy is it to obtain service?
does service representative answer you calls quickly?
Accuracy
is service performed right every time?
is your bank or credit card statement correct every month?
Responsiveness
how well does company react to unusual situations?
how well is a telephone operator able to respond to a
customers questions?
2-76
What Is Quality:
Producers Perspective
Quality of conformance
making sure product or service is produced
according to design
if new tires do not conform to specifications, they
wobble
if a hotel room is not clean when a guest checks
in, hotel is not functioning according to
specifications of its design
2-77
Meaning of Quality
2-78
What Is Quality:
A Final Perspective
Customers and producers perspectives
depend on each other
Producers perspective:
production process and COST
Customers perspective:
fitness for use and PRICE
Customers view must dominate
2-79
Evolution of Quality Management:

Quality Gurus
Walter Shewart

In 1920s, developed control charts

Introduced term quality
quality assurance
W. Edwards Deming
Developed courses during World War II to teach

statistical qualityquality-control techniques to engineers and
executives of companies that were military suppliers
After war, began teaching statistical quality control to
Japanese companies
Joseph M. Juran

Followed Deming to Japan in 1954

Focused on strategic quality planning
Quality improvement achieved by focusing on projects
to solve problems and securing breakthrough solutions
2-80
Evolution of Quality Management:

Quality Gurus (cont.)
Armand V. Feigenbaum
In 1951, introduced concepts of total quality control
and continuous quality improvement
Philip Crosby
In 1979, emphasized that costs of poor quality far
outweigh cost of preventing poor quality
In 1984, defined absolutes of quality management
management
conformance to requirements, prevention, and zero
defects
Kaoru Ishikawa
Promoted use of quality circles
Developed fishbone diagram
Emphasized importance of internal customer
2-81
Demings 14 Points
1. Create constancy of purpose
2. Adopt philosophy of prevention
3. Cease mass inspection
4. Select a few suppliers based on
quality
5. Constantly improve system and
workers
2-82
Demings 14 Points (cont.)

6. Institute worker training
7. Instill leadership among
supervisors
8. Eliminate fear among employees
9. Eliminate barriers between
departments
10. Eliminate slogans
2-83
Demings 14 Points (cont.)

11. Remove numerical quotas
12. Enhance worker pride
13. Institute vigorous training and
education programs
14. Develop a commitment from top
management to implement
above 13 points
2-84
Deming Wheel: PDCA Cycle
2-85
Quality Tools
Process Flow
Chart
Cause
Cause--and
and-Effect Diagram
Check Sheet
Pareto Analysis
Histogram
Scatter Diagram
Statistical Process
Control Chart
2-86
Flow Chart
2-87
Cause--and
Cause
and--Effect Diagram
Cause
Cause--and
and--effect diagram (fishbone diagram)
chart showing different categories of problem causes
2-88
Cause--and
Cause
and--Effect Matrix
Cause
Cause--andand-effect matrix
grid used to prioritize causes of quality problems
2-89
Check Sheets and Histograms
2-90
Pareto Analysis
Pareto analysis
most quality problems result from a few causes
2-91
Pareto Chart
2-92
Scatter Diagram
2-93
Control Chart
2-94
TQM and QMS

Total Quality Management (TQM)
customer-oriented, leadership, strategic

customerplanning, employee responsibility,
continuous improvement, cooperation,
statistical methods, and training and
education
Quality Management System (QMS)

system to achieve customer satisfaction

that complements other company
systems
2-95
Focus of Quality Management

Management
Customers
TQM and QMSs
serve to achieve customer satisfaction
Partnering
a relationship between a company and

its supplier based on mutual quality
standards
Measuring customer satisfaction

important component of any QMS

customer surveys, telephone interviews
2-96
Role of Employees in
Quality Improvement
Participative
problem solving
employees involved in
quality--management
quality
every employee has
undergone extensive
training to provide quality
service to Disneys guests
Kaizen
involves everyone in
process of continuous
improvement
2-97
Quality Circles
and QITs
Organization
8-10 members
Same area
Supervisor/moderator
Quality circle
group of workers
and supervisors
from same area
who address
quality problems
Process/Quality
improvement teams
(QITs)
focus attention on
business processes
rather than separate
company functions
Training
Presentation
Implementation
Monitoring
Group processes
Data collection
Problem analysis
Solution
Problem
Identification
Problem results
Problem
Analysis
List alternatives
Consensus
Brainstorming
Cause and effect

Data collection
and analysis
2-98
Quality in Services
Service defects are not always easy
to measure because service output
is not usually a tangible item
Services tend to be labor intensive
Services and manufacturing
companies have similar inputs but
different processes and outputs
2-99
Quality Attributes in
Services
Principles of TQM apply
equally well to services
and manufacturing
Timeliness
how quickly a service is

provided?
Benchmark
best level of quality

achievement in one
company that other
companies seek to achieve
quickest, friendliest, most

accurate service
available.
2-100
Six Sigma
A process for developing and delivering
virtually perfect products and services
Measure of how much a process
deviates from perfection
3.4 defects per million opportunities
Six Sigma Process
four basic steps of Six Sigma

Sigmaalign,
mobilize, accelerate, and govern
Champion
an executive responsible for project success

2-101
Six Sigma:
Breakthrough Strategy
StrategyDMAIC
DEFINE
MEASURE
ANALYZE
IMPROVE
CONTROL
3.4 DPMO
67,000 DPMO
cost = 25% of
sales
2-102
Six Sigma:
Black Belts and
Green Belts
Black Belt
project leader
Master Black Belt

a teacher and mentor

for Black Belts
Green Belts
project team
members
2-103
Six Sigma
Design for Six Sigma (DFSS)
a systematic approach to designing products and

processes that will achieve Six Sigma
Profitability

typical criterion for selection Six Sigma project

one of the factors distinguishing Six Sigma from
TQM
Quality is not only free, it is an
honest--to
honest
to--everything profit maker.
2-104
Cost of Quality
Cost of Achieving Good Quality
Prevention costs
costs incurred during product design
Appraisal costs
costs of measuring, testing, and analyzing
Cost of Poor Quality

Internal failure costs

include scrap, rework, process failure, downtime,

and price reductions
External failure costs

include complaints, returns, warranty claims,

liability, and lost sales
2-105
Prevention Costs
Quality planning costs
costs of developing and

implementing quality
management program
Training costs
Product
Product--design costs
costs of designing
products with quality
characteristics
Process costs
costs expended to make

sure productive process
conforms to quality
specifications
costs of developing and

putting on quality training
programs for employees
and management
Information costs
costs of acquiring
and maintaining data
related to quality, and
development and
analysis of reports on
quality performance
2-106
Appraisal Costs
Inspection and testing
costs of testing and inspecting materials, parts, and

product at various stages and at end of process
Test equipment costs

costs of maintaining equipment used in testing

quality characteristics of products
Operator costs
costs of time spent by operators to gather data for

testing product quality, to make equipment
adjustments to maintain quality, and to stop work to
assess quality
2-107
Internal Failure Costs

Scrap costs
costs of poorpoor-quality
products that must be
discarded, including labor,
material, and indirect costs
Rework costs
costs of fixing defective

products to conform to
quality specifications
Process failure costs

costs of determining why

production process is
producing poorpoor-quality
products
Process downtime costs

costs of shutting down

productive process to fix
problem
Price
Price--downgrading costs
costs of discounting poorpoorquality products

productsthat is,
selling products as
seconds
2-108
External Failure Costs

Customer complaint costs
costs of investigating and

satisfactorily responding to a
customer complaint resulting
from a poorpoor-quality product
Product return costs
Product liability costs

litigation costs
resulting from product
liability and customer
injury
costs of handling and replacing Lost sales costs

costs incurred
poor--quality products returned
poor
by customer
because customers
are dissatisfied with
Warranty claims costs
poor--quality products
poor
costs of complying with
and do not make
product warranties
additional purchases
2-109
Measuring and
Reporting Quality Costs
Index numbers
ratios that measure quality costs against a

base value
labor index
cost index
ratio of quality cost to manufacturing cost
sales index
ratio of quality cost to labor hours
ratio of quality cost to sales
production index
ratio of quality cost to units of final product

2-110
Quality
Quality
Cost Relationship
Cost of quality
difference between price of

nonconformance and conformance
cost of doing things wrong
20 to 35% of revenues
cost of doing things right

3 to 4% of revenues
2-111
Effect of Quality
Management on Productivity
Productivity
ratio of output to input
Quality impact on productivity

fewer defects increase output, and quality

improvement reduces inputs
Yield
a measure of productivity
Yield=(total input)(% good units) + (total input)(1-%good units)(% reworked)
or
Y=(I)(%G)+(I)(1--%G)(%R)
Y=(I)(%G)+(I)(1
2-112
Computing Product
Cost per Unit
Product Cost
(Kd )(I) +(Kr )(R)

=
Y
where:
Kd = direct manufacturing cost per unit
I = input
Kr = rework cost per unit
R = reworked units
Y = yield
2-113
Computing Product Yield

for Multistage Processes
Y = (I)(%g1)(%g2) (%gn)
where:
I = input of items to the production process that will
result in finished products
gi = good-quality, work-in-process products at stage i
2-114
Quality
Quality
Productivity Ratio
QPR
QPR =
productivity index that includes productivity and

quality costs
(good-quality units)
(input) (processing cost) + (reworked units) (rework cost)
(100)
2-115
Malcolm Baldrige Award

Created in 1987 to stimulate growth of
quality management in United States
Categories

Leadership
Information and analysis
Strategic planning
Human resource focus
Process management
Business results
Customer and market focus
2-116
Other Awards for Quality

National individual
awards

Armand V. Feigenbaum
Medal
Deming Medal
E. Jack Lancaster Medal
Edwards Medal
Shewart Medal
Ishikawa Medal
International awards

European Quality Award

Canadian Quality Award
Australian Business
Excellence Award
Deming Prize from Japan
2-117
ISO 9000
A set of procedures and
policies for international
quality certification of
suppliers
Standards
ISO 9000:2000
Quality Management
Systems
Systems
Fundamentals
and Vocabulary
defines fundamental
terms and definitions
used in ISO 9000 family
ISO 9001:2000
Quality Management
Systems
Systems
Requirements
standard to assess ability to
achieve customer satisfaction
ISO 9004:2000
Quality Management
Systems
Systems
Guidelines for
Performance Improvements
guidance to a company for
continual improvement of its
quality--management system
quality
2-118
ISO 9000 Certification,

Implications, and Registrars
ISO 9001:2000
9001:2000only
standard that carries thirdthirdparty certification
Many overseas companies
will not do business with a
supplier unless it has ISO
9000 certification
ISO 9000 accreditation
ISO registrars
2-119
Chapter 3
Statistical Process Control
Lecture Outline

Basics of Statistical Process Control

Control Charts
Control Charts for Attributes
Control Charts for Variables
Control Chart Patterns
SPC with Excel and OM Tools
Process Capability
3-121
Basics of Statistical
Process Control
Statistical Process Control
(SPC)
monitoring production process

to detect and prevent poor
quality
UCL
Sample
subset of items produced to

use for inspection
LCL
Control Charts
process is within statistical

control limits
3-122
Basics of Statistical
Process Control (cont.)
Random

inherent in a process
depends on equipment
and machinery,
engineering, operator,
and system of
measurement
natural occurrences
Non
Non--Random

special causes
identifiable and
correctable
include equipment out of
adjustment, defective
materials, changes in
parts or materials, broken
machinery or equipment,
operator fatigue or poor
work methods, or errors
due to lack of training
3-123
SPC in Quality Management

SPC
tool for identifying problems in

order to make improvements
contributes to the TQM goal of
continuous improvements
3-124
Quality Measures:
Attributes and Variables
Attribute
a product characteristic that can be

evaluated with a discrete response
good bad; yes - no
Variable measure
a product characteristic that is continuous

and can be measured
weight - length
3-125
SPC Applied to
Services
Nature of defect is different in services
Service defect is a failure to meet
customer requirements
Monitor time and customer satisfaction
3-126
SPC Applied to
Services (cont.)
Hospitals
timeliness and quickness of care, staff responses to requests,

accuracy of lab tests, cleanliness, courtesy, accuracy of
paperwork, speed of admittance and checkouts
Grocery stores
waiting time to check out, frequency of outout-of

of--stock items,
quality of food items, cleanliness, customer complaints,
checkout register errors
Airlines
flight delays, lost luggage and luggage handling, waiting time

at ticket counters and checkcheck-in, agent and flight attendant
courtesy, accurate flight information, passenger cabin
cleanliness and maintenance
3-127
SPC Applied to
Services (cont.)
Fast
Fast--food restaurants
waiting time for service, customer complaints,

cleanliness, food quality, order accuracy, employee
courtesy
Catalogue
Catalogue--order companies
order accuracy, operator knowledge and courtesy,

packaging, delivery time, phone order waiting time
Insurance companies
billing accuracy, timeliness of claims processing,

agent availability and response time
3-128
Where to Use Control Charts

Process has a tendency to go out of control
Process is particularly harmful and costly if it
goes out of control
Examples
at the beginning of a process because it is a waste of

time and money to begin production process with bad
supplies
before a costly or irreversible point, after which
product is difficult to rework or correct
before and after assembly or painting operations that
might cover defects
before the outgoing final product or service is
delivered
3-129
Control Charts
A graph that establishes
control limits of a
process
Control limits
Types of charts
Attributes
p-chart
c-chart
upper and lower bands of

a control chart
Variables
mean (x bar chart)
range (R(R-chart)
3-130
Process Control Chart

Out of control
Upper
control
limit
Process
average
Lower
control
limit
10
Sample number
3-131
Normal Distribution
95%
99.74%
- 3
- 2
- 1
=0
3-132
A Process Is in
Control If
1. no sample points outside limits
2. most points near process average
3. about equal number of points above
and below centerline
4. points appear randomly distributed
3-133
Control Charts for

Attributes
p-chart
uses portion defective in a sample
c-chart
uses number of defective items in
a sample
3-134
p-Chart
UCL = p + zp
LCL = p - zp
z = number of standard deviations from
process average
p = sample proportion defective; an estimate
of process average
p = standard deviation of sample proportion
p =
p(1 - p)
n
3-135
Construction of pp-Chart
SAMPLE
1
2
3
:
:
20
NUMBER OF
DEFECTIVES
PROPORTION
DEFECTIVE
6
0
4
:
:
18
200
.06
.00
.04
:
:
.18
20 samples of 100 pairs of jeans

3-136
Construction of pp-Chart (cont.)

p=
total defectives
total sample observations
UCL = p + z
p(1 - p)
n
= 200 / 20(100) = 0.10
= 0.10 + 3
0.10(1 - 0.10)
100
UCL = 0.190
LCL = p - z
p(1 - p)
n
= 0.10 - 3
0.10(1 - 0.10)
100
LCL = 0.010
3-137
0.20
UCL = 0.190
0.18
Construction
of pp-Chart
(cont.)
Proportion defective
0.16
0.14
0.12
0.10
p = 0.10
0.08
0.06
0.04
0.02
LCL = 0.010
2
8
10
12 14
Sample number
16
18
20
3-138
c-Chart
UCL = c + zc
LCL = c - zc
c =
where
c = number of defects per sample
3-139
c-Chart (cont.)
Number of defects in 15 sample rooms
SAMPLE
1
2
3
NUMBER
OF
DEFECTS
:
:
15
c=
12
8
16
:
:
15
190
190
15
= 12.67
UCL = c + zc
= 12.67 + 3
= 23.35
12.67
= c - z c
= 12.67 - 3
= 1.99
12.67
LCL
3-140
24
UCL = 23.35
c-Chart
(cont.)
Number of defects
21
18
c = 12.67
15
12
9
6
LCL = 1.99
10
12
14
16
Sample number
3-141
Control Charts for

Variables
Range chart ( RR-Chart )
uses amount of dispersion in a
sample
Mean chart ( x -Chart )

uses process average of a
sample
3-142
x-bar Chart:
Standard Deviation Known
UCL = x= + zx
LCL = =
x - z x
x1 + x2 + ... xn
n
x= =
where
=
x = average of sample means

3-143
x-bar Chart Example:

Standard Deviation Known (cont.)
3-144

Standard Deviation Known (cont.)
3-145

Standard Deviation Unknown
UCL = x= + A2R
LCL = x= - A2R
where
x = average of sample means

3-146
Control
Limits
3-147

Standard Deviation Unknown
OBSERVATIONS (SLIP(SLIP- RING DIAMETER, CM)
SAMPLE k
5.02
5.01
4.94
4.99
4.96
4.98
0.08
5.01
5.03
5.07
4.95
4.96
5.00
0.12
4.99
5.00
4.93
4.92
4.99
4.97
0.08
5.03
4.91
5.01
4.98
4.89
4.96
0.14
4.95
4.92
5.03
5.05
5.01
4.99
0.13
4.97
5.06
5.06
4.96
5.03
5.01
0.10
5.05
5.01
5.10
4.96
4.99
5.02
0.14
5.09
5.10
5.00
4.99
5.08
5.05
0.11
5.14
5.10
4.99
5.08
5.09
5.08
0.15
10
5.01
4.98
5.08
5.07
4.99
5.03
0.10
50.09
1.15
Example 15.4
3-148

Standard Deviation Unknown (cont.)
R
R=
x= =
x
k
1.15
10
= 0.115
50.09
= 5.01 cm
10
= A R = 5.01 + (0.58)(0.115) = 5.08

UCL = x +
2
LCL = x =
- A2R = 5.01 - (0.58)(0.115) = 4.94
Retrieve Factor Value A2
3-149
5.10
5.08
UCL = 5.08
5.06
Mean
5.04
x= = 5.01
5.02
5.00
x- bar
Chart
Example
(cont.)
4.98
4.96
LCL = 4.94
4.94
4.92
|
1
|
2
|
3
|
|
|
|
4
5
6
7
Sample number
|
8
|
9
|
10
3-150
R- Chart
UCL = D4R
R=
LCL = D3R
R
k
where
R = range of each sample
k = number of samples
3-151
R-Chart Example
OBSERVATIONS (SLIP(SLIP-RING DIAMETER, CM)
SAMPLE k
5.02
5.01
4.94
4.99
4.96
4.98
0.08
5.01
5.03
5.07
4.95
4.96
5.00
0.12
4.99
5.00
4.93
4.92
4.99
4.97
0.08
5.03
4.91
5.01
4.98
4.89
4.96
0.14
4.95
4.92
5.03
5.05
5.01
4.99
0.13
4.97
5.06
5.06
4.96
5.03
5.01
0.10
5.05
5.01
5.10
4.96
4.99
5.02
0.14
5.09
5.10
5.00
4.99
5.08
5.05
0.11
5.14
5.10
4.99
5.08
5.09
5.08
0.15
10
5.01
4.98
5.08
5.07
4.99
5.03
0.10
50.09
1.15
Example 15.3
3-152
R-Chart Example (cont.)

UCL = D4R = 2.11(0.115) = 0.243
LCL = D3R = 0(0.115) = 0
Retrieve Factor Values D3 and D4
Example 15.3
3-153
R-Chart Example (cont.)

0.28
0.24
UCL = 0.243
Range
0.20
0.16
R = 0.115
0.12
0.08
0.04
0
LCL = 0
|
|
|
1 2
3
|
|
|
|
4
5
6
7
Sample number
|
8
|
9
|
10
3-154
Using xx- bar and RR-Charts

Together
Process average and process variability must be in control
It is possible for samples to have very narrow ranges, but

their averages might be beyond control limits
It is possible for sample averages to be in control, but

ranges might be very large
It is possible for an RR-chart to exhibit a distinct downward

trend, suggesting some nonrandom cause is reducing
variation
3-155
Control Chart Patterns

Run
sequence of sample values that display same characteristic
Pattern test
determines if observations within limits of a control chart display a
nonrandom pattern
To identify a pattern:
8 consecutive points on one side of the center line
8 consecutive points up or down
14 points alternating up or down
2 out of 3 consecutive points in zone A (on one side of center line)
4 out of 5 consecutive points in zone A or B (on one side of center
line)
3-156
Control Chart Patterns (cont.)

UCL
UCL
LCL
Sample observations
consistently below the
center line
LCL
Sample observations
consistently above the
center line
3-157
Control Chart Patterns (cont.)

UCL
UCL
LCL
Sample observations
consistently increasing
LCL
Sample observations
consistently decreasing
3-158
Zones for Pattern Tests

=
3 sigma = x + A2R
UCL
Zone A
= 2
2 sigma = x +
((A
A2R)
3
Zone B
= 1
1 sigma = x +
((A
A2R)
3
Zone C
=
x
Process
average
Zone C
= 1
1 sigma = x - (A2R)
3
Zone B
= 2
2 sigma = x - (A2R)
3
Zone A
=
3 sigma = x - A2R
LCL
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
11
|
12
|
13
Sample number
3-159
Performing a Pattern Test

SAMPLE
1
2
3
4
5
6
7
8
9
10
ABOVE/BELOW
UP/DOWN
ZONE
4.98
5.00
4.95
4.96
4.99
5.01
5.02
5.05
5.08
5.03
B
B
B
B
B
A
A
A
A
U
D
D
U
U
U
U
U
D
B
C
A
A
C
C
C
B
A
B
3-160
Sample Size Determination

Attribute charts require larger sample sizes

50 to 100 parts in a sample
Variable charts require smaller samples
2 to 10 parts in a sample
3-161
SPC with Excel
3-162
SPC with Excel and OM Tools
3-163
Process Capability
Tolerances
design specifications reflecting product

requirements
Process capability
range of natural variability in a process

process
what we measure with control charts
3-164
Process Capability (cont.)

Design
Specifications
(a) Natural variation
exceeds design
specifications; process
is not capable of
meeting specifications
all the time.
Process
Design
Specifications
(b) Design specifications
and natural variation the
same; process is capable
of meeting specifications
most of the time.
Process
3-165
Process Capability (cont.)

Design
Specifications
(c) Design specifications
greater than natural
variation; process is
capable of always
conforming to
specifications.
Process
Design
Specifications
(d) Specifications greater
than natural variation,
but process off center;
capable but some output
will not meet upper
specification.
Process
3-166
Process Capability Measures

Process Capability Ratio
Cp =
tolerance range
process range
upper specification limit lower specification limit
6
3-167
Computing Cp
Net weight specification = 9.0 oz 0.5 oz
Process mean = 8.80 oz
Process standard deviation = 0.12 oz
Cp =
upper specification limit lower specification limit

6
9.5 - 8.5 = 1.39
6(0.12)
3-168
Process Capability Measures

Process Capability Index
=
Cpk = minimum
x - lower specification limit

3
upper specification limit - x
3-169
Computing Cpk
Net weight specification = 9.0 oz 0.5 oz
Process mean = 8.80 oz
Process standard deviation = 0.12 oz
=
x - lower specification limit
Cpk = minimum
3
=
upper specification limit - x
3
8.80 - 8.50
= minimum
3(0.12) ,
9.50 - 8.80
3(0.12)
= 0.83
3-170
Process Capability
with Excel
3-171
Process Capability
with Excel and OM Tools
3-172
Acceptance Sampling
Lecture Outline
Single
Single--Sample Attribute Plan
Operating Characteristic Curve
Developing a Sampling Plan with Excel
Average Outgoing Quality
Double - and MultipleMultiple-Sampling Plans
Supplement 33-174
Acceptance Sampling
Accepting or rejecting a production lot based
on the number of defects in a sample
Not consistent with TQM or Zero Defects
philosophy

producer and customer agree on the number of

acceptable defects
a means of identifying not preventing poor quality
percent of defective parts versus PPM
Sampling plan
provides guidelines for accepting a lot

Supplement 33-175
SingleSample
Single
Attribute Plan
Single sampling plan
N = lot size
n = sample size (random)
c = acceptance number
d = number of defective items in sample
If d c, accept lot; else reject
Supplement 33-176
Producers and
Consumers Risk
AQL or acceptable quality level
proportion of defects consumer will accept in

a given lot
or producers risk
probability of rejecting a good lot
LTPD or lot tolerance percent defective

limit on the number of defectives the

customer will accept
or consumers risk
probability of accepting a bad lot

Supplement 33-177
Producers and
Consumers Risk (cont.)
Good Lot
Reject
No Error
Type I Error
Producer Risk
Bad Lot
Accept
Type II Error
Consumers Risk
No Error
Sampling Errors
Supplement 33-178
Operating Characteristic
(OC) Curve
shows probability of accepting lots of
different quality levels with a specific
sampling plan
assists management to discriminate
between good and bad lots
exact shape and location of the curve is
defined by the sample size (n
(n) and
acceptance level (c
(c) for the sampling
plan
Supplement 33-179
OC Curve (cont.)
1.00
= 0.05
Probability of acceptance, Pa
0.80
OC curve for n and c
0.60
0.40
0.20
= 0.10
0.02 0.04 0.06 0.08 0.10 0.12 0.14 0.16 0.18 0.20
AQL
Proportion defective
LTPD
Supplement 33-180
Developing a Sampling Plan

with OM Tools
ABC Company produces mugs
in lots of 10,000. Performance
measures for quality of mugs
sent to stores call for a
producers risk of 0.05 with an
AQL of 1% defective and a
consumers risk of 0.10 with a
LTPD of 5% defective. What
size sample and what
acceptance number should
ABC use to achieve
performance measures called
for in the sampling plan?
N = 10,000
= 0.05
?
= 0.10
AQL = 1%
LTPD = 5%
n=?
c=
Supplement 33-181
Average Outgoing
Quality (AOQ)
Expected number of defective
items that will pass on to
customer with a sampling plan
Average outgoing quality limit
(AOQL)

maximum point on the curve

worst level of outgoing quality
Supplement 33-182
AOQ Curve
Supplement 33-183
Double--Sampling Plans
Double
Take small initial sample
If # defective lower limit, accept
If # defective > upper limit, reject
If # defective between limits, take second
sample
Accept or reject based on 2 samples

Less costly than singlesingle-sampling plans
Supplement 33-184
Multiple--Sampling Plans
Multiple
Uses smaller sample sizes
Take initial sample
If # defective lower limit, accept
If # defective > upper limit, reject
If # defective between limits, resample
Continue sampling until accept or reject

lot based on all sample data
Supplement 33-185
Chapter 4
Product Design
Lecture Outline
Design Process
Concurrent Design
Technology in Design
Design Reviews
Design for Environment
Design for Robustness
Quality Function Deployment
4-187
Design Process
Effective design can provide a competitive
edge
matches product or service characteristics with

customer requirements
ensures that customer requirements are met in the
simplest and least costly manner
reduces time required to design a new product or
service
minimizes revisions necessary to make a design
workable
Copyright 2009 John Wiley & Sons, Inc.
4-188
Design Process (cont.)

Product design

defines appearance of product

sets standards for performance
specifies which materials are to be used
determines dimensions and tolerances
4-189
Design Process (cont.)
4-190
Idea Generation
Companys own
R&D department
Customer complaints
or suggestions
Marketing research
Suppliers
Salespersons in the
field
Factory workers
New technological
developments
Competitors
4-191
Idea Generation (cont.)

Perceptual Maps
Visual comparison of
customer perceptions
Benchmarking
Comparing product/process
against bestbest-inin-class
Reverse engineering
Dismantling competitors product to
improve your own product
4-192
Perceptual Map of
Breakfast Cereals
4-193
Feasibility Study
Market analysis
Economic analysis
Technical/strategic analyses
Performance specifications
4-194
Rapid Prototyping
testing and revising a
preliminary design model
Build a prototype

form design
functional design
production design
Test prototype
Revise design
Retest
4-195
Form and Functional Design

Form Design
how product will

look?
Functional Design
how product will

perform?

reliability
maintainability
usability
4-196
Computing Reliability
Components in series
0.90
0.90
0.90 x 0.90 = 0.81
4-197
Computing Reliability (cont.)

Components in parallel
0.90
R2
0.95 + 0.90(10.90(1-0.95) = 0.995
0.95
R1
4-198
System Reliability
0.90
0.98
0.98
0.92
0.98
0.92+(1--0.92)(0.90)=0.99
0.92+(1
0.98
0.98 x 0.99 x 0.98 = 0.951

4-199
System Availability (SA)
SA =
MTBF
MTBF + MTTR
where:
MTBF = mean time between failures
MTTR = mean time to repair
4-200
System Availability
(cont.)
PROVIDER
MTBF (HR)
MTTR (HR)
A
B
C
60
36
24
4.0
2.0
1.0
SAA = 60 / (60 + 4) = .9375 or 94%

SAB = 36 / (36 + 2) = .9473 or 95%
SAC = 24 / (24 + 1) = .96 or 96%
4-201
Usability
Ease of use of a product or service

ease of learning
ease of use
ease of remembering how to use
frequency and severity of errors
user satisfaction with experience
4-202
Production Design
How the product will be made
Simplification
reducing number of parts, assemblies, or options in a

product
Standardization
using commonly available and interchangeable parts
Modular Design
combining standardized building blocks, or modules, to

create unique finished products
Design for Manufacture (DFM)

Designing a product so that it can be produced easily and
economically
4-203
Design
Simplification
(a) Original design
Assembly using
common fasteners
Source: Adapted from G. Boothroyd and

P. Dewhurst, Product Design. Key to
Successful Robotic Assembly. Assembly
Engineering (September 1986), pp. 909093.
(b) Revised design
(c) Final design
One-piece base &

Oneelimination of
fasteners
Design for
push--and
push
and--snap
assembly
4-204
Final Design and Process Plans

Final design
detailed drawings
and specifications
for new product or
service
Process plans
workable instructions
necessary equipment
and tooling
component sourcing
recommendations
job descriptions and
procedures
computer programs for
automated machines
4-205
Design Team
4-206
Concurrent Design
A new approach to
design that involves
simultaneous design of
products and processes
by design teams
Improves quality of early
design decisions
Involves suppliers
Incorporates production
process
Uses a priceprice-minus
system
Scheduling and
management can be
complex as tasks are
done in parallel
Uses technology to aid
design
4-207
Technology in Design
Computer Aided Design (CAD)
assists in creation, modification, and analysis of

a design
computer--aided engineering (CAE)
computer
computer--aided manufacturing (CAD/CAM)

computer
ultimate designdesign-toto-manufacture connection
product life cycle management (PLM)

tests and analyzes designs on computer screen
managing entire lifecycle of a product
collaborative product design (CPD)

4-208
Collaborative Product Design

(CPD)
A software system for collaborative design and
development among trading partners
With PML, manages product data, sets up project
workspaces, and follows life cycle of the product
Accelerates product development, helps to resolve
product launch issues, and improves quality of design
Designers can

conduct virtual review sessions

test what if scenarios
assign and track design issues
communicate with multiple tiers of suppliers
create, store, and manage project documents
4-209
Design Review
Review designs to prevent failures and
ensure value
Failure mode and effects analysis (FMEA)

Fault tree analysis (FTA)

a systematic method of analyzing product

failures
a visual method for analyzing interrelationships
among failures
Value analysis (VA)

helps eliminate unnecessary features and

functions
4-210
FMEA for Potato Chips

Failure
Mode
Cause of
Failure
Effect of
Failure
Corrective
Action
Stale
low moisture content

expired shelf life
poor packaging
tastes bad
wont crunch
thrown out
lost sales
add moisture
cure longer
better package seal
shorter shelf life
Broken
too thin
too brittle
rough handling
rough use
poor packaging
cant dip
poor display
injures mouth
chocking
perceived as old
lost sales
change recipe
change process
change packaging
Too Salty
outdated receipt
process not in control
uneven distribution of salt
eat less
drink more
health hazard
lost sales
experiment with recipe

experiment with process
introduce low salt version
4-211
Fault tree analysis (FTA)
4-212
Value analysis (VA)

Can we do without it?

Does it do more than is required?
Does it cost more than it is worth?
Can something else do a better job?
Can it be made by

a less costly method?

with less costly tooling?
with less costly material?
Can it be made cheaper, better, or faster by

someone else?
4-213
Value analysis (VA) (cont.)

Updated versions also include:

Is it recyclable or biodegradable?
Is the process sustainable?
Will it use more energy than it is worth?
Does the item or its byby-product harm the
environment?
4-214
Design for Environment and

Extended Producer Responsibility
Design for environment

designing a product from material that can be recycled

design from recycled material
design for ease of repair
minimize packaging
minimize material and energy used during manufacture,
consumption and disposal
Extended producer responsibility

holds companies responsible for their product even after its

useful life
4-215
Design for Environment
4-216
Sustainability
Ability to meet present needs without compromising
those of future generations
Green product design

Use fewer materials

Use recycled materials or recovered components
Dont assume natural materials are always better
Dont forget energy consumption
Extend useful life of product
Involve entire supply chain
Change paradigm of design
Source: Adapted from the Business
Social Responsibility Web site,
www.bsr.org,, accessed April 1, 2007.
www.bsr.org
4-217
Quality Function
Deployment (QFD)
Translates voice of customer into technical
design requirements
Displays requirements in matrix diagrams

first matrix called house of quality

series of connected houses
4-218
House of Quality
Importance
5
Trade--off matrix
Trade
3
Design
characteristics
Customer
requirements
Relationship
matrix
Competitive
assessment
Target values
4-219
Competitive Assessment
of Customer
Requirements
Competitive Assessment
Easy and
safe to use
Irons
well
Customer Requirements
B A
Presses quickly
Removes wrinkles
AB
Doesnt stick to fabric
BA
Provides enough steam
AB
Doesnt spot fabric
X AB
Doesnt scorch fabric
A XB
Heats quickly
Automatic shutshut-off
Quick coolcool-down
Doesnt break when dropped
AB
Doesnt burn when touched
AB X
Not too heavy
A
AB
ABX
X
A B
X
4-220
Irons
well
Presses quickly
Removes wrinkles
Doesnt stick to fabric
+ +
+ + +
Doesnt spot fabric
+ + +
-
+ - +
+
Automatic shutshut-off
Quick coolcool-down
Doesnt break when dropped
- +
+ + +
Doesnt burn when touched

Not too heavy
+
+ -
- +
+
+
+ + +
-4-221
Automatic shutoff
Protective cover for soleplate
+ + +
Heats quickly
Time to go from 450 to 100
Doesnt scorch fabric
Time required to reach 450 F
Flow of water from holes
Size of holes
Number of holes
- + + +
Provides enough steam
Easy and
safe to use
Material used in soleplate
Thickness of soleplate
Size of soleplate
Weight of iron
Customer Requirements
Energy needed to press
From Customer
Requirements
to Design
Characteristics
4-222
Automatic shutoff
Time required to reach 450
Size of holes
Number of holes
Size of soleplate
Weight of iron
Tradeoff Matrix
+
Units of measure
lb
in.
cm
ty
ea
Iron A
1.4
8x4
SS
27
15
0.5
45
500
Iron B
1.2
8x4
MG
27
15
0.3
35
350
Our Iron (X)
1.7
9x5
35
15
0.7
50
600
Estimated impact
Estimated cost
1.2
8x5
SS
30
30
500
Objective
measures
ftft-lb
Targets
Design changes
mm oz/s sec sec Y/N Y/N
4-223
Automatic shutoff
Time required to reach 450
Size of holes
Number of holes
Size of soleplate
Weight of iron
Targeted Changes in
Design
Completed
House of Quality
SS = Silverstone
MG = Mirorrglide
T = Titanium
4-224
A Series of Connected
QFD Houses
Part
characteristics
Process
characteristics
A-2
Parts
deployment
Operations
A-3
Process
planning
Process
characteristics
House
of
quality
Part
characteristics
A-1
Product
characteristics
Customer
requirements
Product
characteristics
A-4
Operating
requirements
4-225
Benefits of QFD
Promotes better understanding of
customer demands
Promotes better understanding of
design interactions
Involves manufacturing in design
process
Provides documentation of design
process
4-226
Design for Robustness

Robust product
designed to withstand variations in environmental and

operating conditions
Robust design
yields a product or service designed to withstand

variations
Controllable factors
design parameters such as material used, dimensions,

and form of processing
Uncontrollable factors
users control (length of use, maintenance, settings, etc.)
4-227
Design for Robustness (cont.)

Tolerance
allowable ranges of variation in the dimension of a

part
Consistency
consistent errors are easier to correct than random

errors
parts within tolerances may yield assemblies that
are not within limits
consumers prefer product characteristics near their
ideal values
4-228
Quantifies customer
preferences toward
quality
Emphasizes that
customer preferences
are strongly oriented
toward consistently
Design for Six Sigma
(DFSS)
Quality Loss
Taguchis Quality Loss

Function
Lower
tolerance
limit
Target
Upper
tolerance
limit
4-229
Copyright 2009 John Wiley & Sons, Inc.

All rights reserved. Reproduction or translation of this work beyond
that permitted in section 117 of the 1976 United States Copyright
Act without express permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permission Department, John Wiley & Sons, Inc. The purchaser
may make backback-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages caused by the use of these
programs or from the use of the information herein.
4-230
Chapter 5
Service Design
Lecture Outline
Service Economy
Characteristics of Services
Service Design Process
Tools for Service Design
Waiting Line Analysis for
Service Improvement
5-232
Service Economy
Source: U.S. Bureau of Labor Statistics, IBM Almaden Research Center

5-233
5-234
Characteristics of Services
Services
acts, deeds, or performances
Goods
tangible objects
Facilitating services
accompany almost all purchases of goods
Facilitating goods
accompany almost all service purchases

5-235
Continuum from
Goods to Services
Source: Adapted from Earl W. Sasser, R.P. Olsen, and D. Daryl Wyckoff,
Management of Service Operations (Boston: Allyn Bacon, 1978), p.11.
5-236
Characteristics
of Services (cont.)

Services are
intangible
Service output is
variable
Services have higher
customer contact
Services are
perishable
Service inseparable
from delivery
Services tend to be
decentralized and
dispersed
Services are
consumed more often
than products
Services can be easily
emulated
5-237
Service
Design
Process
5-238
Service Design
Process (cont.)
Service concept
purpose of a service; it defines target

market and customer experience
Service package
mixture of physical items, sensual

benefits, and psychological benefits
Service specifications

performance specifications
design specifications
delivery specifications
5-239
Service Process Matrix
5-240
High v. Low Contact

Services
Design
Decision
High-Contact Service
Facility Convenient to
location
customer
Facility
layout
Must look presentable,

accommodate
customer needs, and
facilitate interaction
with customer
Low-Contact Service
Near labor or
transportation source
Designed for efficiency
Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Compensative
Advantage (New York:McGraw-Hill, 2001), p. 210
5-241
High v. Low Contact

Services (cont.)
Design
Decision
Quality
control
More variable since

customer is involved in
process; customer
expectations and
perceptions of quality
may differ; customer
present when defects
occur
Capacity
Excess capacity required

to handle peaks in
demand
Low-Contact
Service
Measured against
established
standards; testing
and rework possible
to correct defects
Planned for average

demand
5-242
High v. Low Contact

Services (cont.)
Design
Decision
Worker skills
Scheduling
Low-Contact
Service
Must be able to
interact well with
customers and use
judgment in decision
making
Technical skills
Must accommodate
customer schedule
Customer
concerned only
with completion
date
5-243
High v. Low Contact

Services (cont.)
Design
Decision
Service
process
Service package
Low-Contact
Service
Mostly front-room
activities; service may
change during delivery
in response to
customer
Mostly back-room
activities;
planned and
executed with
minimal
interference
Varies with customer;

includes environment
as well as actual
service
Fixed, less
extensive
5-244
Tools for Service Design

Service blueprinting

line of influence
line of interaction
line of visibility
line of support
FrontFront-office/Backoffice/Backoffice activities
Servicescapes

space and function

ambient conditions
signs, symbols, and
artifacts
Quantitative
techniques
5-245
Service Blueprinting
5-246
Service Blueprinting (Cont)
5-247
Elements of
Waiting Line Analysis
Operating characteristics
average values for characteristics that describe

performance of waiting line system
Queue
a single waiting line
Waiting line system

consists of arrivals, servers, and waiting line

structure
Calling population
source of customers; infinite or finite

5-248
5-249
Elements of
Waiting Line Analysis (cont.)
Arrival rate (
()
frequency at which customers arrive at a waiting line

according to a probability distribution, usually Poisson
Service time (
()
time required to serve a customer, usually described by

negative exponential distribution
Service rate must be shorter than arrival rate (

( < )
Queue discipline
order in which customers are served
Infinite queue
can be of any length; length of a finite queue is limited
5-250
Elements of
Waiting Line Analysis (cont.)
Channels
number of
parallel
servers for
servicing
customers
Phases
number of
servers in
sequence a
customer
must go
through
5-251
Operating Characteristics
Operating characteristics are assumed to
approach a steady state
5-252
Traditional Cost Relationships

as service improves, cost increases
5-253
Psychology of Waiting
Waiting rooms
magazines and
newspapers
televisions
Bank of America
Disney

costumed characters
mobile vendors
accurate wait times
special passes
mirrors
Supermarkets

magazines
impulse purchases
5-254
Psychology of Waiting (cont.)

Preferential treatment
Grocery stores: express lanes for customers with

few purchases
Airlines/Car rental agencies: special cards
available to frequentfrequent-users or for an additional fee
Phone retailers: route calls to more or less
experienced salespeople based on customers
sales history
Critical service providers

services of police department, fire department, etc.

waiting is unacceptable; cost is not important
5-255
Waiting Line Models

Single
Single--server model
simplest, most basic waiting line structure
Frequent variations (all with Poisson arrival rate)

exponential service times

general (unknown) distribution of service times
constant service times
exponential service times with finite queue
exponential service times with finite calling population
5-256
Basic SingleSingle-Server Model

Assumptions

Poisson arrival rate

exponential service
times
first--come, firstfirst
firstserved queue
discipline
infinite queue length
infinite calling
population
Computations

= mean arrival rate

= mean service rate
n = number of
customers in line
5-257
Basic SingleSingle-Server Model (cont.)

probability that no customers
are in queuing system
( )
P0 =
L=
probability of n customers in
queuing system
average number of customers

in waiting line
( ) ( )( )
Pn =
P0 =
average number of customers

in queuing system
Lq =
2
( )
5-258
Basic SingleSingle-Server Model (cont.)

average time customer
spends in queuing system
W=
average time customer

spends waiting in line
Wq =
( )
probability that server is busy

and a customer has to wait
(utilization factor)
probability that server is idle

and customer can be served
I=1
=1
= P0
5-259

Example
5-260

Example (cont.)
5-261
Service Improvement Analysis

waiting time (8 min.) is too long
hire assistant for cashier?

increased service rate
hire another cashier?

reduced arrival rate
Is improved service worth the cost?
5-262

Example: Excel
5-263
Advanced SingleSingle-Server Models

Constant service times
occur most often when automated equipment or

machinery performs service
Finite queue lengths

occur when there is a physical limitation to length of

waiting line
Finite calling population

number of customers that can arrive is limited
5-264
Advanced SingleSingle-Server
Models (cont.)
5-265
Basic MultipleMultiple-Server Model

single waiting line and service facility with
several independent servers in parallel
same assumptions as singlesingle-server model
s >

s = number of servers
servers must be able to serve customers faster than
they arrive
5-266

(cont.)
probability that there are no customers in system
1
P0 = n = s 1
1 n
1 s
s
n=0
()
n!
( )( )
s!
s -
probability of n customers in system

1
n
P0, for n > s
n
s
s!s
Pn =
1 n
P0, for n s
n!
()
()
5-267

(cont.)
probability that customer must wait
Pw =
L=
()
1
s!
(/)s
(s 1)! ((s
s ) 2
L
W=
P0
P0 +
Lq = L
Wq = W
Lq
=
s
5-268

Example
5-269

Example (cont.)
5-270

Example (cont.)
5-271

Example (cont.)
5-272

Example (cont.)
5-273

Example (cont.)
To cut wait time, add another service
representative
now, s = 4
Therefore:
5-274
Multiple-Server Waiting Line

Multiplein Excel
5-275
Chapter 6
Processes and Technology
Lecture Outline
Process Planning
Process Analysis
Process Innovation
Technology Decisions
6-277
Process Planning
Process
a group of related tasks with specific inputs and outputs
Process design
what tasks need to be done and how they are

coordinated among functions, people, and
organizations
Process strategy
an organizations overall approach for physically

producing goods and services
Process planning
converts designs into workable instructions for

manufacture or delivery
6-278
Process Strategy
Vertical integration
extent to which firm will produce inputs and control outputs of

each stage of production process
Capital intensity
mix of capital (i.e., equipment, automation) and labor

resources used in production process
Process flexibility
ease with which resources can be adjusted in response to

changes in demand, technology, products or services, and
resource availability
Customer involvement
role of customer in production process
6-279
Outsourcing
Cost
Capacity
Quality
Speed
Reliability
Expertise
6-280
Process Selection
Projects
one-of-a-kind production of a product to customer order
Batch production
processes many different jobs at the same time in groups or

batches
Mass production
produces large volumes of a standard product for a mass

market
Continuous production
used for very-high volume commodity products
6-281
Sourcing Continuum
6-282
Product--Process Matrix
Product
Source: Adapted from Robert Hayes and Steven Wheelwright, Restoring the Competitive Edge
Competing through Manufacturing (New York, John Wiley & Sons, 1984), p. 209.
6-283
Types of Processes
Type of
product
Type of
customer
Product
demand
PROJECT
BATCH
MASS
CONT..
CONT
Unique
Made-toMadetoorder
Made-to
Madeto-stock
Commodity
(customized)
(standardized )
Few
individual
customers
Mass
market
Mass
market
Fluctuates
Stable
Very stable
One-atOneat-atime
Infrequent
Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive
Advantage (New York:McGrawYork:McGraw-Hill, 2001), p. 210
6-284
Types of Processes (cont.)

PROJECT
BATCH
MASS
CONT..
CONT
Demand
volume
Very low
Low to
medium
High
Very high
No. of
different
products
Infinite
variety
Many, varied
Few
Very few
Production
system
Long-term
Longproject
Discrete, job
shops
Repetitive,
assembly
lines
Continuous,
process
industries
6-285

PROJECT
BATCH
MASS
CONT..
CONT
Equipment
Varied
GeneralGeneralpurpose
SpecialSpecialpurpose
Highly
automated
Primary
type of
work
Specialized
contracts
Fabrication
Assembly
Mixing,
treating,
refining
Worker
skills
Experts,
crafts-crafts
persons
Wide range
of skills
Limited
range of
skills
Equipment
monitors
6-286

PROJECT
Advantages
DisDisadvantages
Examples
BATCH
MASS
CONT..
CONT
Custom work,
latest technology
Flexibility,
quality
Efficiency,
speed,
low cost
Highly efficient,
large capacity,
ease of control
Non-repetitive,
Nonsmall customer
base, expensive
Costly, slow,
difficult to
manage
Capital
investment;
lack of
responsiveness
Difficult to change,
farfar-reaching errors,
limited variety
Construction,
shipbuilding,
spacecraft
Machine shops,
print shops,
bakeries,
education
Automobiles,
televisions,
computers,
fast food
Paint, chemicals,
foodstuffs
Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Competitive Advantage (New
York:McGraw--Hill, 2001), p. 210
York:McGraw
6-287
Process Selection with

Break--Even Analysis
Break
examines cost trade-offs associated with demand volume
Cost
Fixed costs
constant regardless of the number of units produced
Variable costs
vary with the volume of units produced
Revenue
price at which an item is sold
Total revenue
is price times volume sold
Profit
difference between total revenue and total cost
6-288

Break--Even Analysis (cont.)
Break
Total cost = fixed cost + total variable cost
TC = cf + vcv
Total revenue = volume x price
TR = vp
Profit = total revenue - total cost
Z = TR TC = vp - (cf + vcv)
6-289

Break--Even Analysis (cont.)
Break
TR = TC
vp = cf + vcv
vp - vcv = cf
v ( p - c v) = c f
v=
cf
p - cv
Solving for BreakBreak-Even Point (Volume)

6-290
Break--Even Analysis: Example

Break
Fixed cost = cf = $2,000
Variable cost = cv = $5 per raft
Price = p = $10 per raft
Break--even point is
Break
v=
cf
p - cv
2000
= 400 rafts
10 - 5
6-291
Break--Even Analysis: Graph

Break
Dollars
Total
cost
line
$3,000
$2,000
$1,000
Total
revenue
line
400
Break--even point
Break
Units
6-292
Process Plans
Set of documents that detail manufacturing
and service delivery specifications

assembly charts
operations sheets
quality-control check-sheets
6-293
Process Selection
Process A
Process B
$2,000 + $5v
$5v = $10,000 + $3v
$3v
$2v
$2v = $8,000
v = 4,000 rafts
Below or equal to 4,000, choose A

Above or equal to 4,000, choose B
6-294
Process Analysis
systematic
examinatio
n of all
aspects of
process to
improve
operation
6-295
An Operations Sheet for a Plastic Part

Part name
Crevice Tool
Part No.
52074
Usage
Hand
Hand--Vac
Assembly No. 520

Oper. No.
Description
Dept.
Machine/Tools
Time
10
Pour in plastic bits
041
Injection molding
2 min
20
Insert mold
041
#076
2 min
30
Check settings
& start machine
041
113, 67, 650
20 min
40
Collect parts & lay flat
051
Plastics finishing
10 min
50
Remove & clean mold
042
Parts washer
15 min
60
Break off rough edges
051
Plastics finishing
10 min
6-296
Process Analysis
Building a flowchart

Determine objectives
Define process boundaries
Define units of flow
Choose type of chart
Observe process and collect data
Map out process
Validate chart
6-297
Process Flowcharts
look at manufacture of product or delivery
of service from broad perspective
Incorporate
nonproductive activities (inspection,

transportation, delay, storage)
productive activities (operations)
6-298
Process Flowchart
Symbols
Operations
Inspection
Transportation
Delay
Storage
6-299
Process
Flowchart
of Apple
Processin
g
6-300
6-301
Simple Value Chain Flowchart
6-302
Process Innovation
Continuous improvement
refines the breakthrough
Breakthrough
Improvement
Total redesign
of a process for
breakthrough
improvements
Continuous improvement activities

peak; time to reengineer process
6-303
From Function to Process
Sales
Manufacturing
Purchasing
Accounting
Product Development
Order Fulfillment
Customer Service
Function
Process
6-304
Process Innovation
Customer
Requirements
Strategic
Directives
Baseline Data
Benchmark
Data
Goals for Process

Performance
High - level
Process map
Innovative
Ideas
Detailed
Process Map
Model
Validation
Pilot Study
of New Design
No
Goals
Met?
Yes
Design
Principles
Key
Performance
Measures
Full Scale
Implementation
6-305
High--Level Process Map

High
6-306
Principles for Redesigning

Processes
Remove waste, simplify, and consolidate
similar activities
Link processes to create value
Let the swiftest and most capable enterprise
execute the process
Flex process for any time, any place, any way
Capture information digitally at the source and
propagate it through process
6-307
Principles for Redesigning

Processes (cont.)
Provide visibility through fresher and richer
information about process status
Fit process with sensors and feedback loops
that can prompt action
Add analytic capabilities to process
Connect, collect, and create knowledge around
process through all who touch it
Personalize process with preferences and
habits of participants
6-308
Techniques for Generating

Innovative Ideas
Vary the entry point to a problem
in trying to untangle fishing lines, its best to start

from the fish, not the poles
Draw analogies
a previous solution to an old problem might work
Change your perspective

think like a customer

bring in persons who have no knowledge of
process
6-309
Techniques for Generating

Innovative Ideas (cont.)
Try inverse brainstorming

what would increase cost

what would displease the customer
Chain forward as far as possible

if I solve this problem, what is the next problem
Use attribute brainstorming

how would this process operate if. . .

our workers were mobile and flexible

there were no monetary constraints
we had perfect knowledge
6-310
Technology Decisions
Financial justification of technology

Purchase cost
Operating Costs
Annual Savings
Revenue Enhancement
Replacement Analysis
Risk and Uncertainty
Piecemeal Analysis
6-311
Components of ee-Manufacturing
6-312
A Technology Primer
Product Technology
Computer-aided
design (CAD)
Group technology
(GT)
Computer-aided
engineering (CAE)
Collaborative
product commerce
(CPC)
Creates and communicates designs

electronically
Classifies designs into families for easy
retrieval and modification
Tests functionality of CAD designs
electronically
Facilitates electronic communication and
exchange of information among designers
and suppliers
6-313
A Technology Primer (cont.)

Product Technology
Product data
management
(PDM)
Product life cycle
management
(PLM)
Product
configuration
Keeps track of design specs and revisions

for the life of the product
Integrates decisions of those involved in
product development, manufacturing, sales,
customer service, recycling, and disposal
Defines products configured by customers
who have selected among various options,
usually from a Web site
6-314

Process Technology
Standard for
exchange of
product model data
(STEP)
Computer-aided
design and
manufacture
(CAD/CAM)
Computer aided
process (CAPP)
E-procurement
Set standards for communication among

different CAD vendors; translates CAD data
into requirements for automated inspection
and manufacture
Electronic link between automated design
(CAD) and automated manufacture (CAM)
Generates process plans based on
database of similar requirements
Electronic purchasing of items from eemarketplaces, auctions, or company
websites
6-315

Manufacturing Technology
Computer
Machines controlled by software code to perform a
numerically control
variety of operations with the help of automated
(CNC)
tool changers; also collects processing information
Flexible
manufacturing
system (FMS)
Robots
Conveyors
and quality data

A collection of CNC machines connected by an
automated material handling system to produce a
wide variety of parts
Manipulators that can be programmed to perform
repetitive tasks; more consistent than workers but
less flexible
Fixed
Fixed--path material handling; moves items along a
belt or overhead chain; reads packages and
diverts them to different directions; can be very fast
6-316

Manufacturing Technology
Automatic guided
vehicle (AGV)
A driverless truck that moves material along a

specified path; directed by wire or tape embedded
in floor or by radio frequencies; very flexible
Automated storage
and retrieval system
(ASRS)
An automated warehouse
warehousesome 26 stores high
high
in which items are placed in a carouselcarousel-type
storage system and retrieved by fastfast-moving
stacker cranes; controlled by computer
Process Control
Continuous monitoring of automated equipment;

makes realreal-time decisions on ongoing operation,
maintenance, and quality
Computer-integrated
manufacturing (CIM)
Automated manufacturing systems integrated

through computer technology; also called eemanufacturing
6-317

Information Technology
Business to
Business (B2B)
Business to
Consumer (B2C)
Internet
Electronic transactions between businesses

usually over the Internet
Intranet
Communication networks internal to an

organization; can be password (i.e., firewall)
protected sites on the Internet
Extranet
Electronic transactions between businesses and

their customers usually over the Internet
A global information system of computer networks
that facilitates communication and data transfer
Intranets connected to the Internet for shared

access with select suppliers, customers, and
trading partners
6-318

Bar Codes
Radio Frequency
Identification tags
(RFID)

Electronic data
interchange (EDI)
Extensive markup
language (XML)
Enterprise
resource planning
(ERP)

A series of vertical lines printed on most packages that

identifies item and other information when read by a
scanner
An integrated circuit embedded in a tag that can send
and receive information; a twentytwenty-first century bar code
with read/write capabilities
A computercomputer-to
to--computer exchange of business
documents over a proprietary network; very expensive
and inflexible
A programming language that enables computer to computer communication over the Internet by tagging
data before its is sent
Software for managing basic requirements of an
enterprise, including sales & marketing, finance and
accounting, production & materials management, and
human resources
6-319


Supply chain
management (SCM)
Customer relationship
management (CRM)
Decision support
systems (DSS)
Expert systems (ES)
Artificial intelligence
(AI)

Software for managing flow of goods and information

among a network of suppliers, manufacturers and
distributors
Software for managing interactions with customers and
compiling and analyzing customer data
An information system that helps managers make
decisions; includes a quantitative modeling component
and an interactive component for whatwhat-if analysis
A computer system that uses an expert knowledge base
to diagnose or solve a problem
A field of study that attempts to replicate elements of
human thought in computer processes; includes expert
systems, genetic algorithms, neural networks, and fuzzy
logic
6-320
Chapter 7
Capacity and Facilities

Lecture Outline
Capacity Planning
Basic Layouts
Designing Process Layouts
Designing Service Layouts
Designing Product Layouts
Hybrid Layouts
Capacity
Maximum capability to produce
Capacity planning
establishes overall level of productive

resources for a firm
3 basic strategies for timing of capacity

expansion in relation to steady growth in
demand (lead, lag, and average)
Capacity Expansion Strategies
Capacity (cont.)
Capacity increase depends on

volume and certainty of anticipated demand

strategic objectives
costs of expansion and operation
Best operating level

% of capacity utilization that minimizes unit costs
Capacity cushion
% of capacity held in reserve for unexpected

occurrences
Economies of Scale
it costs less per unit to produce high levels of
output
fixed costs can be spread over a larger number of

units
production or operating costs do not increase
linearly with output levels
quantity discounts are available for material
purchases
operating efficiency increases as workers gain
experience
Best Operating Level for a Hotel
Machine Objectives of
Facility Layout
Arrangement of areas within a facility to:
Minimize material-handling
costs
Utilize space efficiently
Utilize labor efficiently
Eliminate bottlenecks
Facilitate communication and
interaction
Reduce manufacturing cycle
time
Reduce customer service time
Eliminate wasted or redundant
movement
Increase capacity
Facilitate entry, exit, and

placement of material, products,
and people
Incorporate safety and security
measures
Promote product and service
quality
Encourage proper maintenance
activities
Provide a visual control of
activities
Provide flexibility to adapt to
changing conditions
BASIC LAYOUTS
Process layouts
group similar activities together

according to process or function they
perform
Product layouts
arrange activities in line according to

sequence of operations for a particular
product or service
Fixed-position layouts
are used for projects in which product

cannot be moved
Process Layout in Services

Womens
lingerie
Shoes
Housewares
Womens
dresses
Cosmetics
and jewelry
Childrens
department
Womens
sportswear
Entry and
display area
Mens
department
Manufacturing Process Layout
A Product Layout
In
Out
Comparison of Product
and Process Layouts
Product
Description
Type of process
Sequential
arrangement of
activities
Continuous, mass
production, mainly
assembly
Product
Demand
Volume
Equipment

Process
Functional
grouping of
activities
Intermittent, job
shop, batch
production, mainly
fabrication
Standardized, made Varied, made to
order
to stock
Fluctuating
Stable
Low
High
General purpose
Special purpose
Comparison of Product
and Process Layouts
Product
Limited skills
Low inin-process, high
finished goods
Storage space
Small
Material handling Fixed path (conveyor)
Aisles
Narrow
Scheduling
Part of balancing
Layout decision
Line balancing
Goal
Equalize work at each
station
Advantage
Efficiency
Workers
Inventory
Process
Varied skills
High inin-process, low
finished goods
Large
Variable path (forklift)
Wide
Dynamic
Machine location
Minimize material
handling cost
Flexibility
Fixed--Position Layouts
Fixed
Typical of projects in
which product produced
is too fragile, bulky, or
heavy to move
Equipment, workers,
materials, other
resources brought to the
site
Low equipment utilization
Highly skilled labor
Typically low fixed cost
Often high variable costs
7-335
Designing Process Layouts

Goal: minimize material handling costs
Block Diagramming
minimize nonadjacent loads
use when quantitative data is available
Relationship Diagramming
based on location preference between areas
use when quantitative data is not available
Block Diagramming
STEPS
create load summary chart
quantity in which
material is normally
calculate composite (two
moved
way) movements
develop trial layouts
Nonadjacent load
minimizing number of
distance farther
nonadjacent loads
than the next block
Unit load
Block Diagramming: Example

Load Summary Chart
1
FROM/TO
DEPARTMENT
Department 1
100
50
200
1
2
3
4
5
60
100
50
4
50
40
50
60
Block Diagramming:
Example (cont.)
2
2
1
1
4
3
2
3
1
1
3
4
3
2
5
5
5
4
4
5
200 loads
150 loads
110 loads
100 loads
60 loads
50 loads
50 loads
40 loads
0 loads
0 loads
Nonadjacent Loads:
110+40=150
0
110
4
Grid 2
1
100
150
200
3
4
150 200
50 5050 40 60
110
50
60
3
5
40
Block Diagramming:
Example (cont.)
Block Diagram
type of schematic layout diagram; includes space requirements
(a) Initial block diagram
(b) Final block diagram
4
2
Relationship Diagramming
Schematic diagram that

uses weighted lines to
denote location preference
Muthers grid
format for displaying
manager preferences for
department locations
Relationship Diagramming: Excel
necessary
Relationship AE Absolutely
Especially important
Diagramming: Example
I Important
O Okay
U Unimportant
X Undesirable
Production
O
A
Offices
U
A
Shipping and
receiving
U
O
O
O
X
U
Locker room
Toolroom
Stockroom
Relationship Diagrams: Example (cont.)

(a) Relationship diagram of original layout
Offices
Stockroom
Locker
room
Toolroom
Shipping
and
receiving
Key: A
E
I
Production
O
U
X
Relationship Diagrams: Example (cont.)

(b) Relationship diagram of revised layout
Stockroom
Shipping
and
receiving
Offices
Toolroom
Production
Locker
room
Key: A
E
I
O
U
X
Computerized layout
Solutions
CRAFT
Computerized Relative Allocation of Facilities

Technique
CORELAP
Computerized Relationship Layout Planning
PROMODEL and EXTEND

visual feedback
allow user to quickly test a variety of scenarios
Three-D modeling and CAD

integrated layout analysis

available in VisFactory and similar software
Designing Service
Layouts
Must be both attractive and functional
Types
Free flow layouts
Grid layouts
encourage browsing, increase impulse purchasing, are flexible

and visually appealing
encourage customer familiarity, are low cost, easy to clean and
secure, and good for repeat customers
Loop and Spine layouts

both increase customer sightlines and exposure to products,

while encouraging customer to circulate through the entire
store
Types of Store Layouts
Designing Product
Layouts
Objective
Balance the assembly line
Line balancing
tries to equalize the amount of work at each

workstation
Precedence requirements
physical restrictions on the order in which operations

are performed
Cycle time
maximum amount of time a product is allowed to

spend at each workstation
Cycle Time Example
Cd =
Cd =
production time available

desired units of output
(8 hours x 60 minutes / hour)
(120 units)
Cd =
480
120
= 4 minutes
Flow Time vs Cycle Time

Cycle time = max time spent at any station
Flow time = time to complete all stations
1
4 minutes
4 minutes
4 minutes
Flow time = 4 + 4 + 4 = 12 minutes

Cycle time = max (4, 4, 4) = 4 minutes
Efficiency of Line and Balance Delay

Efficiency
Minimum number of
workstations
E=
i=1
nCa
ti
N=
ti
Balance
delay
i=1
Cd
where
ti
j
n
Ca
Cd
= completion time for element i

= number of work elements
= actual number of workstations
= actual cycle time
= desired cycle time
total idle
time of line
calculated
as (1 efficiency)
Line Balancing Procedure

1. Draw and label a precedence diagram
2. Calculate desired cycle time required for line
3. Calculate theoretical minimum number of
workstations
4. Group elements into workstations, recognizing cycle
time and precedence constraints
5. Calculate efficiency of line
6. Determine if theoretical minimum number of
workstations or an acceptable efficiency level has
been reached. If not, go back to step 4.
Line Balancing: Example

WORK ELEMENT
A
B
C
D
PRECEDENCE
TIME (MIN)
A
A
B, C
0.1
0.2
0.4
0.3
Press out sheet of fruit

Cut into strips
Outline fun shapes
Roll up and package
0.2
0.1 A
D
C
0.4
0.3
Line Balancing: Example (cont.)

WORK ELEMENT
A
B
C
D
PRECEDENCE
TIME (MIN)
A
A
B, C
0.1
0.2
0.4
0.3
Press out sheet of fruit

Cut into strips
Outline fun shapes
Roll up and package
Cd =
N=
40 hours x 60 minutes / hour

6,000 units
0.1 + 0.2 + 0.3 + 0.4
0.4
2400
= 0.4 minute
6000
=
1.0
0.4
= 2.5 3 workstations

WORKSTATION
1
2
3
ELEMENT
A
B
C
D
B
REMAINING
TIME
0.3
0.1
0.0
0.1
0.2
0.1 A
Cd = 0.4
N = 2.5
D
0.4
REMAINING
ELEMENTS
B, C
C, D
D
none
0.3
E=
Work
station 1
Work
station 2
Work
station 3
A, B
0.3
minute
0.4
minute
0.3
minute
0.1 + 0.2 + 0.3 + 0.4

3(0.4)
1.0
1.2
Cd = 0.4
N = 2.5
= 0.833 = 83.3%
Computerized Line
Balancing
Use heuristics to assign tasks to
workstations

Longest operation time

Shortest operation time
Most number of following tasks
Least number of following tasks
Ranked positional weight
Hybrid Layouts
Cellular layouts
group dissimilar machines into work centers (called cells)

that process families of parts with similar shapes or
processing requirements
Production flow analysis (PFA)

reorders part routing matrices to identify families of parts

with similar processing requirements
Flexible manufacturing system

automated machining and material handling systems

which can produce an enormous variety of items
Mixed-model assembly line

processes more than one product model in one line
Cellular Layouts
1. Identify families of parts with similar
flow paths
2. Group machines into cells based on
part families
3. Arrange cells so material movement
is minimized
4. Locate large shared machines at
point of use
Parts Families
A family of
similar parts
A family of related
grocery items
Original Process Layout

Assembly
5
2
12
10
3
11
Raw materials
Part Routing Matrix

Parts
A
B
C
D
E
F
G
H
Figure 5.8
Machines
4 5 6 7
x
x
x
x
x
x
10 11 12
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Revised Cellular Layout

Assembly
10
12
11
Cell 1
Cell 2
Cell 3
7
A B C
Raw materials
Reordered Routing Matrix

Parts
Machines
8 10 3 6
A
D
F
C
G
B
H
E
x
x
x
x
x
x
x
x
x
x
x
11 12
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Advantages and Disadvantages

of Cellular Layouts
Advantages

Reduced material
handling and transit time
Reduced setup time
Reduced workwork-ininprocess inventory
Better use of human
resources
Easier to control
Easier to automate
Disadvantages

Inadequate part families

Poorly balanced cells
Expanded training and
scheduling of workers
Increased capital
investment
Automated Manufacturing Cell
Source: J. T. Black, Cellular

Manufacturing Systems Reduce
Setup Time, Make Small Lot
Production Economical. Industrial
Engineering (November 1983)
Flexible Manufacturing
Systems (FMS)
FMS consists of numerous programmable
machine tools connected by an automated
material handling system and controlled by
a common computer network
FMS combines flexibility with efficiency
FMS layouts differ based on

variety of parts that the system can process

size of parts processed
average processing time required for part
completion
Full-Blown FMS
Mixed Model
Assembly Lines
Produce multiple models in any order
on one assembly line
Issues in mixed model lines

Line balancing
U-shaped lines
Flexible workforce
Model sequencing
Balancing UU-Shaped Lines

Precedence diagram:
A
Cycle time = 12 min
(a) Balanced for a straight line
(b) Balanced for a UU-shaped line
A,B
C,D
9 min
12 min
3 min
Efficiency =
24
3(12)
24
A,B
= .6666 = 66.7 %
C,D
36
E
Efficiency =
24
2(12)
24
24
= 100 % 12 min
12 min
Facility Location Models
Lecture Outline
Types of Facilities
Site Selection: Where to Locate
Location Analysis Techniques
Supplement 77-374
Types of Facilities
Heavy
Heavy--manufacturing facilities
large, require a lot of space, and are

expensive
Light
Light--industry facilities
smaller, cleaner plants and usually less

costly
Retail and service facilities

smallest and least costly

Supplement 77-375
Factors in Heavy Manufacturing

Location
Construction costs
Land costs
Raw material and finished goods
shipment modes
Proximity to raw materials
Utilities
Means of waste disposal
Labor availability
Supplement 77-376
Factors in Light Industry

Location
Land costs
Transportation costs
Proximity to markets
depending on delivery requirements

including frequency of delivery
required by customer
Supplement 77-377
Factors in Retail Location
Proximity to customers
Location is everything
Supplement 77-378
Site Selection: Where to Locate

Infrequent but important
being in the right place at the

right time
Must consider other factors,

especially financial
considerations
Location decisions made more
often for service operations
than manufacturing facilities
Location criteria for service
access to customers
Location criteria for

manufacturing facility

nature of labor force

labor costs
proximity to suppliers and
markets
distribution and
transportation costs
energy availability and cost
community infrastructure
quality of life in community
government regulations and
taxes
Supplement 77-379
Global Location Factors

Government stability
Government regulations
Political and economic
systems
Economic stability and growth
Exchange rates
Culture
Climate
Export/import regulations,
duties and tariffs
Raw material availability

Number and proximity of
suppliers
Transportation and
distribution system
Labor cost and education
Available technology
Commercial travel
Technical expertise
Cross
Cross--border trade
regulations
Group trade agreements
Supplement 77-380
Regional and Community

Location Factors in U.S.
Labor (availability,
education, cost, and
unions)
Proximity of customers
Number of customers
Construction/leasing
costs
Land cost
Modes and quality of

transportation
Transportation costs
Community government
Local business
regulations
Government services
(e.g., Chamber of
Commerce)
Supplement 77-381
Regional and Community

Location Factors in U.S. (cont.)

Business climate
Community services
Incentive packages
Government regulations
Environmental
regulations
Raw material availability
Commercial travel
Climate
Infrastructure (e.g.,
roads, water, sewers)
Quality of life
Taxes
Availability of sites
Financial services
Community inducements
Proximity of suppliers
Education system
Supplement 77-382
Location Incentives

Tax credits
Relaxed government regulation
Job training
Infrastructure improvement
Money
Supplement 77-383
Geographic Information
Systems (GIS)
Computerized system for storing, managing,
creating, analyzing, integrating, and digitally
displaying geographic, i.e., spatial, data
Specifically used for site selection
enables users to integrate large quantities of
information about potential sites and analyze these
data with many different, powerful analytical tools
Supplement 77-384
GIS Diagram
Supplement 77-385
Location Analysis Techniques

Location factor rating
Center
Center--of
of--gravity
Load
Load--distance
Supplement 77-386
Location Factor Rating

Identify important factors

Weight factors (0.00 - 1.00)
Subjectively score each factor (0 - 100)
Sum weighted scores
Supplement 77-387
Location Factor Rating: Example

SCORES (0 TO 100)
LOCATION FACTOR
Labor pool and climate
Proximity to suppliers
Wage rates
Community environment
Proximity to customers
Shipping modes
Air service
WEIGHT
Site 1
Site 2
Site 3
.30
.20
.15
.15
.10
.05
.05
80
100
60
75
65
85
50
65
91
95
80
90
92
65
90
75
72
80
95
65
90
Weighted Score for Labor pool and climate for

Site 1 = (0.30)(80) = 24
Supplement 77-388
Location Factor Rating: Example

(cont.)
WEIGHTED SCORES
Site 1
Site 2
Site 3
24.00
20.00
9.00
11.25
6.50
4.25
2.50
77.50
19.50
18.20
14.25
12.00
9.00
4.60
3.25
80.80
27.00
15.00
10.80
12.00
9.50
3.25
4.50
82.05
Site 3 has the

highest factor rating
Supplement 77-389
Location Factor Rating

Supplement 77-390
Center-ofCenterof-Gravity
Technique
Locate facility at center of movement
in geographic area
Based on weight and distance
traveled; establishes gridgrid-map of
area
Identify coordinates and weights
shipped for each location
Supplement 77-391
Grid--Map Coordinates
Grid
y
xiWi
x=
Wi
i=1
1 (x
(x1, y1), W1
3 (x
(x3, y3), W3
y3
x1
x2
x3
yiWi
i=1
2 (x
(x2, y2), W2
y2
y1
i=1
y=
Wi
i=1
where,
x, y = coordinates of new facility
at center of gravity
xi, yi = coordinates of existing
facility i
Wi = annual weight shipped from
facility i
x
Supplement 77-392
Center-ofCenterof-Gravity Technique:
Example
y
700
600
Miles
500
C
(135)
200
200
200
75
100
500
105
250
600
135
500
300
60
(105)
400
300
x
y
Wt
D
(60)
A
(75)
100
0
100 200 300 400 500 600 700 x

Miles
Supplement 77-393
Example (cont.)
n
xiWi
x=
i=1
n
Wi
(200)(75) + (100)(105) + (250)(135) + (500)(60)

75 + 105 + 135 + 60
= 238
i=1
n
yiWi
y=
i=1
n
Wi
(200)(75) + (500)(105) + (600)(135) + (300)(60)

75 + 105 + 135 + 60
= 444
i=1
Supplement 77-394
Example (cont.)
y
700
600
Miles
500
C
(135)
B
(105)
400
300
200
x
y
Wt
200
200
75
100
500
105
250
600
135
500
300
60
Center of gravity (238, 444)

D
(60)
(75)
100
0
100 200 300 400 500 600 700 x

Miles
Supplement 77-395
Center-ofCenterof-Gravity Technique
Supplement 77-396
Load--Distance Technique
Load
Compute (Load x Distance) for each site

Choose site with lowest (Load x Distance)
Distance can be actual or straightstraight-line
Supplement 77-397
Load--Distance Calculations
Load
n
ld
LD =
i=1
where,
LD =
load--distance value
load
li
load expressed as a weight, number of trips or units

being shipped from proposed site and location i
distance between proposed site and location i
di
di
(xi - x)2 + (y
(yi - y)2
where,
(x,y
x,y)) = coordinates of proposed site
(xi , yi) = coordinates of existing facility
Supplement 77-398
Load--Distance: Example
Load
Potential Sites
Site
X
1
360
2
420
3
250
Y
180
450
400
A
200
200
75
X
Y
Wt
Suppliers
B
C
100
250
500
600
105
135
D
500
300
60
Compute distance from each site to each supplier

Site 1 dA =
dB =
(200-360)2 + (200(200(200-180)2 = 161.2
(xB - x1)2 + (yB - y1)2 =
(100-360)2 + (500(100(500-180)2 = 412.3
(xA - x1)2 + (yA - y1)2
dC = 434.2
dD = 184.4
Supplement 77-399
Load--Distance: Example (cont.)

Load
Site 2 dA = 333
dB = 323.9 dC = 226.7 dD = 170
Site 3 dA = 206.2 dB = 180.3 dC = 200
dD = 269.3
Compute loadload-distance
LD =
ld
i
i=1
Site 1 = (75)(161.2) + (105)(412.3) + (135)(434.2) + (60)(434.4) = 125,063
Site 2 = (75)(333) + (105)(323.9) + (135)(226.7) + (60)(170) = 99,789
Site 3 = (75)(206.2) + (105)(180.3) + (135)(200) + (60)(269.3) = 77,555*
* Choose site 3
Supplement 77-400
Load-Distance Technique
Loadwith Excel and OM Tools
Supplement 77-401
Chapter 8
Human Resources
Lecture Outline
Human Resources and Quality Management
Changing Nature of Human Resources
Management
Contemporary Trends in Human Resources
Management
Employee Compensation
Managing Diversity in Workplace
Job Design
Job Analysis
Learning Curves
8-403
Human Resources and Quality

Management
Employees play important
role in quality management
Malcolm Baldrige National
Quality Award winners have a
pervasive human resource
focus
Employee training and
education are recognized as
necessary long-term
investments
Employees have power to

make decisions that will
improve quality and customer
service
Strategic goals for quality and
customer satisfaction require
teamwork and group
participation
8-404
Changing Nature of Human

Resources Management
Scientific management
Breaking down jobs into

elemental activities and
simplifying job design
Jobs
Comprise a set of tasks,

elements, and job motions
(basic physical
movements)
In a piece-rate wage
system, pay is based on
output
Assembly-line
Production meshed with

principles of scientific
management
Advantages of task
specialization
High output, low costs,

and minimal training
Disadvantages of task
specialization
Boredom, lack of
motivation, and physical
and mental fatigue
8-405
Employee Motivation
Motivation
willingness to work hard because

that effort satisfies an employee
need
Improving Motivation
positive reinforcement and
feedback
effective organization and
discipline
fair treatment of people
satisfaction of employee needs
setting of work-related goals
Improving Motivation
(cont.)
design of jobs to fit employee
work responsibility
empowerment
restructuring of jobs when
necessary
rewards based on company as
well as individual performance
achievement of company goals
8-406
Evolution of Theories of
Employee Motivation
Abraham Maslows
Pyramid of Human
Needs
Douglas McGregors
Theory X and Theory Y
Theory X Employee
SelfSelfactualization
Esteem
Social
Safety/Security
Physiological (financial)
Dislikes work
Must be coerced
Shirks responsibility
Little ambition
Security top motivator
Theory Y Employee
Work is natural
Self
Self--directed
Controlled
Accepts responsibility
Makes good decisions
Frederick Herzbergs
Hygiene/Motivation
Theories
Hygiene Factors
Company policies
Supervision
Working conditions
Interpersonal relations
Salary, status, security
Motivation Factors
Achievement
Recognition
Job interest
Responsibility
Growth
Advancement
8-407
Contemporary Trends in
Human Resources Management
Job training

extensive and varied

two of Demings 14 points
refer to employee
education and training
Cross Training
an employee learns more

than one job
Job rotation
horizontal movement
between two or more jobs
according to a plan
Empowerment
giving employees
authority to make
decisions
Teams
group of employees work

on problems in their
immediate work area
8-408
Contemporary Trends in Human

Resources Management (cont.)
Job enrichment
vertical enlargement
allows employees control

over their work
horizontal enlargement
an employee is assigned a
complete unit of work with
defined start and end
Flexible time
part of a daily work

schedule in which
employees can choose
time of arrival and
departure
Alternative workplace
nontraditional work location
Telecommuting
employees work
electronically from a
location they choose
Temporary and part-time

employees
mostly in fast-food and

restaurant chains, retail
companies, package delivery
services, and financial firms
8-409
Employee Compensation
Types of pay
hourly wage
individual incentive or piece rate

employees are paid for the number of units they produce

during the workday
straight salary
the longer someone works, the more s/he is paid
common form of payment for management
commissions
usually applied to sales and salespeople
8-410
Employee Compensation (cont.)

Gainsharing
an incentive plan joins employees

in a common effort to achieve
company goals in which they
share in the gains
Profit sharing
sets aside a portion of profits for

employees at years end
8-411
Managing Diversity in
Workplace
Workforce has become more diverse
4 out of every 10 people entering workforce during

the decade from 1998 to 2008 will be members of
minority groups
In 2000 U.S. Census showed that some minorities,
primarily Hispanic and Asian, are becoming
majorities
Companies must develop a strategic approach

to managing diversity
8-412
Affirmative Actions vs.

Managing Diversity
Affirmative action
an outgrowth of laws and

regulations
government initiated and
mandated
contains goals and
timetables designed to
increase level of
participation by women
and minorities to attain
parity levels in a
companys workforce
not directly concerned
with increasing company
success or increasing
profits
Managing diversity
process of creating a work

environment in which all
employees can contribute
to their full potential in
order to achieve a
companys goals
voluntary in nature, not
mandated
seeks to improve internal
communications and
interpersonal
relationships, resolve
conflict, and increase
product quality,
productivity, and efficiency
8-413
Diversity Management Programs

Education
Awareness
Communication
Fairness
Commitment
8-414
Global Diversity Issues

Cultural, language, geography
significant barriers to managing a globally diverse workforce
E-mails, faxes, Internet, phones, air travel

make managing a global workforce possible but not

necessarily effective
How to deal with diversity?

identify critical cultural elements

learn informal rules of communication
use a third party who is better able to bridge cultural gap
become culturally aware and learn foreign language
teach employees cultural norm of organization
8-415
Attributes of Good Job Design

An appropriate degree of
repetitiveness
An appropriate degree of
attention and mental
absorption
Some employee
responsibility for
decisions and discretion
Employee control over
their own job
Goals and achievement

feedback
A perceived contribution
to a useful product or
service
Opportunities for
personal relationships
and friendships
Some influence over the
way work is carried out
in groups
Use of skills
8-416
Factors in Job Design

Task analysis
how tasks fit together to form a job
Worker analysis
determining worker capabilities and responsibilities for a

job
Environment analysis
physical characteristics and location of a job
Ergonomics
fitting task to person in a work environment
Technology and automation

broadened scope of job design
8-417
Elements of Job Design
8-418
Job Analysis
Method Analysis (work methods)
Study methods used in the work included in

the job to see how it should be done
Primary tools are a variety of charts that
illustrate in different ways how a job or work
process is done
8-419
Process Flowchart Symbols

Operation:
An activity directly contributing to product or service
Transportation:
Moving the product or service from one location to another
Inspection:
Examining the product or service for completeness,
irregularities, or quality
Delay:
Process having to wait
Storage:
Store of the product or service
8-420
Process Flowchart
8-421
Job PhotoPhoto-Id Cards

Time
(min)
WorkerWorkerMachine
Chart
Operator
Date
Time
(min)
10/14
Photo Machine
Key in customer data

on card
2.6
Idle
Feed data card in
0.4
Accept card
2
3
4
Position customer for photo 1.0
Idle
Take picture
0.6
Begin photo process
Idle
3.4
Photo/card processed
Inspect card & trim edges
1.2
Idle
5
6
7
8
9
8-422
Worker--Machine Chart: Summary

Worker
Summary
Operator Time
Photo Machine Time
Work
5.8
63
4.8
52
Idle
3.4
37
4.4
48
Total
9.2 min
100%
9.2 Min
100%
8-423
Motion Study
Used to ensure efficiency of motion in
a job
Frank & Lillian Gilbreth
Find one best way to do task
Use videotape to study motions
8-424
General Guidelines for

Motion Study
Efficient Use Of Human Body
Work
simplified, rhythmic and symmetric
Hand/arm motions
coordinated and simultaneous
Employ full extent of physical capabilities
Conserve energy
use machines, minimize distances, use momentum
Tasks
simple, minimal eye contact and muscular effort, no
unnecessary motions, delays or idleness
8-425
General Guidelines for

Motion Study
Efficient Arrangement of Workplace
Tools, material, equipment - designated, easily accessible
location
Comfortable and healthy seating and work area
Efficient Use of Equipment

Equipment and mechanized tools enhance worker abilities
Use footfoot-operated equipment to relieve hand/arm stress
Construct and arrange equipment to fit worker use
8-426
Illustrates
improvement rate of
workers as a job is
repeated
Processing time per
unit decreases by a
constant percentage
each time output
doubles
Processing time per unit
Learning Curves
Units produced
8-427
Learning Curves (cont.)

Time required for the nth unit =
tn = t1n b
where:
tn =
t1 =
n=
b=
time required for nth unit produced

time required for first unit produced
cumulative number of units produced
ln r where r is the learning curve percentage
ln 2 (decimal coefficient)
8-428
Learning Curve Effect

Contract to produce 36 computers.
t1 = 18 hours, learning rate = 80%
What is time for 9th, 18th, 36th units?
t9 = (18)(9)ln(0.8)/ln 2 = (18)(9)-0.322
= (18)/(9)0.322 = (18)(0.493) = 8.874hrs
t18 = (18)(18)ln(0.8)/ln 2 = (18)(0.394) = 7.092hrs
t36 = (18)(36)ln(0.8)/ln 2 = (18)(0.315) = 5.674hrs
8-429
Processing time per unit
Learning Curve for Mass

Production Job
End of improvement
Standard
time
Units produced
8-430
Learning Curves (cont.)

Advantages

planning labor
planning budget
determining
scheduling
requirements
Limitations
product modifications
negate learning curve
effect
improvement can derive
from sources besides
learning
industry-derived learning
curve rates may be
inappropriate
8-431
Work Measurement
Lecture Outline
Time Studies
Work Sampling
Supplement 88-433
Work Measurement
Determining how long it takes to do a job
Growing importance in service sector

Services tend to be laborlabor-intensive

Service jobs are often repetitive
Time studies
Standard time
is time required by an average worker to perform a job once
Incentive piecepiece-rate wage system based on time

study
Supplement 88-434
Stopwatch Time
Study Basic Steps
1.
2.
3.
4.
5.
Establish standard job method

Break down job into elements
Study job
Rate workers performance (RF)
Compute average time (t)
Supplement 88-435
Stopwatch Time Study

Basic Steps (cont.)
6. Compute normal time
Normal Time = (Elemental average) x (rating factor)
Nt = (t )(RF
)(RF))
Normal Cycle Time = NT = Nt
7. Compute standard time

Standard Time = (normal cycle time) x (1 + allowance factor)
ST = (NT)(1 + AF)
Supplement 88-436
Performing a Time Study

Time Study Observation Sheet
Identification of operation
Date
Sandwich Assembly
Operator
Smith
Approval
Jones
Observer
Russell
Cycles
1
Grasp and lay
1 out bread slices
2
Spread mayonnaise
on both slices
Place ham, cheese,

and lettuce on bread
Summary
7
10
.04 .05 .05 .04 .06 .05 .06 .06 .07 .05
R .04
.38 .72 1.05 1.40 1.76 2.13 2.50 2.89 3.29
t .07
.06
R .11
.44 .79 1.13 1.47 1.83 2.21 2.60 2.98 3.37
t .12
.11
R .23 .55
.07 .08 .07 .07
.14
.12
.13
.13
5/17
.08
.13
.10
.12
.09
.14
.08
RF
Nt
.53 .053 1.05 .056
.77 .077 1.00 .077
.14 1.28 1.28 1.10 .141
.93 1.25 1.60 1.96 2.34 2.72 3.12 3.51
Place top on sandwich, t .10 .12 .08 .09 .11 .11 .10 .10 .12 .10 1.03 1.03 1.10 .113
Slice, and stack
R .33 .67 1.01 1.34 1.71 2.07 2.44 2.82 3.24 3.61
Supplement 88-437
Performing a Time
Study (cont.)
Average element time = t =
0.53
t
=
= 0.053
10
10
Normal time = (Elemental average)(rating factor)

Nt = ( t )(RF
)(RF)) = (0.053)(1.05) = 0.056
Normal Cycle Time = NT = Nt = 0.387
ST = (NT) (1 + AF) = (0.387)(1+0.15) = 0.445 min
Supplement 88-438
Performing a Time
Study (cont.)
How many sandwiches can be made in 2 hours?
120 min
0.445 min/sandwich
= 269.7 or 270 sandwiches
Example 17.3
Supplement 88-439
Number of Cycles
To determine sample size:
zs
n=
eT
where
z = number of standard deviations from the mean in a
normal distribution reflecting a level of statistical
confidence
s=
(xi - x)2 = sample standard deviation from sample

time study
n-1
T = average job cycle time from the sample time study

e = degree of error from true mean of distribution
Supplement 88-440
Number of Cycles: Example

Average cycle time = 0.361
Computed standard deviation = 0.03
Company wants to be 95% confident that computed time is
within 5% of true average time
zs
n=
eT
(1.96)(0.03)
= 10.61 or 11
(0.05)(0.361)
Supplement 88-441
Number of Cycles: Example

(cont.)
Supplement 88-442
Developing Time Standards

without a Time Study
Elemental standard time
files
predetermined job
element times
Predetermined motion
times
predetermined times for

basic micromicro-motions
Time measurement units

TMUs = 0.0006 minute

100,000 TMU = 1 hour
Advantages

worker cooperation
unnecessary
workplace uninterrupted
performance ratings
unnecessary
consistent
Disadvantages

ignores job context

may not reflect skills and
abilities of local workers
Supplement 88-443
MTM Table for MOVE

TIME (TMU) WEIGHT ALLOWANCE
DISTANCE
MOVED
(INCHES)
A
3/4 or less
2.0
1
2.5
2
3.6
3
4.9
4
6.1
20
19.2
B
2.0
2.9
4.6
5.7
6.9
C
2.0
3.4
5.2
6.7
8.0
18.2
22.1
Hand in
motion
B
Weight
(lb)
up to:
Static
constant
TMU
Dynamic
factor
2.3
2.9
3.6
4.3
2.5
1.00
7.5
1.06
2.2
15.6
37.5
1.39
12.5
A. Move object to other hand or against stop

B. Move object to approximate or indefinite location
Source: MTM Association for Standards and Research.
C. Move object to exact location
Supplement 88-444
Work Sampling
Determines the proportion of time a worker
spends on activities
Primary uses of work sampling are to
determine
ratio delay
percentage of time a worker or machine is delayed or idle
analyze jobs that have nonnon-repetitive tasks
Cheaper, easier approach to work

measurement
Supplement 88-445
Steps of Work Sampling

1.
2.
Define job activities

Determine number of observations in work sample
2
n=
z
e p(1 - p)
where
n = sample size (number of sample observations)
z = number of standard deviations from mean for desired
level of confidence
e = degree of allowable error in sample estimate
p = proportion of time spent on a work activity estimated
prior to calculating work sample
Supplement 88-446
Steps of Work Sampling

(cont.)
3. Determine length of sampling
period
4. Conduct work sampling study;
record observations
5. Periodically re
re--compute number
of observations
Supplement 88-447
Work Sampling: Example

What percent of time is spent looking up
information? Current estimate is p = 30%
Estimate within +/+/- 2%, with 95% confidence
n=
z
e
p(1 - p) =
1.96
(0.3)(0.7) = 2016.84 or 2017
0.02
After 280 observations, p = 38%
n=
z
e
p(1 - p) =
1.96
(0.38)(0.62) = 2263
0.02
Supplement 88-448
Supplement 88-449
Chapter 9
Project Management
Lecture Outline
Project Planning
Project Scheduling
Project Control
CPM/PERT
Probabilistic Activity Times
Microsoft Project
Project Crashing and Time-Cost
Trade-off
9-451
Project Management Process

Project
unique, one-time operational activity or effort
9-452

(cont.)
9-453

(cont.)
9-454
Project Elements

Objective
Scope
Contract requirements
Schedules
Resources
Personnel
Control
Risk and problem analysis
9-455
Project Team and Project Manager

Project team
made up of individuals from various areas and

departments within a company
Matrix organization
a team structure with members from functional

areas, depending on skills required
Project manager
most important member of project team
9-456
Scope Statement and Work

Breakdown Structure
Scope statement
a document that provides an understanding,

justification, and expected result of a project
Statement of work
written description of objectives of a project
Work breakdown structure (WBS)

breaks down a project into components,

subcomponents, activities, and tasks
9-457
Work Breakdown Structure for Computer Order

Processing System Project
9-458
Responsibility Assignment Matrix

Organizational
Breakdown
Structure (OBS)
a chart that
shows which
organizational
units are
responsible for
work items
Responsibility
Assignment
Matrix (RAM)
shows who is
responsible for
work in a
project
9-459
Global and Diversity Issues in

Project Management
In existing global business environment,
project teams are formed from different
genders, cultures, ethnicities, etc.
In global projects diversity among team
members can add an extra dimension to
project planning
Cultural research and communication are
important elements in planning process
9-460
Project Scheduling
Steps

Define activities
Sequence
activities
Estimate time
Develop schedule
Techniques

Gantt chart
CPM/PERT
Microsoft Project
9-461
Gantt Chart
Graph or bar chart with a bar for each
project activity that shows passage of
time
Provides visual display of project
schedule
Slack
amount of time an activity can be delayed

without delaying the project
9-462
Example of Gantt Chart

0
Month
4
10
Activity
Design house
and obtain
financing
Lay foundation
Order and
receive
materials
Build house
Select paint
Select carpet
1
Finish work
Month
9-463
Project Control

Time management
Cost management
Quality management
Performance management
Earned Value Analysis

a standard procedure for numerically measuring a

projects progress, forecasting its completion date and
cost and measuring schedule and budget variation
Communication
Enterprise project management
9-464
CPM/PERT
Critical Path Method (CPM)

DuPont & RemingtonRemington-Rand (1956)

Deterministic task times
Activity--on
Activity
on--node network construction
Project Evaluation and Review Technique

(PERT)

US Navy, Booz, Allen & Hamilton

Multiple task time estimates; probabilistic
Activity--on
Activity
on--arrow network construction
9-465
Project Network
Activity-on-node (AON)
nodes represent activities,

and arrows show
precedence relationships
Activity-on-arrow (AOA)
arrows represent activities

and nodes are events for
points in time
Event
Node
1
Branch
completion or beginning
of an activity in a project
Dummy
two or more activities

cannot share same start
and end nodes
9-466
AOA Project Network for

a House
3
Lay
foundation
2
3
Design house
and obtain
financing
Dummy
Build
house
0
1
Order and
receive
materials
4
Select
paint
Finish
work
3
1
Select
carpet
9-467
Concurrent Activities
Lay foundation
3
Lay
foundation
Order material
(a) Incorrect precedence

relationship
Dummy
2
0
1
Order material
(b) Correct precedence
relationship
9-468
AON Network for House

Building Project
Lay foundations
Build house
4
3
2
2
Start
Finish work
7
1
1
3
Design house
and obtain
financing
3
1
Order and receive

materials
5
1
6
1
Select carpet
Select paint
9-469
Critical Path
4
3
2
2
Start
7
1
1
3
3
1
A:
B:
C:
D:
1-2-4-7
3 + 2 + 3 + 1 = 9 months
1-2-5-6-7
3 + 2 + 1 + 1 + 1 = 8 months
1-3-4-7
3 + 1 + 3 + 1 = 8 months
1-3-5-6-7
3 + 1 + 1 + 1 + 1 = 7 months
5
1
6
1
Critical path
Longest path
through a network
Minimum project
completion time
9-470
Activity Start Times

Start at 5 months
4
3
2
2
Start
Finish at 9 months
7
1
1
3
3
1
Start at 3 months
5
1
Finish
6
1
Start at 6 months
9-471
Node Configuration
Activity number
Earliest start
Earliest finish
1
3
Latest finish
Activity duration
Latest start
9-472
Activity Scheduling
Earliest start time (ES)

earliest time an activity can start

ES = maximum EF of immediate predecessors
Forward pass
starts at beginning of CPM/PERT network to

determine earliest activity times
Earliest finish time (EF)

earliest time an activity can finish

earliest start time plus activity time
EF= ES + t
9-473
Earliest Activity Start and

Finish Times
Lay foundations
Build house
Start
5
4
3
1
1
Design house
and obtain
financing
1
6
3
1
Order and receive
materials
Finish work
1
5
Select carpet
Select pain
9-474
Activity Scheduling (cont.)

Latest start time (LS)
Latest time an activity can start without delaying

critical path time
LS= LF - t
Latest finish time (LF)

latest time an activity can be completed without

delaying critical path time
LF = minimum LS of immediate predecessors
Backward pass
Determines latest activity times by starting at the end

of CPM/PERT network and working forward
9-475
Latest Activity Start and

Finish Times
Lay foundations
Build house
Start
Design house
and obtain
financing
Order and receive

materials
Finish work
Select carpet
Select pain
9-476
Activity Slack
Activity
LS
ES
LF
EF
Slack S
*1
*2
*4
*7
* Critical Path
9-477
Probabilistic Time Estimates

Beta distribution
a probability distribution traditionally used in

CPM/PERT
Mean (expected time):
Variance:
a+4
4m
m+b
t=
=
2
b-a
where
a = optimistic estimate
m = most likely time estimate
b = pessimistic time estimate
9-478
P(time)
P(time)
Examples of Beta Distributions
Time
Time
P(time)
m=t
Time
9-479
Project Network with Probabilistic

Time Estimates: Example
Equipment
installation
Equipment testing
and modification
6,8,10
2,4,12
System
development
Start
Manual
testing
3,6,9
Position
recruiting
2,3,4
3
1,3,5
System
training
3,7,11
1,4,7
Finish
11
Job Training
2,4,6
System
testing
3,4,5
Final
debugging
10
1,10,13
System
changeover
Orientation
7
2,2,2
9-480
Activity Time Estimates

TIME ESTIMATES (WKS)
ACTIVITY
1
2
3
4
5
6
7
8
9
10
11
MEAN TIME
VARIANCE
6
3
1
2
2
3
2
3
2
1
1
8
6
3
4
3
4
2
7
4
4
10
10
9
5
12
4
5
2
11
6
7
13
8
6
3
5
3
4
2
7
4
4
9
0.44
1.00
0.44
2.78
0.11
0.11
0.00
1.78
0.44
1.00
4.00
9-481
Activity Early, Late Times,

and Slack
ACTIVITY
1
2
3
4
5
6
7
8
9
10
11
ES
EF
LS
LF
8
6
3
5
3
4
2
7
4
4
9
0.44
1.00
0.44
2.78
0.11
0.11
0.00
1.78
0.44
1.00
4.00
0
0
0
8
6
3
3
9
9
13
16
8
6
3
13
9
7
5
16
13
17
25
1
0
2
16
6
5
14
9
12
21
16
9
6
5
21
9
9
16
16
16
25
25
1
0
2
8
0
2
11
0
3
8
0
9-482
Earliest, Latest, and Slack

1 0
8 1
Start
2 0
6 0
3 0
3 2
4 8
5 16 21
10 13 17
8 9
7 9
Critical Path
13
5 6
3 6
6 3
4 5
16
3
Finish
16
1 0
13
9 9
4 12 16
11 16 25
9 16 25
7 3 5
2 14 16
9-483
Total project variance

2 = 22 + 52 + 82 + 112
= 1.00 + 0.11 + 1.78 + 4.00

= 6.89 weeks
9-484
9-485
Probabilistic Network Analysis

Determine probability that project is
completed within specified time
Z=
where
x-
= tp = project mean time

= project standard deviation
x = proposed project time
Z = number of standard deviations x
is from mean
9-486
Normal Distribution of
Project Time
Probability
= tp
Time
9-487
Southern Textile Example

What is the probability that the project is completed within 30
weeks?
P(x 30 weeks)
= 25 x = 30
= 6.89 weeks
= 2.62 weeks
6.89
Z =
=
x-
30 - 25
2.62
= 1.91
Time (weeks)
From Table A.1, (appendix A) a Z score of 1.91 corresponds to a

probability of 0.4719. Thus P(30) = 0.4719 + 0.5000 = 0.9719
9-488
Southern Textile Example

What is the probability that the project is completed within 22
weeks?
P(x 22 weeks)
x = 22 = 25
= 6.89 weeks
= 2.62 weeks
6.89
Z =
=
x-
22 - 25
2.62
= -1.14
Time
(weeks)
From Table A.1 (appendix A) a Z score of -1.14 corresponds to a

probability of 0.3729. Thus P(22) = 0.5000 - 0.3729 = 0.1271
9-489
Microsoft Project
Popular software package for project
management and CPM/PERT analysis
Relatively easy to use
9-490
Microsoft Project (cont.)
9-491
9-492
9-493
9-494
9-495
9-496
PERT Analysis with

Microsoft Project
9-497
PERT Analysis with

9-498
PERT Analysis with

9-499
Project Crashing
Crashing
reducing project time by expending additional

resources
Crash time
an amount of time an activity is reduced
Crash cost
cost of reducing activity time
Goal
reduce project duration at minimum cost

9-500
Project Network for Building

a House
4
2
8
12
7
4
1
12
3
4
5
4
6
4
9-501
Normal Time and Cost

vs. Crash Time and Cost
$7,000
$6,000
Crash cost
Crashed activity
$5,000
Slope = crash cost per week
$4,000
Normal activity
$3,000
Normal cost
$2,000
Normal time
Crash time
$1,000
|
2
|
4
|
6
|
8
|
10
|
12
|
14
Weeks
9-502
Project Crashing: Example

TOTAL
ALLOWABLE
CRASH TIME
(WEEKS)
NORMAL
TIME
(WEEKS)
CRASH
TIME
(WEEKS)
NORMAL
COST
12
$3,000
$5,000
$400
2,000
3,500
500
4,000
7,000
3,000
12
50,000
71,000
7,000
500
1,100
200
500
1,100
200
15,000
22,000
7,000
$75,000
$110,700
ACTIVITY
CRASH
COST
CRASH
COST PER
WEEK
9-503
$7000
$500
Project Duration:
36 weeks
2
8
$700
12
7
4
FROM
12
$400
3
4
6
4
5
4
$3000
$200
$200
$7000
$500
2
8
TO
Project Duration:
31 weeks
Additional Cost:
$2000
$700
12
7
4
1
7
$400
3
4
$3000
5
4
6
4
$200
$200
9-504
Time--Cost Relationship
Time
Crashing costs increase as project
duration decreases
Indirect costs increase as project
duration increases
Reduce project length as long as
crashing costs are less than indirect
costs
9-505
Time--Cost Tradeoff
Time
Minimum cost = optimal project time
Total project cost
Cost ($)
Indirect cost
Direct cost
Crashing
Time
Project duration
9-506
Chapter 10
Strategy and Design
Lecture Outline
The Management of Supply Chains
Information Technology: A Supply Chain
Enabler
Supply Chain Integration
Supply Chain Management (SCM)
Software
Measuring Supply Chain Performance
10
10--508
Supply Chains
All facilities, functions, and activities
associated with flow and transformation
of goods and services from raw materials
to customer, as well as the associated
information flows
An integrated group of processes to
source, make, and deliver products
10
10--509
Supply Chain Illustration

10
10--510
Supply
Chain
for
Denim
Jeans
10
10--511
Supply
Chain
for
Denim
Jeans
(cont.)
10
10--512
Supply Chain Processes
10
10--513
Supply Chain for Service

Providers
More difficult than manufacturing
Does not focus on the flow of physical goods
Focuses on human resources and support
services
More compact and less extended
10
10--514
Value Chains
Value chain

every step from raw materials to the eventual end user

ultimate goal is delivery of maximum value to the end user
Supply chain
activities that get raw materials and subassemblies into

manufacturing operation
ultimate goal is same as that of value chain
Demand chain
increase value for any part or all of chain
Terms are used interchangeably

Value
creation of value for customer is important aspect of supply

chain management
10
10--515
Supply Chain
Management (SCM)
Managing flow of information through supply
chain in order to attain the level of
synchronization that will make it more
responsive to customer needs while lowering
costs
Keys to effective SCM

information
communication
cooperation
trust
10
10--516
Supply Chain
Uncertainty and Inventory
One goal in SCM:
respond to uncertainty in
customer demand
without creating costly
excess inventory
Negative effects of
uncertainty

lateness
incomplete orders
Inventory
insurance against supply

chain uncertainty
Factors that contribute to

uncertainty

inaccurate demand
forecasting
long variable lead times
late deliveries
incomplete shipments
product changes
batch ordering
price fluctuations and
discounts
inflated orders
10
10--517
Bullwhip Effect
Occurs when slight demand variability is magnified as information
moves back upstream
10
10--518
Risk Pooling
Risks are aggregated to reduce the
impact of individual risks
Combine inventories from multiple locations

into one
Reduce parts and product variability,
thereby reducing the number of product
components
Create flexible capacity
10
10--519
Information Technology:
A Supply Chain Enabler
Information links all aspects of supply chain
E-business
replacement of physical business processes with electronic

ones
Electronic data interchange (EDI)

a computer-to-computer exchange of business documents
Bar code and point-of-sale

data creates an instantaneous computer record of a sale
10
10--520
Information Technology:
A Supply Chain Enabler (cont.)
Radio frequency identification (RFID)
technology can send product data from an item to a reader

via radio waves
Internet
allows companies to communicate with suppliers,

customers, shippers and other businesses around the world
instantaneously
Build-to-order (BTO)
direct-sell-to-customers model via the Internet; extensive

communication with suppliers and customer
10
10--521
Supply Chain Enablers
10
10--522
RFID Capabilities
10
10--523
RFID Capabilities (cont.)
10
10--524
Supply Chain Integration

Information sharing among supply chain
members

Reduced bullwhip effect

Early problem detection
Faster response
Builds trust and confidence
Collaborative planning, forecasting,

replenishment, and design

Reduced bullwhip effect

Lower costs (material, logistics, operating, etc.)
Higher capacity utilization
Improved customer service levels
10
10--525
Supply Chain Integration (cont.)

Coordinated workflow, production and
operations, procurement

Production efficiencies
Fast response
Improved service
Quicker to market
Adopt new business models and

technologies

Penetration of new markets

Creation of new products
Improved efficiency
Mass customization
10
10--526
Collaborative Planning, Forecasting,

and Replenishment (CPFR)
Process for two or more companies in
a supply chain to synchronize their
demand forecasts into a single plan to
meet customer demand
Parties electronically exchange

past sales trends

point-of-sale data
on-hand inventory
scheduled promotions
forecasts
10
10--527

(SCM) Software
Enterprise resource planning (ERP)
software that integrates the components of a

company by sharing and organizing
information and data
10
10--528
Key Performance Indicators

Metrics used to measure supply chain performance
Inventory turnover
Inventory turns =
Cost of goods sold

Average aggregate value of inventory
Total value (at cost) of inventory

Average aggregate value of inventory = (average inventory for item i ) (unit value item i )
Days of supply
Days of supply =
Average aggregate value of inventory

(Cost of goods sold)/(365 days)
Fill rate: fraction of orders filled by a distribution center within a

specific time period
10
10--529
Computing
Key
Performance
Indicators
10
10--530
Process Control and SCOR

Process Control

not only for manufacturing operations

can be used in any processes of supply chain
Supply Chain Operations Reference (SCOR)

a cross industry supply chain diagnostic tool

maintained by the Supply Chain Council
10
10--531
SCOR
10
10--532
SCOR
(cont.)
10
10--533
Chapter 11
Global Supply Chain
Procurement and Distribution
Lecture Outline
Procurement
E-Procurement
Distribution
Transportation
The Global Supply Chain
1111-535
Procurement
The purchase of goods and services from suppliers
Cross enterprise teams
coordinate processes between a company and its supplier
On
On--demand (direct(direct-response) delivery
requires the supplier to deliver goods when demanded by the

customer
Continuous replenishment
supplying orders in a short period of time according to a

predetermined schedule
1111-536
Outsourcing
Sourcing
selection of suppliers
Outsourcing
purchase of goods and services from an

outside supplier
Core competencies
what a company does best
Single sourcing
a company purchases goods and services

from only a few (or one) suppliers
1111-537
Categories of Goods and

Services...
1111-538
E-Procurement
Direct purchase from suppliers over the
Internet, by using software packages or
through ee-marketplaces, ee-hubs, and
trading exchanges
Can streamline and speed up the
purchase order and transaction process
1111-539
E-Procurement (cont.)
What can companies buy over the
Internet?
Manufacturing inputs
the raw materials and components that go

directly into the production process of the product
Operating inputs
maintenance, repair, and operation goods and

services
1111-540
E-Procurement (cont.)
E-marketplaces (e(e-hubs)
Websites where companies and suppliers

conduct businessbusiness-to
to--business activities
Reverse auction
process used by ee-marketplaces for buyers

to purchase items; company posts orders on
the internet for suppliers to bid on
1111-541
Distribution
Encompasses all channels, processes, and functions,
including warehousing and transportation, that a
product passes on its way to final customer
Order fulfillment
process of ensuring onon-time delivery of an order
Logistics
transportation and distribution of goods and
services
Driving force today is speed
Particularly important for Internet dotdot-coms
1111-542
Distribution Centers (DC)

and Warehousing
DCs are some of the largest business
facilities in the United States
Trend is for more frequent orders in smaller
quantities
Flow--through facilities and automated
Flow
material handling
Postponement
final assembly and product configuration
may be done at the DC
1111-543
Warehouse Management
Systems
Highly automated system that runs dayday-toto-day
operations of a DC
Controls item putaway, picking, packing, and
shipping
Features
transportation management
order management
yard management
labor management
warehouse optimization
1111-544
A WMS
1111-545
Vendor--Managed Inventory
Vendor
Manufacturers generate orders, not distributors or
retailers
Stocking information is accessed using EDI
A first step towards supply chain collaboration
Increased speed, reduced errors, and improved
service
1111-546
Collaborative Logistics and

Distribution Outsourcing
Collaborative planning, forecasting, and
replenishment create greater economies of
scale
Internet--based exchange of data and
Internet
information
Significant decrease in inventory levels and
costs and more efficient logistics
Companies focus on core competencies
1111-547
Transportation
Rail
low-value, high-density, bulk

products, raw materials,
intermodal containers
not as economical for small
loads, slower, less flexible
than trucking
Trucking
main mode of freight

transport in U.S.
small loads, point-to-point
service, flexible
More reliable, less damage
than rails; more expensive
than rails for long distance
1111-548
Transportation (cont.)
Air
most expensive and fastest, mode of
freight transport
lightweight, small packages <500 lbs
high-value, perishable and critical
goods
less theft
Package Delivery
small packages
fast and reliable
increased with e-Business
primary shipping mode for Internet
companies
1111-549
Transportation (cont.)
Water
low-cost shipping mode
primary means of international shipping
U.S. waterways
slowest shipping mode
Intermodal
combines several modes of shippingtruck, water and rail
key component is containers
Pipeline
transport oil and products in liquid form
high capital cost, economical use
long life and low operating cost
1111-550
Internet Transportation
Exchanges
Bring together shippers and carriers
Initial contact, negotiations, auctions
Examples
www.nte.com
www.freightquote.com
1111-551
Global Supply Chain

International trade barriers have fallen
New trade agreements
To compete globally requires an effective supply chain
Information technology is an enabler of global trade
1111-552
Obstacles to Global Chain

Transactions
Increased documentation for invoices, cargo
insurance, letters of credit, ocean bills of lading or air
waybills, and inspections
Ever changing regulations that vary from country to
country that govern the import and export of goods
Trade groups, tariffs, duties, and landing costs
Limited shipping modes
Differences in communication technology and
availability
1111-553
Obstacles to Global Chain

Transactions (cont.)
Different business practices as well as language
barriers
Government codes and reporting requirements that
vary from country to country
Numerous players, including forwarding agents,
custom house brokers, financial institutions, insurance
providers, multiple transportation carriers, and
government agencies
Since 9/11, numerous security regulations and
requirements
1111-554
Duties and Tariffs

Proliferation of trade agreements
Nations form trading groups
no tariffs or duties within group
charge uniform tariffs to nonmembers
Member nations have a competitive advantage

within the group
Trade specialists
include freight forwarders, customs house brokers,
export packers, and export management and trading
companies
1111-555
Duties and Tariffs (cont.)
1111-556
Landed Cost
Total cost of producing, storing, and
transporting a product to the site of
consumption or another port
Value added tax (VAT)
an indirect tax assessed on the increase in value of

a good at any stage of production process from
raw material to final product
Clicker shock
occurs when an ordered is placed with a company

that does not have the capability to calculate landed
cost
1111-557
Web-based International Trade

WebLogistic Systems
International trade logistics web-based software
systems reduce obstacles to global trade

convert language and currency

provide information on tariffs, duties, and customs processes
attach appropriate weights, measurements, and unit prices to
individual products ordered over the Web
incorporate transportation costs and conversion rates
calculate shipping costs online while a company enters an
order
track global shipments
1111-558
Recent Trends in Globalization for

U.S. Companies
Two significant changes

passage of NAFTA
admission of China in WTO
Mexico
cheap labor and relatively short shipping time
China
cheaper labor and longer work week, but lengthy

shipping time
Major supply chains have moved to China
1111-559
Chinas Increasing Role

in the Global Supply Chain
Worlds premier sources of supply
Abundance of lowlow-wage labor
Worlds fastest growing market
Regulatory changes have liberalized its
market
Increased exporting of higher technology
products
1111-560
Models in Doing Business in China

Employ local thirdthird-party trading agents
Wholly
Wholly--owned foreign enterprise
Develop your own international
procurement offices
1111-561
Challenges Sourcing from China

Getting reliable information in more
difficult than in the U.S.
Information technology is much less
advanced and sophisticated than in the
U.S.
Work turnover rates among lowlow-skilled
workers is extremely high
1111-562
Effects of 9/11 on Global Chains

Increase security measures

added time to supply chain schedules

Increased supply chain costs
24 hours rules for risk screening

extended documentation
extend time by 33-4 days
Inventory levels have increased 5%

Other costs include:
new people, technologies, equipment, surveillance,

communication, and security systems, and training necessary
for screening at airports and seaports around the world
1111-563
Transportation and
Transshipment Models
Lecture Outline
Transportation Model
Transshipment Model
Supplement 1111-565
Transportation Model
A transportation model is formulated for a class of
problems with the following characteristics
a product is transported from a number of sources to a

number of destinations at the minimum possible cost
each source is able to supply a fixed number of units of
product
each destination has a fixed demand for product
Solution Methods

stepping-stone
steppingmodified distribution
Excels Solver
Supplement 1111-566
Transportation Method: Example
Supplement 1111-567
Transportation Method: Example
Supplement 1111-568
Problem
Formulation
Using Excel
Total Cost
Formula
Supplement 1111-569
Using Solver
from Tools
Menu
Supplement 1111-570
Solution
Supplement 1111-571
Modified
Problem
Solution
Supplement 1111-572
Transshipment
Model
Supplement 1111-573
Transshipment Model: Solution
Supplement 1111-574
Chapter 12
Forecasting
Lecture Outline
Strategic Role of Forecasting in Supply
Chain Management
Components of Forecasting Demand
Time Series Methods
Forecast Accuracy
Time Series Forecasting Using Excel
Regression Methods
12
12--576
Forecasting
Predicting the future
Qualitative forecast methods
subjective
Quantitative forecast
methods
based on mathematical
formulas
12
12--577
Forecasting and Supply Chain

Management
Accurate forecasting determines how much
inventory a company must keep at various points
along its supply chain
Continuous replenishment

supplier and customer share continuously updated data

typically managed by the supplier
reduces inventory for the company
speeds customer delivery
Variations of continuous replenishment

quick response
JIT (just(just-in
in--time)
VMI (vendor(vendor-managed inventory)
stockless inventory
12
12--578
Forecasting
Quality Management
Accurately forecasting customer demand is

a key to providing good quality service
Strategic Planning
Successful strategic planning requires

accurate forecasts of future products and
markets
12
12--579
Types of Forecasting Methods

Depend on

time frame
demand behavior
causes of behavior
12
12--580
Time Frame
Indicates how far into the future is
forecast
Short-- to midShort
mid-range forecast
typically encompasses the immediate future
daily up to two years
Long--range forecast
Long
usually encompasses a period of time longer

than two years
12
12--581
Demand Behavior
Trend
a gradual, longlong-term up or down movement of

demand
Random variations
movements in demand that do not follow a pattern
Cycle
an upup-and
and--down repetitive movement in demand
Seasonal pattern
an upup-and
and--down repetitive movement in demand
occurring periodically
12
12--582
Demand
Demand
Forms of Forecast Movement
Random
movement
Time
(b) Cycle
Demand
Demand
Time
(a) Trend
Time
(c) Seasonal pattern
Time
(d) Trend with seasonal pattern
12
12--583
Forecasting Methods
Time series
statistical techniques that use historical demand data

to predict future demand
Regression methods
attempt to develop a mathematical relationship

between demand and factors that cause its behavior
Qualitative
use management judgment, expertise, and opinion to

predict future demand
12
12--584
Qualitative Methods
Management, marketing, purchasing,
and engineering are sources for internal
qualitative forecasts
Delphi method
involves soliciting forecasts about

technological advances from experts
12
12--585
Forecasting Process
1. Identify the
purpose of forecast
2. Collect historical
data
6. Check forecast
accuracy with one or
more measures
5. Develop/compute
forecast for period of
historical data
7.
Is accuracy of
forecast
acceptable?
No
3. Plot data and identify

patterns
4. Select a forecast
model that seems
appropriate for data
8b. Select new

forecast model or
adjust parameters of
existing model
Yes
8a. Forecast over
planning horizon
9. Adjust forecast based

on additional qualitative
information and insight
10. Monitor results

and measure forecast
accuracy
12
12--586
Time Series
Assume that what has occurred in the past will
continue to occur in the future
Relate the forecast to only one factor - time
Include

moving average
exponential smoothing
linear trend line
12
12--587
Moving Average
Naive forecast
demand in current period is used as next periods

forecast
Simple moving average

uses average demand for a fixed sequence of

periods
stable demand with no pronounced behavioral
patterns
Weighted moving average

weights are assigned to most recent data
12
12--588
Moving Average:
Nave Approach
MONTH
ORDERS
PER MONTH
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
FORECAST
120 90
120
10090
75
100
11075
50
110
7550
13075
110
130
90
110
90
12
12--589
Simple Moving Average

n
D
i
MAn =
i=1
where
n = number of periods in
the moving average
Di = demand in period i
12
12--590
3-month Simple Moving Average
MONTH
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
ORDERS
PER MONTH
120
90
100
75
110
50
75
130
110
90
-
MOVING
AVERAGE
103.3
88.3
95.0
78.3
78.3
85.0
105.0
110.0
MA3 =
Di
i=1
3
90 + 110 + 130
3
= 110 orders
for Nov
12
12--591
5-month Simple Moving Average
MONTH
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
ORDERS
PER MONTH
120
90
100
75
110
50
75
130
110
90
-
MOVING
AVERAGE
99.0
85.0
82.0
88.0
95.0
91.0
MA5 =
Di
i=1
90 + 110 + 130+75+50
5
= 91 orders
for Nov
12
12--592
Smoothing Effects
150
5-month
125
Orders
100
75
3-month
50
Actual
25
0
|
Jan
|
Feb
|
Mar
|
|
|
|
Apr May June July
Month
|
|
Aug Sept
|
Oct
|
Nov
12
12--593
Weighted Moving Average

Wi Di
n
Adjusts moving average

method to more
closely reflect data
fluctuations
WMAn =
i=1
where
Wi = the weight for period i,

between 0 and 100
percent
Wi = 1.00
12
12--594
Weighted Moving Average Example

MONTH
WEIGHT
August
September
October
DATA
17%
33%
50%
130
110
90
3
November Forecast WMA3 =
Wi Di
i=1
= (0.50)(90) + (0.33)(110) + (0.17)(130)

= 103.4 orders
12
12--595
Exponential Smoothing
Averaging method
Weights most recent data more strongly
Reacts more to recent changes
Widely used, accurate method
12
12--596
Exponential Smoothing (cont.)

Ft +1 = Dt + (1 - )Ft
where:
Ft +1 = forecast for next period
Dt = actual demand for present period
Ft = previously determined forecast for
present period
= weighting factor, smoothing constant
12
12--597
Effect of Smoothing Constant

0.0 1.0
If = 0.20, then Ft +1 = 0.20 Dt + 0.80 Ft
If = 0, then Ft +1 = 0 Dt + 1 Ft = Ft
Forecast does not reflect recent data

If = 1, then Ft +1 = 1 Dt + 0 Ft = Dt
Forecast based only on most recent data
12
12--598
Exponential Smoothing (
(=0.30)
PERIOD
MONTH
DEMAND
1
2
3
4
5
6
7
8
9
10
11
12
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
37
40
41
37
45
50
43
47
56
52
55
54
F2 = D1 + (1 - )F1
= (0.30)(37) + (0.70)(37)
= 37
F3 = D2 + (1 - )F2
= (0.30)(40) + (0.70)(37)
= 37.9
F13 = D12 + (1 - )F12
= (0.30)(54) + (0.70)(50.84)
= 51.79
12
12--599

PERIOD
1
2
3
4
5
6
7
8
9
10
11
12
13
MONTH
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
DEMAND
37
40
41
37
45
50
43
47
56
52
55
54
FORECAST, Ft + 1
( = 0.3)
( = 0.5)
37.00
37.90
38.83
38.28
40.29
43.20
43.14
44.30
47.81
49.06
50.84
51.79
37.00
38.50
39.75
38.37
41.68
45.84
44.42
45.71
50.85
51.42
53.21
53.61
12
12--600

70
= 0.50
Actual
60
Orders
50
40
= 0.30
30
20
10
0
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
11
|
12
|
13
Month
12
12--601
Adjusted Exponential Smoothing

AFt +1 = Ft +1 + Tt +1
where
T = an exponentially smoothed trend factor
Tt +1 = (Ft +1 - Ft) + (1 - ) Tt
where
Tt = the last period trend factor
= a smoothing constant for trend
12
12--602
Adjusted Exponential
Smoothing (
(=0.30)
PERIOD
MONTH
DEMAND
1
2
3
4
5
6
7
8
9
10
11
12
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
37
40
41
37
45
50
43
47
56
52
55
54
T3 = (F3 - F2) + (1 - ) T2
= (0.30)(38.5 - 37.0) + (0.70)(0)
= 0.45
AF3 = F3 + T3 = 38.5 + 0.45
= 38.95
T13 = (F13 - F12) + (1 - ) T12
= (0.30)(53.61 - 53.21) + (0.70)(1.77)
= 1.36
AF13 = F13 + T13 = 53.61 + 1.36 = 54.97

12
12--603
Adjusted Exponential Smoothing:

Example
PERIOD
1
2
3
4
5
6
7
8
9
10
11
12
13
MONTH
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
DEMAND
FORECAST
Ft +1
37
40
41
37
45
50
43
47
56
52
55
54
37.00
37.00
38.50
39.75
38.37
38.37
45.84
44.42
45.71
50.85
51.42
53.21
53.61
TREND
ADJUSTED
Tt +1
FORECAST AFt +1
0.00
0.45
0.69
0.07
0.07
1.97
0.95
1.05
2.28
1.76
1.77
1.36
37.00
38.95
40.44
38.44
38.44
47.82
45.37
46.76
58.13
53.19
54.98
54.96
12
12--604
Adjusted Exponential Smoothing

Forecasts
70
Adjusted forecast (
( = 0.30)
60
Actual
Demand
50
40
Forecast (
( = 0.50)
30
20
10
0
|
1
|
2
|
3
|
4
|
5
|
|
6
7
Period
|
8
|
9
|
10
|
11
|
12
|
13
12
12--605
Linear Trend Line

y = a + bx
where
a = intercept
b = slope of the line
x = time period
y = forecast for
demand for period x
xy - nxy
b =
2
2
x - nx
a = y-bx
where
n = number of periods
x
x = n
= mean of the x values
y
y = n = mean of the y values
12
12--606
Least Squares Example

x(PERIOD)
y(DEMAND)
1
2
3
4
5
6
8
9
10
11
12
47
56
52
55
54
37
80
123
148
225
300
301
376
504
520
605
648
78
557
3867
73
40
41
37
45
50
xy
43
x2
1
4
9
16
25
36
49
64
81
100
121
144
650
12
12--607
Least Squares Example

(cont.)
78
12
557
12
xy - nxy
b = 2
x - nx2
x =
y =
= 6.5
= 46.42
3867 - (12)(6.5)(46.42)
=
650 - 12(6.5)2
=1.72
a = y - bx
= 46.42 - (1.72)(6.5) = 35.2
12
12--608
Linear trend line y = 35.2 + 1.72x

Forecast for period 13 y = 35.2 + 1.72(13) = 57.56 units
70
60
Actual
Demand
50
40
Linear trend line
30
20
10
0
|
1
|
2
|
3
|
4
|
5
|
|
6
7
Period
|
8
|
9
|
10
|
11
|
12
|
13
12
12--609
Seasonal Adjustments
Repetitive increase/ decrease in demand
Use seasonal factor to adjust forecast
Seasonal factor = Si =
Di
D
12
12--610
Seasonal Adjustment (cont.)

YEAR
2002
2003
2004
Total
DEMAND (1000S PER QUARTER)

1
2
3
4
Total
12.6
14.1
15.3
42.0
8.6
10.3
10.6
29.5
6.3
7.5
8.1
21.9
17.5
18.2
19.6
55.3
45.0
50.1
53.6
148.7
D1
42.0
S1 =
=
= 0.28
D 148.7
D3
21.9
S3 =
=
= 0.15
D 148.7
D2
29.5
S2 =
=
= 0.20
D 148.7
D4
55.3
S4 =
=
= 0.37
D 148.7
12
12--611
Seasonal Adjustment (cont.)
For 2005
y = 40.97 + 4.30x
4.30x = 40.97 + 4.30(4) = 58.17
SF1 = ((S
S1) ((F
F5) = (0.28)(58.17) = 16.28
SF2 = ((S
S2) ((F
F5) = (0.20)(58.17) = 11.63
SF3 = ((S
S3) ((F
F5) = (0.15)(58.17) = 8.73
SF4 = ((S
S4) ((F
F5) = (0.37)(58.17) = 21.53
12
12--612
Forecast Accuracy
Forecast error

difference between forecast and actual demand

MAD
MAPD

mean absolute deviation

mean absolute percent deviation
Cumulative error
Average error or bias
12
12--613
Mean Absolute Deviation

(MAD)
| Dt - Ft |
MAD =
n
where
t = period number
Dt = demand in period t
Ft = forecast for period t
n = total number of periods
= absolute value
12
12--614
MAD Example
PERIOD
1
2
3
4
5
6
7
8
9
10
11
12
DEMAND, Dt
Ft ( =0.3)
(Dt - Ft)
|Dt - Ft|
37
37.00
40
37.00
3.00
41
3.10
| D37.90
F
|
t
t
37
38.83
-1.83
MAD
=
n
45
38.28
6.72
50
40.29
9.69
53.39
= 43.20 -0.20
43
47
43.14
3.86
11
56
44.30
11.70
=
4.85
52
47.81
4.19
55
49.06
5.94
54
50.84
3.15
3.00
3.10
1.83
6.72
9.69
0.20
3.86
11.70
4.19
5.94
3.15
557
53.39
49.31
12
12--615
Other Accuracy Measures

Mean absolute percent deviation (MAPD)
|Dt - Ft|
MAPD =
Dt
Cumulative error
E = et
Average error
E=
et
n
12
12--616
Comparison of Forecasts
FORECAST
MAD
MAPD
Exponential smoothing (
( = 0.30) 4.85
9.6% 49.31
( = 0.50) 4.04
8.5% 33.21
Adjusted exponential smoothing
3.81
7.5% 21.14
( = 0.50, = 0.30)
Linear trend line
2.29
4.9%
(E)
4.48
3.02
1.92
12
12--617
Forecast Control
Tracking signal
monitors the forecast to see if it is biased

high or low
Tracking signal =

(Dt - Ft)
E
=
MAD
MAD
1 MAD 0.8
Control limits of 2 to 5 MADs are used most
frequently
12
12--618
Tracking Signal Values

PERIOD
1
2
3
4
5
6
7
8
9
10
11
12
DEMAND
Dt
37
40
41
37
45
50
43
47
56
52
55
54
FORECAST,
Ft
ERROR
Dt - Ft
E =
(Dt - Ft)
37.00
37.00
3.00
3.00
37.90
3.10
6.10
38.83
-1.83
4.27
38.28 signal6.72
10.99
Tracking
for period
3
40.29
9.69
20.68
43.20
-0.20
20.48
6.10
43.14
24.34
TS3 = 3.86 = 2.00
3.05
44.30
11.70
36.04
47.81
4.19
40.23
49.06
5.94
46.17
50.84
3.15
49.32
TRACKING
MAD SIGNAL
3.00 1.00
3.05 2.00
2.64 1.62
3.66 3.00
4.87 4.25
4.09 5.01
4.06 6.00
5.01 7.19
4.92 8.18
5.02 9.20
4.85 10.17
12
12--619
Tracking Signal Plot

Tracking signal (MAD)
3
2
= 0.30)
1
0
-1
-2
Linear trend line
-3
|
0
|
1
|
2
|
3
|
4
|
5
|
6
Period
|
7
|
8
|
9
|
10
|
11
|
12
12
12--620
Statistical Control Charts

=
(Dt - Ft)2
n-1
Using we can calculate statistical control

limits for the forecast error
Control limits are typically set at 3
12
12--621
Statistical Control Charts

18.39
UCL = +3
12.24
Errors
6.12
0
-6.12
-12.24
-18.39
|
0
LCL = -3
|
1
|
2
|
3
|
4
|
5
|
6
Period
|
7
|
8
|
9
|
10
|
11
|
12
12
12--622
Time Series Forecasting using Excel

Excel can be used to develop forecasts:

Moving average
Exponential smoothing
Adjusted exponential smoothing
Linear trend line
12
12--623
Exponentially Smoothed and Adjusted

Exponentially Smoothed Forecasts
12
12--624
Demand and exponentially

smoothed forecast
12
12--625
Data Analysis option
12
12--626
Computing a Forecast with

Seasonal Adjustment
12
12--627
OM Tools
12
12--628
Regression Methods
Linear regression
a mathematical technique that relates a

dependent variable to an independent
variable in the form of a linear equation
Correlation
a measure of the strength of the relationship

between independent and dependent
variables
12
12--629
Linear Regression
y = a + bx
a = y-bx
xy - nxy
b =
2
2
x - nx
where
a = intercept
b = slope of the line
x
x =n
y
y =n
= mean of the x data

= mean of the y data
12
12--630
Linear Regression Example

(WINS)
x
(ATTENDANCE)
4
6
6
8
6
7
5
7
49
y
xy
x2
36.3
40.1
41.2
53.0
44.0
45.6
39.0
47.5
145.2
240.6
247.2
424.0
264.0
319.2
195.0
332.5
16
36
36
64
36
49
25
49
346.7
2167.7
311
12
12--631
Linear Regression Example (cont.)

49
x=
8
346.9y =
8
= 6.125
= 43.36
xy - nxy2 b =
x2 - nx2
=
(2,167.7) - (8)(6.125)(43.36)
(311) - (8)(6.125)2
= 4.06
a = y - bx
= 43.36 - (4.06)(6.125)
= 18.46
12
12--632
Linear Regression Example (cont.)

Regression equation
Attendance forecast for 7 wins
y = 18.46 + 4.06x
y = 18.46 + 4.06(7)
= 46.88, or 46,880
60,000
Attendance, y
50,000
40,000
30,000
Linear regression line,

y = 18.46 + 4.06x
4.06x
20,000
10,000
|
0
|
1
|
2
|
3
|
4
|
|
5
6
Wins, x
|
7
|
8
|
9
|
10
12
12--633
Correlation and Coefficient of

Determination
Correlation, r
Measure of strength of relationship

Varies between -1.00 and +1.00
Coefficient of determination, r2
Percentage of variation in dependent

variable resulting from changes in the
independent variable
12
12--634
Computing Correlation
r=
r=
n xy - x y
[n x2 - ( x)2] [[nn y2 - ( y)2]
(8)(2,167.7) - (49)(346.9)
[(8)(311) - (49)2] [(8)(15,224.7) - (346.9)2]

r = 0.947
Coefficient of determination
r2 = (0.947)2 = 0.897
12
12--635
Regression Analysis with Excel
12
12--636

(cont.)
12
12--637

(cont.)
12
12--638
Multiple Regression
Study the relationship of demand to two or more independent
variables
y = 0 + 1x1 + 2x2 + kxk

where
0 = the intercept
1, , k = parameters for the
independent variables
x1, , xk = independent variables
12
12--639
Multiple Regression with Excel
12
12--640
Chapter 13
Inventory Management
Operations Management - 6th Edition
Beni Asllani
University of Tennessee at Chattanooga
Lecture Outline
Elements of Inventory Management
Inventory Control Systems
Economic Order Quantity Models
Quantity Discounts
Reorder Point
Order Quantity for a Periodic Inventory
System
13
13--642
What Is Inventory?
Stock of items kept to meet future
demand
Purpose of inventory management

how many units to order

when to order
13
13--643
Inventory and Supply Chain

Management
Bullwhip effect

demand information is distorted as it moves away

from the endend-use customer
higher safety stock inventories to are stored to
compensate
Seasonal or cyclical demand

Inventory provides independence from vendors
Take advantage of price discounts
Inventory provides independence between
stages and avoids work stoppages
13
13--644
Inventory and Quality

Management in the Supply Chain
Customers usually perceive quality
service as availability of goods they want
when they want them
Inventory must be sufficient to provide
high-quality customer service in QM
13
13--645
Types of Inventory
Raw materials
Purchased parts and supplies
Work-in-process (partially completed)
products (WIP)
Items being transported
Tools and equipment
13
13--646
Two Forms of Demand

Dependent
Demand for items used to produce final
products
Tires stored at a Goodyear plant are an
example of a dependent demand item
Independent
Demand for items used by external
customers
Cars, appliances, computers, and houses
are examples of independent demand
inventory
13
13--647
Inventory Costs
Carrying cost
cost of holding an item in inventory

Ordering cost
cost of replenishing inventory

Shortage cost
temporary or permanent loss of sales

when demand cannot be met
13
13--648
Inventory Control Systems

Continuous system (fixed(fixed-orderorderquantity)
constant amount ordered when
inventory declines to
predetermined level
Periodic system (fixed(fixed-timetimeperiod)

order placed for variable amount
after fixed passage of time
13
13--649
ABC Classification
Class A

5 15 % of units
70 80 % of value
Class B

30 % of units
15 % of value
Class C

50 60 % of units
5 10 % of value
13
13--650
ABC Classification: Example

PART
1
2
3
4
5
6
7
8
9
10
UNIT COST
$ 60
350
30
80
30
20
10
320
510
20
ANNUAL USAGE
90
40
130
60
100
180
170
50
60
120
13
13--651
ABC Classification:
Example (cont.)
PART
9
8
2
1
4
3
6
5
10
7
PART
VALUE
$30,6001
16,0002
14,000
3
5,400
4,8004
3,9005
3,6006
3,0007
CLASS
2,400
A 8
1,700
B 9
C 10
TOTAL
% OF TOTAL % OF TOTAL
UNIT
COST
ANNUAL
USAGE
VALUE
QUANTITY
% CUMMULATIVE
35.9 $ 60
6.0
18.7 350
5.0
16.4
4.0
30
6.3
9.0
80
5.6
6.0
4.6 30
10.0
4.2 %20
18.0
OF TOTAL
3.5 10VALUE
13.0
ITEMS
2.8
12.0
320
9, 8,2.0
2
71.0
17.0
1, 4, 3 510
16.5
$85,400
6, 5, 10, 720 12.5
90 6.0
11.0
40
A
130 15.0
24.0
60 30.0
B 100 40.0
58.0
%180
OF TOTAL
170 71.0
QUANTITY
83.0
C 50 100.0
15.0
60 25.0
120 60.0
Example 10.1
13
13--652
Economic Order Quantity

(EOQ) Models
EOQ
optimal order quantity that will

minimize total inventory costs
Basic EOQ model

Production quantity model
13
13--653
Assumptions of Basic
EOQ Model
Demand is known with certainty and is constant over time
No shortages are allowed
Lead time for the receipt of orders is constant
Order quantity is received all at once
13
13--654
Inventory Order Cycle

Inventory Level
Order quantity, Q
Demand
rate
Average
inventory
Q
2
Reorder point, R
Lead
time
Order Order
placed receipt
Lead
time
Order Order
placed receipt
Time
13
13--655
EOQ Cost Model

Co - cost of placing order
Cc - annual perper-unit carrying cost
D - annual demand
Q - order quantity
Annual ordering cost =
CoD
Q
Annual carrying cost =
CcQ
2
Total cost =
CoD
+
Q
CcQ
2
13
13--656
EOQ Cost Model

Deriving Qopt
Proving equality of
costs at optimal point
CcQ
CoD
TC =
+
Q
2
CoD
Cc
TC
= 2 +
Q
2
Q
C0D
Cc
0= 2 +
Q
2
Qopt =
2CoD
Cc
CoD
CcQ
=
Q
2
Q2
2CoD
=
Cc
Qopt =
2CoD
Cc
13
13--657
EOQ Cost Model (cont.)

Annual
cost ($)
Total Cost
Slope = 0
CcQ
Carrying Cost =
2
Minimum
total cost
CoD
Ordering Cost = Q
Optimal order
Qopt
Order Quantity, Q
13
13--658
EOQ Example
Cc = $0.75 per gallon
Qopt =
2CoD
Cc
Qopt =
2(150)(10,000)
(0.75)
Co = $150
Qopt = 2,000 gallons

Orders per year = D/Qopt
= 10,000/2,000
= 5 orders/year
D = 10,000 gallons
CcQ
CoD
TCmin =
+
Q
2
TCmin
(150)(10,000) (0.75)(2,000)
=
+
2
2,000
TCmin = $750 + $750 = $1,500

Order cycle time = 311 days/(
days/(D
D/Qopt)
= 311/5
= 62.2 store days
13
13--659
Production Quantity
Model
An inventory system in which an order is
received gradually, as inventory is
simultaneously being depleted

AKA non-instantaneous receipt model

assumption that Q is received all at once is relaxed
p - daily rate at which an order is received over

time, a.k.a. production rate
d - daily rate at which inventory is demanded
13
13--660
Production Quantity Model

(cont.)
Inventory
level
Q(1
(1--d/p)
d/p)
Maximum
inventory
level
Q
(1
(1--d/p)
d/p)
2
Average
inventory
level
0
Order
receipt period
Begin
End
order order
receipt receipt
Time
13
13--661
Production Quantity Model

(cont.)
p = production rate
d = demand rate
Q
Maximum inventory level = Q - p d
d
= Q 1 -p
2CoD
Qopt =
Q
d
Average inventory level =
1p
2
Cc 1 - d
p
CoD CcQ
d
TC = Q + 2 1 - p
13
13--662
Production Quantity Model:

Example
Cc = $0.75 per gallon
Co = $150
d = 10,000/311 = 32.2 gallons per day
2C o D
Qopt =
Cc 1 - d
p
D = 10,000 gallons
p = 150 gallons per day
2(150)(10,000)
=
CoD CcQ
d
TC = Q + 2 1 - p
0.75 1 - 32.2
150
= 2,256.8 gallons
= $1,329
2,256.8
Q
Production run = p =
= 15.05 days per order
150
13
13--663
Production Quantity Model:

Example (cont.)
10,000
D
Number of production runs = Q = 2,256.8 = 4.43 runs/year
d
Maximum inventory level = Q 1 - p
= 2,256.8 1 -
32.2
150
= 1,772 gallons
13
13--664
Solution of EOQ Models with

Excel
13
13--665
Solution of EOQ Models with

Excel (Cont)
13
13--666
Solution of EOQ Models with OM

Tools
13
13--667
Quantity Discounts
Price per unit decreases as order
quantity increases
CcQ
CoD
TC =
+
+ PD
2
Q
where
P = per unit price of the item
D = annual demand
13
13--668
Quantity Discount Model (cont.)

ORDER SIZE
0 - 99
100 199
200+
PRICE
$10
8 (d1)
6 (d2)
TC = ($10 )
TC (d1 = $8 )
Inventory cost ($)
TC (d2 = $6 )
Carrying cost
Ordering cost
Q(d1 ) = 100 Qopt
Q(d2 ) = 200
13
13--669
Quantity Discount: Example

QUANTITY
1 - 49
50 - 89
90+
Qopt =
For Q = 72.5
For Q = 90
PRICE
$1,400
1,100
900
2C o D
=
Cc
Co = $2,500
Cc = $190 per TV
D = 200 TVs per year
2(2500)(200)
= 72.5 TVs
190
CcQopt
CoD
TC =
+
+ PD = $233,784
2
Qopt
CcQ
CoD
TC =
+
+ PD = $194,105
2
Q
13
13--670
Quantity-Discount Model Solution

Quantitywith Excel
13
13--671
Reorder Point
Level of inventory at which a new order is placed
R = dL
where
d = demand rate per period
L = lead time
13
13--672
Reorder Point: Example

Demand = 10,000 gallons/year
Store open 311 days/year
Daily demand = 10,000 / 311 = 32.154
gallons/day
Lead time = L = 10 days
R = dL = (32.154)(10) = 321.54 gallons
13
13--673
Safety Stocks
Safety stock
buffer added to on hand inventory during lead
time
Stockout
an inventory shortage
Service level
probability that the inventory available during lead
time will meet demand
13
13--674
Variable Demand with

a Reorder Point
Inventory level
Reorder
point, R
0
LT
LT
Time
13
13--675
Inventory level
Reorder Point with

a Safety Stock
Q
Reorder
point, R
Safety Stock
0
LT
LT
Time
13
13--676
Reorder Point With

Variable Demand
R = dL + zd L
where
d = average daily demand
L = lead time
d = the standard deviation of daily demand
z = number of standard deviations
corresponding to the service level
probability
zd L = safety stock
13
13--677
Reorder Point for

a Service Level
Probability of
meeting demand during
lead time = service level
Probability of
a stockout
Safety stock
z
d L
dL
Demand
R
13
13--678
Reorder Point for

Variable Demand
The paint store wants a reorder point with a 95%
service level and a 5% stockout probability
d = 30 gallons per day
L = 10 days
d = 5 gallons per day
For a 95% service level, z = 1.65
R = dL + z d L
Safety stock = z d L
= 30(10) + (1.65)(5)( 10)
= (1.65)(5)( 10)
= 326.1 gallons
= 26.1 gallons
13
13--679
Determining Reorder Point with

Excel
13
13--680
Order Quantity for a

Periodic Inventory System
Q = d(tb + L) + zd
tb + L - I
where
d = average demand rate
tb = the fixed time between orders
L = lead time
d = standard deviation of demand
zd
tb + L = safety stock
I = inventory level
13
13--681
Periodic Inventory System
13
13--682
Fixed-Period Model with

FixedVariable Demand
d = 6 packages per day
d = 1.2 packages
tb = 60 days
L = 5 days
I = 8 packages
z = 1.65 (for a 95% service level)
Q = d(tb + L) + zd
tb + L - I
= (6)(60 + 5) + (1.65)(1.2)
60 + 5 - 8
= 397.96 packages
13
13--683
Fixed--Period Model with Excel

Fixed
13
13--684
Simulation
Lecture Outline
Monte Carlo Simulation

Computer Simulation with Excel
Areas of Simulation Application
Supplement 1313-686
Simulation
Mathematical and computer modeling technique for
replicating real-world problem situations
Modeling approach primarily used to analyze
probabilistic problems
It does not normally provide a solution; instead it provides

information that is used to make a decision
Physical simulation
Space flights, wind tunnels, treadmills for tires
Mathematical-computerized simulation
Computer-based replicated models
Supplement 1313-687
Monte Carlo Simulation

Select numbers randomly from a
probability distribution
Use these values to observe how a
model performs over time
Random numbers each have an equal
likelihood of being selected at random
Supplement 1313-688
Distribution of Demand
LAPTOPS DEMANDED
PER WEEK, x
0
1
2
3
4
FREQUENCY OF
DEMAND
20
40
20
10
10
PROBABILITY OF
DEMAND, P(x)
0.20
0.40
0.20
0.10
0.10
100
1.00
Supplement 1313-689
Roulette Wheel of Demand

0
90
x=4
x=0
80
20
x=3
x=2
x=1
60
Supplement 1313-690
Generating Demand
from Random Numbers
DEMAND,
x
RANGES OF RANDOM NUMBERS,

r
0
1
2
3
4
0-19
2020-59
6060-79
8080-89
9090-99
r = 39
Supplement 1313-691
Random Number Table
Supplement 1313-692
15 Weeks of Demand
WEEK
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
39
73
72
75
37
02
87
98
10
47
93
21
95
97
69
DEMAND (x
(x)
1
2
2
2
1
0
3
4
0
1
4
1
4
4
2
= 31
REVENUE (S)
4,300
8,600
8,600
8,600
4,300
0
12,900
17,200
0
4,300
17,200 Average demand
4,300
= 31/15
17,200
= 2.07 laptops/week
17,200
8,600
$133,300
Supplement 1313-693
Computing Expected Demand

E(x) = (0.20)(0) + (0.40)(1) + (0.20)(2)
+ (0.10)(3) + (0.10)(4)
= 1.5 laptops per week
Difference between 1.5 and 2.07 is due to small number of periods
analyzed (only 15 weeks)
SteadySteady-state result
an average result that remains constant after enough trials
Supplement 1313-694
Random Numbers in Excel
Supplement 1313-695
Simulation in Excel
Supplement 1313-696
Simulation in Excel (cont.)
Supplement 1313-697

Simulation
Supplement 1313-698

Simulation (cont.)
Supplement 1313-699

Waiting Lines/Service
Complex systems for which it is difficult to develop

analytical formulas
Determine how many registers and servers are
needed to meet customer demand
Inventory Management
Traditional models make the assumption that

customer demand is certain
Simulation is widely used to analyze JIT without
having to implement it physically
Supplement 1313-700
Areas of Simulation
Application (cont.)
Production and Manufacturing Systems
Examples: production scheduling, production sequencing,

assembly line balancing, plant layout, and plant location
analysis
Machine breakdowns typically occur according to some
probability distributions
Capital Investment and Budgeting

Capital budgeting problems require estimates of cash flows,

often resulting from many random variables
Simulation has been used to generate values of cash flows,
market size, selling price, growth rate, and market share
Supplement 1313-701

(cont.)
Logistics
Typically include numerous random variables, such as

distance, different modes of transport, shipping rates, and
schedules to analyze different distribution channels
Service Operations
Examples: police departments, fire departments, post offices,

hospitals, court systems, airports
Complex operations that no technique except simulation can
be employed
Environmental and Resource Analysis

Examples: impact of manufacturing plants, waste-disposal

facilities, nuclear power plants, waste and population
conditions, feasibility of alternative energy sources
Supplement 1313-702
Chapter 14
Sales and Operations Planning
Lecture Outline
The Sales and Operations Planning
Process
Strategies for Adjusting Capacity
Strategies for Managing Demand
Quantitative Techniques for Aggregate
Planning
Hierarchical Nature of Planning
Aggregate Planning for Services
14
14--704

Determines the resource capacity needed to
meet demand over an intermediate time
horizon
Aggregate refers to sales and operations planning

for product lines or families
Sales and Operations planning (S&OP) matches
supply and demand
Objectives
Establish a company wide game plan for allocating

resources
Develop an economic strategy for meeting
demand
14
14--705

Process
14
14--706
The Monthly S&OP Planning

Process
14
14--707
Meeting Demand Strategies

Adjusting capacity
Resources necessary to meet demand

are acquired and maintained over the
time horizon of the plan
Minor variations in demand are handled
with overtime or underunder-time
Managing demand
Proactive demand management
14
14--708
Strategies for Adjusting Capacity

Level production
Overtime and underunder-time
Producing at a constant rate

Increasing or decreasing
and using inventory to
working hours
absorb fluctuations in
Subcontracting
demand
Let outside companies
Chase demand
complete the work
Hiring and firing workers to
Part
Part--time workers
match demand
Hiring part time workers to
Peak demand
complete the work
Maintaining resources for
Backordering
high--demand levels
high
Providing the service or
product at a later time period
14
14--709
Level Production
Demand
Units
Production
Time
14
14--710
Chase Demand
Demand
Units
Production
Time
14
14--711
Strategies for Managing Demand

Shifting demand into
other time periods

Incentives
Sales promotions
Advertising campaigns
Offering products or
services with countercyclical demand patterns
Partnering with suppliers
to reduce information
distortion along the
supply chain
14
14--712
Quantitative Techniques For AP

Pure Strategies
Mixed Strategies
Linear Programming
Transportation Method
Other Quantitative
Techniques
14
14--713
Pure Strategies
Example:
QUARTER
Spring
Summer
Fall
Winter
SALES FORECAST (LB)

80,000
50,000
120,000
150,000
Hiring cost = $100 per worker

Firing cost = $500 per worker
Inventory carrying cost = $0.50 pound per quarter
Regular production cost per pound = $2.00
Production per employee = 1,000 pounds per quarter
Beginning work force = 100 workers
14
14--714
Level Production Strategy

Level production
(50,000 + 120,000 + 150,000 + 80,000)
= 100,000 pounds
4
QUARTER
Spring
Summer
Fall
Winter
SALES
FORECAST
PRODUCTION
PLAN
INVENTORY
80,000
50,000
120,000
150,000
100,000
20,000
100,000
70,000
100,000
50,000
100,000
0
400,000
140,000
Cost of Level Production Strategy
(400,000 X $2.00) + (140,00 X $.50) = $870,000
14
14--715
Chase Demand Strategy

QUARTER
Spring
Summer
Fall
Winter
SALES PRODUCTION
FORECAST
PLAN
80,000
50,000
120,000
150,000
80,000
50,000
120,000
150,000
WORKERS WORKERS WORKERS

NEEDED
HIRED
FIRED
80
50
120
150
0
0
70
30
20
30
0
0
100
50
Cost of Chase Demand Strategy

(400,000 X $2.00) + (100 x $100) + (50 x $500) = $835,000
14
14--716
Level Production with Excel
14
14--717
Chase Demand with Excel
14
14--718
Mixed Strategy
Combination of Level Production and
Chase Demand strategies
Examples of management policies
no more than x% of the workforce can be

laid off in one quarter
inventory levels cannot exceed x dollars
Many industries may simply shut down

manufacturing during the low demand
season and schedule employee
vacations during that time
14
14--719
Mixed Strategies with Excel
14
14--720
Mixed Strategies with Excel

(cont.)
14
14--721
General Linear Programming (LP)

Model
LP gives an optimal solution, but demand
and costs must be linear
Let

Wt = workforce size for period t

Pt =units produced in period t
It =units in inventory at the end of period t
Ft =number of workers fired for period t
Ht = number of workers hired for period t
14
14--722
LP MODEL
Minimize Z = $100 (H1 + H2 + H3 + H4)
+ $500 (F1 + F2 + F3 + F4)
+ $0.50 (I1 + I2 + I3 + I4)
+ $2 (P1 + P2 + P3 + P4)
Subject to
Demand
constraints
Production
constraints
Work force
constraints
P1 - I1
I1 + P2 - I2
I2 + P3 - I3
I3 + P4 - I4
1000 W1
1000 W2
1000 W3
1000 W4
100 + H1 - F1
W1 + H2 - F2
W2 + H3 - F3
W3 + H4 - F4
= 80,000
= 50,000
= 120,000
= 150,000
= P1
= P2
= P3
= P4
= W1
= W2
= W3
= W4
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
14
14--723
Setting up the Spreadsheet
14
14--724
The LP Solution
14
14--725
Transportation Method
EXPECTED
QUARTER
DEMAND
1
2
3
4
900
1500
1600
3000
REGULAR
OVERTIME SUBCONTRACT
CAPACITY
CAPACITY
CAPACITY
1000
1200
1300
1300
100
150
200
200
500
500
500
500
Regular production cost per unit

$20
Overtime production cost per unit
$25
Subcontracting cost per unit
$28
Inventory holding cost per unit per period
$3
Beginning inventory
300 units
14
14--726
Transportation Tableau
PERIOD OF USE
PERIOD OF PRODUCTION
Beginning
Inventory
300
Regular
600
20
300
100
29
1000
100
34
100
37
500
28
31
Subcontract
28
31
34
1200
20
23
26
1200
25
28
150
31
150
28
31
Regular
1300
Overtime
200
20
25
28
Subcontract
Regular
250
500
1300
Overtime
200
Subcontract
500
Demand
900
300
26
25
Regular
Overtime
Subcontract
23
Unused
Capacity
Capacity
4
3
Overtime
1500
1600
34
250
500
23
1300
28
200
31
500
20
1300
25
200
28
3000
500
250
14
14--727
Burruss Production Plan

REGULAR
SUBSUBENDING
PERIOD DEMAND PRODUCTION OVERTIME CONTRACT INVENTORY
1
2
3
4
Total
900
1500
1600
3000
7000
1000
1200
1300
1300
4800
100
150
200
200
650
0
250
500
500
1250
500
600
1000
0
2100
14
14--728
Using Excel for the Transportation

Method of Aggregate Planning
14
14--729
Other Quantitative Techniques

Linear decision rule (LDR)
Search decision rule (SDR)
Management coefficients model
14
14--730
Hierarchical Nature of Planning

Production
Planning
Capacity
Planning
Resource
Level
Product lines
or families
Sales and
Operations
Plan
Resource
requirements
plan
Plants
Individual
products
Master
production
schedule
Rough-cut
capacity
plan
Critical
work
centers
Components
Material
requirements
plan
Capacity
requirements
plan
All
work
centers
Manufacturing
operations
Shop
floor
schedule
Input/
output
control
Individual
machines
Items
Disaggregation: process of breaking an aggregate plan into more detailed plans

14
14--731
Collaborative Planning
Sharing information and synchronizing
production across supply chain
Part of CPFR (collaborative planning,
forecasting, and replenishment)
involves selecting products to be jointly

managed, creating a single forecast of
customer demand, and synchronizing
production across supply chain
14
14--732
Available-to-Promise (ATP)
Quantity of items that can be promised to customer
Difference between planned production and customer
orders already received
AT in period 1 = (On-hand quantity + MPS in period 1)
(CO until the next period of planned production)
ATP in period n = (MPS in period n)
(CO until the next period of planned production)
Capable-to-promise
quantity of items that can be produced and mad available at

a later date
14
14--733
ATP: Example
14
14--734
ATP: Example (cont.)
14
14--735
ATP: Example (cont.)
Take excess units from April
ATP in April = (10+100) 70==30

40
ATP in May = 100 110 = -=10
0
ATP in June = 100 50 = 50
14
14--736
Rule Based ATP

Product
Request
Yes
Is the product
available at
this location?
No
Availableto-promise
Yes
Is an alternative
product available
at this location?
No
Allocate
inventory
Yes
Is this product
available at a
different
location?
No
Is an alternative
product available
at an alternate
location?
Yes
No
Allocate
inventory
Capable-topromise date
Is the customer
willing to wait for
the product?
No
Availableto-promise
Yes
Revise master
schedule
Trigger production
Lose sale
14
14--737
Aggregate Planning for Services

1. Most services cannot be inventoried
2. Demand for services is difficult to predict
3. Capacity is also difficult to predict
4. Service capacity must be provided at the
appropriate place and time
5. Labor is usually the most constraining
resource for services
14
14--738
Yield Management
14
14--739
Yield Management (cont.)
14
14--740
Yield Management: Example

NO
NO--SHOWS
PROBABILITY
0
1
2
3
P(N < X)
.15
.25
.30
.30
.00
.15
.40
.70
.517
Optimal probability of nono-shows

P(
P(n
n < x)
Cu
75
=
= .517
Cu + Co
75 + 70
Hotel should be overbooked by two rooms

14
14--741
Linear Programming
Lecture Outline

Model Formulation
Graphical Solution Method
Linear Programming Model Solution
Solving Linear Programming Problems
with Excel
Sensitivity Analysis
Supplement 1414-743
Linear Programming (LP)

A model consisting of linear relationships
representing a firms objective and resource constraints
LP is a mathematical modeling technique used to determine a

level of operational activity in order to achieve an objective,
subject to restrictions called constraints
Supplement 1414-744
Types of LP
Supplement 1414-745
Types of LP (cont.)
Supplement 1414-746
Types of LP (cont.)
Supplement 1414-747
LP Model Formulation
Decision variables
mathematical symbols representing levels of activity of an

operation
Objective function

a linear relationship reflecting the objective of an operation

most frequent objective of business firms is to maximize profit
most frequent objective of individual operational units (such as
a production or packaging department) is to minimize cost
Constraint
a linear relationship representing a restriction on decision

making
Supplement 1414-748
LP Model Formulation (cont.)

Max/min
z = c1x1 + c2x2 + ... + cnxn
subject to:
a11x1 + a12x2 + ... + a1nxn (, =, ) b1
a21x1 + a22x2 + ... + a2nxn (, =, ) b2
:
an1x1 + an2x2 + ... + annxn (, =, ) bn
xj = decision variables
bi = constraint levels
cj = objective function coefficients
aij = constraint coefficients
Supplement 1414-749
LP Model: Example
RESOURCE REQUIREMENTS
PRODUCT
Bowl
Mug
Labor
(hr/unit)
1
2
Clay
(lb/unit)
4
3
Revenue
($/unit)
40
50
There are 40 hours of labor and 120 pounds of clay

available each day
Decision variables
x1 = number of bowls to produce
x2 = number of mugs to produce
Supplement 1414-750
LP Formulation: Example
Maximize Z = $40 x1 + 50 x2
Subject to
x1 +
4x1 +
2x2 40 hr
3x2 120 lb
x1 , x2 0
Solution is x1 = 24 bowls
Revenue = $1,360
(labor constraint)
(clay constraint)
x2 = 8 mugs
Supplement 1414-751
Graphical Solution Method

1. Plot model constraint on a set of coordinates
in a plane
2. Identify the feasible solution space on the
graph where all constraints are satisfied
simultaneously
3. Plot objective function to find the point on
boundary of this space that maximizes (or
minimizes) value of objective function
Supplement 1414-752
Graphical Solution: Example

x2
50
40
4 x1 + 3 x2 120 lb
30
Area common to
both constraints
20
x1 + 2 x2 40 hr
10
0
|
10
|
20
|
30
|
40
|
50
|
60
x1
Supplement 1414-753
Computing Optimal Values

x2
40 4 x1 + 3 x2 = 120 lb
30
20
x1 + 2 x2 = 40 hr
x1 +
4x1 +
2x 2 =
3x 2 =
40
120
4x1 +
-4x1 -
8x 2 =
3x 2 =
160
-120
5x 2 =
x2 =
40
8
x1 + 2(8) =
x1
=
40
24
10 8
0
|
10
| 24 |
20
30
| x1
40
Z = $40(24) + $50(8) = $1,360
Supplement 1414-754
Extreme Corner Points

x1 = 0 bowls
x2 = 20 mugs
Z = $1,000
x2
40
30
20
A
B
10
0
x1 = 224 bowls
x2 = 8 mugs
Z = $1,360
x1 = 30 bowls
x2 = 0 mugs
Z = $1,200
|
10
|
20
| C|
30 40
x1
Supplement 1414-755
Objective Function
x2
40
4x1 + 3x
3x2 = 120 lb
Z = 70x
70x1 + 20x
20x2
30
Optimal point:
x1 = 30 bowls
x2 = 0 mugs
Z = $2,100
A
20
10
|
10
|
20
x1 + 2
2xx2 = 40 hr
| C
|
30
40
x
1
Supplement 1414-756
Minimization Problem
CHEMICAL CONTRIBUTION
Brand
Gro-plus
GroCrop--fast
Crop
Nitrogen (lb/bag)
Phosphate (lb/bag)
2
4
4
3
Minimize Z = $6x1 + $3x2

subject to
2x1 + 4x2 16 lb of nitrogen
4x1 + 3x2 24 lb of phosphate
x 1, x 2 0
Supplement 1414-757
Graphical Solution
x2
14
x1 = 0 bags of GroGro-plus
Crop-fast
12 x2 = 8 bags of CropZ = $24
10
A
Z = 6x
6x1 + 3x
3x 2
8
6
4
2
0
B
|
2
|
4
|
6
|
8
|
10
|
12
|
14
x1
Supplement 1414-758
Simplex Method
A mathematical procedure for solving linear programming
problems according to a set of steps
Slack variables added to constraints to represent unused
resources

x1 + 2x2 + s1 =40
40 hours of labor
4x1 + 3x2 + s2 =120
120 lb of clay
Surplus variables subtracted from constraints to represent

excess above resource requirement. For example,

2x1 + 4
4x
x2 16
16 is transformed into
2x1 + 4
4x
x2 - s1 = 1
16
6
Slack/surplus variables have a 0 coefficient in the objective

function
Z = $40x1 + $50x2 + 0s1 + 0s2
Supplement 1414-759
Solution
Points with
Slack
Variables
Supplement 1414-760
Solution
Points with
Surplus
Variables
Supplement 1414-761
Solving LP Problems with Excel
Supplement 1414-762

(cont.)
Supplement 1414-763

(cont.)
Supplement 1414-764
Sensitivity Range for Labor

Hours
Supplement 1414-765
Sensitivity Range for

Bowls
Supplement 1414-766
Chapter 15
Resource Planning
Lecture Outline

Material Requirements Planning (MRP)

Capacity Requirements Planning (CRP)
Enterprise Resource Planning (ERP)
Customer Relationship Management (CRM)
Supply Chain Management (SCM)
Product Lifecycle Management (PLM)
15
15--768
Resource
Planning for
Manufacturing
15
15--769
Material Requirements
Planning (MRP)
Computerized inventory control and
production planning system
When to use MRP?

Dependent demand items

Discrete demand items
Complex products
Job shop production
Assemble-to-order environments
15
15--770
Demand Characteristics
Independent demand
Dependent demand
100 x 1 =
100 tabletops
100 x 4 = 400 table legs
100 tables
Continuous demand
Discrete demand
400
300
No. of tables
No. of tables
400
200
100
1
4
Week
300
200
100
5
M T W Th F
M T W Th F
15
15--771
Material
Requirements
Planning
Product
structure
file
Master
production
schedule
Material
requirements
planning
Item
master
file
Planned
order
releases
Work
orders
Purchase
orders
Rescheduling
notices
15
15--772
MRP Inputs and Outputs

Inputs

Master production
schedule
Product structure file
Item master file
Outputs
Planned order
releases

Work orders
Purchase orders
Rescheduling notices
15
15--773
Master Production Schedule

Drives MRP process with a schedule of
finished products
Quantities represent production not demand
Quantities may consist of a combination of
customer orders and demand forecasts
Quantities represent what needs to be
produced, not what can be produced
Quantities represent end items that may or
may not be finished products
15
15--774

(cont.)
MPS ITEM
Pencil Case
Clipboard
Lapboard
Lapdesk
125
85
75
0
125
95
120
50
PERIOD
3
4
125
120
47
0
125
100
20
50
5
125
100
17
0
15
15--775
Product Structure File
15
15--776
Product Structure
Clipboard
Top clip (1)
Pivot (1)
Bottom clip (1)
Spring (1)
Rivets (2)
Finished clipboard
Pressboard (1)
15
15--777
Product Structure Tree

Level 0
Clipboard
Pressboard
(1)
Top Clip
(1)
Clip Assy
(1)
Bottom Clip
(1)
Rivets
(2)
Pivot
(1)
Level 1
Spring
(1)
Level 2
15
15--778
Multilevel Indented BOM

LEVEL
0----1----2---2---2---2--1---1---
ITEM
Clipboard
Clip Assembly
Top Clip
Bottom Clip
Pivot
Spring
Rivet
Press Board
UNIT OF MEASURE
QUANTITY
ea
ea
ea
ea
ea
ea
ea
ea
1
1
1
1
1
1
2
1
15
15--779
Specialized BOMs
Phantom bills

Transient subassemblies
Never stocked
Immediately consumed in next stage
K-bills
Group small, loose parts under pseudopseudo-item

number
Reduces paperwork, processing time, and file
space
15
15--780
Specialized BOMs (cont.)

Modular bills

Product assembled from major subassemblies and

customer options
Modular bill kept for each major subassembly
Simplifies forecasting and planning
X10 automobile example

3 x 8 x 3 x 8 x 4 = 2,304 configurations
3 + 8 + 3 + 8 + 4 = 26 modular bills
15
15--781
Modular BOMs
X10
Automobile
Engines
(1 of 3)
4-Cylinder (.40)
Exterior color
(1 of 8)
Interior
(1 of 3)
Bright red (.10)
Leather (.20)
Interior color
(1 of 8)
Body
(1 of 4)
Grey (.10)
Sports coupe (.20)
6-Cylinder (.50)
White linen (.10)
Tweed (.40)
Light blue (.10)
TwoTwo-door (.20)
8-Cylinder (.10)
Sulphur yellow (.10)
Plush (.40)
Rose (.10)
FourFour-door (.30)
OffOff-white (.20)
Station wagon (.30)
Neon orange (.10)

Metallic blue (.10)
Cool green (.10)
Emerald green (.10)
Black (.20)
Jet black (.20)
Brown (.10)
Champagne (.20)
B/W checked (.10)
15
15--782
Time-phased Bills
an assembly chart shown against a time
scale
Forward scheduling: start at todays date and schedule forward to determine

the earliest date the job can be finished. If each item takes one period to
complete, the clipboards can be finished in three periods
Backward scheduling: start at the due date and schedule backwards to
determine when to begin work. If an order for clipboards is due by period three,
we should start production now
15
15--783
Item Master File

DESCRIPTION
Item
Pressboard
Item no.
7341
Item type
Purch
Product/sales class
Comp
Value class
B
Buyer/planner
RSR
Vendor/drawing
07142
Phantom code
N
Unit price/cost
1.25
Pegging
Y
LLC
1
INVENTORY POLICY
Lead time
Annual demand
Holding cost
Ordering/setup cost
Safety stock
Reorder point
EOQ
Minimum order qty
Maximum order qty
Multiple order qty
Policy code
1
5000
1
50
0
39
316
100
500
1
3
15
15--784
Item Master File (cont.)

PHYSICAL INVENTORY
On hand
Location
On order
Allocated
Cycle
Last count
Difference
150
W142
100
75
3
9/5
-2
USAGE/SALES
YTD usage/sales
MTD usage/sales
YTD receipts
MTD receipts
Last receipt
Last issue
CODES
Cost acct.
Routing
Engr
1100
75
1200
0
8/25
10/5
00754
00326
07142
15
15--785
MRP Processes

Exploding the bill

of material
Netting out inventory
Lot sizing
Time--phasing
Time
requirements
Netting
process of subtracting ononhand quantities and

scheduled receipts from
gross requirements to
produce net requirements
Lot sizing
determining the quantities

in which items are usually
made or purchased
15
15--786
MRP Matrix
15
15--787
MRP: Example
1
Clipboard
Lapdesk
85
0
2
95
60
3
120
0
4
100
60
5
100
0
Item Master File

On hand
On order
LLC
Lot size
Lead time
CLIPBOARD
LAPDESK
25
20
175 (Period 1)
0
(sch receipt)
0
0
L4L
Mult 50
1
1
PRESSBOARD
150
0
1
Min 100
1
15
15--788
MRP: Example (cont.)

Product Structure Record
Level 0
Clipboard
Pressboard
(1)
Clip Assy
(1)
Rivets
(2)
Level 1
Level 0
Lapdesk
Pressboard
(2)
Trim
(3)
Beanbag
(1)
Glue
(4 oz)
Level 1
15
15--789

ITEM: CLIPBOARD
LOT SIZE: L4L
LLC: 0
LT: 1
Gross Requirements
PERIOD
1
85
95
120
100
100
Scheduled Receipts
Projected on Hand
175
25
Net Requirements
Planned Order Receipts
Planned Order Releases
15
15--790

ITEM: CLIPBOARD
LOT SIZE: L4L
LLC: 0
LT: 1
Gross Requirements
PERIOD
1
85
95
120
100
100
Scheduled Receipts
Projected on Hand
Net Requirements
175
25
115
0

(25 + 175) = 200 units available

(200 - 85) = 115 on hand at the end of Period 1
15
15--791

ITEM: CLIPBOARD
LOT SIZE: L4L
LLC: 0
LT: 1
Gross Requirements
PERIOD
1
85
95
120
100
100
Scheduled Receipts
Projected on Hand
25
Net Requirements
175
115
20

115 units available

(115 - 85) = 20 on hand at the end of Period 2
15
15--792

ITEM: CLIPBOARD
LOT SIZE: L4L
LLC: 0
LT: 1
Gross Requirements
PERIOD
1
85
95
120
100
100
Scheduled Receipts
Projected on Hand
25
Net Requirements
175
115
20
100

100
100
20 units available
(20 - 120) = -100 100 additional Clipboards are required
Order must be placed in Period 2 to be received in Period 3
15
15--793

ITEM: CLIPBOARD
LOT SIZE: L4L
LLC: 0
LT: 1
Gross Requirements
PERIOD
1
85
95
120
100
100
Scheduled Receipts
Projected on Hand
25
Net Requirements
175
115
20
100
100
100
100
100
100

100
100
100
Following the same logic Gross Requirements in Periods 4

and 5 develop Net Requirements, Planned Order Receipts, and
15
15--794

ITEM: LAPDESK
LOT SIZE: MULT 50
LLC: 0
LT: 1
Gross Requirements
PERIOD
1
60
3
0
4
60
5
0
Scheduled Receipts
Projected on Hand
20
Net Requirements
15
15--795

ITEM: LAPDESK
LOT SIZE: MULT 50
LLC: 0
LT: 1
Gross Requirements
PERIOD
1
60
60
20
10
10
Scheduled Receipts
Projected on Hand
20
Net Requirements

50
40
50
50
50
50
Following the same logic, the Lapdesk MRP matrix is

completed as shown
15
15--796

ITEM: CLIPBOARD
LLC: 0
LOT SIZE: L4L
LT: 1

ITEM: LAPDESK
LOT SIZE: MULT 50
LLC: 0
LT: 1

ITEM: PRESSBOARD LLC: 0
LOT SIZE: MIN 100
LT: 1
Gross Requirements
Scheduled Receipts
Projected on Hand
Net Requirements
PERIOD
3
4
100
100
PERIOD
3
4
50
1
100
5
50
2
PERIOD
3
4
150
15
15--797

ITEM: CLIPBOARD
LLC: 0
LOT SIZE: L4L
LT: 1

ITEM: LAPDESK
LOT SIZE: MULT 50
LLC: 0
LT: 1
PERIOD
3
4
100
100
PERIOD
x1
3
4
x1
1
50
x2
ITEM: PRESSBOARD LLC: 0x2
LOT SIZE: MIN 100
LT: 1
1
2
Gross Requirements
100
100
Scheduled Receipts
Projected on Hand
150
Net Requirements
100
x1
5
50
PERIOD
3
4
200
100
5
0
15
15--798

ITEM: CLIPBOARD
LLC: 0
LOT SIZE: L4L
LT: 1

ITEM: LAPDESK
LOT SIZE: MULT 50
LLC: 0
LT: 1

ITEM: PRESSBOARD LLC: 0
LOT SIZE: MIN 100
LT: 1
Gross Requirements
Scheduled Receipts
Projected on Hand
150
Net Requirements
PERIOD
3
4
100
100
PERIOD
3
4
50
100
5
50
1
100
2
100
50
50
100
PERIOD
3
4
200
100
50
100
150
0
150
150
100
5
0
0
100
100
15
15--799

Planned Order Report
PERIOD
ITEM
Clipboard
Lapdesk
Pressboard
100 100 100

50
50
100 150 100
15
15--800
Lot Sizing in MRP Systems

Lot-for-lot ordering policy
Fixed-size lot ordering policy

Minimum order quantities

Maximum order quantities
Multiple order quantities
Economic order quantity
Periodic order quantity
15
15--801
Using Excel for MRP Calculations
15
15--802
Advanced Lot Sizing Rules: L4L
Total cost of L4L = (4 X $60) + (0 X $1) = $240

15
15--803
Advanced Lot Sizing Rules: EOQ

EO Q =
2(30)(60
= 60
1
minimum order quantity
Total cost of EOQ = (2 X $60) + [(10 + 50 + 40) X $1)] = $220

15
15--804
Advanced Lot Sizing Rules: POQ

POQ = Q / d = 60 / 30 = 2 periods worth of requirements
Total cost of POQ = (2 X $60) + [(20 + 40) X $1] = $180
15
15--805
Planned Order Report

Item
#2740
On hand
100
On order
200
Allocated
50
DATE
10
10--08
10
10--27
ORDER NO.
9-26
9-30
10
10--01
SR 7542
10
10--10
10
10--15
10
10--23
GR 6473
Date
9 - 25 - 05
Lead time
2 weeks
Lot size
200
Safety stock
50
GROSS REQS.
AL 4416
AL 4174
GR 6470
SCHEDULED PROJECTED
RECEIPTS
ON HAND
ACTION
25
25
50
200
CO 4471
GR 6471
GR 6471
50
Key: AL = allocated
CO = customer order
PO = purchase order
150
75
50
25
- 50
50
25
0
- 50
Expedite SR 1010-01
75
25
0
Release PO 1010-13
WO = work order
SR = scheduled receipt
GR = gross requirement
15
15--806
MRP Action Report

Current date 99-2525-08
ITEM
#2740
#3616
#2412
#3427
#2516
#2740
#3666
DATE
10
10--08
10
10--09
10
10--10
10
10--15
10
10--20
10
10--27
10
10--31
ORDER NO. QTY.

7542
200
7648
100
200
50
Expedite
Move forward
Move forward
Move backward
De
De--expedite
Release
Release
ACTION
SR
PO
PO
PO
SR
PO
WO
10
10--01
10
10--07
10
10--05
10
10--25
10
10--30
10
10--13
10
10--24
15
15--807
Capacity Requirements
Planning (CRP)
Creates a load profile
Identifies under-loads and over-loads
Inputs

Planned order releases

Routing file
Open orders file
15
15--808
CRP
MRP planned
order
releases
Routing
file
Capacity
requirements
planning
Open
orders
file
Load profile for

each process
15
15--809
Calculating Capacity
Maximum capability to produce
Rated Capacity
Theoretical output that could be attained if a process were

operating at full speed without interruption, exceptions, or
downtime
Effective Capacity
Takes into account the efficiency with which a particular

product or customer can be processed and the utilization of
the scheduled hours or work
Effective Daily Capacity = (no. of machines or workers) x
(hours per shift) x (no. of shifts) x (utilization) x ( efficiency)
15
15--810
Calculating Capacity (cont.)

Utilization
Percent of available time spent working
Efficiency
How well a machine or worker performs compared to a

standard output level
Load
Standard hours of work assigned to a facility
Load Percent
Ratio of load to capacity

load
Load Percent =
capacity
x 100%
15
15--811
Load Profiles
graphical comparison of load versus
capacity
Leveling underloaded conditions:

Acquire more work

Pull work ahead that is scheduled for later
time periods
Reduce normal capacity
15
15--812
Reducing OverOver-load Conditions

1. Eliminating unnecessary requirements
2. Rerouting jobs to alternative machines,
workers, or work centers
3. Splitting lots between two or more machines
4. Increasing normal capacity
5. Subcontracting
6. Increasing efficiency of the operation
7. Pushing work back to later time periods
8. Revising master schedule
15
15--813
Hours of capacity
Initial Load Profile

120
110
100
90
80
70
60
50
40
30
20
10
0
Normal
capacity
Time (weeks)
15
15--814
Hours of capacity
Adjusted Load Profile

120
110
100
90
80
70
60
50
40
30
20
10
0
Pull ahead
Overtime
Work
an
extra
shift
Push back
Push back
Normal
capacity
Time (weeks)
Load leveling
process of balancing underloads and overloads

15
15--815
Relaxing MRP Assumptions

Material is not always the most constraining
resource
Lead times can vary
Not every transaction needs to be recorded
Shop floor may require a more sophisticated
scheduling system
Scheduling in advance may not be appropriate
for on-demand production.
15
15--816
Enterprise Resource Planning

(ERP)
Software that organizes and manages
a companys business processes by

sharing information across functional

areas
integrating business processes
facilitating customer interaction
providing benefit to global companies
15
15--817
Organizational Data Flows
Source: Adapted from Joseph Brady, Ellen Monk, and Bret Wagner, Concepts in
Enterprise Resource Planning (Boston: Course Technology, 2001), pp. 712
15
15--818
ERPs Central Database
15
15--819
Selected Enterprise Software

Vendors
15
15--820
ERP Implementation
Analyze business processes
Choose modules to implement
Which processes have the biggest impact on

customer relations?
Which process would benefit the most from
integration?
Which processes should be standardized?
Align level of sophistication

Finalize delivery and access
Link with external partners
15
15--821
Customer Relationship
Management (CRM)
Software that

Plans and executes business processes

Involves customer interaction
Changes focus from managing products to
managing customers
Analyzes pointpoint-ofof-sale data for patterns
used to predict future behavior
15
15--822

Software that plans and executes business
processes related to supply chains
Includes

Supply chain planning

Supply chain execution
Supplier relationship management
Distinctions between ERP and SCM are

becoming increasingly blurred
15
15--823
Product Lifecycle Management

(PLM)
Software that
Incorporates new product design and

development and product life cycle
management
Integrates customers and suppliers in the
design process though the entire product life
cycle
15
15--824
ERP and Software Systems
15
15--825
Connectivity
Application programming interfaces (APIs)
give other programs wellwell-defined ways of speaking to

them
Enterprise Application Integration (EAI) solutions

EDI is being replaced by XML, business
language of Internet
Service
Service--oriented architecture (SOA)
collection of services that communicate with each

other within software or between software
15
15--826
Chapter 16
Lean Systems
Lecture Outline

Basic Elements of Lean Production

Benefits of Lean Production
Implementing Lean Production
Lean Services
Leaning the Supply Chain
Lean Six Sigma
Lean and the Environment
Lean Consumption
16
16--828
Lean Production
Doing more with less inventory, fewer
workers, less space
Just-in-time (JIT)
smoothing the flow of material to arrive

just as it is needed
JIT and Lean Production are used
interchangeably
Muda
waste, anything other than that which

adds value to product or service
16
16--829
Waste in Operations
16
16--830
Waste in Operations (cont.)
16
16--831
Waste in Operations (cont.)
16
16--832
Basic Elements
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Flexible resources
Cellular layouts
Pull system
Kanbans
Small lots
Quick setups
Uniform production levels
Quality at the source
Total productive
maintenance
Supplier networks
16
16--833
Flexible Resources
Multifunctional workers

perform more than one job

general-purpose machines perform
several basic functions
Cycle time
time required for the worker to complete

one pass through the operations
assigned
Takt time
paces production to customer demand
16
16--834
Standard Operating
Routine for a Worker
16
16--835
Cellular Layouts
Manufacturing cells
comprised of dissimilar machines brought

together to manufacture a family of parts
Cycle time is adjusted to match takt time

by changing worker paths
16
16--836
Cells with Worker Routes
16
16--837
Worker Routes Lengthen as

Volume Decreases
16
16--838
Pull System
Material is pulled through the system when
needed
Reversal of traditional push system where
material is pushed according to a schedule
Forces cooperation
Prevent over and underproduction
While push systems rely on a predetermined
schedule, pull systems rely on customer
requests
16
16--839
Kanbans
Card which indicates standard quantity
of production
Derived from twotwo-bin inventory system
Maintain discipline of pull production
Authorize production and movement of
goods
16
16--840
Sample Kanban
16
16--841
Origin of Kanban
a) TwoTwo-bin inventory system
b) Kanban inventory system
Bin 1
Kanban
Bin 2
Reorder
card
Q-R
R
Q = order quantity
R = reorder point - demand during lead time
16
16--842
Types of Kanban
Production kanban
authorizes production of
goods
Signal kanban
Withdrawal kanban
authorizes movement of
goods
Kanban square
a marked area designated

to hold items
a triangular kanban
used to signal
production at the
previous workstation
Material kanban
used to order material in

advance of a process
Supplier kanban
rotates between the

factory and suppliers
16
16--843
16
16--844
16
16--845
16
16--846
Determining Number of
Kanbans
No. of Kanbans =
average demand during lead time + safety stock

container size
dL + S
C
where
N =
N = number of kanbans or containers

d = average demand over some time period
L = lead time to replenish an order
S = safety stock
C = container size
16
16--847
Determining Number of
Kanbans: Example
d = 150 bottles per hour
L = 30 minutes = 0.5 hours
S = 0.10(150 x 0.5) = 7.5
C = 25 bottles
(150 x 0.5) + 7.5
dL + S
N=
=
25
C
= 75 + 7.5 = 3.3 kanbans or containers
25
Round up to 4 (to allow some slack) or
down to 3 (to force improvement)
16
16--848
Small Lots
Require less space and capital
investment
Move processes closer together
Make quality problems easier to
detect
Make processes more dependent
on each other
16
16--849
Inventory Hides Problems
16
16--850
Less Inventory Exposes Problems
16
16--851
Components of Lead Time

Processing time
Reduce number of items or improve efficiency
Move time
Reduce distances, simplify movements, standardize

routings
Waiting time
Better scheduling, sufficient capacity
Setup time
Generally the biggest bottleneck

16
16--852
Quick Setups
Internal setup
Can be performed
only when a
process is stopped
External setup
Can be performed
in advance
SMED Principles

Separate internal setup from

external setup
Convert internal setup to external
setup
Streamline all aspects of setup
Perform setup activities in
parallel or eliminate them entirely
16
16--853
Common Techniques for Reducing

Setup Time
16
16--854

Setup Time (cont.)
16
16--855

Setup Time (cont.)
16
16--856
Uniform Production Levels

Result from smoothing production
requirements on final assembly line
Kanban systems can handle +/+/- 10%
demand changes
Reduce variability with more accurate
forecasts
Smooth demand across planning
horizon
Mixed
Mixed--model assembly steadies
component production
16
16--857
Mixed--Model Sequencing
Mixed
16
16--858
Quality at the Source

Visual control
makes problems visible
Poka-yokes
prevent defects from

occurring
Kaizen
a system of continuous
improvement; change for
the good of all
Jidoka
authority to stop the

production line
Andons
call lights that signal

quality problems
Under-capacity
scheduling
leaves time for planning,

problem solving, and
maintenance
16
16--859
Examples of Visual
Control
16
16--860
Examples of Visual
Control (cont.)
16
16--861
Examples of Visual
Control (cont.)
16
16--862
5 Whys
One of the keys to an effective Kaizen is
finding the root cause of a problem and
eliminating it
A practice of asking why? repeatedly
until the underlying cause is identified
(usually requiring five questions)
Simple, yet powerful technique for finding
the root cause of a problem
16
16--863
Total Productive
Maintenance (TPM)
Breakdown maintenance
Repairs to make failed machine operational
Preventive maintenance
System of periodic inspection and

maintenance to keep machines operating
TPM combines preventive maintenance

and total quality concepts
16
16--864
TPM Requirements
Design products that can be easily produced
on existing machines
Design machines for easier operation,
changeover, maintenance
Train and retrain workers to operate machines
Purchase machines that maximize productive
potential
Design preventive maintenance plan spanning
life of machine
16
16--865
5S Scan
Goal
Eliminate or Correct
Seiri(sort)
Keep only what you

need
Seiton(set in order)
A place for
everything and
everything in its
place
Cleaning, and looking
for ways to keep
clean and organized
Unneeded equipment, tools, furniture;

unneeded items on walls, bulletins; items
blocking aisles or stacked in corners;
unneeded inventory, supplies, parts; safety
hazards
Items not in their correct places; correct places
not obvious; aisles, workstations, & equipment
locations not indicated; items not put away
immediately after use
Floors, walls, stairs, equipment, & surfaces not
clean; cleaning materials not easily
accessible; lines, labels, signs broken or
unclean; other cleaning problems
Necessary information not visible; standards
not known; checklists missing; quantities and
limits not easily recognizable; items cant be
located within 30 seconds
Number of workers without 5S training; number
of daily 5S inspections not performed; number
of personal items not stored; number of times
job aids not available or up-to-date
Seisou (shine)
Seiketsu
(standardize)
Shisuke (sustain)
Maintaining and
monitoring the first
three categories
Sticking to the rules
16
16--866
Supplier Networks

Long-term supplier contracts

Synchronized production
Supplier certification
Mixed loads and frequent deliveries
Precise delivery schedules
Standardized, sequenced delivery
Locating in close proximity to the customer
16
16--867
Benefits of Lean
Production

Reduced inventory
Improved quality
Lower costs
Reduced space requirements
Shorter lead time
Increased productivity
16
16--868
Benefits of Lean
Production (cont.)

Greater flexibility
Better relations with suppliers
Simplified scheduling and control activities
Increased capacity
Better use of human resources
More product variety
16
16--869
Implementing Lean Production

Use lean production to finely tune an
operating system
Somewhat different in USA than Japan
Lean production is still evolving
Lean production is not for everyone
16
16--870
Lean Services
Basic elements of lean
production apply equally to
services
Most prevalent applications

lean retailing
lean banking
lean health care
16
16--871
Leaning the Supply Chain

pulling a smooth flow of material through a
series of suppliers to support frequent
replenishment orders and changes in customer
demand
Firms need to share information and
coordinate demand forecasts, production
planning, and inventory replenishment with
suppliers and suppliers suppliers throughout
supply chain
16
16--872
Leaning the Supply Chain (cont.)

Steps in Leaning the Supply Chain:
Build a highly collaborative business

environment
Adopt the technology to support your
system
16
16--873
Lean Six Sigma

Lean and Six Sigma are natural partners for
process improvement
Lean

Eliminates waste and creates flow

More continuous improvement
Six Sigma
Reduces variability and enhances process

capabilities
Requires breakthrough improvements
16
16--874
Lean and the Environment

Leans mandate to eliminate waste and
operate only with those resources that
are absolutely necessary aligns well with
environmental initiatives
Environmental waste is often an indicator
of poor process design and inefficient
production
16
16--875
EPA Recommendations
Commit to eliminate environmental waste through lean
implementation
Recognize new improvement opportunities by
incorporating environmental, heath and safety (EHS)
icons and data into value stream maps
Involve staff with EHS expertise in planning
Find and drive out environmental wastes in specific
process by using lean processprocess-improvement tools
Empower and enable workers to eliminate
environmental wastes in their work areas
16
16--876
Lean Consumption
Consumptions process involves locating,
buying, installing, using, maintaining, repairing,
and recycling.
Lean Consumption seeks to:

Provide customers what they want, where and

when they want it
Resolve customer problems quickly and completely
Reduce the number of problems customers need to
solve
16
16--877
Chapter 17
Scheduling
Lecture Outline

Objectives in Scheduling
Loading
Sequencing
Monitoring
Advanced Planning and Scheduling Systems
Theory of Constraints
Employee Scheduling
17
17--879
What is Scheduling?
Last stage of planning before production
occurs
Specifies when labor, equipment, and
facilities are needed to produce a
product or provide a service
17
17--880
Scheduled Operations
Process Industry

Linear programming
EOQ with nonnon-instantaneous
replenishment
Mass Production

Assembly line balancing
Project
Batch Production
Project -scheduling
techniques (PERT, CPM)
Aggregate planning
Master scheduling
Material requirements
planning (MRP)
Capacity requirements
planning (CRP)
17
17--881
Objectives in Scheduling
Meet customer due
dates
Minimize job lateness
Minimize response time
Minimize completion
time
Minimize time in the
system
Minimize overtime
Maximize machine or
labor utilization
Minimize idle time
Minimize workwork-ininprocess inventory
17
17--882
Shop Floor Control (SFC)

scheduling and monitoring of dayday-toto-day production

in a job shop
also called production control and production
activity control (PAC)
usually performed by production control department

Loading
Check availability of material, machines, and labor
Sequencing
Release work orders to shop and issue dispatch lists for

individual machines
Monitoring
Maintain progress reports on each job until it is complete

17
17--883
Loading
Process of assigning work to limited
resources
Perform work with most efficient
resources
Use assignment method of linear
programming to determine allocation
17
17--884
Assignment Method
1. Perform row reductions
4. If number of lines equals number

of rows in matrix, then optimum
subtract minimum value in each
solution has been found. Make
row from all other row values
assignments where zeros appear
2. Perform column reductions
subtract minimum value in each

column from all other column
values
3. Cross out all zeros in matrix
use minimum number of

horizontal and vertical lines
Else modify matrix

subtract minimum uncrossed value

from all uncrossed values
add it to all cells where two lines
intersect
other values in matrix remain
unchanged
5. Repeat steps 3 and 4 until

optimum solution is reached
17
17--885
Assignment Method: Example

Initial
Matrix
Bryan
Kari
Noah
Chris
Row reduction
5
4
2
5
0
0
1
1
1
2
0
0
1
10
6
7
9
PROJECT
3
4
6
10
4
6
5
6
4
10
2
5
2
6
5
Column reduction
5
4
1
6
3
2
0
3
0
0
1
1
1
2
0
0
4
3
0
5
Cover all zeros

3
2
0
3
0
0
1
1
1
2
0
0
4
3
0
5
Number lines number of rows so modify matrix
17
17--886
Assignment Method: Example (cont.)

Modify matrix
1
0
0
1
0
0
3
1
1
2
2
0
Cover all zeros

2
1
0
3
1
0
0
1
0
0
3
1
1
2
2
0
2
1
0
3
Number of lines = number of rows so at optimal solution

PROJECT
Bryan
Kari
Noah
Chris
1
1
0
0
1
2
0
0
3
1
3
1
2
2
0
PROJECT
4
2
1
0
3
Bryan
Kari
Noah
Chris
1
10
6
7
9
2
5
2
6
5
3
6
4
5
4
4
10
6
6
10
Project Cost = (5 + 6 + 4 + 6) X $100 = $2,100

17
17--887
Sequencing
Prioritize jobs assigned to a resource
If no order specified use first-come first-served (FCFS)
Other Sequencing Rules
FCFS - first-come, first-served
LCFS - last come, first served
DDATE - earliest due date
CUSTPR - highest customer priority
SETUP - similar required setups
SLACK - smallest slack
CR - smallest critical ratio
SPT - shortest processing time
LPT - longest processing time
17
17--888
Minimum Slack and

Smallest Critical Ratio
SLACK considers both work and time remaining
SLACK = (due date todays date) (processing time)
CR recalculates sequence as processing

continues and arranges information in ratio form
time remaining
CR
= remaining
work
due date - todays date

=
remaining
processing time
If CR > 1, job ahead of schedule

If CR < 1, job behind schedule
If CR = 1, job on schedule
17
17--889
Sequencing Jobs through One Process

Flow time (completion time)
Time for a job to flow through system
Makespan
Time for a group of jobs to be completed
Tardiness
Difference between a late jobs due date

and its completion time
17
17--890
Simple Sequencing Rules
JOB
PROCESSING
TIME
DUE
DATE
A
B
C
D
E
5
10
2
8
6
10
15
5
12
8
17
17--891
Simple Sequencing
Rules: FCFS
FCFS
START PROCESSING COMPLETION
SEQUENCE TIME
TIME
TIME
DATE
A
B
C
D
E
Total
Average
0
5
15
17
25
5
10
2
8
6
5
15
17
25
31
93
93/5 = 18.60
10
15
5
12
8
DUE
TARDINESS
0
0
12
13
23
48
48/5 = 9.6
17
17--892
Simple Sequencing
Rules: DDATE
DDATE
SEQUENCE TIME
TIME
TIME
DATE
C
E
A
D
B
Total
Average
0
2
8
13
21
2
6
5
8
10
2
8
13
21
31
75
75/5 = 15.00
5
8
10
12
15
DUE
TARDINESS
0
0
3
9
16
28
28/5 = 5.6
17
17--893
Simple Sequencing
Rules: SLACK
A(10-0) 5 = 5
B(15-0) 10 = 5
C(5-0) 2 = 3
D(12-0) 8 = 4
E(8-0) 6 = 2
SLACK
SEQUENCE TIME
TIME
TIME
DATE
E
C
D
A
B
Total
Average
0
6
8
16
21
6
2
8
5
10
6
8
16
21
31
82
82/5 = 16.40
8
5
12
10
15
DUE
TARDINESS
0
3
4
11
16
34
34/5 = 6.8
17
17--894
Simple Sequencing
Rules: SPT
SPT
SEQUENCE TIME
TIME
TIME
DATE
C
A
E
D
B
Total
Average
0
2
7
13
21
2
5
6
8
10
2
7
13
21
31
74
74/5 = 14.80
5
10
8
12
15
DUE
TARDINESS
0
0
5
9
16
30
30/5 = 6
17
17--895
Simple Sequencing
Rules: Summary
RULE
AVERAGE
COMPLETION TIME
FCFS
DDATE
SLACK
SPT
18.60
15.00
16.40
14.80
AVERAGE
TARDINESS
9.6
5.6
6.8
6.0
NO. OF
JOBS TARDY
3
3
4
3
MAXIMUM
TARDINESS
23
16
16
16
17
17--896
Sequencing Jobs Through

Two Serial Process
Johnsons Rule
1. List time required to process each job at each machine.
Set up a oneone-dimensional matrix to represent desired
sequence with # of slots equal to # of jobs.
2. Select smallest processing time at either machine. If
that time is on machine 1, put the job as near to
beginning of sequence as possible.
3. If smallest time occurs on machine 2, put the job as
near to the end of the sequence as possible.
4. Remove job from list.
5. Repeat steps 2
2--4 until all slots in matrix are filled and all
jobs are sequenced.
17
17--897
Johnsons Rule
JOB
A
B
C
D
E
PROCESS 1
6
11
7
9
5
PROCESS 2
8
6
3
7
10
A D
17
17--898
Johnsons Rule (cont.)

E
E
A
5
D
11
Process 1
(sanding)
20
31
38
Idle time
E
5
A
15
D
23
B
30
Process 2
(painting)
C
37
41
Completion time = 41
Idle time = 5+1+1+3=10
17
17--899
Guidelines for Selecting a

Sequencing Rule
1.
2.
3.
4.
5.
6.
SPT most useful when shop is highly congested

Use SLACK for periods of normal activity
Use DDATE when only small tardiness values can
be tolerated
Use LPT if subcontracting is anticipated
Use FCFS when operating at lowlow-capacity levels
Do not use SPT to sequence jobs that have to be
assembled with other jobs at a later date
17
17--900
Monitoring
Work package
Shop paperwork that travels with a job
Gantt Chart
Shows both planned and completed

activities against a time scale
Input/Output Control
Monitors the input and output from each

work center
17
17--901
Gantt Chart
Job 32B
Behind schedule
Facility
3
Job 23C
Ahead of schedule
2
Job 11C
Job 12A
On schedule
1
Key:
6
8
Todays Date
10
11
12
Days
Planned activity
Completed activity
17
17--902
Input/Output Control
Input/Output Report
PERIOD
Planned input
Actual input
Deviation
Planned output
Actual output
Deviation
Backlog
65
65
70
70
75
75
75
75
30
20
10
TOTAL
270
0
0
300
0
0
0
17
17--903
Input/Output Control (cont.)

Input/Output Report
PERIOD
Planned input
Actual input
Deviation
Planned output
Actual output
Deviation
Backlog
65
60
-5
75
75
-0
30
65
60
-5
75
75
-0
15
70
65
-5
75
65
-10
0
70
65
-5
75
65
-10
0
TOTAL
270
250
-20
300
280
-20
0
17
17--904
Advanced Planning and

Scheduling Systems
Infinite - assumes infinite capacity

Loads without regard to capacity

Then levels the load and sequences jobs
Finite - assumes finite (limited) capacity

Sequences jobs as part of the loading

decision
Resources are never loaded beyond
capacity
17
17--905
Advanced Planning and

Scheduling Systems (cont.)
Advanced planning and scheduling (APS)

Add-ins to ERP systems

AddConstraint--based programming (CBP) identifies a
Constraint
solution space and evaluates alternatives
Genetic algorithms based on natural selection
properties of genetics
Manufacturing execution system (MES) monitors
status, usage, availability, quality
17
17--906
Theory of Constraints

Not all resources are used evenly

Concentrate on the bottleneck resource
Synchronize flow through the bottleneck
Use process and transfer batch sizes to
move product through facility
17
17--907
Drum-Buffer-Rope
Drum
Bottleneck, beating to set the pace of production for

the rest of the system
Buffer
Inventory placed in front of the bottleneck to ensure

it is always kept busy
Determines output or throughput of the system
Rope
Communication signal; tells processes upstream

when they should begin production
17
17--908
TOC Scheduling Procedure

Identify bottleneck
Schedule job first whose lead time to
bottleneck is less than or equal to
bottleneck processing time
Forward schedule bottleneck machine
Backward schedule other machines to
sustain bottleneck schedule
Transfer in batch sizes smaller than
process batch size
17
17--909
Synchronous
Manufacturing
B3 1 7
C3 2 15
D3 3 5
B2 2 3
C2 1 10
D2 2 8
B1 1 5
C1 3 2
D1 3 10
Key:
ij k l
Item i
Operation j of item i performed at
machine center k takes l minutes
to process
17
17--910
Synchronous
Manufacturing (cont.)
Demand = 100 As
Machine setup time = 60 minutes
MACHINE 1 MACHINE 2 MACHINE 3
B1
B3
C2
Sum
5
7
10
22
B2
C3
D2
3
15
8
26*
C1
D3
D1
2
5
10
17
* Bottleneck
17
17--911
Synchronous Manufacturing (cont.)

Setup
Machine 1
C2
Setup
B1
B3
1562
1002
2322
Idle
Setup
Machine 2
C3
B2
1512
12
Machine 3
Setup
C1
0 200
Setup
D2
1872
2732
Setup
D1
Idle
1260
D3
1940
Completion
time
2737
17
17--912
Employee Scheduling
Labor is very flexible
resource
Scheduling workforce is
complicated, repetitive
task
Assignment method can
be used
Heuristics are commonly
used
17
17--913
Employee Scheduling Heuristic

1. Let N = no. of workers available
Di = demand for workers on day i
X = day working
O = day off
2. Assign the first N - D1 workers day 1 off. Assign the next N - D2
workers day 2 off. Continue in a similar manner until all days are
have been scheduled
3. If number of workdays for full time employee < 5, assign
remaining workdays so consecutive days off are possible
4. Assign any remaining work to part
part--time employees
5. If consecutive days off are desired, consider switching schedules
among days with the same demand requirements
17
17--914
Employee Scheduling
DAY OF WEEK
WORKERS REQUIRED
T
W
MIN NO. OF
3
3
4
TH
SA
SU
Taylor
Smith
Simpson
Allen
Dickerson
17
17--915
Employee Scheduling (cont.)

DAY OF WEEK
WORKERS REQUIRED
Taylor
Smith
Simpson
Allen
Dickerson
T
W
MIN NO. OF
3
3
4
O
O
X
X
X
X
X
O
O
X
X
X
X
X
O
TH
SA
SU
O
O
X
X
X
X
X
O
X
X
X
X
X
X
X
X
X
X
O
O
Completed schedule satisfies requirements but has no

consecutive days off
17
17--916
Employee Scheduling (cont.)

DAY OF WEEK
WORKERS REQUIRED
Taylor
Smith
Simpson
Allen
Dickerson
T
W
MIN NO. OF
3
3
4
O
O
X
X
X
O
O
X
X
X
X
X
O
X
X
TH
SA
SU
X
X
O
O
X
X
X
X
X
O
X
X
X
X
X
X
X
X
O
O
Revised schedule satisfies requirements with consecutive

days off for most employees
17
17--917
Automated Scheduling Systems

Staff Scheduling
Schedule Bidding
Schedule
Optimization
17
17--918
Thank You
www.bookfiesta4u.com
2-919

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Chapter 1-17

Roberta Russell & Bernard W. Taylor, III

Organization of This Text:

Organization of This Text:

Chapter 10 (Slide 507)

What Operations and

design, operation, and improvement of productive

a function or system that transforms inputs into outputs of

What is a Transformation Process?

a series of activities along a value chain extending from

Feedback & Requirements

How is Operations Relevant to my

As an auditor you must

How is Operations Relevant to my

Its all about processes. I live

Evolution of Operations and

process of handcrafting products or

dividing a job into a series of small tasks

standardization of parts initially as

Evolution of Operations and

systematic analysis of work methods

high-volume production of a standardized

adaptation of mass production that prizes

Time and motion studies

Frank and Lillian

Joseph Orlicky, IBM

Events/Concepts Dates Originator

Taiichi Ohno (Toyota)

Internet, WWW, ERP,

Globalization WTO, European Union,

Evolution of Operations and

management of the flow of information, products, and services across

results from the Internet and falling trade

Hourly Compensation Costs for Production Workers

World Population Distribution

Trade in Goods as % of GDP

degree to which a nation can produce goods and

ratio of output to input

sales made, products produced, customers

labor hours, investment in equipment, material

Average Annual Growth Rates in Productivity, 19951995-2005.

Average Annual Growth Rates in Output and Input, 19951995-2005

productivity is increasing, but both output and input

Assumption that more input would cause

certain limits to the amount of output may not be

Strategy and Operations

Provides direction for achieving a mission

Five Steps for Strategy Formulation

Defining a primary task

Assessing core competencies

What qualifies an item to be considered for purchase?

Positioning the firm

What does the firm do better than anyone else?

Determining order winners and order qualifiers

What is the firm in the business of doing?

How will the firm compete?

Deploying the strategy

Positioning the Firm