Week 2: Operations Strategy

Distinctive Competencies
● Distinctive competence refers to a superior characteristic, strength, or quality that distinguishes a
company from its competitors. This distinctive quality can be just about anything :
○ Price
○ Variety
○ Fast Delivery
○ Quality
■ These competencies need to be ->
● Efficient
● Flexible
● Responsive
● Reliable
Strategy vs Operations
● Strategy decisions
○ Where you want your company to go in the next 10 years
● Tactical decisions
○ Procedures, guidelines, requirements
● Operational decisions
○ Day to day operations, implementation phase of previous phases
Goods and Services

●
Characteristics of Goods
● Tangible products
● Consistent product definition
● Production usually separate from consumption
● Can be inventoried
● Low customer interaction
Characteristics of Services
 ● Intangible product
● Produced and consumed at same time
● Often unique
● Higher customer interaction
● Inconsistent product definition
● Often knowledge-based
Competing on Price
● Provide the maximum value as perceived by the customer. Does not imply low quality
○ Budget Airlines
■ Secondary airports, few fare options, smaller crews, no expensive ticket offices,
no complimentary meals
○ Dollarama
■ Small overhead, shrinkage (optimizing space to sell more items), distribution
costs
Competing on Variety
● Uniqueness can go beyond both the physical characteristics and service attributes to encompass
everything that impacts customer’s perception of value
○ First iPhones - leading products
○ Walt Disney Magic Kingdom - experience differentiation
○ Hard Rock Cafe - dining experience
Competing on Quality & Fast Delivery
● Flexibility
○ Matching market changes in design, innovation, and volumes
● Reliability
○ Products that don’t fail their customers
● Timeliness
○ Quickness in design, production, and delivery
Competencies
● Competitive priorities
○ The direction selected by an organization to compete in the marketplace
○ Priority will be driven by the distinctive competency of the organization
○ Important to have a strategic fit between the competency and operational capabilities
Order-qualifying and winning factors
● We no longer view cost, quality, delivery and even variety as trade-offs
● They have become order qualifiers: those attributes that make the product a potential purchase
● Order winners are those attributes which actually cause the purchase. A slight improvement in
any direction can now differentiate you from your competitors
● The continuous challenge of improvement
Productivity Challenge
● Whichever direction of improvement you choose strategically, you need to improve it. Even if the
change is slight, the outcomes can be tremendous
○ Make investments:
■ Equipment
■ Quality Assurance
 ■ Infrastructure/facilities
■ Human Capital
Productivity
● Productivity is the ratio of outputs (goods and services) divided by the inputs (resources such as
labor and capital)
○ Objective is always to improve productivity
○ Productivity = Outputs / Inputs
● Measures the process improvement
● Helps us compare different operational investments/improvements and choose the right direction
● Represents output relative to input
● Example: Labour Productivity
○

■ Single resource input(labor) -> single-factor productivity

● Possible resource inputs that can be considered
○ Labor
○ Material
○ Energy
○ Capital
● Multifactor Productivity

○ Productivity =
○ Productivity = 10000 * 10 / (500*9) + 5000 + 25,0000
■ Productivity = 100,000 / 34,500 = 2.89
■ If the job can be finished within 350 hours instead, replace 500 with 350 to get
MFP(new) = 3.01
Productivity - Measure your progress
● Output could be measured differently depending on your operational strategy
○ Cost-efficiency
○ # of items (faster)
 ○ # of different products (variety)
○ Failure rate: (quality)

Week 3: Forecasting
Supply Chain Management
● Forecasting -> Process Design -> Production -> Inventory
○ The path of a supply chain
● What is forecasting?
○ The art or science of seeing the future
○ Forecasting means to calculate or estimate a supported hypothetical of future trends
(financial trends)
● Underlying basis of all businesses
○ Production, Inventory, Personnel, Facilities
Forecasts vs Prediction
● Predictions can be used in any context, while forecasting is primarily used to estimate financial
and weather trends
Forecasting
● Historical Data + Time Horizon + Model = Forecasting
● Forecasting Time Horizons
○ Short-range forecast (< 1 year)
■ Purchasing, job scheduling, workforce levels, job assignments, production levels
○ Medium-range forecast (1-3 years)
■ Sales and production planning, budgeting
○ Long-range forecast (>3 years)
■ New product planning, facility location, research and development
Product Life Cycles
● The Life Cycle of a product goes through these stages:
○ Incubation -> Growth -> Maturity/Dominance -> Decline
■ Incubation uses judgemental techniques/methods
■ Growth uses linear trends and double exponential shooting
■ Maturity/Dominance uses moving averages and simple exponential smoothing
■ Decline uses judgment methods
○ Introduction and growth require longer forecasts than maturity and decline
○ As product passes through life cycle, forecasts are useful in projecting
Seven Steps in Forecasting
1. Determine the use of the forecast
2. Select the items to be forecasted
3. Determine the time horizon of the forecast
4. Select the forecasting model(s)
5. Gather the data
6. Make the forecast
7. Validate and implement results
● In terms of planning…
Forecasting Techniques
● Objective Forecasting Techniques:
○ Time Series Models: use historical data to predict the future (our precogs and many
more)
■ Definition - A chronological series of observations taken over time
■ Assumes that future values can be calculated only from past data
■ In demand forecasting, past data on demand is used to predict future demand
■ Let A1,….,t = Actual demands up to period t
■ Ft = Forecast for period t
○ Time Series Analysis:
■ Identify the behavior of past data, look for patterns in the following behavior
types:
● Random variations - caused by chance (steady demand)
○ Used for everyday items (items that have no trend and demand
randomly fluctuates)
● Trends
○ long-term movement in data (periods of increase/decrease)
● Seasonality (seasonal variations)
○ short-term regular variations in data (less than a year)
● Cyclical
○ long-term regular variations in data (more than a year)
○ Simple & Weighted Moving Average Technique
■ Good technique to use for data with random variations with no stable trend,
series is fluctuating around some average (stationary, no trend)
■ Averaging techniques always underestimate demand (lagging) if demand has an
increasing trend. Similarly, they would overestimate, if demand has a decreasing
trend.
■ 2 types of Moving Averages:
● 1) Simple Moving 2) Weighted Moving
■ Smooth fluctuations of the time series - exhibit less variability than the original
data series
■ Simple Moving Average Formula:

■
● The forecast for next period is the average of n’s most recent data
■ Weighted Moving Average Formula

■
 ■ Time Periods
● Less time periods will provide a more responsive to actual changes, but
produce less smooth forecasts
● More time periods: produces smoother forecasts, but less responsive

○ Exponential Smoothing
■ Similar to averaging methods, used for data with no trend or seasonal pattern and
effective for short-term forecasting
■ Assigns weights automatically (α)
■ Based on the same premise --The most recent observations might have the
highest predictive value
■ The current forecast (Ft ) is the weighted average of the last forecast (Ft-1) and
last actual value (At-1)
■ Steps:
● Step 1: Initialize F1
○ Set F1 = A1
● Step 2: Forecast for period 2:
○ F2 = F1 + (A1 – F1 )
■ General Step: Continue forecasting until period t

●
■ Effect of alpha
● Higher (α) means we put more weight on the recent data
○ So, forecasts will be more responsive to the fluctuations in the
actual data. Forecasts produced will be less smooth (more
fluctuations)
○ Double Exponential Smoothing (employed to estimate trends)
■ Used for data with trend but no seasonal pattern
■ Also effective for short-term forecasting
■ Forecast including trend (FITt+1) = exponentially smoothed average (Ft) +
exponentially smoothed trend (Tt)
■ General Steps for DES:
 ● (FITt+1) = (Ft) + (Tt)
■ This procedure requires two smoothing constants, (α) for the average and β for
the trend.
■ Unless stated otherwise, initialize your forecast with:
● Ft = A1
● T1 = A2 - A1
○ Then, apply the exponential smoothing and trend equations to
obtain the starting estimates of Ft and Tt
■ Steps for double exponential smoothing
● https://ibb.co/f9ZSbPs
○ Moving Average vs Exponential Smoothing (ES)
■ Similarities
● Assumes no trend
● Works fine if data is randomly fluctuates around some average
● Lags behind if there is a trend
■ Differences
● ES observes all past data, MA only uses the last couple N observations
● ES requires less judgment than Weighted MA
○ Associative/Causal models: use explanatory variables to predict the future (we will talk
about in last class)
■ Machine Learning, AI based algorithms
● Subjective Forecasting Techniques
○ Rely solely on judgements and opinions of experts
○ Required when data is not available
○ Applicable when:
■ There is no time to gather data, so subjective techniques are often used when
time constraints prohibit objective forecasts
■ No data available (e.g. new products)
■ Judgmental Methods:
● Executive opinions
● Consumer surveys
● Outside opinion (consultants)
● Opinions of managers and staff: Panel Consensus, Delphi Technique
● Forecasting Accuracy
○ How accurate is the forecast?
 ■ Error - difference between actual value and predicted value
■ Mean absolute deviation (MAD)
● Average absolute error
■ Mean squared error (MSE)
● Average of squared error
○ To monitor performance over time and take corrective actions if necessary
○ To choose a forecasting technique and parameters (α, β, w)
○ Formula for mean absolute deviation (MAD) and Mean Squared Error (MSE)

■
● n = time periods
● Forecasting Realities
○ Forecasts are seldom perfect, a good forecast is more than a single number (confidence
intervals)
○ Most techniques assume an underlying stability in the system (shocks are not considered)
○ Product family and aggregated forecasts are more accurate than individual product

Week 4: Process and Capacity Management

Production Systems
● Forecast -> Process Design -> Production -> Inventory
Process Framework
● Process is a transformation; a transformation/production process uses resources to convert inputs
into some desired output
● Inputs -> Resources -> Outputs
● Inputs:
○ Any tangible or intangible items that flow into the process
● Outputs:
○ Any tangible or intangible items that flow out of the process
● Resources (capacity): transformers
● Flow Unit: The unit of analysis
● Example:
○ Process - Car Manufacturing
○ Flow unit - Cars
○ Input-Output Transformation - From receipt of raw materials to the completion of the car
(the product)
Process Analysis
● Why do we need to analyze the process?
○ To estimate our production capacity before signing contracts
 ○ To identify inefficient tasks
○ To spot potential effectiveness improvement tasks
○ To understand where value can be added
● How can we analyze a process, and what are the relevant performance measures
Process Flowcharts
● Graphical description of a process (ideal for representation of complex assembly lines, etc.):
○ Flow of material or work
○ Processing step
○ Buffer/waiting goods:
■ Raw materials, RM
■ Work in Process, WIP
■ Finished Goods Inventory, FGI
○ Decision Point
○ Example of a flowchart:

Process Times vs Cycle Times

● After a flowchart is established, the next step is ESTIMATE THE CAPACITY
● Estimating the Capacity:
● Process Time of a Station, systems and cycles
○ Process time of a station is the time to produce a unit at that single workstation
○ Process time of a system is the time of the longest process in the system.. the bottleneck
○ Process cycle time is the time it takes for a product to go through the production process
with no waiting
Process Types
1. Simple Processes
2. Parallel Processes
3. Simultaneous Processes
4. Processes with Set-up Times
Capacity Analysis
● Two identical burrito lines
● Lines have two workers and three operations
● All completed sandwiches are wrapped
Processes with Set-up Activities
● Set-up Time:
 ○ Period required to prepare a device, machine, process, or system for it to be ready to
function or accept a job
○ Spent once before each production batch
○ Equally distribute among each item in the batch.
Process Capacity: Bottleneck Analysis
● Capacity of the Process
○ Capacity of a task is the physical limitation in terms of “how much can be processed in
this task/system”
○ The capacity of the process is determined by one of the following two:
■ capacity of the step with the longest process time
■ Minimum processing rate across all steps
How do we measure performance?
● Process Time
○ Average time for completion of a unit at the bottleneck station. Measured as time/unit
● Capacity or Processing Rate:
○ Average number of units processed over a time interval, and is measured as units/time
Make to Stock (MTS) vs Make to Order (MTO)
● MTS: Produce – Store in Inventory – Ready to purchase at the time of order (push)
● MTO: Produce after you receive the order (pull)
● Trade-offs:

Capacity Management Realities

● Bottleneck Management
○ Release work orders to the system at the pace of set by the bottleneck
○ Lost time at the bottleneck represents lost time for the whole system
○ Increasing the capacity of a non-bottleneck station is redundant
○ Increasing the capacity of a bottleneck increases the capacity of the whole system until
another process becomes the bottleneck
Time Horizons and Capacity Options
● Time Horizon
● Long-range planning
● Intermediate-range planning
○ Aggregate planning
● Short-range planning
○ Scheduling
Capacity Consideration
● Too little capacity loses customers and too much capacity is expensive
● Capacity needs to be “just right and tight, but not too tight”
● Theoretical calculations will never match the actual reality
Throughput for different systems
● If the system is running at capacity - throughput for the process is the capacity of the bottleneck
● If the system is running below capacity - the throughput for the process is the demand rate
Design and Effective Capacity
● Design Capacity
 ○ Maximum theoretical output of a system, based on machine limits
● Effective capacity
○ Capacity a firm expects to achieve given current operating constraints (set-ups,
maintenance, change in product mixes, breaks etc)
○ Lower than design capacity
● Actual output:
○ Capacity achieved due to further unplanned disruptions (Machine breakdowns, quality,
stock-outs, etc)
Utilization and Efficiency
● Utilization is the percent of design capacity achieved
○ Utilization = Actual output/Design capacity
● Efficiency is the percent of effective capacity achieved
○ Efficiency = Actual output/Effective Capacity
How to improve a complex process…
1. Look at the process step by step
2. Determine processing rate (or capacity) of each step
3. Identify the process bottleneck (smallest processing rate, or longest cycle time)
4. Channel your resources to improve the bottleneck ONLY. And ONLY until another process
becomes the bottleneck
5. Release the jobs at the speed of the bottleneck, (or make sure your other stations are not idle)
6. Determine the demand rate for the process
7. For Make-to-Stock, throughput = capacity of the bottleneck
● For Make to order
○ If demand rate > capacity then Throughput = Capacity of the bottleneck
○ If demand rate < capacity then Throughput = demand rate (no need to improve capacity)
Key Messages
● Units are extremely important in process analysis (minutes/units vs units/hr)
● Process time of a system (i.e. throughput rate) determined by the bottleneck
● System capacity is the inverse of the process time and vice versa
● MTO vs. MTS trade-offs
● Utilization = Actual output/Design capacity
● Efficiency = Actual output/Effective capacity

Video: retailers are using line managers/busters to deal with holiday lines

Week 6: Waiting Lines

Balking, Reneging, Jockeying

● Balking customers never join the line because it appears too long
● Reneging customers leave a line because it is moving too slowly
○ Loss of potential sales
● Jockeying customers switch lines when they see that another line is moving faster
○ May cause other customers to balk, etc. Deteriorates the customer’s own experience
Components of Waiting-Line Systems
 ● Arrival Pattern
○ Population size, behavior, statistical distribution of arrival times
● Queue
○ Limited or unlimited in length, discipline of people or items in it
● Service Pattern
○ Design, statistical distribution of service times
Parts of a Waiting Line
● Arrival characteristics:
○ Size of arrival population
■ Unlimited (infinite) vs. limited (finite)
○ Pattern of Arrivals
■ Scheduled vs. random (i.e Poisson distribution)
○ Behavior of arrivals
■ Wait in the queue and do not switch lines
■ No balking, reneging, or jockeying
○ Statistical distribution of arrivals
● Waiting-Line Characteristics
○ Limited vs Unlimited
○ Queue discipline
● Service characteristics
○ Service design
Poisson Distribution
● Probability =

Queue or Server Characteristics

● Limited or unlimited queue length
● Queue discipline - first in, first-out is most common
● Other priority rules may be used in special circumstances
○ Hospital triage, commercial lines in banks, Mcdonald’s self check-in kiosks
● Queueing system designs
○ Single-queue system, multiple-queue system
○ Single-phase system, multiphase system
○ Single-server, multiple-server systems
● Server Characteristics of a Waiting-Line
○ Number of servers
○ Service time distribution
■ Constant service time (constant service time is only possible with machines)
■ Random service times, usually a negative exponential distribution
Queueing System Designs
● A family dentist’s office can be considered a single-queue, single-server system
○ Customer arrive -> wait in queue -> go into office -> depart after service
● A Mcdonald’s dual window drive-through is a single-queue, multiphase system
 ○ Customer arrives -> waits in queue -> Phase 1: order through microphone -> wait in
queue -> Phase 2: pick-up food at second window -> depart after service
● Most bank-teller and retail counter services use single queue, multi-server system
○ Customers arrive -> wait in queue -> go to whatever cashier or broker is available ->
depart after service
● SFU student registrations use a single-queue, multi-server, multiphase system
○ Customer arrives -> wait in queue -> Phase 1: service facility channel 1 or channel 2 ->
Phase 2 service facility channel 1 or channel 2 -> Depart after service
Why do queues occur?
● Arrival rate and/or the service rate are not constants
○ Arrival rates are random (randomly distributed)
● Because it's random, waiting lines may form even in underloaded systems (service rates are
higher than arrival rates)
Components of Waiting-Line Systems
● Arrivals or inputs to the system
○ Population size, behavior, statistical distribution
● Queue discipline, or the waiting line itself
○ Limited or unlimited in length, discipline of people or items in it
● The service facility
○ Design, statistical distribution of service times
Measuring the Queue performance
● We can model the queues through:
○ Closed-form mathematical models (simpler queues, less priority rules)
○ Simulation
Queueing Cost Trade-off
● Making your customers wait is costly
○ Unsatisfied customers may not return -> Long-term sales loss
○ Reviews on different platforms will tank
○ Complimentary gifts and more serious consequences (hospital, credit-card fraud etc)
● Waiting lines can be reduced by increasing capacity
○ Adding servers, workers, counters, etc for example
Queueing Cost Trade-off
● Queueing models:
○ Mathematical analysis of waiting lines
○ Goal: minimize sum of
■ Server (capacity) costs
■ Customer waiting costs
■ Optimal queue design
Measuring Waiting costs (Customer’s experience)
1. Average time that each customer or object spends in the queue (Wq)
2. Average queue length (number in queue) (Lq)
3. Average time each customer spends in the system (Ws)
4. Average number of customers in the system (Ls)
5. Probability that the service facility will be idle (P0)
 6. Utilization factor for the system (ρ/u)
7. Probability of a specific number of customers in the system (Pn)
Measuring Waiting Costs
● Quantifiable costs of waiting in a queue
○ When the customers are internal (e.g employees waiting for making copies), salaries paid
to be employees
○ Cost of the space of waiting (e.g. patient waiting room)
○ Loss of business (lost profits)
● Hard to quantify waiting costs
○ Loss of customer goodwill
○ Loss of social welfare (e.g. patients waiting for hospital beds)
Two Queueing Models
● Two mathematical models to observe queues
○ Single server (single-queue)
○ Multi-server (single-queue)

Week 7: Inventory Management

What is inventory?
● Inventory is a stack of idle goods
● Inventory can be in many forms:
○ Raw materials and purchased parts
○ Partially completed goods - not yet completed goods
○ Finished - goods inventory
○ Inventory can be replacement parts, tools, supplies (equipment for service companies)
● Inventory Management
○ Objective of IM is to strike a balance between the inventory investment and the customer
service levels (stock-outs)
● Importance of Inventory Management
○ One of the most expensive assets of many companies representing as much as 50% of
total invested capital
○ Enables to overcome forecasting errors
■ Under-stock: Frequent stock-outs
■ Lost sales, loss of customer goodwill
■ Low level of customer service
○ Over-stock: Excess inventory
■ Costs of ordering and carrying inventory increases
● Functions of Inventory
○ To smooth the production requirements
○ To avoid stock-outs, increase customer service level
○ To take advantage of Economies of Scale: holding, purchasing, producing
○ To hedge against inflation or price increases in raw materials as well as the end products
Classifying Inventory
 ● Process Stage
○ Raw Material
○ WIP
○ Finished Goods
● Volume and Value
○ Pateo Principle
■ 80% of outcomes come from 20% of inputs (identify the 20% of items that will
provide the revenue)
○ A items
○ B Items
○ C items
● Demand Type
○ Dependent
○ Independent
ABC Analysis
● Divides inventory into three classes based on annual dollar volume
○ Annual Dollar Volume = unit cost * annual demand
○ Class A - High annual dollar volume
○ Class B - Medium Annual dollar volume
○ Class C - low annual dollar volume
● Used to establish policies that focus on the few critical parts and not the many trivial ones
● Policies employed for A items may include
○ More emphasis on supplier development for A items
○ Tighter physical inventory control for A items
○ More attention and care in forecasting A items
Independent vs Dependent Demand
● Independent Demand - the demand for item is independent of the demand for any other item in
inventory
● Dependent demand - the demand for item is dependent upon the demand for some other item in
the inventory
Inventory Tracking
● Record Accuracy
○ Accurate records are a critical ingredient in production and inventory systems
○ Necessary to make precise decisions about ordering, scheduling, and shipping
○ Incoming and outgoing record keeping must be accurate
○ Stockrooms should be secure
○ Reviewing can be periodic or continuous
● Periodic Review
○ Items are counted and records updated on a periodic basis
○ Often used with ABC analysis to determine the frequency
○ After each review
■ Decision made: To order or not to order
● Continuous Review
○ Inventory level monitored continuously
○ RFID, Sensors, Barcodes (regular grocery)
○ Decision when to order, how much to order
○ Set the rules once, then update if necessary
Inventory Models: holding and set-up costs
● Inventory models for independent demand
○ Models need to determine when and how many to order
■ Basic Economic Order Quantity (EOQ)
■ Quantity Discount Model
● Holding, ordering, and setup costs
○ Holding costs - the costs of holding or carrying inventory over time (H)
○ Setup costs - the costs of placing an order and receiving goods
○ Trade off: Holding Costs vs Ordering Costs
● Holding Costs
○ Inventory holding (carrying) Cost (H): Cost to physically carry an item in inventory
■ Usually represented as an annual cost
● H = $/unit/year
○ Charged proportional to the average level of inventory
○ Holding cost increases as the following cost items increase
○ Opportunity cost of capital (most important)
○ Insurance, tax, storage
○ Obsolescence, pilferage, spoilage, and breakage
○ Calculate as H = I*P where i = annual interest rate and p = unit purchase/production cost
● Order costs
○ Ordering (setup or fixed) cost: cost to place an purchasing or production order
■ Charged every time an order is placed; S = $/order
■ Independent of the size of the order
■ Fixed cost increases in the following cost items:
● Administrative and order processing costs
● Logistics costs
● Quality inspection costs
 ● Machine setup, product changeover costs
Basic EOQ Model
● Economic Order Quantity
● Important assumptions:
○ Demand is known and constant
○ Lead time is known and constant
○ .Receipt of inventory is instantaneous and complete
○ Quantity discounts are not possible
○ Only variable costs are setup and holding
○ Stock-outs can be completely avoided
Order Set-up Costs
● Q = Number of pieces per order
● Q*= Optimal number of pieces per order (EOQ) -> Q*= Square root of 2*D*S / H
● D = Annual demand in units for the inventory item
● S = Setup or ordering cost for each order
● H = Holding or carrying cost per unit per year
● Annual Setup cost= Number of orders placed per year * setup or order cost per order=(D/Q)*(S)
○ (Annual demand / number of units in each year ) * ( setup or order cost per order)
■ = (D/Q)*(S)
● Annual Holding Cost = (Average inventory level) * (Holding cost per unit per year)= (Q/2)*H
○ (Order Quantity/2)*(Holding cost per unit per year)
■ (Q/2)*(H)
● Optimal order quantity is found when annual setup cost equals annual holding cost
Reorder Points (ROP)
● EOQ answers the how much question
● ROP answers when to order
● ROP = (Demand per day)*(lead time for a new order in days) -> d * L
○ d = D / number of working days in a year
Quantity Discount Models
● Reduced prices are often available when larger quantities are purchased
● Trade-off is between reduced product cost and increased holding cost
● Your suppliers prefer you carry the inventory
● Total Cost = Setup cost + holding cost + Product Cost
○ TC = (D/Q*)*S + (Q/H)*H + PD

Midterm/Final stuff to remember yuhhhh

● Format - MC + short answers (Case problems)
● Productivity
○ How to know if someone is unitless or has a unit
○ $ / ab - hr = $/hour
○ $ / $ = unitless
● Trend - double exponential smoothing
○ Not exponential smoothing
● 7 cannot be calculated in a multi-server queue problem