POM Slide-Mid

9/21/2021
Chapter 1:
Operations and
productivity
Instructor: Truong Quang Duoc, Ph.D
Learning Objectives
When you complete this lecture, you
should be able to:
1. Define operations management

2. Explain the distinction between
goods and services
3. Explain the difference between
production and productivity
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Learning Objectives
should be able to:
4. Compute single-factor productivity

5. Compute multifactor productivity
6. Identify the critical variables in
enhancing productivity
Operations Management
at Hard Rock Cafe
 First opened in 1971

• Now – 185 restaurants in over 75 countries
 Rock music memorabilia
 Creates value in the form of good food
and entertainment
 3,500+ custom meals per day in Orlando
 How does an item get on the menu?
 Role of the Operations Manager
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What is Operations Management?
 Production is the creation of goods and

services
 Operations management (OM) is the set
of activities that creates value in the form
of goods and services by transforming
inputs into outputs
Operations as a Transformation Process

Value added
INPUT Transformation OUTPUT

process
Control
feedback feedback
Material/Land Goods
Machines or
Labor Services
Management
Capital/Information
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Types of Operations
Operations Examples
Goods Producing Farming, mining, construction,
manufacturing, power generation
Storage/Transportation Warehousing, trucking, mail
service, moving, taxis, buses,
hotels, airlines
Exchange Retailing, wholesaling, banking,
renting, leasing, library, loans
Entertainment Films, radio and television,
concerts, recording
Communication Newspapers, radio and television
newscasts, telephone, satellites
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Organizing to Produce Goods & Services

 Essential functions:
1. Marketing – generates demand for goods
2. Operations – creates the product
3. Finance/accounting – tracks how well
organizational performance, pays bills,
collects money
Operations
Business Operations Marketing Finance

Overlap
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Organizational Charts
Commercial Bank
Operations Finance Marketing

Teller Investments Loans
Scheduling Security Commercial
Check Clearing Real estate Industrial
Collection Financial
Transaction Accounting Personal
processing
Facilities Mortgage
design/layout
Auditing
Vault operations
Trust Department
Maintenance
Security
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Airline
Operations Finance/ Marketing

Ground support accounting
Traffic
equipment Accounting administration
Maintenance Payables Reservations
Ground Operations Receivables Schedules
General Ledger Tariffs (pricing)
Facility Finance
maintenance Sales
Catering Cash control Advertising
Flight Operations International
exchange
Crew scheduling
Flying
Communications
Dispatching
Management science
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Manufacturing
Operations Finance/ Marketing

Facilities accounting Sales
Construction; maintenance Disbursements/ promotion
Production and inventory control credits Advertising
Scheduling; materials control Receivables Sales
Quality assurance and control Payables
General ledger Market
Supply-chain management research
Funds Management
Manufacturing
Tooling; fabrication; assembly Money market
International
Design exchange
Product development and design
Detailed product specifications Capital requirements
Industrial engineering Stock issue
Efficient use of machines, space, Bond issue
and personnel and recall
Process analysis
Development and installation of
production tools and equipment
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The Supply Chain

 A global network of organizations and activities
that supply a firm with goods and services
 Members of the supply chain collaborate to
achieve high levels of customer satisfaction,
efficiency and competitive advantage.
Farmer Syrup Bottler Distributor Retailer

producer
Soft Drink Supply Chain

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Why Study OM?

1. OM is one of three major functions, we want to
study how people organize themselves for
productive enterprise
2. We want (and need) to know how goods and
services are produced
3. We want to understand what operations
managers do
4. OM is such a costly part of an organization
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Options for Increasing Contribution
Finance/
Marketing Accounting OM
Option Option Option
Increase Reduce Reduce

Sales Finance Production
Current Revenue 50% Costs 50% Costs 20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of Goods – 80,000 – 120,000 – 80,000 – 64,000
Gross Margin 20,000 30,000 20,000 36,000
Finance Costs – 6,000 – 6,000 – 3,000 – 6,000
Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% – 3,500 – 6,000 – 4,250 – 7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500
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Responsibilities of Operations Manager

Planning Staffing
– Capacity – Hiring/laying off
– Location – Use of Overtime
– Products & services
Leading
– Make or buy
– Incentive plans
– Layout
– Issuance of work orders
– Projects
– Job assignments
– Scheduling
Controlling
Organizing Inventory
–
– Degree of centralization Quality
–
– Process selection
– Costs
– Productivity
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Critical Decisions
Decision Areas Lecture(s)
1. Design of goods and services 3
2. Managing quality 4
3. Process & capacity design 5,6
4. Location strategy 8
5. Layout strategy 9
6. Supply-chain management 10
7. Inventory MRP and JIT 11,12
8. Scheduling 13
9. Job design & Work Measurement 14
10. Maintenance No
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Ten Critical Decisions

1. Design of goods and services
 What good or service should we offer?
 How should we design these products
and services?
2. Managing quality
 How do we define quality?
 Who is responsible for quality?
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Ten Critical Decisions (cont.)

3. Process and capacity design
 What process and what capacity will
these products require?
 What equipment and technology is
necessary for these processes?
4. Location strategy
 Where should we put the facility?
 On what criteria should we base the
location decision?
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5. Layout strategy
 How should we arrange the facility
and material flow?
 How large must the facility be to meet
our plan?
6. Scheduling
 Are we better off keeping people on
the payroll during slowdowns?
 Which jobs do we perform next?
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7. Supply-chain management
 Should we make or buy this
component?
 Who are our suppliers and who can
integrate into our e-commerce program?
8. Inventory, material requirements
planning, and JIT
 How much inventory of each item
should we have?
 When do we re-order? 20
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9. Human resources and job design
 How do we provide a reasonable
work environment?
 How much can we expect our
employees to produce?
10. Maintenance
 Who is responsible for maintenance?
 When do we do maintenance?
WHAT – WHEN – WHERE – HOW - WHO

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Where are the OM Jobs?

 Technology/methods
 Facilities/space utilization
 Strategic issues
 Response time
 People/team development
 Customer service
 Quality
 Cost reduction
 Inventory reduction
 Productivity improvement
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Opportunities
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Certifications
 APICS, the American Production and
Inventory Control Society
 American Society of Quality (ASQ)
 Institute for Supply Management (ISM)
 Project Management Institute (PMI)
 Council of Supply Chain Management
Professionals
 Charter Institute of Purchasing and Supply
(CIPS)
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Significant Events in OM
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The Heritage of OM
 Division of labor (Adam Smith 1776; Charles
Babbage 1852)
 Standardized parts (Whitney 1800)
 Scientific Management (Taylor 1881)
 Coordinated assembly line (Ford/ Sorenson 1913)
 Gantt charts (Gantt 1916)
 Motion study (Frank and Lillian Gilbreth 1922)
 Quality control (Shewhart 1924; Deming 1950)
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The Heritage of OM
 Computer (Atanasoff 1938)
 CPM/PERT (DuPont 1957, Navy 1958)
 Material requirements planning (Orlicky 1960)
 Computer aided design (CAD 1970)
 Flexible manufacturing system (FMS 1975)
 Baldrige Quality Awards (1980)
 Computer integrated manufacturing (1990)
 Globalization (1992)
 Internet (1995)
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Eli Whitney
 Born 1765; died 1825
 In 1798, received
government contract to
make 10,000 muskets
 Showed that machine
tools could make
standardized parts to
exact specifications
© 1995 Corel Corp.
 Musket parts could be
used in any musket
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Frederick W. Taylor
 Born 1856; died 1915

 Known as ‘father of scientific
management’
 In 1881, as chief engineer for
Midvale Steel, studied how
tasks were done
 Began first motion and time
studies
 Created efficiency principles
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Taylor’s Principles
Management Should Take More
Responsibility for:
 Matching employees to right job
 Providing the proper training
 Providing proper work methods and tools
 Establishing legitimate incentives for work
to be accomplished
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Frank & Lillian Gilbreth

 Frank (1868-1924);
Lillian (1878-1972)
 Husband-and-wife engineering
team
 Further developed work
measurement methods
 Applied efficiency methods to
their home and 12 children!
 Book & Movie: “Cheaper by the
Dozen,” book: “Bells on Their
Toes”
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Henry Ford
 Born 1863; died 1947
 In 1903, created Ford Motor
Company
 In 1913, first used moving
assembly line to make Model T
 Unfinished product moved
by conveyor past work
station
 Paid workers very well for 1911
($5/day!)
Ford Historic Model T, CarData

http://www.youtube.com/watch?v=S4KrIMZpwCY
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W. Edwards Deming
 Born 1900; died 1993
 Engineer and physicist
 Credited with teaching Japan
quality control methods in
post-WW2
 Used statistics to analyze
process
 His methods involve workers
in decisions
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Contributions from
 Human factors
 Industrial engineering: statistics, economics
 Management science
 Biological science
 Physical sciences: anatomy, chemistry, physics
 Information science: internet, e-commerce
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Operations for
Goods and Services
 Manufacturers produce tangible product,
services often intangible
 Operations activities often very similar
 Distinction not always clear
 Few pure services
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Characteristics of Goods
 Tangible product
 Consistent product
definition
 Production usually
separate from
consumption
 Can be inventoried
 Low customer
interaction
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Characteristics of Service
 Intangible product
 Produced and consumed
at same time
 Often unique
 High customer interaction
 Inconsistent product
definition
 Often knowledge-based
 Frequently dispersed
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Differences Between Goods and

TABLE 1.3 Services
CHARACTERISTICS OF SERVICES CHARACTERISTICS OF GOODS
Intangible: Ride in an airline seat Tangible: The seat itself
Produced and consumed simultaneously: Product can usually be kept in inventory
Beauty salon produces a haircut that is (beauty care products)
consumed as it is produced
Unique: Your investments and medical care are Similar products produced (iPods)
unique
High customer interaction: Often what the Limited customer involvement in production
customer is paying for (consulting, education)
Inconsistent product definition: Auto Insurance Product standardized (iPhone)
changes with age and type of car
Often knowledge based: Legal, education, and Standard tangible product tends to make
medical services are hard to automate automation feasible
Services dispersed: Service may occur at retail Product typically produced at a fixed facility
store, local office, house call, or via internet.
Quality may be hard to evaluate: Consulting, Many aspects of quality for tangible products
education, and medical services are easy to evaluate (strength of a bolt)
Reselling is unusual: Musical concert or Product often has some residual value
medical care
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Industry and Services as

Percentage of GDP
90 −
Services Manufacturing
80 −
70 −
60 −
50 −
40 −
30 −
20 −
10 −
0−
France
UK
Canada
Germany
South Africa
China
Japan
Russian Fed
US
Australia
Czech Rep
Hong Kong
Mexico
Spain
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Goods and Services

Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |
Percent of Product that is a Good Percent of Product that is a Service
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40
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U.S. Agriculture, Manufacturing,

and Service Employment
100 –
80 –
Percent of Workforce
60 –
40 –
20 –
0–
| | | | | | | | |
1825 1875 1925 1975 2025 (est.)

1800 1850 1900 1950 2000
Agriculture Services Manufacturing
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Organizations in Each Sector

TABLE 1.4
PERCENT OF
SECTOR EXAMPLE ALL JOBS
Service Sector
Education, Legal, Medical, San Diego Zoo, Arnold Palmer Hospital 13.2
Other Walgreen's, Walmart, Nordstrom 13.8
Trade (retail, wholesale) Pacific Gas & Electric, American Airlines 3.3
Utilities, Transportation Snelling and Snelling, Waste Management, 10.1
85.9
Professional and Business Inc. 21.0
Services Citicorp, American Express, Prudential, 9.0
Finance, Information, Real Aetna
Estate 15.5
Olive Garden, Motel 6, Walt Disney
Food, Lodging, Entertainment U.S., State of Alabama, Cook County
Public Administration
Manufacturing Sector General Electric, Ford, U.S. Steel, Intel 8.2
Construction Sector Bechtel, McDermott 4.1
Agriculture King Ranch 1.4
Mining Sector Homestake Mining .4
Grand Total 100.0
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Service Pay
 Perception that services are low-paying
 42% of service workers receive above
average wages
 14 of 33 service industries pay below
average
 Retail trade pays only 61% of national
average
 Overall average wage is 96% of the
average
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Productivity Challenge
Productivity is the ratio of outputs (goods and
services) divided by the inputs (resources such as
labor and capital)
The objective is to improve

productivity!
Important Note!
Production is a measure of output
only and not a measure of efficiency
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The Economic System

Inputs Processes Outputs
Labor, The U.S. economic system Goods

capital, transforms inputs to outputs and
management at about an annual 2.5% services
increase in productivity per
year. The productivity
increase is the result of a
mix of capital (38% of 2.5%),
labor (10% of 2.5%), and
management (52% of 2.5%).
Feedback loop
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Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Stop requiring signatures Saved 8 seconds
on credit card purchases per transaction
under $25
Change the size of the ice Saved 14 seconds
scoop per drink
New espresso machines Saved 12 seconds
per shot
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Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Operations improvements have
helped Starbucks increase yearly
Stop requiring signatures Saved
revenue per outlet by8$250,000
secondsto
on credit card purchases
$1,000,000per
in transaction
six years.
under $25
Productivity has improved by 27%,
Change the size of theorice Saved
about 4.5% 14year.
per seconds
scoop per drink
New espresso machines Saved 12 seconds
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Productivity measurement
Units produced
Productivity =
Input used
 Measure of process improvement
 Represents output relative to input
 Only through productivity increases can
our standard of living improve
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Productivity Calculations
Labor Productivity
Units produced
Productivity =
Labor-hours used
1,000
= = 4 units/labor-hour
250
One resource input  single-factor productivity

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Multi-Factor Productivity
Output
Productivity =
Labor + Material + Energy
+ Capital + Miscellaneous
 Also known as total factor productivity

 Output and inputs are often expressed
in dollars
Multiple resource inputs  multi-factor productivity
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Collins Title Productivity

Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
Old labor 8 titles/day

=
productivity 32 labor-hrs = .25 titles/labor-hr
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Old System:
New System:
14 titles/day Overhead = $800/day
Old labor 8 titles/day

=
productivity 32 labor-hrs = .25 titles/labor-hr
New labor 14 titles/day

= = .4375 titles/labor-hr
productivity 32 labor-hrs
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Old System:
New System:
Old multifactor 8 titles/day

= = .0077 titles/dollar
productivity $640 + 400
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Old System:
New System:
Old multifactor 8 titles/day

New multifactor 14 titles/day

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Measurement Problems
1. Quality may change while the

quantity of inputs and outputs
remains constant
2. External elements may cause an
increase or decrease in
productivity
3. Precise units of measure may be
lacking
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Productivity Variables
 Labor - contributes
about 10% of the annual
increase
 Capital - contributes
about 38% of the annual
increase
 Management -
contributes about 52%
of the annual increase
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Key Variables for Improved

Labor Productivity
1. Basic education appropriate for the

labor force
2. Diet of the labor force
3. Social overhead that makes labor
available
 Challenge is maintaining and
enhancing skills in the midst of
rapidly changing technology and
knowledge
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Labor Skills
About half of the 17-year-olds in the US cannot
correctly answer questions of this type
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Capital
Percent increase in mfg productivity 10
8 Japan
Belgium
Netherlands
6
Italy
France
4
Canada
2 US UK
0
10 15 20 25 30 35
Percentage investment
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Management
 Ensures labor and capital are effectively
used to increase productivity
 Use of knowledge
 Application of technologies
 Knowledge societies
 Difficult challenge
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Productivity and the

Service Sector
1. Typically labor intensive
2. Frequently focused on unique individual
attributes or desires
3. Often an intellectual task performed by
professionals
4. Often difficult to mechanize
5. Often difficult to evaluate for quality
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New Challenges in OM
 Global focus
 Supply-chain partnering
 Sustainability
 Rapid product development
 Mass customization
 Just-in-time performance
 Empowered employees
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Ethics and Social Responsibility,

and Sustainability
Challenges facing
operations managers:
 Develop and produce safe, high-quality
green products
 Train, retrain, and motivate employees in
a safe workplace
 Honor stakeholder commitments
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Chapter 2
The Global Environment and

Operations strategy
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Learning Objectives
When you complete this chapter, you

should be able to:
1. Define mission and strategy
2. Identify and explain 3 strategic approaches to
competitive advantage
3. Understand the significant key success factors
and core competencies
4. Use factor rating to evaluate both country and
provider outcources
5. Identify and explain 4 global operations strategy
options
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Boeing’s Global Supply-
Chain Strategy
Some of the International Suppliers of Boeing 787 Components

HEADQUARTERS
SUPPLIER COUNTRY COMPONENT
Latecoere France Passenger doors
Labinel France Wiring
Dassault France Design and PLM software
Messier-Bugatti France Electric brakes
Thales France Electrical power conversion
system and integrated
standby flight display
Messier-Dowty France Landing gear structure
Diehl Germany Interior lighting

Chain Strategy

HEADQUARTERS
Cobham UK Fuel pumps and valves
Rolls-Royce UK Engines
Smiths Aerospace UK Central computer systems
BAE Systems UK Electronics
Alenia Aeronautica Italy Upper center fuselage and
horizontal stabilizers
Toray Industries Japan Carbon fiber for wing and tail
units
Fuji Heavy Industries Japan Center wing box
2
Chain Strategy

HEADQUARTERS
Kawasaki Heavy Japan Forward fuselage, fixed
Industries sections of wing, landing
gear wheel well
Teijin Seiki Japan Hydraulic actuators
Mitsubishi Heavy Japan Wing box
Industries
Chengdu Aircraft Group China Rudder
Hafei Aviation China Parts
Korean Airlines South Korea Wingtips
Saab Sweden Cargo and access doors
Global Strategies
 Boeing – sales and supply chain are worldwide
 Italy’s Benetton – moves inventory to stores around the
world faster than its competition by building flexibility into
design, production, and distribution
 Sony – purchases components from suppliers in Thailand,
Malaysia, and around the world
 Volvo – considered a Swedish company (controlled by Ford
US company), recently purchased by Cheely (Chinese
company).
 Haier – A Chinese company, produces compact refrigerators
(it has 1/3 of the US market) and wine cabinets (it has 1/2 of
the US market) in South Carolina
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Growth of World Trade
60 –
55 –
50 –
45 –
40 –
Percent
35 –
30 –
25 –
20 –
15 –
10 |– | | | | | | | |
Figure 2.1
1970 1975 1980 1985 1990 1995 2000 2005 2010 7
Year
Some Multinational Corporations

% Sales % Assets
Outside Outside
Home Home Home % Foreign
Company Country Country Country Workforce
Citicorp USA 34 46 NA
Colgate- USA 72 63 NA
Palmolive
Dow USA 60 50 NA
Chemical
Gillette USA 62 53 NA
Honda Japan 63 36 NA
IBM USA 57 47 51
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Some Multinational Corporations
% Sales % Assets
Outside Outside
Home Home Home % Foreign
Company Country Country Country Workforce
ICI Britain 78 50 NA
Nestle’ Switzerland 98 95 97
Philips Netherlands 94 85 82
Electronics
Siemens Germany 51 NA 38
Unilever Britain & 95 70 64
Netherlands
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Reasons to Globalize
6 Reasons to Globalize
Tangible 1. Improve supply chain
Reasons
2. Reduce costs (labor, taxes, tariffs, etc.)
3. Improve operations
4. Understand markets
5. Improve products
Intangible
Reasons 6. Attract and retain global talent
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5
Improve the Supply Chain
 Locating facilities closer to unique resources
(expertise, labor, raw material etc.)
 Examples:
 Auto design to California
 Athletic shoe production to China
 Perfume manufacturing in France
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Reduce Costs
 Foreign locations with lower wage rates can lower
both direct and indirect costs
 Trade agreement can lower tariffs
• Maquiladoras (Free trade zones- US-Mexico)
• Trade Agreement
• WTO- World Trade Organization
• NAFTA- North American Free Trade Agreement
(USA-Canada-Mexico)
• APEC, SEATO (Australia, New Zealand, Japan, Hong
Kong, South Korea, New Guinea, and Chile),
MERCOSUR (Argentina, Brazil, Paraguay, Uruguay)
• European Union (EU)
• EVFTA 12
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6
Improve Operations
 Understand differences between how

business is handled in other countries
• Japanese – inventory management
• Scandinavians – ergonomics
 International operations can improve
response time and customer service
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Understand markets
 Interacting with foreign customers,
suppliers, competition can lead to new
opportunities for new products
• Cell phone design move from Europe to
Japan
• Extend the product
life cycle
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Improve Products
 Remain open to free flow of ideas

 Toyota and BMW manage joint research
and development
• Reduced risk, state-of-the-art design,
lower costs
 Samsung and Bosch jointly produce
lithium-ion batteries
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Attract and Retain Global Talent
 Offer better employment opportunities

 Better growth opportunities and
insulation against unemployment
 Relocate unneeded personnel to more
prosperous locations
 Incentives for people who like to travel
in foreign countries
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Cultural and Ethical Issues
 Social and cultures can be quite different

 Attitudes can be quite different towards
 Punctuality  Thievery
 Lunch breaks  Bribery
 Environment  Child labor
 Intellectual
property
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Companies Want To Consider

 National literacy rate  Work ethic
 Rate of innovation  Tax rates
 Rate of technology  Inflation
change
 Availability of raw materials
 Number of skilled
 Interest rates
workers
 Population
 Political Stability
 Number of miles of
 Product liability laws
highway
 Export restrictions
 Phone system
 Variations in language 18
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Developing Missions & Strategies
Mission statements tell an

organization where it is going
The Strategy tells the

organization how to get there
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Mission
 Mission - where are you going?
• Organization’s purpose
for being
• Answers ‘What do we
contribute to society?’
• Provides boundaries and
focus
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Mission:
 To refresh the world.
 To inspire moments of
optimism and happiness.
 To create value and
make a difference.
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TOYOTA
moving forward
"To attract and attain customers with high-

valued products and services and the
most satisfying ownership experience in
America.“
"To be the most successful and respected
car company in America."
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Our Mission:
Delight our customers, employees, and
shareholders by relentlessly delivering
the platform and technology
advancements that become essential to
the way we work and live.
Our goal is to be the preeminent provider of
semiconductor chips and platforms for
the worldwide digital economy
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Mission:
Global market leader of the international
express and logistics industry, specializing
in providing innovative and customized
solutions from a single source.
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Hard Rock Cafe
Our Mission:
To spread the spirit of Rock ‘n’ Roll by
delivering an exceptional entertainment and
dining experience. We are committed to being
an important, contributing member of our
community and offering the Hard Rock family
a fun, healthy, and nurturing work environment
while ensuring our long-term success.
25
25
This mission statement for

Walmart is:
"help people save

money so they can
live better"
26
26
13
Factors Affecting Mission
Philosophy
and Values
Profitability
Environment
and Growth
Mission
Customers Public Image
Benefit to
Society
27
27
The Need for an Explicit Mission
 Why is this firm in business?

 What are our economic goals?
 What is our operating philosophy in terms of
quality, company image, and self-concept?
 What are our core competencies and
competitive advantages?
 What customers do and can we serve?
 How do we view our responsibilities to
stockholders, employees, communities,
environment, social issues, and competitors?
28
28
14
Formulating a Mission
 The typical business begins with the beliefs,
desires, and aspirations of a single
entrepreneur
 These beliefs are usually the basis for the
company’s mission
 As the business grows or is forced to alter
its product, market, or technology,
redefining the company mission may be
necessary
29
29
Mission Statement Components
1. Customer-market
2. Product-service
3. Geographic Domain
4. Technology
5. Concern for Survival
6. Philosophy
7. Self-concept
8. Concern for Public
Image
30
30
15
Strategic Process
Organization’s
Mission
Functional
Area Missions
Finance/
Marketing Operations
Accounting
31
31
Sample Missions
Sample Company Mission
To manufacture and service an innovative, growing, and

profitable worldwide microwave communications business that
exceeds our customers’ expectations.
Sample Operations Management Mission
To produce products consistent with the company’s mission as

the worldwide low-cost manufacturer.
32
32
16
Sample Missions
Sample OM Department Missions
Product design To design and produce products and
services with outstanding quality and
inherent customer value.
Quality management To attain the exceptional value that is
consistent with our company mission and
marketing objectives by close attention to
design, procurement, production, and field
service operations
Process design To determine and design or produce the
production process and equipment that
will be compatible with low-cost product,
high quality, and good quality of work life
at economical cost.
33
33
Sample Missions

Location To locate, design, and build efficient and
economical facilities that will yield high
value to the company, its employees, and
the community.
Layout design To achieve, through skill, imagination, and
resourcefulness in layout and work
methods, production effectiveness and
efficiency while supporting a high quality
of work life.
Human resources To provide a good quality of work life, with
well-designed, safe, rewarding jobs, stable
employment, and equitable pay, in
exchange for outstanding individual
contribution from employees at all levels.
34
34
17
Sample Missions
Supply chain To collaborate with suppliers to develop
management innovative products from stable, effective,
and efficient sources of supply.
Inventory To achieve low investment in inventory
consistent with high customer service
levels and high facility utilization.
Scheduling To achieve high levels of throughput and
timely customer delivery through effective
scheduling.
Maintenance To achieve high utilization of facilities and
equipment by effective preventive
maintenance and prompt repair of facilities
and equipment.
35
35
Strategy
 Action plan to achieve mission

 Functional areas have
strategies
 Strategies exploit
opportunities and strengths,
neutralize threats, and avoid
weaknesses
36
36
18
Alternative Strategic Management Structures
37
37
Strategies for Competitive

Advantage
 Differentiation – better, or
at least different
 Cost leadership – cheaper
 Response – more response
38
38
19
Competing on Differentiation
Uniqueness can go beyond both the physical
characteristics and service attributes to encompass
everything that impacts customer’s perception of
value
 Safeskin gloves-
leading edge products
 Walt Disney Magic
Kingdom – experience
differentiation
 Hard Rock Cafe –
dining experience
39
39
Competing on Cost
Provide the maximum value as perceived
by customer. Does not imply low quality.
 Southwest Airlines – secondary airports, no
frills service, efficient utilization of equipment
 Wal-Mart – small overheads, shrinkage,
distribution costs
 Franz Colruyt – no bags, low light, no music,
and doors on freezers
40
40
20
Competing on Response
 Flexibility is matching market

changes in design innovation and
volumes
 A way of life at Hewlett-Packard
 Reliability is meeting schedules
 German machine industry
 Timeliness is quickness in
design, production, and delivery
 Johnson Electric, Motorola,
Pizza Hut
41
41
OM’s Contribution to Strategy

10 Operations Competitive
Decisions Approach Example Advantage
Product DIFFERENTIATION
Innovative design Safeskin’s innovative gloves
Broad product line Fidelity Security’s mutual funds
Quality After-sales service Caterpillar’s heavy equipment
service
Process Experience Hard Rock Café’s dining
experience
Location COST LEADERSHIP

Low overhead Franz-Colruyt’s warehouse-type
Differentiation
stores
Layout Effective capacity (better)
use Southwest Airline’s
Human aircraft utilization
resource Inventory
Response
management Wal Mart’s sophisticated
distribution system (faster)
Supply chain Cost
RESPONSE leadership
Flexibility Hewlett-Packard’s response to (cheaper)
Inventory
volatile world market
Reliability FedEx’s “absolutely, positively,
Scheduling on time”
Quickness Pizza Hut’s 5-minute guarantee
at lunchtime
Maintenance
42
42
21
Managing Global Service Operations
Requires a different perspective on:

 Capacity planning
 Location planning
 Facilities design and layout
 Scheduling
43
43
Strategy development via

Process design
Process-focused
High Mass Customization
JOB SHOPS
Customization at
(Print shop, emergency high Volume
room, machine shop,
fine dining rest. (Dell Computer’s PC,
Variety of Products
Repetitive cafeteria)
(modular) focus
ASSEMBLY LINE
Moderate (Cars, appliances,
TVs, fast-food
restaurants) Product focused
CONTINUOUS
(steel, beer,
paper, bread,
institutional
kitchen)
Low
Low Moderate High

Volume 44
Mission: To provide outstanding French fine dining
44
22
Issues In Operations Strategy
 Resources view
 Value-chain analysis
 Porter’s Five Forces model
 Operating in a system with many
external factors
 Constant change
45
45
Issues in Operations Strategy
Strategic Options to Gain a Competitive

Advantage
28% - Operations Management
18% - Marketing/distribution
17% - Momentum/name recognition
16% - Quality/service
14% - Good management
4% - Financial resources
3% - Other
46
46
46
23
Issues in Operations Strategy
Elements of 28% Operations Management
 Low-cost product
 Product-line breadth
 Technical superiority
 Product characteristics/differentiation
 Continuing product innovation
 Low-price/high-value offerings
 Efficient, flexible operations adaptable to consumers
 Engineering research development
 Location
 Scheduling
47
47
Product Life Cycle

Introduction Growth Maturity Decline
Best period to Practical to Poor time to Cost control
increase market change price or change image, critical
Company Strategy/Issues
share quality image price, or quality
R&D engineering Strengthen niche Competitive costs

is critical become critical
Defend market
position Drive-through
Internet search engines restaurants
LCD & DVDs
Xbox 360 plasma TVs
iPods
Boeing 787
Sales 3D printers
3-D game Electric Analog

players vehicles TVs
Twitter
48
Strategy and issues during a product’s life
48
24
Product Life Cycle
Product design Forecasting critical Standardization Little product
and development Fewer product differentiation
Product and
critical process reliability changes, more Cost
OM Strategy/Issues
Frequent product minor changes minimization

Competitive
and process product Optimum capacity Overcapacity in
design changes improvements and Increasing the industry
Short production options stability of Prune line to
runs Increase capacity process eliminate items
High production Long production not returning
Shift toward good margin
costs product focus runs
Limited models Product Reduce
Enhance capacity
Attention to quality distribution improvement and
cost cutting
49
49
SWOT Analysis
Mission
Internal External
Strengths Opportunities
Analysis
Internal External
Weaknesses Threats
Strategy
50
50
25
Strategy Development Process
Analyze the Environment

Identify the strengths, weaknesses, opportunities, and threats.
Understand the environment, customers, industry, and competitors.
Determine Corporate Mission

State the reason for the firm’s existence and identify the value it
wishes to create.
Form a Strategy
Build a competitive advantage, such as low price, design, or
volume flexibility, quality, quick delivery, dependability, after-
sale service, broad product lines. 51
51
Strategy Development and

Implementation
 Identify key success factors (KFSs)

 Integrate OM with other activities
 Build and staff the organization
The operations manager’s job is to implement an

OM strategy, provide competitive advantage, and
increase productivity
52
52
26
Key Success Factors
Support a Core Competence and Implement Strategy by
Identifying and Executing the Key Success Factors in the Functional Areas
Marketing Finance/Accounting Production/Operations

Service Leverage
Distribution Cost of capital
Promotion Working capital
Channels of Receivables
distribution Payables
Product positioning Financial control
(image, functions) Lines of credit
Decisions Sample Options Lecture

Product Customized, or standardized 3
Quality Define customer expectations and how to achieve them 4
Process Facility size, technology, capacity 5
Location Near supplier or near customer 8
Layout Work cells or assembly line 9
Human resource Specialized or enriched jobs 14
Supply chain Single or multiple suppliers 10
Inventory When to reorder, how much to keep on hand 11
Schedule Stable or fluctuating production rate 12
Maintenance Repair as required or preventive maintenance No 53
53
Activity Mapping at
Southwest Airlines
Courteous, but
Limited Passenger
Service
Lean, Short Haul, Point-to-

Productive Point Routes, Often to
Employees Secondary Airports
Competitive Advantage:
Low Cost
High Frequent,
Aircraft Reliable
Utilization Standardized Schedules
Fleet of Boeing
737 Aircraft
54
54
27
Activity Mapping at
Southwest Airlines
Courteous, but
Limited Passenger
Service

Employees Automated ticketing machines Secondary Airports
No seat assignments
No baggage transfers
Low Cost
No meals (peanuts)
High Frequent,
Aircraft Reliable
Fleet of Boeing
737 Aircraft
55
55
Activity Mapping at
Southwest Airlines
Courteous, but
Limited Passenger
Service
No meals (peanuts)
Lean,
Lower gate costs at secondary Short Haul, Point-to-
Productive airports Point Routes, Often to
High number of flights reduces
employee idle time between flights
Low Cost
High Frequent,
Aircraft Reliable
Fleet of Boeing
737 Aircraft
56
56
28
Activity Mapping at
Southwest Airlines
Courteous, but
Limited Passenger
Service

Competitive
employee Advantage:
idle time between flights
Low Cost
Saturate a city with flights, lowering
administrative costs (advertising, HR,
High etc.) per passenger for that city Frequent,
Aircraft Reliable
Pilot training required on only one
Utilization Schedules
Standardized
type of aircraft
Fleet of Boeing
Reduced maintenance 737 Aircraft
inventory
required because of only one type of 57
aircraft
57
Activity Mapping at
Southwest Airlines
Courteous, but
Limited Passenger
Service
Pilot training required on only one
type of aircraft
Reduced maintenance inventory
Employees required because of only one type of
Secondary Airports
aircraft
Excellent supplier relations with
Low
Boeing has Cost
aided financing
High Frequent,
Aircraft Reliable
Fleet of Boeing
737 Aircraft
58
58
29
Activity Mapping at
Southwest Airlines
Courteous, but
Limited
ReducedPassenger
maintenance inventory
Service
required because of only one type of
aircraft
Lean,
Flexible union Short Haul, Point-to-
Productive Flexible employees and Point
standard
Routes, Often to
contracts
Employees planes aid scheduling
Secondary Airports
Maintenance personnel trained only
Competitiveone
Advantage:
type of aircraft
Low Cost
20-minute gate turnarounds
High Frequent,
Aircraft Reliable
Fleet of Boeing
737 Aircraft
59
59
Activity Mapping at
Southwest Airlines
Automated ticketing
Courteous, but machines
LimitedEmpowered
Passenger employees
Service
High employee compensation
Productive Hire for attitude, then train
Point Routes, Often to
High level of stock ownership
employee
Low Cost between flights
idle time
High Frequent,
Aircraft Reliable
Fleet of Boeing
737 Aircraft
60
60
30
Implementing Strategic
Decisions
TABLE 2.1 Operations Strategies of Two Drug Companies
BRAND NAME DRUGS, INC. GENERIC DRUGS CORP.
COMPETITIVE PRODUCT DIFFERENTIATION LOW COST STRATEGY

ADVANTAGE STRATEGY
Product Heavy R&D investment; extensive Low R&D investment; focus on
selection and labs; focus on development in a broad development of generic drugs
design range of drug categories
Quality Quality is major priority, standards Meets regulatory requirements on a

exceed regulatory requirements country-by-country basis, as
necessary
Process Product and modular production Process focused; general production

process; tries to have long product processes; “job shop” approach, short-
runs in specialized facilities; builds run production; focus on high
capacity ahead of demand utilization
Location Still located in city where it was Recently moved to low-tax, low-labor-
founded cost environment
61
61
Implementing Strategic
Decisions
TABLE 2.1 Operations Strategies of Two Drug Companies
BRAND NAME DRUGS, INC. GENERIC DRUGS CORP.
COMPETITIVE PRODUCT DIFFERENTIATION LOW COST STRATEGY
ADVANTAGE STRATEGY
Layout Layout supports automated product- Layout supports process-focused “job
focused production shop” practices
Human Hire the best; nationwide searches Very experienced top executives
resources provide direction; other personnel paid
below industry average
Supply chain Long-term supplier relationships Tends to purchase competitively to find
bargains
Inventory Maintains high finished goods Process focus drives up work-in-
inventory primarily to ensure all process inventory; finished goods
demands are met inventory tends to be low
Scheduling Centralized production planning Many short-run products complicate
scheduling
Maintenance Highly trained staff; extensive parts Highly trained staff to meet changing
inventory demands 62
62
31
Strategic Planning, Core
Competencies, and Outsourcing
 Outsourcing – transferring activities that

traditionally been internal to external
suppliers
 Accelerating due to
 Increased technological expertise
 More reliable and cheaper transportation
 Rapid development and deployment of
advancements in telecommunications and
computers
63
63
Strategic Planning, Core

Competencies, and Outsourcing
 Subcontracting - contract manufacturing

 Outsourced activities
 Legal
services
 Travel  Production
services  Surgery
 Payroll
64
64
32
Theory of Comparative
Advantage
 If an external provider can perform

activities more productively than the
purchasing firm, then the external
provider should do the work
 Purchasing firm focuses on core
competencies
 Drives outsourcing
65
65
Risks of Outsourcing
TABLE 2.2 Potential Advantages and Disadvantages of Outsourcing

ADVANTAGES DISADVANTAGES
Cost savings Increased logistics and inventory
costs
Gaining outside expertise Loss of control (quality, delivery, etc.)
Improving operations and service Potential creation of future
competition
Maintaining a focus on core Negative impact on employees
competencies
Accessing outside technology Risks may not manifest themselves
for years
66
66
33
Rating Outsourcing Providers
 Insufficient analysis most common reason

for failure
 Factor rating method
 Points and weights assigned for each
factor to each
67
67
Rating Provider Selection Criteria
TABLE 2.3 Factor Ratings Applied to National Architects’s Potential IT Outsourcing Providers
OUTSOURCING PROVIDERS
IMPORTANCE BIM S.P.C. TELCO
FACTOR (CRITERION) WEIGHTS (U.S.) (INDIA) (ISRAEL)
1. Can reduce operating costs .2 3 3 5
2. Can reduce capital investment .2 4 3 3
3. Skilled personnel .2 5 4 3
4. Can improve quality .1 4 5 2
5. Can gain access to technology not in
company .1 5 3 5
6. Can create additional capacity .1 4 2 4
7. Aligns with policy/philosophy/culture .1 2 3 5
Totals 1.0 3.9 3.3 3.8
Score for BIM = (.2 * 3) + (.2 * 4) + (.2 * 5) + (.1 * 4) + (.1 * 5) + (.1 * 4) + (.1 * 2) = 3.9
68
68
34
Global Operations Strategy
Options
 International business
 A firm that engages in cross-border
transactions.
 Multinational Corporation (MNC)
 A firm that has extensive involvement in
international business, owning or controlling
facilities in more than one country
 MNC applies to world’s large and well-known
businesses (IBM)
69
69
4 Global Strategies
 International Strategy: uses exports and licenses to
penetrate the global area (Harley Davidson, US Steel)
 Global Strategy: Operating decisions are centralized and
headquarters coordinates the standardization and learning
between facilities (Texas Instruments, Caterpillar)
 Multi-domestic Strategy: Operating decisions are
decentralized to each country to enhance local
responsiveness (McDonald’s)
 Transnational Strategy: Exploits economies of scale
and learning, as well as pressure for responsiveness, by
recognizing that core competencies reside everywhere in
the organization (Coca-Cola, Nestle’)
70
70
35
Four International Operations
Strategies
High International
Strategy
 Import/export or license
existing product
Cost Reduction
Examples: Global markets are

U.S. Steel
Harley Davidson penetrated using
exports and
licenses
Low
Low High
Local Responsiveness 71
(Quick Response and/or Differentiation)
71

Strategies
High
Cost Reduction
International Strategy
 Import/export or
license existing
product
Examples:
U.S. Steel
Harley Davidson
Low
Low High
72
36
Four International Operations Strategies
Global
Strategy
High
 Standardized
product
 Economies of scale
 Cross-cultural
Cost Reduction
learning
Operating decisions are
Examples:
centralized & headquarters
Texas Instruments
license existing
Caterpillar
product
coordinates the
Otis
ExamplesElevator standardization and
U.S. Steel
Harley Davidson learning between facilities
Low
Low High
73

Strategies
High
Global Strategy
 Standardized product
 Economies of scale
 Cross-cultural learning
Examples
Texas Instruments
Cost Reduction
Caterpillar
Otis Elevator
license existing
product
Examples
U.S. Steel
Harley Davidson
Low
Low High
74
37
Multidomestic
High
Strategy
 Use existing
Global Strategy
domestic
 Standardized productmodel
globally
 Examples
Franchise,
Texas Instruments
joint
Cost Reduction
ventures,
Caterpillar
Otis Elevator
subsidiaries
Examples:
Operating decisions are
Heinz
Import/export or decentralized to each
license existing
McDonald’s
product country to enhance local
The
Examples Body Shop
U.S. Steel responsiveness
Hard Rock Cafe
Harley Davidson
Low
Low High
75

Strategies
High
Global Strategy
 Standardized product
 Economies of scale
 Cross-cultural learning
Examples
Texas Instruments
Cost Reduction
Caterpillar
Otis Elevator
International Strategy Multidomestic Strategy

 Use existing
 Import/export or domestic model globally
license existing  Franchise, joint ventures,
product subsidiaries
Examples Examples
U.S. Steel Heinz The Body Shop
Harley Davidson McDonald’s Hard Rock Cafe
Low
Low High
76
38
Transnational
High
Strategy
 Global
Move Strategy
material,
 Standardized product
people, ideas
Combines the benefits
across national
Examples
of global-scale
boundaries
Texas Instruments efficiencies with the
Cost Reduction
Caterpillar
 Economies of
Otis Elevator benefits of local
scale responsiveness
International
Cross-cultural
Strategy Multidomestic Strategy
 Use existing
learning
license existing
domestic model globally
 Franchise, joint ventures,
Examples:
Examples
U.S. Steel
Examples
Heinz The Body Shop
Harley Davidson
Coca-Cola McDonald’s Hard Rock Cafe
Low Nestlé
Low High
77

Strategies
High
Global Strategy Transnational Strategy
 Standardized product  Move material, people, ideas
 Economies of scale across national boundaries
 Cross-cultural learning  Economies of scale
Examples
Texas Instruments Examples
Cost Reduction
Caterpillar/Komatsu Coca-Cola
Otis Elevator Nestlé
International Strategy Multidomestic Strategy

 Use existing
 Import/export or domestic model globally
license existing  Franchise, joint ventures,
Examples Examples
U.S. Steel Heinz The Body Shop
Harley Davidson McDonald’s Hard Rock Cafe
Low
Low High
78
39
Ranking Corruption
Rank Country 2019 CPI Score (out of 100)
1 Demark, Finland, New Zealand 90 Least
4 Sweden 88 Corrupt
5 Singapore 87
6 Switzerland 86
7 Australia, Norway 85
9 Canada, Netherlands 84
13 Germany 79
14 Hong Kong 77
17 Japan, UK 74
19 USA 73
37 Taiwan 61
39 Israel 60
45 South Korea 56 Most
80 China 39 Corrupt
117 Vietnam 31
133 Russia 28
2 - 79
79
Discussion in class
 What is the operations strategy of

SAMSUNG, HONDA, MADDAZ, HSBC, KFC?
 Who is responsible for strategic planning
 Competing on cost means having the lowest
cost? Give example
 List of key success factors of Vinamilk
 Construct SWOT analysis of HUM restaurant
2 - 80
80
40
9/21/2021
Chapter 5
Product Design
1
Learning Objectives
should be able to:
1. Define product life cycle

2. Describe a product development system
3. Build a house of quality
4. Explain how time-based competition is
implemented by OM
1
9/21/2021
Learning Objectives
should be able to:
5. Describe how products and services
are defined by OM
6. Describe the documents needed for
production
7. Explain how the customer participates
in in the design and delivery of services
8. Apply decision trees to product issues
3
Regal Marine
 Global market
 3-dimensional CAD system
 Reduced product development time
 Reduced problems with tooling
 Reduced problems in production
 Assembly line production
 JIT
2
9/21/2021
Goods and Services Decision

 Organization exist to provide goods or
services to society
 Great products are the key to success
 Top organizations typically focus on core
products
 Customers buy satisfaction, not just a
physical good or particular service
 Fundamental to an organization's strategy
with implications throughout the operations
function 5
Goods and Services Decision

 Goods or services are the basis for an
organization's existence
 Limited and predicable life cycles
requires constantly looking for, designing,
and developing new products
 New products generate substantial
revenue
3
9/21/2021
Product Decision
 Product decision: selection, definition and
design of products  fundamental to
company strategy
 Objective of the product decision is to
develop and implement a product
strategy that meets the demand of the
marketplace with a competitive
advantage
Product Strategy Options
 Differentiation
 Hard Rock Cafe , HM Hospital
 Low cost
 Wall Mart, Taco Bell, Southwest
Airlines, CoopMart,
 Rapid response
 HP, Motorola, Toyota,
4
9/21/2021
Humor in Product Design

As the customer As Marketing
wanted it interpreted it
As Operations made it As Engineering

designed it
Importance of New Products

% of Sales from new products
50% The higher the percentage of

sales from the last 5 years, the
more likely the firm is to be a
40% leader.
30%
20% Figure 5.1
10%
Industry Top Middle Bottom

leader third third third
Position of firm in its industry 10
10
5
9/21/2021
Product Life Cycles
 May be any length from a few

hours to decades
 The operations function must be
able to introduce new products
successfully
11
11
Product Life Cycles

Sales, cost, and cash flow
Cost of development and production

Sales revenue
Net revenue (profit)
Cash
flow
Negative
cash flow Loss

12
12
6
9/21/2021
Life Cycle and strategy

Introductory Phase
 Fine tuning may warrant unusual expenses for
1. Research
2. Product development
3. Process modification and enhancement
4. Supplier development
Growth Phase
 Product design begins to stabilize
 Effective forecasting of capacity becomes necessary
 Adding or enhancing capacity may be necessary
13
13
Product Life Cycle

Maturity Phase
 Competitors now established
 High volume, innovative production may be
needed
 Improved cost control, reduction in options, paring
down of product line
Decline Phase
 Unless product makes a special contribution to the
organization, must plan to terminate offering
14
14
7
9/21/2021
Product Life Cycle Costs

100 –
Costs committed
Percent of total cost 80 –
60 –
Costs incurred
40 –
20 –
Ease of change
0–
Concept Detailed Manufacturing Distribution,

design design service,
prototype and disposal 15
15
Product-by-Value Analysis
 Lists products in descending order of their

individual dollar contribution to the firm
 Lists the total annual dollar contribution of the
product
 Helps management evaluate alternative
strategies for each product
16
16
8
9/21/2021
Product-by-Value Analysis
Sam’s Furniture Factory

Individual Total Annual
Contribution ($) Contribution ($)
Love Seat $102 $36,720
Arm Chair $87 $51,765
Foot Stool $12 $6,240
Recliner $136 $51,000
17
 Your strategic decision?
17
Generating New Product

1. Understanding the
customer
2. Economic change
3. Sociological and
demographic change
4. Technological change
5. Political/legal change
6. Market practice, professional
standards, suppliers, distributors
18
18
9
9/21/2021
Example – Square watermelons
New Products
• What market-related questions would you ask before

producing square watermelons commercially?
• What finance-related questions would you ask before

producing square watermelons commercially?
• What operations-related questions would you ask

before producing square watermelons commercially?
19
Product Development Stages

Concept
Feasibility Figure 5.3
Customer Requirements
Functional Specifications
Product Specifications Scope for

Scope of design and
product Design Review engineering
development teams
team Test Market
Introduction
Evaluation
20
20
10
9/21/2021
Idea Generation/Concept
 Company’s own R&D  Salespersons in the

department field
 Customer complaints  Factory workers
or suggestions  New technological
 Marketing research developments
 Suppliers  Competitors
21
21
Ability/ Feasibility Study
 Market analysis
 Economic analysis
 Technical/strategic analyses
 Performance specifications
22
22
11
9/21/2021
Quality Function Deployment - QFD

 QFD: a process for determining customer
requirements-”wants” & translating them into the
attributes -”hows” (technical design requirements)
 Tools of QFD: House of quality
 7 Steps:
1. Identify customer wants
2. Identify how the good/service will satisfy customer wants
3. Relate customer wants to product hows (matrix)
4. Identify relationships between the firm’s hows
5. Develop customer importance ratings
6. Evaluate competing products
7. Compare performance to desirable technical attributes
23
23
QFD House of Quality

Interrelationships
Customer
importance
How to satisfy
ratings
customer wants
(5= highest)
assessment
Competitive
What the Relationship

customer matrix
wants
Target values Weighted

rating
Technical
evaluation
24
24
12
9/21/2021
Example
 Your team has been charged with

designing a new camera for Great
Cameras, Inc.
 The first action is
to construct a
House of Quality
25
25
Interrelationships
Step 1 How to Satisfy

Customer Wants Competitors
Analysis of
What the
Relationship
Customer
Matrix
Wants
Technical
What the Attributes and
Evaluation
customer
wants Customer
importance
rating
(5 = highest)
Lightweight 3
Easy to use 4
Reliable 5
Easy to hold steady 2
High resolution 1
26
26
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Step 2
Interrelationships
How to Satisfy
Customer Wants
Competitors
Analysis of
What the
Relationship
Customer
Matrix
Wants
Technical
Low electricity requirements

Attributes and
Evaluation
Aluminum components
High number of pixels
Ergonomic design
Auto exposure
How to Satisfy
Customer Wants
Auto focus
27
27
Interrelationships
How to Satisfy
Step 3 Customer Wants Competitors

Analysis of
What the
Relationship
Customer
Matrix
Wants
High relationship (5) Technical

Attributes and
Evaluation
Medium relationship (3)

Low relationship (1)
Lightweight 3
Easy to use 4
Reliable 5
High resolution 1
Relationship matrix 28
28
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9/21/2021
Interrelationships
How to Satisfy
Step 4 Customer Wants
Competitors
Analysis of
What the
Relationship
Customer
Matrix
Wants
Technical
Attributes and
Evaluation

Relationships
between the
things we can do
Aluminum components
High numbet of pixels
Ergonomic design
Auto exposure
Auto focus
29
29
Interrelationships
How to Satisfy
Step 5 Customer Wants Competitors

Analysis of
What the
Relationship
Customer
Matrix
Wants
Technical
Attributes and
Evaluation
Lightweight 3
Easy to use 4
Reliable 5
High resolution 1
Our importance ratings 22 9 27 27 32 25
Weighted
rating 30
30
15
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Interrelationships
How to Satisfy
Customer Wants
Step 6
Competitors
Analysis of
What the
Relationship
Customer
Matrix
Wants
Technical
Attributes and
Company B
Company A
Evaluation
How well do
competing products
meet customer wants
Lightweight 3 G P
Easy to use 4 G P
Reliable 5 F G
Easy to hold steady 2 G P
High resolution 1 P P
Our importance ratings 22 5
31
31
Interrelationships
How to Satisfy
Customer Wants
Step 7
Competitors
Analysis of
What the
Relationship
Customer
Matrix
Wants
Technical
Attributes and
Failure 1 per 10,000
Evaluation
Panel ranking
Technical
2 circuits
attributes
2’ to ∞
0.5 A
75%
Company A 0.7 60% yes 1 ok G

Technical
evaluation Company B 0.6 50% yes 2 ok F
Us 0.5 75% yes 2 ok G
32
32
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House of Quality
Aluminum components
High number of pixels
Ergonomic design
Auto exposure
Company A
Company B
Auto focus
Completed Lightweight
Easy to use
3
4
G P
G P
House of Reliable 5 F G
Easy to hold steady 2 G P
Quality High resolution 1 P P
Our importance ratings 22 9 27 27 32 25
Failure 1 per 10,000

Target values
Panel ranking
(Technical
attributes)
2 circuits
2’ to ∞
0.5 A
75%
Company A 0.7 60% yes 1 ok G
Technical
Company B 0.6 50% yes 2 ok F
evaluation 33
Us 0.5 75% yes 2 ok G
33
House of Quality Sequence

Deploying resources through the
organization in response to
customer requirements
Quality
plan
Production
process
Production
process
Specific House
components
components
4
Specific
Design House
characteristics
characteristics
3
House
Design
requirements
2
Customer
House
1
Figure 5.4
34
34
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Organizing for Product Development
 Traditionally – distinct departments

 Duties and responsibilities are defined
 Difficult to foster forward thinking
 A Champion
 Product manager drives the product through
the product development system and related
organizations
35
35
Organizing for Product Development
 Team approach
 Cross functional – representatives from all
disciplines or functions
 Product development teams, design for
manufacturability teams, value engineering
teams
 Japanese “whole organization” approach
 No organizational divisions
36
36
18
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Concurrent Engineering
Customers Design
Marketing Engineering
Suppliers Production
37
37
Breaking down the barriers to

effective design
38
38
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Manufacturability and
Value Engineering
 Activities helping to improve a product design,
production, maintainability and use
 Benefits:
1. Reduced complexity of the products
2. Reduction of environmental impact
3. Additional standardization of components
4. Improvement of functional aspects of the product
5. Improved job design and job safety
6. Improved maintainability (serviceability of the
product
7. Robust design
39
39
Cost Reduction of a Bracket

via Value Engineering
40
40
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Issues for
Product Design
1. Robust design
2. Modular design
3. Computer-aided design (CAD)
4. Computer-aided manufacturing (CAM)
5. Virtual reality technology
6. Value analysis
7. Sustainability and Life Cycle Assessment
(LCA)
41
41
Robust Design
 Product is designed so that small

variations in production or assembly
do not adversely affect the product
 Typically results in lower cost and
higher quality
42
42
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Modular Design
 Products designed in easily segmented
components/parts
 Adds flexibility to both production & marketing
 Improved ability to satisfy customer requirements
43
43
Computer Aided Design (CAD)

 Using computers to design
products and prepare
engineering documentation
 Shorter development cycles,
improved accuracy, lower
cost
 Information and designs can
be deployed worldwide
44
44
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Extensions of CAD
 Design for Manufacturing and Assembly
(DFMA)
 Solve manufacturing problems during the design
stage
 3-D Object Modeling
 Small prototype
development
 CAD through the
internet
 International data
exchange through STEP 45
45
Computer-Aided Manufacturing
(CAM)
 Utilizing specialized computers and
program to direct and control manufacturing
equipment
 Often driven by
the CAD system
(CAD/CAM)
46
46
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Benefits of CAD/CAM
1. Product quality
2. Shorter design time
3. Production cost reductions
4. Database availability
5. New range of capabilities
47
47
Virtual Reality Technology

 Computer technology used to develop an
interactive, 3-D model of a product from the basic
CAD data
 Allows people to ‘see’ the finished design before a
physical model is built
 Very effective in large-scale designs such as plant
layout
48
48
24
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Value Analysis
 Focuses on design improvement during

production process
 Seeks improvements leading either to a
better product or a product which can be
produced more economically with less
environmental impact
49
49
Sustainability and Life Cycle

Assessment (LCA)
 Sustainability means meeting the needs of
the present without compromising the
ability of future generations to meet their
needs
 LCA is a formal evaluation of the
environmental impact of a product
50
50
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Product Development
Continuum
 Product life cycles are becoming

shorter and the rate of technological
change is increasing
 Developing new products faster can
result in a competitive advantage
 Time-Based Competition
51
51
Product Development
Continuum
External Development Strategies
Figure 5.6 Alliances
Joint ventures
Purchase technology or expertise
by acquiring the developer
Internal Development Strategies

Migrations of existing products
Enhancements to existing products
New internally developed products
Internal Cost of product development Shared

Lengthy Speed of product development Rapid and/
or Existing
High Risk of product development Shared
52
52
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Product Development
Continuum
 Purchasing technology by acquiring a
firm
 Speeds development
 Issues concern the fit between the acquired
organization and product and the host
 Through Joint Ventures
 Both organizations learn
 Risks are shared
53
53
Product Development
Continuum
 Through Alliances
 Cooperative agreements between independent
organizations
 Useful when technology is developing
 Reduces risks
54
54
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Defining The Product

 First definition is in terms of functions
 Rigorous specifications are developed
during the design phase
 Manufactured products will have an
engineering drawing
 Bill of material (BOM) lists the
components of a product
55
55
Monterey Jack Cheese

(a) U.S. grade AA. Monterey cheese shall conform to the following
requirements:
(1) Flavor. Is fine and highly pleasing, free from undesirable flavors and odors.
May possess a very slight acid or feed flavor.
(2) Body and texture. A plug drawn from the cheese shall be reasonably firm.
It shall have numerous small mechanical openings evenly distributed
throughout the plug. It shall not possess sweet holes, yeast holes, or other
gas holes.
(3) Color. Shall have a natural, uniform, bright and attractive appearance.
(4) Finish and appearance—bandaged and
paraffin-dipped. The rind shall be sound,
firm, and smooth providing a good
protection to the cheese.
Code of Federal Regulation, Parts 53 to 109,

General Service Administration
56
56
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Product Documents
 Engineering drawing
 Shows dimensions,
tolerances, and materials
 Shows codes for Group
Technology
 Bill of Material (BOM)
 Lists components,
quantities and where used
 Shows product structure
57
57
Engineering Drawings
Figure 5.8
58
58
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Bills of Material
Figure 5.9 (a)
Panel Weldment
NUMBER DESCRIPTION QTY
A 60-71 PANEL WELDM’T 1
A 60-7 LOWER ROLLER ASSM. 1
R 60-17 ROLLER 1
R 60-428 PIN 1
P 60-2 LOCKNUT 1
A 60-72 GUIDE ASSM. REAR 1
R 60-57-1 SUPPORT ANGLE 1
A 60-4 ROLLER ASSM. 1
02-50-1150 BOLT 1
A 60-73 GUIDE ASSM. FRONT 1
A 60-74 SUPPORT WELDM’T 1
R 60-99 WEAR PLATE 1
02-50-1150 BOLT 1
59
59
Bills of Material
Hard Rock Cafe’s DESCRIPTION QTY
Hickory BBQ Bacon Bun 1
Cheeseburger Hamburger patty 8 oz.
Cheddar cheese 2 slices
Bacon 2 strips
BBQ onions 1/2 cup
Hickory BBQ sauce 1 oz.
Burger set
Lettuce 1 leaf
Tomato 1 slice
Red onion 4 rings
Pickle 1 slice
French fries 5 oz.
Seasoned salt 1 tsp.
Figure 5.9 (b) 11-inch plate 1
HRC flag 1
60
60
30
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Bills of Material
BBQ Bacon Cheeseburger
Description Qty
Bun 1
Hamburger patty 8 oz.
Cheddar cheese 2 slices
Bacon 2 strips
BBQ onions 1/2 cup
Hickory BBQ sauce 1 oz.
Burger set
Lettuce 1 leaf
Tomato 1 slice
Red onion 4 rings
Pickle 1 slice
French fries 5 oz.
Seasoned salt 1 tsp.
11-inch plate 1
HRC flag 1 61
61
Group Technology
 Parts grouped into families with similar

characteristics
 Coding system describes processing and
physical characteristics
 Part families can be produced
in dedicated manufacturing cells
62
62
31
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Group Technology Scheme

(b) Grouped Cylindrical Parts (families of parts)
(a) Ungrouped Parts
Grooved Slotted Threaded Drilled Machined
63
Figure 5.10
63
Group Technology Benefits

1. Improved design
2. Reduced raw material and purchases
3. Simplified production planning and control
4. Improved layout, routing, and machine
loading
5. Reduced tooling setup time, work-in-
process, and production time
64
64
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Documents for Production
1. Assembly drawing
2. Assembly chart
3. Route sheet
4. Work order
5. Engineering change
notices (ECNs)
65
65
Assembly Drawing
 Shows exploded
view of product
 Details relative
locations to show
how to assemble
the product
Figure 5.11 (a)
66
66
33
9/21/2021
Assembly Chart
R 209 Angle
1
2
R 207 Angle
Left
SA bracket A1  Identifies the point
1 assembly
Bolts w/nuts (2) of production where
3
R 209 Angle
components flow
4
R 207 Angle
Right into subassemblies
SA bracket A2
5
Bolts w/nuts (2)
2 assembly and ultimately into
6 the final product
Bolt w/nut
7
R 404 Roller
8 A3
Lock washer Poka-yoke
9 inspection
Part number tag
10 A4 Figure 5.11 (b)
Box w/packing material
11 A5
67
67
Route Sheet
Lists the operations and times required
to produce a component
Setup Operation
Process Machine Operations Time Time/Unit
1 Auto Insert 2 Insert Component 1.5 .4
Set 56
2 Manual Insert Component .5 2.3
Insert 1 Set 12C
3 Wave Solder Solder all 1.5 4.1
components
to board
4 Test 4 Circuit integrity .25 .5
test 4GY
68
68
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Work Order
An instruction to produce a given quantity of a

particular item, usually to a schedule
Work Order
Item Quantity Start Date Due Date
157C 125 5/2/06 5/4/06
Production Delivery
Dept Location
F32 Dept K11
69
69
Engineering Change Notice (ECN)
 A correction or modification to a
product’s definition or documentation
 Engineering drawings
 Bill of material
Quite common with long product life cycles,

long manufacturing lead times, or rapidly
changing technologies
70
70
35
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Configuration Management
 The need to manage ECNs has led to

the development of configuration
management systems
 A product’s planned and changing
components are accurately identified
and control and accountability for
change are identified and maintained
71
71
Product Life-cycle Management

(PLM)
 Integrated software that brings together
most, if not all, elements of product design
and manufacture
 Product design
 CAD/CAM, DFMA
 Product routing
 Materials
 Assembly
 Environmental issues
72
72
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Service Design
 Service typically includes direct interaction

with the customer
 Increased opportunity for customization
 Reduced productivity
 Process – chain – network (PCN)
analysis focuses on the ways in which
processes can be designed to optimize
interaction between firms and their
customers
73
73
Process-Chain-Network (PCN)
Analysis
Figure 5.12 74
74
37
9/21/2021
Analysis
 Direct interaction region includes process steps
that involve interaction between participants
 The surrogate (substitute) interaction region
includes process steps in which one participant
is acting on another participant’s resources
 The independent processing region includes
steps in which the supplier and/or the customer
is acting on resources where each has
maximum control
75
75
Analysis
 All three regions have similar operating issues

but the appropriate way of handling the issues
differs across regions
 Service operations exist only within the area of
direct and surrogate interaction
 PCN analysis provides insight to aid in
positioning and designing processes that can
achieve strategic objectives
76
76
38
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Adding Service Efficiency

 Service productivity is notoriously low
partially because of customer involvement
in the design or delivery of the service, or
both
 Complicates product design
77
77

 Limit the options
• Improves efficiency and ability to meet
customer expectations
 Delay customization
 Modularization
• Eases customization of a service
78
78
39
9/21/2021

 Automation
 Reduces cost, increases customer
service
 Moment of truth
 Critical moments between the customer
and the organization that determine
customer satisfaction
79
79
Customer Participation in
the Design of Services
(a) Customer participation in design
such as pre-arranged funeral services
or cosmetic surgery
(b) Customer participation in

delivery such as stress test for
cardiac exam or delivery of a
baby
(c) Customer participation in design and

delivery such as counseling, college
education, financial management of
personal affairs, or interior decorating
80
80
80
40
9/21/2021
Moments-of-Truth
Computer Company Hotline
Experience Enhancers
Standard Expectations •The technician was

Experience Detractors sincerely concerned
and apologetic about
•Only one local my problem
•I had to call more number needs to be
than once to get dialed •He asked intelligent
through questions that
•I never get a busy allowed me to feel
•A recording spoke to signal confident in his
me rather than a abilities
person •I get a human being
to answer my call Best
•The technician
•While on hold, I get Better quickly and he or she offered various times
silence, and wonder is pleasant and to have work done to
if I am disconnected responsive to my suit my schedule
•The technician problem
•Ways to avoid future
sounded like he was •A timely resolution to problems were
reading a form of my problem is offered suggested
routine questions
•The technician is able
•The technician to explain to me what
sounded uninterested I can expect to
•I felt the technician happen next
rushed me 81
81
Documents for Services
 High levels of customer interaction

necessitates different
documentation
 Often explicit job instructions
 Scripts and storyboards are other
techniques
82
82
41
9/21/2021
First Bank Corp. Drive-up

Teller Service Guidelines
 Be especially discreet when talking to the customer
through the microphone.
 Provide written instructions for customers who must fill out
forms you provide.
 Mark lines to be completed or attach a note with
instructions.
 Always say “please” and “thank you” when speaking
through the microphone.
 Establish eye contact with the customer if the distance
allows it.
 If a transaction requires that the customer park the car
and come into the lobby, apologize for the inconvenience.
83
83
Application of Decision Trees

to Product Design
 Particularly useful when there are a series of
decisions and outcomes which lead to other
decisions and outcomes
 A graphical method for analyzing decision
situations that require a sequence of decisions
over time
State of nature
Chance event
Decision point
84
84
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Application of Decision Trees

to Product Design
Procedures
1. Include all possible alternatives and
states of nature - including “doing
nothing”
2. Enter payoffs at end of branch
3. Determine the expected value of each
branch (EV) and “prune”/cut out the tree
to find the alternative with the best
expected value
85
85
Example
(.4)  Favorable conditions
Purchase CAD
High sales Sales: 25,000 processors
 Unfavorable conditions
(.6) Low sales  sales: 8,000 processors
Hire and train engineers  Price: $100 for each
(.4)  Cost for CAD equipment:

High sales $ 500,000
 Cost for hiring/training:

(.6) $ 375,000
Low sales
 Manufacturing cost
Do nothing
+ without CAD: $ 50
+ with CAD: $ 40 86
86
43
9/21/2021
Example
$2,500,000 Revenue
(.4) - 1,000,000 Mfg cost ($40 x 25,000)
Purchase CAD - 500,000 CAD cost
High sales
$1,000,000 Net
$800,000 Revenue
(.6) Low sales - 320,000 Mfg cost ($40 x 8,000)
- 500,000 CAD cost
Hire and train engineers - $20,000 Net loss
(.4)
High sales
EMV (purchase CAD system) = (.4)($1,000,000) + (.6)(- $20,000)
(.6)
Low sales
Do nothing
87
87
Decision Tree Example

$2,500,000 Revenue
(.4) - 1,000,000 Mfg cost ($40 x 25,000)
$388,000 High sales
$1,000,000 Net
$800,000 Revenue
- 500,000 CAD cost
(.4)
High sales
EMV (purchase CAD system) = (.4)($1,000,000) + (.6)(- $20,000)
= $388,000
(.6)
Low sales
Do nothing
88
88
44
9/21/2021
Example
$2,500,000 Revenue
(.4) - 1,000,000 Mfg cost ($40 x 25,000)
$388,000 High sales
$1,000,000 Net
$800,000 Revenue
- 500,000 CAD cost
$365,000
$2,500,000 Revenue
(.4) - 1,250,000 Mfg cost ($50 x 25,000)
High sales - 375,000 Hire and train cost
$875,000 Net
$800,000 Revenue
(.6) - 400,000 Mfg cost ($50 x 8,000)
Low sales - 375,000 Hire and train cost
Do nothing $0 $25,000 Net
$0 Net 89
89
Transition to Production
 Know when to move to production
• Product development can be viewed as
evolutionary and never complete
• Product must move from design to production
in a timely manner
 Most products have a trial production period
to insure producibility
• Develop tooling, quality control, training
• Ensures successful production
90
90
45
9/21/2021
Transition to Production
 Responsibility must also transition as the
product moves through its life cycle
• Line management takes over from design
 Three common approaches to managing
transition
• Project managers
• Product development teams
• Integrate product development and
manufacturing organizations
91
91
46
10/26/2021
Chapter 6
Managing Quality
2 Learning Objectives
When you complete this lecture you should be
able to:
1. Define quality and TQM
2. Describe the ISO international quality
standards
3. Explain what Six Sigma is
4. Explain how benchmarking is used in TQM
5. Explain quality robust products and
Taguchi concepts
6. Use the seven tools of TQM
1
10/26/2021
Managing Quality Provides a

3
Competitive Advantage
Arnold Palmer Hospital
 Deliver over 16,000 babies annually
 Virtually every type of quality tool is
employed
• Continuous improvement
• Employee empowerment
• Benchmarking
• Just-in-time
• Quality tools as Pareto charts and
flowchart
4
Quality and Strategy
An operations manager’s objective is

to build a total quality management
system that identifies and satisfies
customer needs
2
10/26/2021
5 Quality and Strategy

 Managing quality supports
differentiation, low cost, and
response strategies
 Quality helps firms increase sales
and reduce costs
 Building a quality organization is a
demanding task
Two Ways Quality

6 Improves Profitability
Figure 6.1
Sales Gains via

 Improved response
 Flexible pricing
 Improved reputation
Improved Increased
Quality Profits
Reduced Costs via
 Increased productivity
 Lower rework and scrap costs
 Lower warranty costs
3
10/26/2021
The Flow of Activities

7
Organizational Practices
Leadership, Mission statement, Effective operating
procedures, Staff support, Training
Yields: What is important and what is to be
accomplished
Quality Principles
Customer focus, Continuous improvement,
Benchmarking, Just-in-time, Tools of TQM
Yields: How to do what is important and to be
accomplished
Employee Fulfillment
Empowerment, Organizational commitment
Yields: Employee attitudes that can accomplish
what is important
Customer Satisfaction
Winning orders, Repeat customers
Figure 6.2 Yields: An effective organization with
a competitive advantage
8 Defining Quality
The totality of features and characteristics
of a product or service that bears on its
ability to satisfy stated or implied needs
American Society for Quality
A degree or level of excellence

Oxford American Dictionary
The ability of a product or service to

meet customer needs
4
10/26/2021
9 Different Views
 User-based – better performance,
more features
 Manufacturing-based – conformance
to standards, making it right the first
time
 Product-based – specific and
measurable attributes of the product
10 Implications of Quality
1. Company reputation
 Perception of new products
 Employment practices
 Supplier relations
2. Product liability
 Reduce risk
3. Global implications
 Improved ability to compete
10
5
10/26/2021
11 Key Dimensions of Quality
 Performance  Durability
 Features  Serviceability
 Reliability  Aesthetics
 Conformance  Perceived quality
 Value
11
12
Malcom Baldrige National
Quality Award
 Established in 1988 by the U.S. government
 Designed to promote TQM practices
 Recent winners include
• Lockheed Martin Missiles and Fire Control, MESA
Products Inc., North Mississippi Health Services,
City of Irving, Concordia Publishing House, Henry Ford
Health System, MEDRAD, Nestlé Purina PetCare Co.,
Montgomery County Public Schools
12
6
10/26/2021
13 Baldrige Criteria
Applicants are evaluated on:
Categories Points
Leadership 120
Strategic Planning 85
Customer & Market Focus 85
Measurement, Analysis, and 9
0 Knowledge Management
Workforce Focus 85
Process Management 85
Results 450
13
14 Costs of Quality (COQ)

 Prevention costs - reducing the
potential for defects
 Appraisal costs - evaluating products,
parts, and services
 Internal failure - producing defective
parts or service before delivery
 External costs - defects discovered
after delivery
 Making “it right at the first time”

14
7
10/26/2021
15
Costs of Quality
Total Total Cost

Cost
External Failure
Internal Failure
Prevention
Appraisal
Quality Improvement
15
16
Takumi
A Japanese character that

symbolizes a broader
dimension than quality,
a deeper process than
education, and a more
perfect method than
persistence
16
8
10/26/2021
17 Leaders in Quality Management

TABLE 6.1 Leaders in the Field of Quality Management
LEADER PHILOSOPHY/CONTRIBUTION
W. Edwards Deming Deming insisted management accept responsibility for building

good systems. The employee cannot produce products that on
average exceed the quality of what the process is capable of
producing. His 14 points for implementing quality improvement
are presented in this chapter.
Joseph M. Juran A pioneer in teaching the Japanese how to improve quality,

Juran believed strongly in top-management commitment,
support, and involvement in the quality effort. He was also a
believer in teams that continually seek to raise quality standards.
Juran varies from Deming somewhat in focusing on the
customer and defining quality as fitness for use, not necessarily
the written specifications.
17
Leaders in Quality Management

18
TABLE 6.1 Leaders in the Field of Quality Management
LEADER PHILOSOPHY/CONTRIBUTION
Amarnd Feigenbaum His 1961 book Total Quality Control laid out 40 steps to quality
improvement processes. He viewed quality not as a set of tools
but as a total field that integrated the processes of a company. His
work in how people learn from each other’s successes led to the
field of cross-functional teamwork.
Philip B. Crosby Quality Is Free was Crosby’s attention-getting book published in

1979. Crosby believed that in the traditional trade-off between the
cost of improving quality and the cost of poor quality, the cost of
poor quality is understated. The cost of poor quality should include
all of the things that are involved in not doing the job right the first
time. Crosby coined the term zero defects and stated, “There is
absolutely no reason for having errors or defects in any product or
service.”
18
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19
Ethics and Quality Management
 Operations managers must deliver healthy,

safe, quality products and services
 Poor quality risks injuries, lawsuits, recalls,
and regulation
 Organizations are judged by how they
respond to problems
 All stakeholders much be considered
19
ISO 9000 International Quality

20
Standards
 International recognition
 Encourages quality management procedures,
detailed documentation, work instructions, and
recordkeeping
 2009 revision emphasized sustained success
 Over one million certifications in 178 countries
 Critical for global business
 ISO 14000 series

• Environmental management standard
• 5 Core Elements: Environmental Mngt, Auditing,
Performance evaluation, Labeling, Life cycle
assessment
20
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ISO 9000 International Quality

21
Standards
 Management principles
• Top management leadership

• Customer satisfaction
• Continual improvement
• Involvement of people
• Process analysis
• Use of data-driven decision making
• A systems approach to management
• Mutually beneficial supplier relationships
21
ISO 9000 Certification,

222- Implications, and Registrars
22
 ISO 9001:2008 - only

standard that carries
third- party certification
 Many overseas
companies will not do
business with a supplier
unless it has ISO 9000
certification
 ISO 9000 accreditation
 ISO registrars
22
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ISO 9000 International Quality Certification
23
24 Total Quality Management
 Encompasses entire organization

from supplier to customer
 Stresses a commitment by
management to have a continuing,
companywide drive toward excellence
in all aspects of products and services
that are important to the customer
24
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Achieving TQM
25
Effective Customer
Business Satisfaction
Employee Attitudes
Fulfillment (e.g., Commitment)
Quality How to Do
Principles
What to Do
Organizational
Practices
25
26
Deming’s 14 Points
TABLE 6.2 Deming’s 14 Points for Implementing Quality Improvement
1. Create consistency of purpose

2. Lead to promote change
3. Build quality into the product; stop depending on
inspections to catch problems
4. Build long-term relationships based on performance
instead of awarding business on price
5. Continuously improve product, quality, and service
6. Start training
7. Emphasize leadership
26
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Deming’s 14 Points
27
TABLE 6.2 Deming’s 14 Points for Implementing Quality Improvement
8. Drive out fear

9. Break down barriers between departments
10. Stop haranguing workers
11. Support, help, and improve
12. Remove barriers to pride in work
13. Institute a vigorous program of education and self-
improvement
14. Put everyone in the company to work on the
transformation
27
28 Seven Concepts of TQM
1. Continuous improvement
2. Six Sigma
3. Employee empowerment
4. Benchmarking
5. Just-in-time (JIT)
6. Taguchi concepts
7. Knowledge of TQM tools
28
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29 Continuous Improvement
 Never-ending process of continual

improvement
 Covers people, equipment,
suppliers, materials, procedures
 Every operation can be improved
 The end goal is perfection
29
30
Shewhart’s PDCA Model
Figure 6.3
4. Act 1.Plan
Implement Identify the
the plan, pattern and
document make a plan
3. Check 2. Do
Is the plan Test the
working? plan
30
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31
Shewhart’s PDCA Model (contd.)
Continuous quality improvement with PDCA
31
32 Continuous Improvement
 Kaizen describes the ongoing process

of unending improvement
 TQM and zero defects also used to
describe continuous improvement
32
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33 Six Sigma
 Two meanings
 Statistical definition of a process that is
99.9997% capable, 3.4 defects per million
opportunities (DPMO)
 A program designed to reduce defects,
lower costs, and improve customer
satisfaction
 Comprehensive system (strategy, discipline,
set of tools) for achieving and sustaining
business success
33
34 Six Sigma
Lower limits Upper limits

2,700 defects/million
3.4 defects/million
Mean
±3
Figure 6.4 ±6
34
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35
Six Sigma Program
 Originally developed by Motorola,
adopted and enhanced by Honeywell
and GE
 Highly structured approach to process
improvement
• A strategy
• A discipline – DMAIC
(Define- Measure- Analyze-
Improve- Control)
• A set of 7 tools
6
35
Six Sigma
36
1. Defines the project’s purpose, scope, and outputs,

identifies the required process information keeping
in mind the customer’s definition of quality
2. Measures the process and collects data
3. Analyzes the data ensuring
repeatability and reproducibility DMAIC Approach
4. Improves by modifying or
redesigning existing
processes and procedures
5. Controls the new process
to make sure performance
levels are maintained
36
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37
Six Sigma Implementation
 Emphasize defects per million opportunities as a

standard metric
 Provide extensive training
 Focus on corporate sponsor support (Champions)
 Create qualified process improvement experts
(Black Belts, Green Belts, etc.)
 Set stretch objectives
This cannot be accomplished without major

commitment from top level management
37
38
Employee Empowerment
 Getting employees involved in product and
process improvements
• 85% of quality problems are due
to process and material
 Techniques
1. Build communication networks
that include employees
2. Develop open, supportive supervisors
3. Move responsibility to employees
4. Build a high-morale organization
5. Create formal team structures
38
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39
Quality Circle
 Group of employees who meet regularly
to solve problems
 Trained in planning, problem solving, and
statistical methods
 Often led by a facilitator
 Very effective when done properly
39
Quality Circle
40
Organization
8-10 members
Same area
Supervisor/moderator
Training
Presentation Group processes
Implementation Data collection
Monitoring Problem analysis
Problem
Solution Identification
Problem results List alternatives
Consensus
Brainstorming
Problem Analysis
Cause and effect
Data collection and an
alysis
40
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41
Benchmarking
 Selecting best practices to use as a standard
for performance
 Steps:
1. Determine what to
benchmark
2. Form a benchmark team
3. Identify benchmarking partners
4. Collect and analyze benchmarking
information
5. Take action to match or exceed the
benchmark
41
Best Practices for Resolving

42
Customer Complaints
Table 6.3
BEST PRACTICE JUSTIFICATION
Make it easy for clients to It is free market research

complain
Respond quickly to complaints It adds customers and loyalty
Resolve complaints on first It reduces cost

contact
Use computers to manage Discover trends, share them, and
complaints align your services
Recruit the best for customer It should be part of formal training

service jobs and career advancement
42
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43 Internal Benchmarking
 When the organization is large enough

 Data more accessible
 Can and should be established in a variety of
areas
43
44 Just-in-Time (JIT)
 JIT designed to produce or deliver

goods just as they are needed
 Relationship to quality:
• JIT cuts the cost of quality
• JIT improves quality
• Better quality means less inventory and
better, easier-to-employ JIT system
44
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45
Just-in-Time (JIT)
 ‘Pull’ system of production scheduling
including supply management
• Production only when signaled
 Allows reduced inventory levels
• Inventory costs money and hides
process and material problems
 Encourages improved process and
product quality
45
46
Just-In-Time (JIT) Example
Work in process
inventory level
(hides problems)
Unreliable Capacity
Vendors Scrap Imbalances
46
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47 Just-In-Time (JIT) Example
Reducing inventory reveals

problems so they can be solved
Unreliable Capacity
Vendors Scrap Imbalances
47
48 Taguchi Concepts
 Engineering and experimental design
methods to improve product and
process design
 Identify key component and process
variables affecting product variation
 3 Taguchi Concepts
 Quality robustness
 Quality loss function
 Target-oriented quality
48
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Quality Robustness
 Ability to produce products uniformly

in adverse manufacturing and
environmental conditions
 Remove the effects of adverse
conditions
 Small variations in materials and
process do not destroy product
quality
49
50
Quality Loss Function (QLF)
 Shows that all costs increase as the

product moves away from what the
customer wants
 Costs include: customer
dissatisfaction, warranty
and service, internal
inspection, scrap and repair, costs to
society
 Traditional conformance-oriented
specifications are too simplistic
50
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Quality Loss Function

51
Quality loss function
High loss
L = D2C
Unacceptable where
Loss (to L = loss to society
producing Poor
organization, D = distance from
customer, and Fair target value
society) Good C = cost of deviation
Best
Low loss Target-oriented quality yi
elds more product in the
“best” category
Target-oriented quality br
ings product toward th
Frequency e target value
Conformance-oriented
quality keeps products
within 3 standard
deviations
Lower Target Upper
Specification
Distribution of specifications for products produced

51
Target Specification Example

52
 A study found U.S. consumers preferred Sony TV’s

made in Japan to those made in the U.S. Both factories
used the same designs & specifications
 The difference in quality goals made the difference in
consumer preferences
Freq. Japanese factory

(Target-oriented)
U.S. factory
(Conformance- o
riented)
X
LSL Target USL
Distribution of specifications for products produced
52
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53
Tools of TQM
 Tools for Generating Ideas
 Check sheets
 Scatter diagrams
 Cause-and-effect diagrams
 Tools to Organize the Data
 Pareto charts
 Flowcharts
 Tools for Identifying Problems
 Histogram
 Statistical process control chart
53
Seven Tools of TQM

54
54
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55 Seven Tools of TQM
(a) Check Sheet: An organized method of

recording data
Hour
Defect 1 2 3 4 5 6 7 8
A /// / / / / /// /
B // / / / // ///
C / // // ////
Figure 6.6
55
56
Seven Tools of TQM
(b)Scatter Diagram: A graph of the value of one

variable vs. another variable
Productivity
Absenteeism Figure 6.6
56
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(c) Cause-and-Effect Diagram: A tool that

identifies process elements/causes that
might effect an outcome (Fishbone
diagram)
Cause
Materials Methods
Effect
Figure 6.6
Manpower Machinery
57
58
Seven Tools of TQM
(d) Pareto Chart: A graph to identify and plot

problems or defects in descending order of
frequency
Frequency
Percent
Figure 6.6
A B C D E
58
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(e) Flowchart (Process Diagram): A chart

that describes the steps in a process
Figure 6.6
59
(f) Histogram: A distribution showing the

frequency of occurrences of a variable
Distribution
Frequency
Figure 6.6
Repair time (minutes)
60
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(g)Statistical Process Control Chart: A chart

with time on the horizontal axis to plot values
of a statistic
Upper control limit (UCL)
Target value
Lower control limit (LCL)
Time
Figure 6.6
61
Cause-and-Effect Diagrams
62
Material Method
(ball) (shooting process)
Grain/Feel Aiming point
(grip)
Size of ball
Air pressure Bend knees
Hand position
Balance
Lopsidedness
Follow-through
Missed
Training Rim size
free-throws
Conditioning Motivation Rim height
Consistency Rim alignment Backboard

stability
Concentration
Machine
Manpower Figure 6.7
(hoop &
(shooter)
backboard)
62
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Pareto Charts
63
Pareto Analysis of Hotel Complaints
Data for October

– 100
70 – – 93
– 88
60 –
Frequency (number)
54
Cumulative percent
– 72
50 –
40 –
Number of
30 –
occurrences
20 –
12
10 –
4 3 2
0 –
Room svc Check-in Pool hours Minibar Misc.
72% 16% 5% 4% 3%
Causes and percent of the total
63
64
Flow Charts
MRI Flowchart
1. Physician schedules MRI 7. If unsatisfactory, repeat

2. Patient taken to MRI 8. Patient taken back to room
3. Patient signs in 9. MRI read by radiologist
4. Patient is prepped 10. MRI report transferred to
5. Technician carries out MRI physician
6. Technician inspects film 11. Patient and physician discuss
8
80%
1 2 3 4 5 6 7 11
9 10
20%
64
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65
Statistical Process Control (SPC)
 Uses statistics and control charts to tell

when to take corrective action
 Drives process improvement
 Four key steps
• Measure the process
• When a change is indicated, find the
assignable cause
• Eliminate or incorporate the cause
• Restart the revised process
65
66
An SPC/Control Chart
Plots the percent of free throws missed
20% Upper control limit
10% Coach’s target value
0% | | | | | | | | | Lower control limit

1 2 3 4 5 6 7 8 9
Game number
66
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67 Inspection
 Involves examining items to see if an

item is good or defective
 Detect a defective product
 Does not correct deficiencies in
process or product – an audit
 It is expensive
 Issues
 When to inspect
 Where in process to inspect
67
68
When and Where to Inspect
1. At the supplier’s plant while the supplier is
producing
2. At your facility upon receipt of goods from the s
upplier
3. Before costly or irreversible processes
4. During the step-by-step production process
5. When production or service is complete
6. Before delivery to your customer
7. At the point of customer contact
68
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69
Inspection
 Many problems
 Worker fatigue
 Measurement error
 Process variability
 Cannot inspect quality into a product
 Robust design, empowered employees,
and sound processes are better
solutions
69
69
70 Source Inspection
 Also known as source control

 The next step in the process is
your customer
 Ensure perfect product
to your customer
70
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71 Source Inspection
 Poka-yoke is the concept of

foolproof devices or techniques
designed to pass only acceptable
product
 Checklists ensure
consistency and
completeness
71
Service Industry Inspection

72
TABLE 6.4 Examples of Inspection in Services
ORGANIZATION WHAT IS INSPECTED STANDARD

Jones Law Office Receptionist performance Phone answered by the second
ring
Billing Accurate, timely, and correct
format
Attorney Promptness in returning calls
Hard Rock Hotel Reception desk Use customer’s name

Doorman Greet guest in less than 30
seconds
Room All lights working, spotless
bathroom
Minibar Restocked and charges
accurately posted to bill
72
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73

Arnold Palmer Hospital Billing Accurate, timely, and correct
format
Pharmacy Prescription accuracy,
inventory accuracy
Lab Audit for lab-test accuracy
Nurses Charts immediately updated
Data entered correctly and
Admissions completely
Olive Garden Busboy Serves water and bread within
Restaurant 1 minute
Busboy Clears all entrée items and
crumbs prior to dessert
Waiter Knows and suggest specials,
desserts
73
74
Nordstrom Department Display areas Attractive, well-organized,

Store stocked, good lighting
Stockrooms Rotation of goods, organized,
clean
Salesclerks Neat, courteous, very
knowledgeable
74
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75
Attributes Versus Variables
 Attributes
 Items are either good or bad, acceptable or
unacceptable
 Does not address degree of failure
 Variables
 Measures dimensions such as weight, speed,
height, or strength
 Falls within an acceptable range
 Use different statistical techniques
75
76 TQM In Services
 Service quality is more difficult to

measure than the quality of goods
 Service quality perceptions depend on
1. Intangible differences between
products
2. Intangible expectations customers
have of those products
76
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77 Service Quality
The Operations Manager must

recognize:
 The tangible component of many
services is important
 The service process is important
 The service is judged against the
customer’s expectations
 Exceptions will occur
77
Service Specifications
78
78
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Determinants of Service Quality

79
Table 6.5
Reliability involves consistency of performance and dependability
Responsiveness concerns the willingness or readiness of employees to provide service
Competence means possession of the required skills and knowledge to perform the
service
Access involves approachability and ease of contact

Courtesy involves politeness, respect, consideration, and friendliness
Communication means keeping customers informed and listening to them
Credibility involves trustworthiness, believability, and honesty
Security is the freedom from danger, risk, or doubt
Understanding/knowing the customer involves making the effort to understand the

customer’s needs
Tangibles include the physical evidence of the service
79
80 Service Recovery Strategy
 Managers should have a plan for

when services fail
 Marriott’s LEARN routine
 Listen
 Empathize
 Apologize
 React
 Notify
80
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81 Assignment for Chap6
1. What is quality?
2. Is high quality synonymous with high price of
high cost? Explain and give example.
3. How to measure the quality? (Hints: Develop a
list dimensions of quality)
4. Improving quality at a university does not seem
to be as straightforward as it might be for a
manufacturing firm. So how can a university
control the quality of its output? (That is, its
graduates?)
81
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Chapter 7
Process Design
1
© 2006 Prentice Hall, Inc.
Learning Objectives
should be able to:
1. Describe four process strategies
2. Compute crossover points for different
processes
3. Use the tools of process analysis
4. Describe customer interaction in service
processes
5. Identify recent advances in production
technology 2
1
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Harley-Davidson
Repetitive manufacturing works
 The only leading U.S. motorcycle company
 Emphasizes quality and lean
manufacturing
 Materials as needed system
 Many variations possible
 Tightly scheduled repetitive production
line
© 2011 Pearson Education, Inc. 3
publishing as Prentice Hall
Process Flow Diagram

Frame tube Frame-building Frame Hot-paint
bending work cells machining frame painting
THE ASSEMBLY LINE
TESTING Engines and
Incoming parts transmissions
28 tests
Arrive on a JIT
Air cleaners Oil tank work cell schedule from a
10-station work
cell in
Fluids and mufflers Shocks and forks Milwaukee
Fuel tank work cell Handlebars
Wheel work cell Fender work cell

Roller testing
Crating
2
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Process Design
The objective is to create a process

to produce products that meets
customer requirements within cost
and other managerial constraints
Process Strategy
 Approach to transform resources into goods
and services
 How to produce a product or provide a service
that
 Meets or exceeds customer requirements
 Meets cost and managerial goals
 Has long term effects on
 Efficiency and production flexibility
 Costs and quality
6
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Process Selection and System Design
Facilities and
Forecasting Capacity Equipment
Planning
Product and Layout

Service Design
Process
Technological Selection Work
Change Design
Four Process Strategy

Four basic strategies
1. Process focus
2. Repetitive focus
3. Product focus
4. Mass customization
Within these basic strategies there are

many ways they may be implemented
8
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Process, Volume, and Variety

Figure 7.1
Volume
Low Repetitive High
Volume Process Volume
High Variety
one or few units Process Focus Mass Customization
per run, high projects, job shops (difficult to achieve, but
variety (machine, print, huge rewards)
(allows hospital, restaurant) Dell Computer
customization) Arnold Palmer
Variety (flexibility)
Hospital
Changes in
Modules
modest runs,
standardized Repetitive
modules (autos, motorcycles,
home appliances)
Changes in Harley Davidson
Attributes (such Product Focus
as grade, quality, (commercial baked
size, thickness, Poor Strategy goods, steel, glass,
etc.) (Both fixed and beer)
long runs only variable costs are Frito-Lay
high) 9
Process Focus
 Facilities are organized around specific
activities or processes (intermittent process/
job shop)
 General purpose equipment and skilled
personnel
 High degree of product flexibility
 Typically high costs and low equipment
utilization
 Product flows may vary considerably making
planning and scheduling a challenge
10
10
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Many inputs
Process Focus (surgeries, sick patients,
baby deliveries, emergencies)
Many departments and

many routings
(low volume, high variety,

intermittent processes)
Arnold Palmer Hospital
Many different outputs
Figure 7.2(a) (uniquely treated patients)
11
11
Repetitive Focus
 Facilities often organized as assembly/
production lines
 Characterized by modules with parts
and assemblies made previously
 Modules may be combined for many
output options
 Less flexibility than process-focused
facilities but more efficient
12
12
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Raw materials and

module inputs
Repetitive (multiple engine models,
wheel modules)
Focus
Few
modules
(modular)
Harley Davidson
Figure 7.2(b) Modules combined for many

Output options
(many combinations of motorcycles) 13
13
Product Focus
 Facilities are organized by product:
continuous process
 High volume but low variety of
products
 Long, continuous production runs
enable efficient processes
 Typically high fixed cost but low
variable cost
 Generally less skilled labor 14
14
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Few Inputs
Product Focus (corn, potatoes,
water, seasoning)
(high-volume, low-variety,
continuous process)
Frito-Lay
Output variations in size,

Figure 7.2(c) shape, and packaging
(3-oz, 5-oz, 24-oz package
labeled for each material) 15
15
Mass Customization
 The rapid, low-cost production of

goods and service to satisfy
increasingly unique customer desires
 Combines the flexibility of a
process focus
with the efficiency
of a product focus
16
16
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Mass Customization
TABLE 7.1 Mass Customization Provides More Choices Than Ever
NUMBER OF CHOICES
ITEM 1970s 21ST CENTURY
Vehicle styles 18 1,212

Bicycle types 8 211,000
Software titles 0 400,000
Web sites 0 255,000,000

Movie releases per year 267 744
New book titles 40,530 300,000
Houston TV channels 5 185
Breakfast cereals 160 340
Items (SKUs) in supermarkets 14,000 150,000
17
LCD TVs 0 102
17
Many parts and

Mass component inputs
(chips, hard drives,
Customization software, cases)
Many modules
(high-volume, high-variety)
Dell Computer
Many output versions

(custom PCs and notebooks) 18
18
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Mass Customization
 Imaginative product design

 Flexible process design
 Tightly controlled inventory
management
 Tight schedules
 Responsive supply-chain partners
19
19
Requirements to achieve
Mass Customization
Repetitive Focus
Flexible people
And equipment
Supportive
supply Modular techniques
chains
Mass Customization
Effective Rapid
scheduling throughput
techniques techniques
Process-Focused Product-Focused
High variety, low volume Low variety, high volume
Low utilization (5% to 25%) High utilization (70% to 90%)
General-purpose equipment Specialized equipment
20
20
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Comparison of Processes
TABLE 7.2 Comparison of the Characteristics of Four Types of Processes
PRODUCT MASS
PROCESS FOCUS REPETITIVE FOCUS CUSTOMIZATION
(LOW-VOLUME, FOCUS (HIGH-VOLUME, (HIGH-VOLUME,
HIGH-VARIETY) (MODULAR) LOW-VARIETY) HIGH-VARIETY)
1. Small quantity 1. Long runs, 1. Large 1. Large quantity

and large usually a quantity and and large
variety of standardized small variety variety of
products product from of products products
modules
2. Broadly 2. Moderately 2. Less broadly 2. Flexible

skilled trained skilled operators
operators employees operators
21
MASS
PROCESS FOCUS REPETITIVE PRODUCT FOCUS CUSTOMIZATION
3. Instructions for 3. Few changes 3. Standardized 3. Custom orders

each job in the job requiring many
instructions instructions job instructions
4. High inventory 4. Low inventory 4. Low inventory 4. Low inventory

relative to the
value of the
product
22
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PRODUCT MASS
5. Finished 5. Finished 5. Finished 5. Finished goods

goods are goods are goods are are build-to-
made to order made to made to a order (BTO)
and not frequent forecast and
stored forecasts stored
6. Scheduling is 6. Scheduling is 6. Scheduling is 6. Sophisticated

complex routine routine scheduling
accommodates
custom orders
23
PRODUCT MASS
7. Fixed costs 7. Fixed costs 7. Fixed costs 7. Fixed costs

are low and are dependent are high and tend to be high
variable costs on flexibility of variable costs and variable
high the facility low costs low
24
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Crossover Chart Example

 Evaluate three different accounting software
products
 Calculate crossover points between software A
and B and between software B and C
DOLLARS REQUIRED PER

TOTAL FIXED COST
ACCOUNTING REPORT
Software A $200,000 $60

Software B $300,000 $25
Software C $400,000 $10
25
25
Crossover Chart Example

200,000 + ( 60)V = 300,000 + ( 25)V
1 1
35V1 = 100,000
V1 = 2,857
 Software A is most economical from 0 to 2,857 reports
( )
300,000 + 25 V2 = 400,000 + 10 V2( )
15V2 = 100,000
V2 = 6,666
 Software B is most economical from 2,857 to
6,666 reports
26
26
13
9/28/2021
Crossover Charts
Variable
costs
Variable Variable
$ costs $ costs $
Fixed costs Fixed costs
Fixed costs
Low volume, high variety Repetitive High volume, low variety
Process A Process B Process C
400,000
300,000
200,000
Fixed cost Fixed cost Fixed cost
Figure 7.3 Process A Process B Process C
(2,857) V1 V2 (6,666) Volume 27
27
Focused Processes
 Focus brings efficiency
 Focus on depth of product line rather
than breadth
 Focus can be:
• Customers
• Products
• Service
• Technology
28
28
14
9/28/2021
Selection of Equipment
 Decisions can be complex as alternate
methods may be available
 Important factors may be
• Cost • Quality
• Cash flow • Capacity
• Market stability • Flexibility
29
29
Equipment and Technology
 Possible competitive advantage

 Flexibility may be a competitive
advantage
 May be difficult and expensive and
may require starting over
 Important to get it right
30
30
15
9/28/2021
Changing Processes
 Difficult and expensive

 May mean starting over
 Process strategy determines
transformation strategy for an
extended period
 Important to get it right at the first
time
31
31
Process Analysis and Design

 Is the process designed to achieve a
competitive advantage?
 Does the process eliminate steps that do
not add value?
 Does the process maximize customer
value?
 Will the process win orders?
32
32
16
9/28/2021
Process Analysis Tools

1. Flow Charts - Shows the movement of
materials, product or people
2. Time-Function Mapping/ process mapping
- Shows flows and time frame
3. Value Stream Mapping - Shows flows and
time and value added beyond the immediate
organization
4. Process Charts - Uses symbols to show key
activities
5. Service Blueprinting - focuses on
customer/provider interaction
33
33
“Baseline” Time-Function Map

Order Receive
Customer
product product
Process
Sales order
Order
Production Wait
control
Product
Order
Plant A Print
Product
WIP
Warehouse Wait Wait Wait

Product
WIP
WIP
WIP
Plant B Extrude
Transport Move Move
12 days 13 days 1 day 4 days 1 day 10 days 1 day 0 day 1 day

Figure 7.4(a) 52 days 34
34
17
9/28/2021
“Target” Time-Function Map

Order Receive
Customer
product product
Process
Sales order
Product
Order
Production
Wait
control
Order
WIP
Plant Print Extrude
Product
Warehouse Wait
Product
Transport Move
1 day 2 days 1 day 1 day 1 day

6 days
Figure 7.4(b)
35
35
Process Analysis and Design
 Value-Stream Mapping
• Where value is added in the entire
production process, including the supply
chain
• Extends from the customer back to the
suppliers
36
36
18
9/28/2021
Value-Stream Mapping
1. Begin with symbols for customer, supplier,
and production to ensure the big picture
2. Enter customer order requirements
3. Calculate the daily production
requirements
4. Enter the outbound shipping requirements
and delivery frequency
5. Determine inbound shipping method and
delivery frequency
37
37
6. Add the process steps (i.e., machine,
assemble) in sequence, left to right
7. Add communication methods, add their
frequency, and show the direction with
arrows
8. Add inventory quantities (shown with I )
between every step of the entire flow
9. Determine total working time (value-added
time) and delay (non-value-added time)
38
38
19
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39
39
Process Chart
40
40
20
9/28/2021
Service Blueprinting
 Focuses on the customer and

provider interaction
 Defines three levels of interaction
 Each level has different management
issues
 Identifies potential failure points
41
41
Service Blueprint
Personal Greeting Service Diagnosis Perform Service Friendly Close
Level Customer arrives

for service. Customer departs
#1
(3 min)
CUSTOMER IS IN CONTROL
F
Determine Notify Customer pays bill.
specifics. (4 min)
Warm greeting customer
(5 min)
and obtain No and recommend
an alternative
F
service request.
(10 sec) provider.
Standard Can F
Level request. (7 min)
service be
#2 (3 min) done and does Notify
Direct customer customer No customer the
to waiting room. approve? car is ready.
(5 min) (3 min)
CUSTOMER INTERACT WITH SERVICE PROVIDER

F F F F
Yes Yes
Perform
Level required work. F Prepare invoice.
#3 (varies) (3 min)
Figure 7.7 42
SERVICE IS REMOVED FROM CUSTOMER’S CONTROL
42
21
9/28/2021
Special Considerations for

Service Process Design
 Some interaction with customer is
necessary, but this often affects
performance adversely
 The better these interactions are
accommodated in the process design, the
more efficient and effective the process
 Find the right combination of cost and
customer interaction
43
43
Service Process Matrix

Degree of Customization
Figure 7.8 Low High
Mass Service Professional Service
Private Traditional
banking orthodontics
Commercial
banking
General-
High purpose law firms
Full-service
stockbroker
Degree of Labor
Digital
Boutiques orthodontics
Retailing
Law clinics
Service Factory Service Shop
Limited-service Specialized
stockbroker hospitals
Warehouse and Fast-food Fine-dining
catalog stores restaurants Hospitals
Low restaurants
Airlines
No-frills
airlines
44
44
22
9/28/2021

Mass Service and Professional Service
 Labor involvement is high
 Selection and training highly important
 Focus on human resources
 Personalized services
Degree of Customization
Low High
Private banking
Traditional orthodontics
Commercial banking
High General-
purpose law firms
Full-service
stockbroker
Digital orthodontics
Boutiques
Retailing
Degree of Labor
Law clinics
Limited-service stockbroker Specialized hospitals
Warehouse and catalog

stores Fast-food restaurants
Fine-dining restaurants
Low
Hospitals
Airlines
No-frills airlines
45
45

Service Factory and Service Shop
 Automation of standardized services
 Restricted offerings
 Low labor intensity responds well to
process technology and scheduling
 Tight control required to maintain standards Degree of Customization
Low High
Private banking
Traditional orthodontics
Commercial banking
High General-
purpose law firms
Full-service
stockbroker
Digital orthodontics
Boutiques
Retailing
Degree of Labor
Law clinics
Limited-service stockbroker Specialized hospitals
Warehouse and catalog

stores Fast-food restaurants
Fine-dining restaurants
Low
Hospitals
Airlines
46
No-frills airlines
46
23
9/28/2021
Improving Service Productivity

TABLE 7.3 Techniques for Improving Service Productivity
STRATEGY TECHNIQUE EXAMPLE
Separation Structuring service so Bank customers go to a
customers must go where manager to open a new
the service is offered account, to loan officers for
loans, and to tellers for
deposits
Self-service Self-service so customers Supermarkets and

examine, compare, and department stores
evaluate at their own pace
Postponement Customizing at delivery Customizing vans at delivery
rather than at production
Focus Restricting the offerings Limited-menu restaurant
47
47
Improving Service Productivity

TABLE 7.3 Techniques for Improving Service Productivity
STRATEGY TECHNIQUE EXAMPLE
Modules Modular selection of Investment and insurance
service selection
Modular production Prepackaged food modules
in restaurants
Automation Separating services that Automatic teller machines
may lend themselves to
some type of automation
Scheduling Precise personnel Scheduling ticket counter
scheduling personnel at 15-minute
intervals at airlines
Training Clarifying the service Investment counselor,
options funeral directors
Explaining how to avoid After-sale maintenance
problems personnel
48
48
24
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Improving Service Processes
 Layout
 Product exposure, customer
education, product enhancement
 Human Resources
 Recruiting and training
 Impact of flexibility
49
49
Production Technology
1. Machine technology
2. Automatic identification
systems (AISs) and RFID
3. Process control
4. Vision systems
5. Robots
6. Automated storage and retrieval systems (ASRSs)
7. Automated guided vehicles (AGVs)
8. Flexible manufacturing systems (FMSs)
9. Computer-integrated manufacturing (CIM)
50
50
25
9/28/2021
Machine Technology
 Increased precision
 Increased productivity
 Increased flexibility
 Improved environmental impact
 Reduced changeover time
 Decreased size
 Reduced power requirements
51
51
Automatic Identification
Systems (AIS)
 Improved data acquisition
 Reduced data entry errors
 Increased speed
 Increased scope of
process automation
Bar codes and RFID 52
52
26
9/28/2021
Process Control
 The use of IT to control a physical process
 Real-time monitoring and control of processes
• Sensors collect data
• Devices read data
on periodic basis
• Measurements translated into
digital signals then sent to a
computer
• Computer programs analyze
the data
• Resulting output may take
numerous forms
53
53
Vision Systems
 Particular aid to inspection
 Consistently
accurate
 Never bored
 Modest cost
 Superior to
individuals performing the same tasks
54
54
27
9/28/2021
Robots
 Perform monotonous or dangerous
tasks
 Perform tasks
requiring significant
strength or
endurance
 Generally enhanced
consistency and
accuracy
55
55
Robotic
Surgery
56
56
28
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Automated Storage and

Retrieval Systems (ASRS)
 Automated placement and withdrawal of
parts and products in a warehouse
 Reduced errors and labor
 Particularly useful in inventory and test areas
of manufacturing firms
57
57
Automated Guided Vehicle

(AGV)
 Electronically guided and controlled carts
 Used for movement of products and/ or
individuals
58
58
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Flexible Manufacturing
Systems (FMSs)
 Central computer controls
both the workstation and the
material handling equipment
 Enhance flexibility and
reduced waste
 Can economically produce
low volume at high quality
 Reduced changeover time
and increased utilization
 Stringent communication
requirement between
components 59
59
Flexible Manufacturing System

Center computer
control room
Tools
Conveyor
Pallet
Machine
Load Unload
Finished
Parts Terminal goods 60
60
30
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Computer Integrated
Manufacturing (CIM)
 Extend flexible manufacturing
• Backwards to engineering and
inventory control
• Forward into warehousing and shipping
• Can also include financial and
customer service areas
• Reducing the distinction between low-
volume/high- variety, and high-
volume/low- variety production
61
61
Computer-
Integrated
Manufacturing
(CIM)
ASRS and AGVs
62
62
31
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63
Technology in Services
TABLE 7.4 Examples of Technology’s Impact on Services
SERVICE INDUSTRY EXAMPLE
Financial Services Debit cards, electronic funds transfer, ATMs,
Internet stock trading, on-line banking via cell
phone
Education Electronic bulletin boards, on-line journals,
WebCT, Blackboard, and smart phones
Utilities and government Automated one-man garbage trucks, optical mail
and bomb scanners, flood warning systems,
meters allowing homeowners to control energy
usage and costs
Restaurants and foods Wireless orders from waiters to kitchen, robot
butchering, transponders on cars that track sales
at drive-throughs
Communications Interactive TV, e-books via Kindle
64
64
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9/28/2021
Technology in Services
TABLE 7.4 Examples of Technology’s Impact on Services
SERVICE INDUSTRY EXAMPLE
Hotels Electronic check-in/check-out, electronic
key/lock systems, mobile Web bookings
Wholesale/retail trade Point-of-sale (POS) terminals, e-commerce,
electronic communication between store and
supplier, bar-coded data, RFID
Transportation Automatic toll booths, satellite-directed
navigation systems, Wi-Fi in automobiles
Health care Online patient-monitoring systems, online
medical information systems, robotic surgery
Airlines Ticketless travel, scheduling, Internet
purchases, boarding passes downloaded as
two-dimensional bar codes on smart phones
65
65
Process Redesign
 The fundamental rethinking of business
processes to bring about dramatic
improvements in performance
 Relies on reevaluating the purpose of the
process and questioning both the purpose and
the underlying assumptions
 Requires reexamination of the basic process
and its objectives
 Focuses on activities that cross functional lines
 Any process is a candidate for redesign
66
66
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Ethics and Environmentally

Friendly Processes
Reduce the negative impact
on the environment
 Encourage recycling
 Efficient use of resources
 Reduction of waste by-products
 Use less harmful ingredients
 Use less energy
67
67
Questions?
68
68
34
10/4/2021
Chapter 7S
Capacity Planning
Learning Objectives
When you complete this chapter, you should

be able to:
1. Define capacity
2. Determine design capacity, effective capacity,
and utilization
3. Perform bottleneck analysis
4. Compute break-even
5. Determine the expected monetary value
(EMV) of a capacity decision
6. Compute net present value - NPV 2
1
10/4/2021
Capacity
 The throughput or the number of units a facility
can hold, receive, store, or produce in a period of
time
 Determines fixed costs
 Determines if demand will be satisfied
 Three time horizons
Planning Over a Time Horizon

Figure S7.1
Time Horizon
Options for Adjusting Capacity
Long-range Add facilities

planning Add long lead time equipment *
Intermediate- Subcontract Add personnel
range Add equipment Build or use inventory
planning Add shifts
(aggregate
planning)
Schedule jobs
Short-range
planning
(scheduling)
* Schedule personnel
Allocate machinery
Modify capacity Use capacity
* Difficult to adjust capacity as limited options exist

4
2
10/4/2021
Standard capacity measures

System Standard Measures of Capacity
Hospital Patient days or inmate days /year
Airline Passengers/year, passenger miles/year,
or dollar volume/year
Oil refinery Barrels of oil/ day
Automobile manufacturing Automobiles/ day
Bank Transactions/ day
Gas station Gallons/ day
Restaurant Meals/ week
Truck Cubic yards (volume ) or tonnage
(weight)/day
Computer Computations/second
Production line Units/shift
Storage silo Tons/week
Reservoir Gallons/day
5
Design and Effective Capacity
 Design capacity : the maximum

theoretical output of a system
 Normally expressed as a rate
 Effective capacity : the capacity a firm
expects to achieve given current
operating constraints
 Often lower than design capacity (82%)
3
10/4/2021
Utilization and Efficiency
 Utilization is the percent of design capacity

actually achieved
Utilization = Actual Output/Design Capacity
 Efficiency is the percent of effective capacity

actually achieved
Efficiency = Actual Output/Effective Capacity
Both measures expressed as percentages

7
Bakery Example
Utilization = Actual Output/Design Capacity
Efficiency = Actual Output/Effective Capacity
Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
Utilization = 148,000/201,600 = 73.4%
Efficiency = 148,000/175,000 = 84.6%
4
10/4/2021
Bakery Example
Actual production last week = 148,000 rolls

Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Efficiency = 84.6%
Efficiency of new line = 75%
Expected Output = (Effective Capacity)(Efficiency)
= (175,000)(.75) = 131,250 rolls
Note: Expected Output (or Actual output) refers as rated capacity

9
Capacity and Strategy
 Capacity decisions
impact all 10 decisions
of operations
management as well as
other functional areas of
the organization
 Capacity decisions must
be integrated into the
organization’s mission
and strategy
10
10
5
10/4/2021
Capacity Considerations
1. Forecast demand accurately

2. Match technology increments and sales
volume
3. Find the optimum
operating size
(volume)
4. Build for change
11
11
Economies and Diseconomies of Scale

(sales per square foot)
Average unit cost
1,300 sq 8,000 sq
ft store 2,600 sq ft store
ft store
Economies Diseconomies
of scale of scale
1,300 2,600 8,000
Number of square feet in store
12
12
6
10/4/2021
Steps for Capacity Planning
1. Estimate future capacity requirements

2. Evaluate existing capacity
3. Identify alternatives
4. Conduct financial analysis
5. Assess key qualitative issues
6. Select one alternative
7. Implement alternative chosen
8. Monitor results
13
13
Managing Demand
 Demand exceeds capacity
 Curtail demand by raising prices, scheduling
longer lead time
 Long term solution is to increase capacity
 Capacity exceeds demand
 Stimulate market (price reductions or
aggressive marketing)
 Product changes
 Adjusting to seasonal demands
 Produce products with complimentary
demand patterns
14
14
7
10/4/2021
Complementary Demand Patterns
Figure S7.3
Combining both
demand patterns
reduces the
variation
4,000 –
Sales in units
Snowmobile
3,000 – motor sales
2,000 –
1,000 – Jet ski

engine
sales
J F MAMJ JAS O N D J FMAM JJAS O N D J

Time (months)
15
15
Tactics for Matching Capacity to Demand
1. Making staffing changes

2. Adjusting equipment
 Purchasing additional machinery
 Selling or leasing out existing equipment
3. Improving processes to increase throughput
4. Redesigning products to facilitate more throughput
5. Adding process flexibility to meet changing product
preferences
6. Closing facilities
16
16
8
10/4/2021
Service Sector Demand and

Capacity Management
 Demand management
• Appointment, reservations, FCFS rule
 Capacity management
• Full time,
temporary,
part-time
staff
17
17
17
Bottleneck Analysis and

The Theory of Constraints
 Each work area can have its own unique

capacity
 Capacity analysis determines the
throughput capacity of workstations in a
system
 A bottleneck is a limiting factor or constraint
 A bottleneck has the lowest effective capacity
in a system
18
18
9
10/4/2021
Bottleneck Analysis and

The Theory of Constraints
Figure S7.4
A B C
2 min/unit 4 min/unit 3 min/unit
 The bottleneck time is the time of the slowest

workstation (the one that takes the longest) in a
production system
 The throughput time is the time it takes a unit to
go through production from start to end
19
19
Capacity Analysis
 Two identical sandwich lines

 Lines have two workers and three operations
 All completed sandwiches are wrapped
Bread Fill
15 sec/sandwich 20 sec/sandwich
Wrap/
Order Toaster
Deliver
Bread Fill 37.5 sec/sandwich
20
20
10
10/4/2021
Capacity Analysis
Bread Fill
15 sec 20 sec Wrap/
Order Toaster
Deliver
30 sec 20 sec
Bread Fill 37.5 sec
15 sec 20 sec
 The two lines each deliver a sandwich every

20 seconds
 At 37.5 seconds, wrapping and delivery has
the longest processing time and is the
bottleneck
 Capacity per hour is 3,600 seconds/37.5
seconds/sandwich = 96 sandwiches per hour
 Throughput time is 30 + 15 + 20 + 20 + 37.5
= 122.5 seconds
21
21
Capacity Analysis
 Standard process for cleaning teeth

 Cleaning and examining X-rays can happen
simultaneously
Cleaning
Takes Develops 24 min/unit Check

Check in Dentist
X-ray X-ray out
2 min/unit 2 min/unit 4 min/unit X-ray 8 min/unit 6 min/unit

exam
5 min/unit
22
22
11
10/4/2021
Capacity
Analysis Cleaning
Check Takes Develops 24 min/unit Check

Dentist
in X-ray X-ray out
2 min/unit 2 min/unit 4 min/unit X-ray 8 min/unit 6 min/unit

exam
5 min/unit
 All possible paths must be compared

 Bottleneck is the hygienist at 24 minutes
 Hourly capacity is 60/24 = 2.5 patients
 X-ray exam path is 2 + 2 + 4 + 5 + 8 + 6 = 27 minutes
 Cleaning path is 2 + 2 + 4 + 24 + 8 + 6 = 46 minutes
 Longest path involves the hygienist cleaning the teeth,
patient should complete in 46 minutes
23
23
Theory of Constraints (TOC)
 Five-step process for recognizing and

managing limitations
Step 1: Identify the constraints

Step 2: Develop a plan for overcoming the constraints
Step 3: Focus resources on accomplishing Step 2
Step 4: Reduce the effects of constraints by offloading
work or expanding capability
Step 5: Once overcome, go back to Step 1 and find
new constraints
24
24
12
10/4/2021
Bottleneck Management
1. Release work orders to the

system at the pace of set by
the bottleneck
 Drum, Buffer, Rope
1. Lost time at the bottleneck
represents lost time for the
whole system
2. Increasing the capacity of a
non-bottleneck station is a
mirage
3. Increasing the capacity of a
bottleneck increases the
capacity of the whole system
25
25
Break-Even Analysis
 Technique for evaluating process and

equipment alternatives
 Objective is to find the point in dollars and
units at which cost equals revenue
 Requires estimation of fixed costs, variable
costs, and revenue
26
26
13
10/4/2021
Break-Even Analysis
 Fixed costs are costs that continue even if no

units are produced
 Depreciation, taxes, debt, mortgage
payments
 Variable costs are costs that vary with the
volume of units produced
 Labor, materials, portion of utilities
 Contribution is the difference between
selling price and variable cost
27
27
Break-Even Analysis
 Revenue function begins at the origin

and proceeds upward to the right,
increasing by the selling price of each
unit
 Where the revenue function crosses
the total cost line is the break-even
point
28
28
14
10/4/2021
Break-Even Analysis
–
Total revenue line
900 –
800 –
Break-even point Total cost line
700 – Total cost = Total revenue
Cost in dollars
600 –
500 –
400 – Variable cost
300 –
200 –
100 – Fixed cost

|– | | | | | | | | | | |
0 100 200 300 400 500 600 700 800 900 1000 1100
Volume (units per period) 29
29
Break-Even Analysis
Assumptions
 Costs and revenue are linear functions
 Generally not the case in the real world
 We actually know these costs
 Very difficult to verify
 Time value of money is often ignored
30
30
15
10/4/2021
Break-Even Analysis
BEPx = break-even point x = number of units

in units produced
BEP$ = break-even point TR = total revenue = Px
in dollars F = fixed costs
P = price per unit V = variable cost per unit
(after all TC = total costs = F + Vx
discounts)
Break-even point occurs when
TR = TC
or F
BEPx =
Px = F + Vx P–V
31
31
Break-Even Analysis
BEPx = break-even point x = number of units

in units produced
BEP$ = break-even point TR = total revenue = Px
in dollars F = fixed costs
P = price per unit V = variable cost per unit
(after all TC = total costs = F + Vx
discounts)
F Profit = TR - TC
BEP$ = BEPx P = P
P–V = Px – (F + Vx)
F = Px – F – Vx
= (P – V)/P
= (P - V) x – F
F
BEP$ =
1 – V/P
32
32
16
10/4/2021
Break-Even Example
Fixed costs = $10,000 Material = $.75/unit

Direct labor = $1.50/unit Selling price = $4.00 per unit
F $10,000
BEP$ = =
1 – (V/P) 1 – [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375
33
33
Break-Even Example
Fixed costs = $10,000 Material = $.75/unit

Direct labor = $1.50/unit Selling price = $4.00 per unit
F $10,000
BEP$ = =
1 – (V/P) 1 – [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375
F $10,000
BEPx = = = 5,714
P–V 4.00 – (1.50 + .75)
34
34
17
10/4/2021
Break-Even Example
50,000 –
40,000 – Revenue
Break-
30,000 – even Total
Dollars
point costs
20,000 –
10,000 –
Fixed costs
–
| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Units
35
35
Break-Even Example
Multiproduct Case
Break-even F
point in dollars =
éæ V ö ù
(BEP$) åêç P ÷ i úú
ê 1- i
´ W ( )
ëè i ø û
where V = variable cost per unit

P = price per unit
F = fixed costs
W = percent each product is of total dollar
sales
expressed as a decimal
i = each product 36
36
18
10/4/2021
Multiproduct Example
Fixed costs = $3,000 per month

ITEM PRICE COST ANNUAL FORECASTED SALES UNITS
Sandwich $5.00 $3.00 9,000
Drink 1.50 .50 9,000
Baked potato 2.00 1.00 7,000
1 2 3 4 5 6 7 8
ANNUAL WEIGHTED
SELLING VARIABLE FORECASTED % OF CONTRIBUTION
ITEM (i) PRICE (P) COST (V) (V/P) 1 - (V/P) SALES $ SALES (COL 5 X COL 7)
Sandwich $5.00 $3.00 .60 .40 $45,000 .621 .248
Drinks 1.50 0.50 .33 .67 13,500 .186 .125

Baked
potato 2.00 1.00 .50 .50 14,000 .193 .097
$72,500 1.000 .470

37
37
Multiproduct Example
F
BEP$ =
éæ Vi ö ù
Fixed costs = $3,000 per month åêêç1- P ÷ ´ (W )úú i
ëè i ø û
ITEM PRICE COST $3,000 x 12 SALES UNITS
ANNUAL FORECASTED
= = $76,596
Sandwich $5.00 $3.00 .47
9,000
Drink 1.50 .50 9,000
$76,596
Daily
Baked potato 2.00 1.00 =
sales 3127,000 = $245.50
days
1 2 3 4 5 6 x $245.50
.621 7 8
ANNUAL = 30.5WEIGHTED
 31
SELLING VARIABLE $5.00 % OF Sandwiches
FORECASTED CONTRIBUTION
ITEM (i) PRICE (P) COST (V) (V/P) 1 - (V/P) SALES $ SALES (COL 5 X COL 7)
each day
Sandwich $5.00 $3.00 .60 .40 $45,000 .621 .248
Drinks 1.50 0.50 .33 .67 13,500 .186 .125

Baked
potato 2.00 1.00 .50 .50 14,000 .193 .097
$72,500 1.000 .470

38
38
19
10/4/2021
Reducing Risk with

Incremental Changes
Figure S7.6
(a) Leading demand with (b) Leading demand with
incremental expansion one-step expansion
New New
capacity capacity
Demand
Demand
Expected
Expected
demand
demand
(c) Capacity lags demand with (d) Attempts to have an average

incremental expansion capacity with incremental
New
expansion
capacity New
Demand
Demand
Expected capacity Expected

demand demand
39
39
Reducing Risk with

Incremental Changes
(a) Leading demand with incremental
expansion
Figure S7.6
New
capacity
Demand
Expected
demand
1 2 3
Time (years) 40
40
20
10/4/2021
Reducing Risk with

Incremental Changes
(b) Leading demand with one-step
expansion
New
capacity
Expected
Demand
demand
1 2 3
Time (years) 41
41
Reducing Risk with

Incremental Changes
(c) Lagging demand with incremental
expansion
New
capacity
Expected
Demand
demand
1 2 3
Time (years) 42
42
21
10/4/2021
Reducing Risk with

Incremental Changes
(d) Attempts to have an average capacity
with incremental expansion
New
capacity
Demand
Expected
demand
1 2 3
Time (years) 43
43
Applying Expected Monetary Value

(EMV) and Capacity Decisions
 Determine states of nature

• Future demand
• Market favorability
 Assign probability values to states of
nature to determine expected value
44
44
22
10/4/2021
EMV Applied to Capacity Decision

 Southern Hospital Supplies capacity expansion
Market favorable (.4)
$100,000
Market unfavorable (.6)

-$90,000

$60,000
Medium plant
-$10,000

$40,000

-$5,000
$0
45
45

$100,000

-$90,000

$60,000
Medium plant
Large Plant Market unfavorable (.6)
-$10,000
EMV = (.4)($100,000) Market favorable (.4)

+ (.6)(-$90,000) $40,000

EMV = -$14,000 -$5,000
$0
46
46
23
10/4/2021
 Southern Hospital Supplies capacity expansion
EMV (large plant) = (.4)($100,000) + (.6)(–$90,000)

= –$14,000
EMV (medium plant) = (.4)($60,000) + (.6)(–$10,000)
= +$18,000
EMV (small plant) = (.4)($40,000) + (.6)(–$5,000)
= +$13,000
EMV (do nothing) = $0
47
47
-$14,000
$100,000

-$90,000
$18,000
$60,000
Medium plant
-$10,000
$13,000
$40,000

-$5,000
$0
48
48
24
10/4/2021
Strategy-Driven Investment
 Operations manager may have to

decide among various financial
options (ROI, ROA)
 Analyzing capacity alternatives
should include capital investment,
variable cost, cash flows, and net
present value
49
49
Net Present Value (NPV)
In general:
F = P(1 + i)N
where F = future value
P = present value
i = interest rate
N = number of years
Solving for P:
F
P=
(1 + i)N
50
50
25
10/4/2021
Net Present Value (NPV)
In general:
F = P(1 + i)N
where F = future value
P While
= present value this works fine,
i = interestitrate
is cumbersome for
N = number of larger
years values of N
Solving for P:
F
P=
(1 + i)N
51
51
NPV Formula
• A higher NPV is better

• Higher the discount
rate lower the NPV
52
26
10/4/2021
NPV Using Factors
F
P= = FX
(1 + i)N
where X = a factor from Table S7.1 defined as =
1/(1 + i)N and F = future value
TABLE S7.1 Present Value of $1

YEAR 6% 8% 10% 12% 14%
1 .943 .926 .909 .893 .877
2 .890 .857 .826 .797 .769
3 .840 .794 .751 .712 .675
4 .792 .735 .683 .636 .592
Portion of
5 .747 .681 .621 .567 .519 Table S7.1
53
53
Present Value of an Annuity
An annuity is an investment which

generates uniform equal payments
S = RX
where X = factor from Table S7.2
S = present value of a series of uniform
annual receipts
R = receipts that are received every year
of the life of the investment
54
54
27
10/4/2021
TABLE S7.2 Present Value of and Annuity of $1

YEAR 6% 8% 10% 12% 14%
1 .943 .926 .909 .893 .877
2 1.833 1.783 1.736 1.690 1.647
3 2.676 2.577 2.487 2.402 2.322
4 3.465 3.312 3.170 3.037 2.914
5 4.212 3.993 3.791 3.605 3.433
Portion of
Table S7.2
55
55
▶River Road Medical Clinic equipment investment
$7,000 in receipts per for 5 years

Interest rate = 6%
From Table S7.2
X = 4.212
S = RX
S = $7,000(4.212) = $29,484
56
56
28
10/4/2021
Present Value With Different

Future Receipts
Investment A’s Investment B’s Present Value

Year
Cash Flow Cash Flow Factor at 8%
$10,000 $9,000 1 .926
9,000 9,000 2 .857
8,000 9,000 3 .794
7,000 9,000 4 .735
57
57
Present Value With Different

Future Receipts
Investment A’s Investment B’s
Year
Present Values Present Values
1 $9,260 = (.926)($10,000) $8,334 = (.926)($9,000)
2 7,713 = (.857)($9,000) 7,713 = (.857)($9,000)
3 6,352 = (.794)($8,000) 7,146 = (.794)($9,000)
4 5,145 = (.735)($7,000) 6,615 = (.735)($9,000)
Totals $28,470 $29,808
Minus initial
investment -25,000 -26,000
Net present value

$3,470 $3,808
58
58
29
10/4/2021
59
59
Limitations
1. Investments with the same NPV may have

different projected lives and salvage
values
2. Investments with the same NPV may have
different cash flows
3. Assumes we know future interest rates
4. Payments are not always made at the end
of a period
60
60
30
10/4/2021
Questions?
61
61
Assignment 6- Capacity Planning
I Multichoice: Delivered in advance in syllabus

II. Problems:
P1: Given the following data, calculate: a) BEPx, b) BEP$ and c) at 100,000 units
P= $8/unit V= $4/unit F= $50,000
P2: The three station work cell at a manufacturer is illustrated below. It has two machines at work station in
parallel
a) What is the process cycle time of this work cell?
b) What is the system process time of this work cell?
c) If the company operates 8 hours/ day, 6 days/week, what is the weekly capacity of this work cell?
Station 1
Machine A
20 min/unit Station 2 Station 3
Station 1
Machine B 12 min/unit 8 min/unit
20 min/unit
P3: You are considering opening a copy center in the student union of IU. You estimate your fixed cost at
$15,000 and the variable cost of each copy sold at $0,01. You expect the selling price to average %0.05.
Calculate:
a) What is the break-even point in dollars?
b) What is the break-even point in units?
___& ___ 62
62
31

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9/21/2021

Instructor: Truong Quang Duoc, Ph.D

1. Define operations management

4. Compute single-factor productivity

 First opened in 1971

What is Operations Management?

 Production is the creation of goods and

Operations as a Transformation Process

INPUT Transformation OUTPUT

Organizing to Produce Goods & Services

Business Operations Marketing Finance

Operations Finance Marketing

Operations Finance/ Marketing

Operations Finance/ Marketing

The Supply Chain

Farmer Syrup Bottler Distributor Retailer

Soft Drink Supply Chain

Why Study OM?

Options for Increasing Contribution

Increase Reduce Reduce

Responsibilities of Operations Manager

Ten Critical Decisions

Ten Critical Decisions (cont.)

Ten Critical Decisions (cont.)

Ten Critical Decisions (cont.)

Ten Critical Decisions (cont.)

WHAT – WHEN – WHERE – HOW - WHO

Where are the OM Jobs?

 Born 1856; died 1915

Frank & Lillian Gilbreth

Ford Historic Model T, CarData

Differences Between Goods and

Industry and Services as

Goods and Services

Percent of Product that is a Good Percent of Product that is a Service

U.S. Agriculture, Manufacturing,

1825 1875 1925 1975 2025 (est.)

Agriculture Services Manufacturing

Organizations in Each Sector

The objective is to improve

The Economic System

Labor, The U.S. economic system Goods

One resource input  single-factor productivity

 Also known as total factor productivity

Collins Title Productivity

Old labor 8 titles/day

Collins Title Productivity

Old labor 8 titles/day

New labor 14 titles/day

Collins Title Productivity

Old multifactor 8 titles/day

Collins Title Productivity

Old multifactor 8 titles/day

New multifactor 14 titles/day

1. Quality may change while the

Key Variables for Improved

1. Basic education appropriate for the

Productivity and the

Ethics and Social Responsibility,

The Global Environment and

When you complete this chapter, you

Some of the International Suppliers of Boeing 787 Components

Boeing’s Global Supply-