summary OM reid.pdf

8/10/2019 summary OM reid.pdf

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Chapter 1: Introduction to operations managemento Scientific Management (Taylor)o Human Relations movement

o job enlargemento job enrichment

o Management Scienceo Computer age

Japan (80s)o Just-in-time (JIT)o Total Quality management (TQM)o Business Process Reengineering

90so Flexibility

o Time-based competitiono Supply Chain management

Chapter 2: Operations Strategy and Competitiveness

Business Strategy serves as an overall guide for development operation strategy

Operations strategy competitive properties:Quality - being competitiveTime being fastFlexible being able to changeCost being productive

Business Strategy

define long-rangeplan for company

Marketing strategy Operational strategy

Develops a plan foroperations function

Finance strategy

BusinessStrategy

Environmental Scanning(Market trends, opportunities &threads)

Mission(Statement, what business anorganization is in (customers, corebelief))

Core competences(Unique strengths)


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Develop operations strategy

Find a trade-off between the competitive priorities.Decide which competitive priorities to focus on:

Order qualifiers: company has to meet if it wants to do businessOrder winners: company6 win order in the market

Strategic role technologyCan be used by companies to gain a competitive advantage and should be acquired tosupport companys chosen competitive priorities

Types:Product technologyProcess technologyInformation technology

Productivity- measure how efficiently organization converts inputs into outputsTotal Productivity computed as ratio of output to all organizational inputsPartial Productivity computed as a ratio of output to only one inputMultifactor productivity computed as a ratio of output to several inputs

Total Productivity Partial Productivity Multifactor Productivity

Output

All inputs

Output or Output

Labor machines

Output or Output

Labor + machines Labor + capital + energy

e.g. Labor productivity = 3 officers x 5 loans/day(Total productivity) 24 labor-hours

Notes

Trends in OM Service sector is growingService / Manufacturers Technology is not only technology but also regulations etc.

OM decisionso strategic decisionso tactical decisions

Chapter 3: Product Design and Process SelectionService design Process of establishing all characteristics of the service (incl. physical,sensual and psychological benefits)

Product Design Process

Business Strategy Design Operations Function

Developed to focus on identified

competitive properties

Structure facilities, technology

Infrastructure: Planning & Controlsystem, workers, pay, quality

Operations Strategy

(Competitive properties)

IdeaDevelopment Product Screening PreliminaryDesign & Testing Final Design


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Idea developmentBenchmarking: process of studying the practices of companies considered best in classand comparing your companys performance against theirsbenchmark against a company completely different line of business also possible

Reverse engineering: process of disassembling a product to analyze its design features

Early supplier involvement (ESI): Involving suppliers in the early stages of productdesign

Product screeningAfter product idea is developed it is evaluated to determine its likelihood of success.Issues like Operations, Marketing and Finance will be explored.

Break-even analysis: technique used to compute the amount of goods a company wouldneed to sell to cover its costs. Useful tool at product screening stage!

Fixed costs: costs a company incurs regardless of how much it producesVariable costs: costs that vary directly with the amount of units produced

Total cost RevenueTotal cost = total

revenueBreak-even

quantity (QBE)

F + (VC) Q

F = fixed costVC = variable cost per

unitQ = number of units

sold

(SP) Q

SP = Selling priceper unit

F + (VC) Q = (SP) QF

SP - VC

Preliminary Design & TestingPrototypes are built and tested. For service companies this may entail testing the offeringon a small scale and working with customers to refine the service offering

Final DesignThe final specifications are then translated into specific processing instructions tomanufacture the product.Product design must support the business strategy

Factors impacting product designDesign for manufacture (DFM): guidelines to follow in order to produce a product easily

and profitably (design simplification, design standardization)

Product life cycle: a series of stages that products pass through in their lifetime1. Introduction2. Growth3. Maturity4. Decline

Concurrent Engineering: approach that brings together multifunction teams in earlyphase of product design in order to simultaneously design the product and the processes

Remanufacturing: concept of using components of old products in production new ones


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Process selectionProduction processes

o Intermittent operations (variety of products with different processingrequirements in lower volumes) / project processes & batch processes!

o Repetitive Operations (used to produce one or a few standardized products inhigh volume) / line processes & continuous process!

Intermittent operations; tend to organize their resources by grouping similar processestogether and having product routed through facility based on their needs. Provide greatflexibility but have high material handling costs and challenge scheduling resources.Repetitive operations; arrange resources in sequence to allow for an efficient buildup ofproduct. Highly efficient but inflexible.

Design Process

Designing processesProcess flow analysis technique used for evaluating a process with goal of improving its

designProcess flowchart viewing sequence of steps involved in producing product. Tool forseeing totality of operation and for identifying potential problem areas.Bottleneck longest task in process

Make-to-stock strategy produces standard products / services for immediatesale/deliveryAssemble-to-order strategy produces standard components that can be combined tocustomer specificationsMake-to-order strategy produces products to customer specifications after orderreceived

Projectprocess

Productdesign

Productiondesign

Process

Low Product Volume High

Low

ProductStandardiz

ation

High

Batchprocess

Lineprocesses

Continuousprocesses

High

Variety

Low


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Process performance metrics: Measurements of different process characteristics thattell how a process is performing

Measure Definition

1. throughput time Average amount of time product takes tomove through system

2. process velocity =Throughput timeValue-added time

Measure of wasted time in system

3. productivity =OutputInput

Measure how well company use its resources

4. utilization =Time a resource usedRime a resource available

Proportion of time a resource is actually used

5. efficiency =Actual outputStandard output

Measure performance relative to a standard

Linking product design and process selection

Decision Intermittent operations Repetitive operations

Product design early stage of product life cycle later stage in life cycle

Competitive priorities delivery, flexibility, quality cost & quality

Facility layout resources grouped by function resources arranged in line

Product strategy make-to-order/assemble-to-order make-to-stock

Vertical integration low high

Product design focus on producing products in different stage of product life cycleProducts are in case of intermittent operations for general purpose and can be adapted to

needs of productVertical integration the larger the number of processes performed by company in chainfrom raw materials to product delivery, the higher the vertical integration

Technology decisionsAdvancements in technology have had the greatest impact on process design decisions.It significantly enhances products and process design.

Information technology Automation E-manufacturing

ERP enterpriseresource planning

FMS flexiblemanufacturing system

CAD computer-aideddesign

GPS global positioningsystems

NC numericallycontrolled machine

CIM computer-integratedmanufacturing

RFID radio frequencyidentification

Designing servicesMore complexities than manufacturing (services produce intangible product and highdegree customer contact).Different service designs include substituting technology for people, getting customerinvolved, and high customer attention approach.

The higher the degree of Labor Intensity the lower the degree of service standardization.Low labor intensity/low degree customer contact: warehouses, distribution centers etc.High Labor intensity/high degree customer contact: restaurant, schools, hospitals etc.


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Chapter 4: E-commerce and Supply Chain ManagementE-commerce use of Internet and web to transact businessE-business transactions and processes within organization

Types of E-commerceB2B (Business-to-Business) E-commerce: companies sell to other businessEvolution:

1970s - begins with Automated order entry systemMethod using telephone models to send digital orders to suppliers

late 1970s electronic data interchange (EDI)Form of computer-to-computer communications that enables sharingbusiness documents

mid-1990s electronic storefrontsOnline-catalogs of products made available to general public by singlsupplier

late 1990s Net marketplacesSuppliers and buyers conduct trade in single Internet-based environment

Benefits B2B E-commerceLower procurement administrative costsLow-cost access to global suppliersLower inventory investment due price transparency and reduced response timesBetter product quality because increased cooperation between buyers and sellers

B2C (Business-to-Customer) E-commerce: on-line business try reach individual consumerDifferent models to generate revenue

Advertising revenue Provides users with info on services and products andprovides an opportunity to advertise

Subscription revenue model web site that charges subscription fee for accessTransaction fee model company receives fee for executing transaction

Sales revenue model means of selling goods, info, or services directly to cust.Affiliate revenue model companies receive referral fee for directing business to

an affiliate

C2C (Customer-to-Customer) E-commerce: Consumers sell to each other with the help ofan on-line market maker

P2P (Peer-to-Peer) E-commerce: Users are linked and so are able to share files andcomputer resources without a common server

M-commerce: Access is provided to anyone, anytime, anywhere, using wireless devices

Supply ChainNetwork of all activities involved in delivering a finished product to customer

Supply Chain Management Coordinates and manages all activities of supply chain. Itprovides streamlined communications between suppliers and company, thus reducingpurchasing lead time (lower inventory levels). Improved communications also improvedemand-forecasting accuracy (reduces uncertainty). Lower inventory levels mean lowercosts while maintaining customer service levels. Improved demand forecast accuracy alsocontributes to development of better staffing plans (lower personnel costs, lowerinventory costs, improved customer services)

Company supply chain structure has three components:1. External suppliers2. Internal processes3. External distributors


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1. External suppliers

Tier one supplier / tier two supplier (Tier one provides directly to processingfacility)

2. Internal processesInternal functions are for example:

Processing, purchasing, production, planning and control, quality assurance andShipping

3. External distributorsLogistics includes traffic management (responsible for arranging the method of shipmentfor both incoming and outgoing products or materials)Distribution management responsible for movement of material form manufacturer tocustomer

Bullwhip effectInaccurate or distorted demand information created in supply chain. The more levels thatexist, the more possible distortion. Variability results from updating demand estimates at

each level, order batching, price fluctuations, and rationing.

Counteracting bullwhip effect:o Product demand information available from final seller to all levels supply chaino Eliminate order batching; Lower ordering costs eliminate need for batch orders.o Stabilize prices; Discourage forward buyingo Eliminate gaming; Manufacturers can allocate products in proportion to past sales

Factors affecting SCMThe power is shifted from suppliers to consumers

o consumer expectations and competition (customer demand better service)o better product quality

o quick response at reasonable priceo ability to return merchandiseo New markets have crated global marketplaceo Evolution of on-line marketplaces changed the way companies do business

Additional factor for global Supply ChainsGreater geographical distances between members of SC causing greater uncertainty indelivery times. This result in increased investment in pipeline inventory (e.g. carryadditional safety stock) and exacerbates (verergert) bullwhip effect.

o Forecasting accuracy is often poorero Fluctuating exchange rates further complicate global supply changeo Many possible infrastructure issues that company may face

o inadequate transporto limited telecommunication capabilitieso uncertain power continuityo low skill levels of workerso poor supply availability

Vertical integrationHow much of supply chain is actually owned or operated by manufacturing companyOrganizations determine appropriate level of vertical integration based on corporateobjectives. Standardized products higher levels of integration than customized products.

Insource processes / activities completed in-houseOutsource processes / activities completed by suppliers

Make-or-buy decisions are based on financial / strategic criteria. Companies outsourceactivities that are not part of core competencies


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Backward integration owning or controlling sources of raw materials and componentsForward integration owning or controlling channels of distribution

Insourcing vs outsourcing decisionsIn-house when:

The product or service is critical to companys success orThe product or service I one of companys core competencies orIs it something company must do to survive?

Total cost buying product Total cost making item in-house

TCBuy= FCBuy+ (VCBuyx Q) TCMake= FCMake+ (VCMakex Q)TC = total annual cost of buyingFC = fixed annual costs associated with buying

VC = variable costs per unitQ = quantity of units

Role of purchasing

Ethics is in Supply Management an ongoing concern. Institute for Supply Managementhas established set of principles and standards to guide purchasing employees.

How many suppliers?Operations like make-to-order products deals with single supplier.It can improve quality of finished product by ensuring consistency of input materials.On other hand, multiple suppliers reduce risk of disrupted supply. Further, it is easier tosupport changing quantity requirements (flexibility of volume). Government regulationsmay require use of multiple suppliers for some operations as well.If company wants to integrate its supply chain, partnering or using single supplier makessense.

Partners share information, risks, technologies and opportunities. Impact, intimacy andvision are critical to successful partnering. Impact means attaining higher levels ofproductivity and competitiveness. Impact comes from reducing duplication and waste,leveraging core competencies and creating new opportunities. Vision is shared objective.

Benefits of partnering ESI (Early supplier involvement) Involvement of critical suppliersin new product design

Characteristics Partnership Relations:o Long-term orientationo Strategic in natureo Share informationo Share risk / opportunitieso Share common visiono Share short= and long-term plans

o Driven by end customer expectations

Information sharingTechnology like bar coding, EDI and point-of-sale (POS) terminals have improveddemand data collection and has greatly reduced cost of developing a common databasefor SCM.

Role of WarehousesThree roles:

1. Transportation consolidation

2. Product mixing or blending3. Service


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Warehouses1. Consolidate less-than-truckload (LTL) quantities into truckload (TL) quantities.2. Realize product mixing that adds value for customers because warehouse groups

items and ships them directly to customer.3. Improve customer service by placing goods closer to customer in order to reduce

response time or by customizing basic products before they are shipped to

customer.

Crossdocking Eliminates storage and order-picking functions of distribution warehouseTypes of crossdocking:

1. Manufacturing receiving and consolidating inbound suppliers and materials tosupport JIT manufacturing

2. Distributor receiving and consolidating inbound products from different vendorsinto multi-SKU pallet

3. Transportation Consolidation of LTL shipments to gain economies of scale4. Retail sorting product from multiple vendors onto outbound truck headed for

specific stores

Advantages crossdocking:1. retailer reduces inventory holding costs (replacing inventory with info and

coordination)2. consolidate shipments to achieve truckload quantities and significantly reduce

companys inbound transportation costs

RFID new wireless technology designed to make order tracking easier

Measuring SC performanceIn addition to regular performance (ROI, profitability, market share, etc.) a companymust also measure activities that reflect objectives of SC (on-time delivery, customerservice levels, inventory investment, etc.)

Current trends SCMMost advance in e-commerce with regart to SCM is use of electronic marketplaces. Netmarketplaces are classified by types of goods supplied (direct or indirect) and types ofpurchases made (contractual or spot) E-distributors are most common form of netmarketplace.

E-distributors independently owned net marketplaces having catalogs representingthousands of suppliers designed for spot purchases

E-purchasing companies connect on-line MRO suppliers to businesses who pay fees tojoint the market, usually for long-term contractual purchasing

VCM (Value Chain Management) A firms purchasing or selling processes are automated

Exchanges marketplace focuses on spot requirement of large firms in single industry

Industry consortia Industry-owned markets enable buyers to purchase direct inputsfrom limited set of invited suppliers


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Chapter 5: Total Quality Management (TQM)TQM an integrated effort designed to improve quality performance at every level oforganizationCustomer defined quality meaning of quality as defined by customer

TQM is different from the old concept of quality because its focus is on servingcustomers, identifying causes of quality problems and building quality into productionprocess.

Defining QualityMost common quality definition in manufacturing is Conformance; the degree to which aproduct characteristic meets preset standards.Quality definition in service organization is difficult. Since a service is experiencedperceptions can be highly subjective. Including courtesy (hoffelijkheid), friendliness ofstaff, promptness in resolving complaints and atmosphere.

Cost of qualityQuality has many other costs:

1. Quality control costs; prevention costs & Appraisal costs2. Quality failure costs; internal & external failure costs.

Prevention costs costs incurred in process of preventing poor quality form occurringAppraisal costs costs incurred in process of uncovering defects (e.g. cost of qualityinspection or product testing etc)

Internal failure costs costs associated with discovering poor product quality beforeproducts reaches customerExternal failure costs costs associated with quality problems that occur at customer site

The earlier defects are found, the less costly they are to correctExternal failure costs tend to be particularly high for service organizations since customer

spends much time in service delivery systems and fewer opportunities to correct.

Evolution of TQMMeaning of quality for businesses changed dramatically in late 1970s. Before quality wasstill viewed as something that needed to be inspected and corrected. However many U.S.industries lost market share to foreign competition. To survive, companies had to makemajor changes in their quality programs. Quality began to have strategic meaning.The term used for todays new concept of quality is TQM.

Taguchi is known for applying a concept called design of experiment to product design. Itis based on developing robust design that results in a product that can perform over awide range of conditions.

He also stated that the smaller the variation around the target, the better the quality.Loss function costs of quality increase as a quadratic function as conformance valuesmove away from the target.

Philosophy of TQMThe focus is on identifying root causes of quality problems and correcting them at thesource. 7 Features of TQM combine to create the TQM philosophy:

o customer focus, continuous improvement, employee empowerment, use of qualitytools, product design, process management, and managing supplier quality.

Quality is customer driven. The companys focus is on its customers to identify and meetcustomer needs.Continuous improvement(kaizen). Philosophy of never-ending improvement. Two ways:

1. Plan-do-study-ac cycle (A diagram that describes the activities that needs to beperformed to incorporate continuous improvement into operation);


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2. Benchmarking (Studying the business practices of other companies for purposesof comparison).

Employee empowerment. empower all employees to seek out quality problems andcorrect them. It places great emphasis on teamwork as well. One of the most commontypes of teams is quality circle A team of volunteer production employees and their

supervisors who meet regularly to solve quality problems.

Use of quality Tools. 7 problem-solving tools are used in managing quality (tools ofquality control):

1. cause-and-effect diagram;2. flowchart;3. checklist;4. control charts (Chart used to evaluate whether a process is operating within set

expectations) Important tool!;5. scatter diagrams (how 2 variables are related to each other);6. pareto analysis;7. histogram.

Product design. Quality function deployment (QFD) is a tool used to translate customerneeds into specific engineering requirements.House of quality resulting matrix when requirements are numerically scored based onimportance, scores translated into specific product characteristics and evaluation are bemade of how the product compares with its main customers.

Reliability - probability that a product, service or part will perform as intended.Rs= (R1) (R2)(Rn)

Rs = reliability of product or systemR1.n= reliability of components 1 through n

Rs= .95 + ((.9) x (1-.95)) = .995

Process ManagementA quality product comes from a quality process. Quality at the source the belief that itis best to uncover the source of quality problems and eliminate it.

Managing Supplier QualityTQM extends the concept of quality to suppliers and ensures that they engage in samequality practices.

Quality awards and standardsMalcolm Baldrige Award is given to companies to recognize excellence in qualitymanagement. These criteria have become a standard for companies that seek to improvequality. ISO 9000 is a certification based on a set of quality standards. Its goal is toensure that quality is built into production processes.

Why TQM efforts failo Lack of a genuine quality culture;o Lack of top management support and commitment;o Over- and under-reliance on statistical process control (SPC) methods.

Original

Backup

.95

.9


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Chapter 7: Just-In-Time and Lean SystemsJIT philosophy get right quantity of goods at right place at right timeJIT-waste anything that does not add value

Developed by Toyota Motor Company in mid-1970s

Philosophy JITJIT is a philosophy based on elimination of waste. Another way to view JIT is to think of itas a philosophy of value-added manufacturing.

Defining beliefs of JIT:o Broad view of operations;

o Simplicity;o Continuous improvement;o Visibility;o Flexibility.

Broad view of organizationTasks/procedures are important only if they meet companys overall goals. Everyonework toward same goal, which is serving customer.

SimplicityJIT is build on simplicity the simpler solution the better

Continuous improvement (kaizen)Major aspect of JIT philosophy is emphasis on quality. Continuous improvement in everyaspect of operation is cornerstone of this philosophy.

Visibility

Part of JIT philosophy is to make all waste visible. Problems must be visible to beidentified and solved.

FlexibilityA company can quickly adapt to the changing needs of its customers. JIT was based onneed for survival, and survival means being flexible in order to adapt to changes inenvironment (e.g. able to make changes in volume of a product produced / produce widevariety of products).

Elements of JIT

JIT Total Quality

Manufacturing Management

Respect forpeople

JIT ManufacturingThe element of JIT that focuses on production system to achieve value-addedmanufacturing

The manufacturing process in JIT starts with a final assembly schedule (masterproduction schedule usually fixed for few months into future). Same amount of eachproduct is produced in same order every day.


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The JIT-coordination system relies on cards (kanban) to pullneeded products throughthe production system. The system enables right quantities of parts to arrive when theyare needed precisely where they are needed. Low inventory costs are realised because ofthe quantity which is needed will be produced immediately.

Key elements of JIT manufacturing are:

o Pull system and kanban production (specifies what is needed);o Small lot sizes and quick setups;o Uniform plant loading;o Flexible resources;o Streamlined layout.

Push systems (traditional) anticipate future demand and produce in advance. Setup costsare high in traditional systems.

Total Quality ManagementTQM Integrated effort designed to improve quality performance at every level oforganization; it permeates (doordringt) every activity and function. Traditional quality

control systems use concept of acceptable quality level (AQL).

The concepts of continuous improvementand quality at the sourceare integralparts that allow for continual growth and the goal of identifying the causes of qualityproblems:

o Quality at the source uncovering root cause of a quality problem;o Continuous improvement goes beyond JIT manufacturing; It includes

improvement worker skills, supplier quality and relationships even performance ofmanagement.

Respect for peopleJIT considers people to be the organizations most important resource. All employees are

highly valued members of organization. Workers are empowered to make decisions andare rewarded for their efforts. Team efforts make possible cross-functional and multilayercoordination.

Example gratia:o Managers spend time on production floor;o JIT believes in developing long-term relationships with suppliers in partnership

format.

JIT ManufacturingKanban productionA card specifies the exact quantity of product that needs to be produced. Kanban isattached to a container.To control movement of empty and full containers, 2 types of cards: production &withdrawal cards.Formula to compute number of kanbans needed:

N = DT + SC

N = number of kanbans or containersD = Demand rate at using workstationT = Time it take to receive an order from previous workstation (lead time)C = Size of containerS = Safety stock (protect against variability / uncertainty)

Demand (D) and lead time (T) have to be in same time units!Variation of Kanban Production

Actual cards do not exist in many facilities; may be as empty place on the floor (kanbansquare)


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Kanban can also be used to coordinate delivery of goods by suppliers (supplier kanbans).Suppliers bring filled containers to the point of usage and at same time pick up emptycontainer.

Small lot sizes and quick stepsPrincipal way of eliminating inventory and excess processing while increasing flexibility is

through small-lot production. Production companies have to reduce setup time. The goalis to achieve single setups. One approach is separate setup into two components:

o Internal setups Internal setups require machine to be stopped for setup;o External setups - External setups can be performed while machine is still running.

Almost all setups in traditional manufacturing systems are internal. With JIT much ofsetup process has been converted to external setups.

Uniform Plant LoadingSudden increases/decreases will be eliminated by JIT through making adjustments(aanpassingen) as small as possible and setting a production plan that is frozen; uniformplant loading.Uniform plant loading a constant production plan for a facility with a given planning

horizon (e.g. 1 month)

Flexible resourcesKey element of JIT is having flexible resources. One aspect is relying on general-purposeequipment capable of performing a number of different functions. General-purposeequipment provides flexibility of operations and eliminates waste of space (e.g. all-in-onecopier, printer & scanner).Another element; Multifunction workers capable of performing more than 1 job

Facility layoutJIT also relies on cell manufacturing placement of dissimilar machines and equipmenttogether to produce a family of products with similar processing requirements.

Equipment in a work cell is usually arranged in a U shape, with worker placed in center ofU. Advantages:1. Use of cells provides production efficiency with flexibility to produce a variety of

different products;2. U shape allows workers to have easy reach and flexibility;3. Worker satisfaction is higher because of ability to perform a variety of tasks.

TQMStrategy of quality improvement:

1. define quality as seen by customer;2. translate customer needs into measurable terms;3. measure quality on an ongoing basis;4. set improvement targets and deadlines;5. develop systematic method for improvement.

Product versus processIn JIT the quality of product is distinguished from quality of process. A faulty product is aresult of a faulty process. So, process needs to be corrected in order to address the rootcause of problem.

Quality at the sourceJidoka authority given to workers to stop production line if a quality problem isdetectedJIT systems usually operate with 7 h. of production and 1 h. for problem solving andworking with teams; called undercapacity scheduling.

To help workers identify quality problems, JIT relies on visual signals:o kanban control


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o colour coding etc.Poka-yoke foolproof devices or mechanisms that prevent detects from occurringThe device could be a clamp (klem) that can be placed only in a certain way.

Preventive maintenanceTo avoid unexpected machine stoppages, costs are significantly higher than regular

inspection. Preventive maintenance is designed to keep machines operational.

Work environmentOrder and simplicity are considered highly important it creates a calm, clear mindenvironment. It is easy to see if something out of order.

Respect for peopleJIT relies on cross-functional worker kills, ability of workers to perform many differenttasks on many different machines.Participation by all employees is vital to success of JIT. JIT uses a style of managementcalled bottom-round management. Decisions are discussed at all levels. Its very slowbut achieves consensus among all involved.

Everyone work together; Quality circlespopular small teams of employees thatvolunteer to solve quality problems. Meetings are usually weekly and attempt to developsolution to problems and share them with management.

Lifetime employmentToady lifetime employment comprises relatively small percentage of total workforce. Buta company must do certain things to reduce employee insecurity and encourage trustand openness. Some possibilities:

o Commit policy of making no layoffs as result of productivity improvements;o If company performs well, workers will share in rewards through bonuses.

Role of management

o responsible for creating JIT culture;o serve as coaches and facilitators;o develop incentive system that rewards workers for their efforts;o develop employee skills necessary to function in JIT environment;o ensure that workers receive multifunctional training;o facilitate teamwork.

Supplier relationshipso suppliers viewed as external factory;o use of single-source suppliers;o long-term supplier relationships developed;o suppliers locate near customer;o stable delivery schedules;o cost and information sharing.

Single-source supplier suppliers that supply entire family of parts for one manufacturer

Benefits of JIT

1. reduction in inventory 2. lower production costs

3. improved quality 4. increased machine utilization

5. reduced space requirements 6. greater flexibility

7. shorter lead times 8. increased productivity

Implementing JITTo implement JIT successfully a company does not need sophisticated systems;What is needed are:

o Correct attitude


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o employee involvemento continuous improvement

Some changes need to be implemented before others:Make quality improvements -> reorganize workplace -> reduce setup times -> reduce lotsizes and lead times -> implement layout changes -> switch to pull production ->

develop relationship with suppliers.

Implementation is never complete, because improving performance is a never-endingtask. As new problems become visible, they must be solved before further reductions ininventory are made.

JIT in servicesJIT is equally applicable in service organizations, particularly with the push toward time-based competition and the need to cut costs.

JIT success is dependent on interfunctional coordination and effort. Marketing must workclosely with customers to define customer-driven quality. IS must design a powerful

information system. Engineering must develop equipment with low setups and designjobs with foolproof devices. Finance must monitor financial improvements with realisticexpectations. Accounting must develop appropriate costing mechanisms.

Chapter 8: Forecasting

Principles of forecasting1. Forecasts are rarely (zelden) perfect. Goal: generate good forecasts on the

average over time and keep forecast errors as low as possible;2. Forecasts are more accurate for groups or families of items rather than individual

items;3. Forecasts are more accurate for shorter than longer time horizons.

Steps in forecasting process1. Decide what to forecast;2. Evaluate and analyze appropriate data;3. Select and test forecasting model;4. Generate forecast;5. Monitor forecast accuracy.

Types forecasting methods

Qualitative methods Quantitative methods

1.Characteristi

cs

Based on human judgment, opinions;subjective & nonmathematical

Based on mathematics;quantitative in nature

2. StrengthsCan incorporate latest changes in

environment and inside information

Consistent & Objective; able toconsider much info and data at

once

3.Weaknesses

Can bias forecast and reduce forecastaccuracy

Often quantifiable data are notavailable.

Qualitative methods -> often used for long-period expectationsgenerate forecast based on subjective opinion forecaster

Qualitative methods

Type Characteristics Strengths Weaknesses

Executiveopinion

Group managers come upwith forecast

Good for strategic ornew-product forecasting

One persons candominate

Market Uses surveys and interviews Good determinant Can be difficult to


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research to identify customerpreferences

customer preferences develop goodquestionnaire

Delphimethod

Seeks to develop consensus(overeenstemming) among

group of experts

Excellent for forecastinglong-term productdemand, technical

changes & scientific

advances

Time consumingto develop

Quantitative methods

Quantitative Forecasting models

Type Description Strengths Weaknesses

T im e s e r i e s M o d e l s

Nave Uses last periods

actual value

Simple & Easy to

use

Only good if data

change little fromperiod to period

Simple mean Uses average ofpast data

Good for levelpattern

Requires carryinglot of data

Simple movingaverage

Method in whichonly n of mostrecent observationsare averaged

Only good for levelpattern

Important to selectproper movingaverage

Weighted movingAverage

Ft+1= ?CtAt

Method where n ofmost recentobservations areaveraged and past

observations

Good for levelpattern; allowsplacing differentweight on past

demands

Selection of weightrequired good

judgement

Exponentialsmoothing

Weighted averageprocedure withweight decliningexponentially asdata become older

Proved excellentforecast results forshort to mediumlength forecasts

Choice of alpha iscritical

Trend adjustedexponentialsmoothing

An exponentialsmoothing modelwith separateequations forforecasting leveland trend

Proved good resultsfor trend data

Only for data withtrend

Linear trend line Technique usesleast squaresmethod to fitstraight line to pastdata over time

Easy to use andunderstand

Data should displayclear trend overtime

Seasonal indexes Computespercentage amountby which data foreach season areabove / below mean

Simple and logicalprocedure forcomputingseasonality

Make sureseasonality isactually present

Cau s a l Mode l s

Linear regression Uses least square

method to modellinear relationship

Easy to understand;

provides goodforecast accuracy

Make sure linear

relationship ispresent

Time series models Causal models


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between 2 variables

Multiple regression Similar to linearregression, butmodels therelationship ofmultiple variables

with variable beginforecast

Powerful tool inforecasting whenmultiple variablesare considered

Significantlyincreases data andcomputationalrequirements

Time series modelsTypes of data patterns:

o Level of horizontal: data fluctuate around constant mean (e.g. product in maturestage);

o Trend: pattern which data exhibit increasing/decreasing values of time;o Seasonality: pattern that regularly repeats itself and is constant in length;o Cycles: Data patterns created by economic fluctuations.

Random variation cannot be predicted.

Forecasting Level or Horizontal Pattern

Nave method

Ft + 1= AtFt= forecast next period, t + 1

At= actual value current period, tt = current time period

Simple mean / average

Ft+1= ?AtN

Simple moving average (SMA) is

similar to simple average except nottaking average of all data but most

recent periods

Smaller number ofobservations? more

responsive forecast tochanges in demand

Weighted Moving Average

Ft+1= ? CtAtCt= weight placed on actual

value period tAt= actual value in period t

e.g. = (.25)AMay+(.25)AJune+ (.5)AJuly

Exponential smoothing model

Ft + 1= aAt + (1 - a)FtAt= actual value current

period tFt= forecast current period t

a = smoothing coefficient

Most frequently usedforecastingtechniques

Small a? Low influence to actual data! Even more stable and less variation!

Forecasting TrendTrend-Adjusted Exponential smoothing

S = exponentially smoothed averageT = exponentially smoothed trenda = smoothing coefficient of level = smoothing coefficient trend

Step 1: Smoothing level ofseries

St= aAt+ (1-a)(St-1+ Tt-1)

Step 2: Smoothing TrendTt= (St-St-1) + (1- )Tt-1

Step 3: ForecastIncl. Trend

FITt+1 = St+Tt

Linear Trend LineTechnique that computes forecast with trend. Useful for computing forecast when datadisplay a clear trend over time.

Y = a + bX Step 1: computer parameter bStep 2: compute parameter a


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Y = forecast for period XX = number of time periods from X = 0

Step 3: generate linear trend lineStep 4: Generate a forecast

Forecasting SeasonalitySeasonal index percentage amount by which data for each season are above/below the

mean

Step 1: calculate average demand each quarter / seasonStep 2: compute seasonal index for every seasonStep 3: calculate average demand per season next yearStep 4: multiply next years average seasonal demand by each seasonal indexStep 5: multiply next years average seasonal demand by each seasonal index

Causal modelsLinear RegressionProcedure that models a straight-line relationship between two variables

Correlation CoefficientStatistic that measures the direction and strength of the linear relationship between 2variables

Multiple RegressionIs an extension of linear regression. It develops a relationship between 1 dependentvariable and multiple independent variables.

Measuring Forecast AccuracyForecast error = difference between forecast and actual value for a given period.

Et= At FtEt = forecast error for period tAt = actual value for period t

Ft= forecast for period t

MAD = Mean absolute deviationMSE = Mean squared error

MAD is based on absolute valuesComparing different forecasting models? MSE

Tracking signalForecast bias = persistent tendency for a forecast to be over/under actual value of dataTracking signal = tool used to monitor the quality of a forecast

Selecting right forecast model4 factors:1. amount and type of data available;2. degree of accuracy required;3. length of forecast horizon;4. Patterns present in data.

Chapter 9: Capacity planning and facility location

Capacity planningCapacity maximum output rate that can be achieved by a facilityCapacity planning is deciding on the maximum output rate of a facility

Measuring available capacity

o Design capacity maximum output rate under ideal conditions


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o Effective capacity maximum output rate under normal conditions

Calculating capacity: actual output actual output(How well capacity is used) effective capacity design capacity

Best operating level: volume of output that results in lowest average unit cost

Economies of scale condition in which the average costs of a unit produced is reducedas the amount of output is increasedDiseconomies of scale condition in which the cost of each additional unit madeincreases

Focused factories facilities that are small, specialized, and focused on a narrow set ofobjectives

Making capacity planning decisionsStep 1: Identify capacity requirements;

Forecasting capacityCapacity cushions (additional capacity added to regular capacity

requirements to provide greater flexibility)Strategic implications

Step 2: Develop capacity alternatives;3 options: Do nothing;

Expand large now;Expand small now with option to add later.

Step 3: Evaluate capacity alternatives.

Decision Treesto choose between capacity planning alternatives managers may use decision trees,which are a modelling tool used to evaluate independent decisions that must insequence.

Procedure for drawing a decision tree: work from left to right with the indicate chanceevents. To solve a decision tree; work from right to left to give the EV (Weighted averageof chance events, where each chance event is given a probability of occurrence).

e.g. EV = 0.3 (80.000) + 0.7 (200.000) = 164.000

Location analysisLocation analysis is deciding on the best location for a facility

Factors affecting location decisions: proximity to sources of supply, to customers, tosource of labour, community considerations, site considerations, quality-of-life issues,other considerations.

Globalization process of locating facilities around the world.

Capacity planning and location analysis decisions are often made simultaneously becausethe location of a facility is usually related to its capacity. When a business decides to


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Computing the Center of Gravity for Matrix Manufacturing

Break-even analysisRemember the break even equations usedfor calculation total cost of each location andfor calculating the breakeven quantity Q.

Total cost = F + cQTotal revenue = pQ

Break-even is where Total Revenue = Total Cost

Transportation MethodThe transportation method of linear programming can be used to solve specific locationproblems

Chapter 10: Facility layout

Layout planning is determining the best physical arrangement of resources within afacility. Proper layout planning is highly important for the efficient running of a business.Otherwise, there can be much wasted time and energy, as well as confusion.Two broad categories of operations:

1. Intermittent processing systems2. Continuous processing systems

Types of layouts:1. Process layouts:

? Group similar resources together (hospital)2. Product layouts:

? Designed to produce a specific product efficiently (assembly line)3. Hybrid layouts:

? Combine aspects of both process and product layouts (grouped technologyor grocery stores (kruidenierswinkels) Commonly used

4. Fixed-Position layouts:? Product is to large to move; e.g. a building

Computing the Center of Gravity for Matrix Manufacturing

Coordinates Load

Location (X,Y) (li) lixi liyi

Cleveland (11,22) 15 165 330

Columbus (10,7) 10 165 70

Cincinnati (4,1) 12 165 12Dayton (3,6) 4 165 24

Total 41 325 436

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Characteristics of process and product layouts:

Process Layouts Product LayoutsProducts: large #, different small #, efficientlyResources: general purpose specializedFacilities: more labor intensive more capital intensive

Flexibility: greater relative to market lower relative to marketProcessingRates: slower fasterHandling costs: high lowSpace requirements: higher lower

Process layouts provide much flexibility and allow for the production of many productswith differing characteristics. Product layouts, on the other hand, provide great efficiencywhen producing one type of product.

Design process layouts

The steps in designing a process layout are:1. Gathering info about space needs, space availability and closeness requirements

of departments; (table 10-2 & 10-3)2. Developing a block plan or schematic of the layout;3. Developing a detailed layout.

Another tool to provide info about importance of proximity (nabijheid) is a REL chart(table 10-3).REL chart table that reflects opinions of managers with regard to importance of havingany two departments close together

Step 2: Develop block plano using trial and error (when a layout problem is small in scope)o using decision support tools

Trial and error; measure effectiveness? load-distance modelLoad-distance model used to compare relative effectiveness of different layouts


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Load-distance score

(Rectilinear distance shortest distance between 2 locations using north- south andeast- west movements)

Using decision support tools2 popular software packages: ALDEP and CRAFT.The best way to use these is to consider the software solution as a starting point indeveloping a final layout.

Step 3: Develop a detailed layoutWe begin to consider exact sizes and shapes of departments and work centers. We also

focus on specific work elements such as desks, cabinets and so on.

Special cases of process layoutWarehouse layouts

Layout Considerations:o Primary decision is where to locate each department relative to the dock;o Departments can be organized to minimize ldtotals (load distance);o Departments of unequal size require modification of the typical ld

calculationsto include a calculation of the ratio of trips to area needede.g. Backpacks trips to and from dock: 160, but area needed: 2 (160/2=80)

o The usage of Crossdocking(see Ch.4) modifies the traditional warehouselayouts; more docks, less storage space, and less order picking.

Office layoutsOffice Layout Considerations:

o Human interaction and communication are the primary factors in designingoffice layouts;

o One key layout trade-off is between proximity and privacy;o Open concept offices promote understanding & trust;o Flexible layouts incorporating office landscaping help to solve the privacy

issue in open office environments.

Designing product layoutsLine balancing process of assigning tasks to workstations in a product layout in order toachieve a desired output and balance the workload among stations

Design product layoutso Step 1: Identify tasks & immediate predecessors


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Step 6: Compute efficiency and balance delayo Efficiency (%) is the ratio of total productive time divided by total time

N = number of workstations

o Balance delay (%) is the amount by which the line falls short of 100%

Other considerationso Shape of the line (S, U, O, L):? Share resources, enhance communication & visibility, impact location of

loading & unloading

o Paced versus un-paced lines (paced, products is physically attached to line)? Paced lines use an automatically enforced cycle time

o Single or mixed-model lines (single-model line designed to produce only oneversion of product

Hybrid layoutsHybrid layouts have advantages over other layout types because they combine elementsof both process and product layouts to increase efficiency

An example of hybrid layouts is group technology or cell layouts. Group technology is heprocess of creating groupings of products based on similar processing requirements. Cellsare created for each grouping of products, resulting in a more orderly flow of productsthrough facility

o One of the most popular hybrid layouts uses Group Technology (GT) and acellular layout

o GT has the advantage of bringing the efficiencies of a product layout to aprocess layout environment

Process flows after use of GT cells

Chapter 11: Work system design

Designing a work system is part of developing a operating strategy

W o r k s t a t i o n E l i g ib l e t a s k T a s k S e le c t e d T a s k t i m e I d l e t i m e

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Work System design involves:o job design;o methods or process analysiso work measurement

Job Design

3 Additional factors in job design1. technical feasibility, job must be physically and mentally doable;2. economic feasibility, cost of job should be less than the value it adds;3. behavioural feasibility, degree to which the job is intrinsically satisfying to

employee

Eliminating Employee Boredomo Job enlargement, horizontal expansion by increasing scope of work;o Job enrichment, vertical expansion by increased worker responsibility;o Job rotation (adds direct value for company because of improved flexibility).

Team Approaches to Job design

Another option for job design is:o Problem-solving teams, small groups, trained in problem-solving techniques;o Special-purpose teams, Highly-focused, short-term teams addressing issues

important to management and labor;o Self-directed teams, Team members work through consensus to plan, manage, &

control their assigned work flow.

Alternative workplace brings work to the worker rather than the worker to the workplace(made possible by technologies).

Method Analysis -Study how a job is done

Advantages:? Can distinguish between value-added & non-value-added steps;? Revise the procedure to improve productivity;? After improvement, must revise the new standard operating procedure;? Follow-up to insure that changes actually improve the operation.

Work Measurement Determines how long it should take to do a job Work measurement techniques are used to set a standard time for a specific job.Standard time is the length of time it should take a qualified worker using appropriateprocess and tools to complete a specific job allowing time for personal, fatigue, andunavoidable delays.

Used to determine standard times and are usually based on time studies. Standard timesare used for:

Product costing;Tracking employee performance;Scheduling and planning required resources.

Setting Standard TimesA time Study is a technique for developing a standard time based on actual observationof the operator.Procedure for a time study:

1. Choose the job for time study;2. Tell worker whose job you will be studying;3. Break job into easily recognizable units;

4. Calculate number of cycles you must observe;5. Time each element, record the times, and rate workers performance;


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6. Compute normal time;7. Computer standard time.

Step 4 need to know how many cycles / observe the workerto ensure the results you want.

Start by making small number of observations so that we candetermine the sample mean (avg. x) and standard deviation (s).

z = confidence level -> table.a = accuracy level -> normally = 5% (0.05)

Step 5 shows mean observed timeAverage of the observation times for each of the work elements.

Performance rating factor (PRF)Subjective estimate of a workers pace relative to a normal

work pace

Frequency of Occurrence (F)How often the work element must be done each cycle. most elements done very cycle. Ifan element is done once every 5 cycles, F = 0.2

Step 6 compute normal timeo NT=(OT)(PRF)(F)

The normal time (NT) is the mean observed time multiplied by the performance ratingfactor (PRF)

Allowance factor amount of time the analyst allows for personal, fatigue (moeheid),

and unavoidable delays. 2 Ways:AFJOB= 1 + PFD (jobs have different allowance factors)

PFD1

1AF WorkedTime

?? (jobs are similar and same allowance factors)

PFD = percentage allowance adjustment based on job time / time worked

Step 7 compute standard time

o (NT)(AF)ST?

NT = Normal timeAF = Allowance Factor

Other Time Series methodso Elemental time data, for typical work elements from previously completed time

studies can be stored in a data base for use on future similar studies.o Predetermined time data (e.g. MTM and MTS), is a larger database of valid

work element times used to set standards for common job elementso Reach, grasp, move, engage, insert, turn, etc.

o Work Sampling, technique for estimating the proportion of time a workerspends on an activity. Commonly used method!

Work SamplingInvolves random observations of a worker to determine the proportion of time spent oneach activity.

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? x-bar: the mean observedtime to complete the task


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? Step 1 We need to estimate the number of observations needed to provide anestimate with 97% confidence (z=2.17), and the resulting estimate will be within5% of its true value. We use

? Step 2 Based on the first 30 observations the secretary was making travelreservations 6 times (6 out of 30 observations = 0.2). With this new estimate,recalculate the sample size needed.

? Final Step After making the 302 observations, the secretary was makingreservations 60 times or 19.9%. This estimate can now be used to make thedecision on savings that might result by consolidating this task with an in housetravel agency

Compensation

o Compensation is the third part of work system designo Time-based plans (day pay) versus output-based systems (incentive pay)o Group incentive plans: profit sharing & gain sharing

? Plans put part of a workers salary at risk? Does the compensation system undermine teamwork?? Does plan prevent free-riders not doing their fair share?? Does the incentive plan encourage workers to support the long-term health

of the organization?

Worker compensation systems are time-based or output-based and can be based onindividual or group performance. Time-based pays the worker on the number of hoursworked. Output-based pays the worker on the number of units completed.

Learning curves- show the rate of learning that occurs when an employee repeats thesame task over time

T x Ln= time required to perform a task the nth timeT = the time required to perform the task the first timeL = the rate of learningn = the number of times the task has doubled

E.g. When the number of times the task is repeated doubles, the time per task reduces.With an 85% learning curve rate, the 2nd time a task is done will take 85% of the 1st time.The 4th time will take 85% of the 2nd.If an employee took 12 hours to complete an initial task, how long will the 16th time take (4thdoubling)?

hours6.26(.85)x1216th taskforHours 4 ??

Chapter 12: Inventory Management

Types of inventory:o raw materials;o components;o Work-in-process (WIP);o Finished Goods; (products sold to customers)o Distribution Inventory; (finished goods in the distribution inventory)o Maintenance, repair & operating (MRO).

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Inventory has several uses:o Anticipation or seasonal inventory;o Safety stock: buffer demand fluctuations;o Lot-size or cycle stock: take advantage of quantity discounts;o Pipeline or transportation inventory;o Speculative or hedge inventory protects against some future event, e.g. labor

strike;o Maintenance, repair, and operating (MRO) inventories.

Inventory management objectiveso Provide desired customer level;

o % of orders shipped on schedule; does not capture value;

o % of line items shipped on schedule; does not capture value;o % of dollar volume shipped on schedule; recognize differences in both line-

items and value (e.g. 20 orders 400, shipped 395 = 395/400 = 98 %service level.

o Provide cost-efficient operations;o Buffer stock for smooth production flow; (WIP) inventory to buffer

operations;o Maintain a level work force; no seasonal demands, e.g. no costs of

overtime;o Allowing longer production runs (lower setup costs) & quantity discounts.

o Minimized inventory related investments.o Inventory turnover; measure minimum inventory investment;

Annual costs of goods soldAverage inventory in dollars

o Weeks (or days) of supply.Average inventory on hand in dollarsAverage weekly usage in dollars

(the higher the number, the more effectiveness inventory)

Inventory investment is measured in inventory turnover and/or level of supply.Inventory performance is calculated as inventory turnover or weeks, days to supply.

Relevant Inventory costsThese costs include:

Item costs

Holding costs ->1. Capital costs;2. Storage costs;3. Risk costs.

Ordering costs -> Fixed costs for placing a order

Shortage costs ->

Costs related to additional paperwork,

shipping expense and intangible cost oflost customer goodwill

Calculating annual holding cost rate =(% of capital cost + storage cost + risk cost) x average inventory

Shortage costsBack order delaying delivery to the customer until item becomes availableLost sale Occurs when customer is not willing to wait for delivery

Determining order quantitiesStock-Keeping Unit (SKU) = an item in a particular geographic location

Some common approaches in ordering:

Lot-for-Lot Order exactly what is needed


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Fixed-orderquantity

Order a predetermined amount each time an order is placed (Qsystem)

Min-max system When on-hand inventory falls below predetermined minimum, order aquantity that take inventory back to predetermined maximum

Order n periods Order enough to satisfy demand for the next nperiods

Smaller lot sizes give a company flexibility and shorter response times. The key toreducing order quantities is to reduce ordering or setup times.

Mathematical models for determining order quantity3 Mathematical models:? Economic Order Quantity (EOQ or Q System)

? An optimizing method used for determining order quantity and reorderpoints;

? Part of continuous review system which tracks on-hand inventory eachtime a withdrawal is made.

? Economic Production Quantity (EPQ);? A model that allows for incremental product delivery.

? Quantity Discount Model.? Modifies the EOQ process to consider cases where quantity discounts are

available.? EOQ = continuous review systemEOQ Assumptions:

? Demand is known & constant - no safety stock is required? Lead time is known & constant? No quantity discounts are available? Ordering (or setup) costs are constant? All demand is satisfied (no shortages)? The order quantity arrives in a single shipment

Reorder point

R = dLd = avg. daily demandL = Lead time (days)

Calculating InventoryTotal annual cost = annual ordering cost + annual holding costs

TC = total annual / inventory costD = annual demandQ = quantity to be orderedH = holding costS = ordering or setup cost

Calculating EOQ

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D = annual demandS = ordering or setup costH = holding cost

After calculating the Economic Order Quantity and the Total annual cost of Inventory youcan calculate the difference between Ordering and Inventory!

? EPQWhen entire replenishment order arrives not at one time

Total cost: TC = total annual costD = annual demand

Q = quantity to be orderedH = holding costS = ordering or setup cost

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Maximum inventory:

(d could also be weekly demand)(p could also be weekly production)

d=avg. daily demand ratep=daily production rate

Calculating EPQ

EPQ Problem: HP Ltd. Produces its premium plant food in 50# bags. Demand is 100,000lbs. per week and they operate 50 wks. each year and HP can produce 250,000 lbs. perweek. The setup cost is $200 and the annual holding cost rate is $.55 per bag. Calculatethe EPQ. Determine the maximum inventory level. Calculate the total cost of using theEPQ policy.

? Quantity Discount ModelEOQ model assumes no quantity discounts are available. This model modifies the EOQprocess to consider cases where quantity discounts are available.

Quantity Discount Procedure:? Calculate the EOQ at the lowest price;? Determine whether the EOQ is feasible at that price;

o Will the vendor sell that quantity at that price?? If yes, stop if no, continue;? Check the feasibility of EOQ at the next higher price;

? Continue until you identify a feasible EOQ;? Calculate the total costs (including total item cost) for the feasible EOQ model;?

Calculate the total costs of buying at the minimum quantity required for each ofthe cheaper unit prices;? Compare total cost of each option & choose the lowest cost alternative.

Quantity Discount Example: Collins Sport store is considering going to a different hatsupplier. The present supplier charges $10 each and requires minimum quantities of 490hats. The annual demand is 12,000 hats, the ordering cost is $20, and the inventorycarrying cost is 20% of the hat cost, a new supplier is offering hats at $9 in lots of 4000.Who should he buy from?

? EOQ at lowest price $9. Is it feasible?

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? Since the EOQ of 516 is not feasible, calculate the total cost (C) for each price tomake the decision

? 4000 hats at $9 each saves $19,320 annually. Space?

Determining safety stock levels

R = dL + SS

R = reorder point in unitsD = daily demand in unitsL = lead time in days

SS = safety stock in units

Order-cycle service level probability that demand during lead time will not exceed on-hand inventory

SS = zsdL z = number of standard deviationssdL= standard deviation of demand during lead time in units

A 95% service level (stockout risk of 5%) has a Z=1.645

Periodic review systemDetermine quantity of an item has on hand at specified, fixed-time intervals to know thesize of replenishment order.

Advantages are:? No need for a system to continuously monitor item;? Items ordered from the same supplier can be reviewed on the same day saving

purchase order costs.

Disadvantages:? Replenishment quantities (Q) vary;? Order quantities may not quality for quantity discounts;? On the average, inventory levels will be higher than Q systems-more stockroom

space needed.

Place an order = Target inventory level quantity on hand; Q = TI - OHIts similar as the min-max system. The difference is that with periodic review system,time between orders is constant with varying quantities ordered.

Two major decisions to be made concern time between orders and target inventory level.

Alternative to base TBO (Time between orders) on the economic order quantitycalculation (EOQ).

Target inventory level (TI)

TI = d(RP + L) + SS

TI = target inventory level in unitsD = average period demand in units

RP = review periodL = lead time

SS = Safety stock

SS = zsRP+L z = number of standard deviationssRP+L= standard deviation of demand during review period and leadtime and is calculated as:

calculating sRP+L -> LRPLRP ??? ??

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P System:an auto parts store calculated the EOQ for Drive Belts at 236 units and wantsto compare the Total Inventory Costsfor a Qvs. aPReview System. Annualdemand (D) is 2704, avg. weekly demand is 52, weekly s is 1.77 belts, and lead time is3 weeks. The annual TCfor the Q system is $229; H=$97, S=$10.

? Review Period

? Target Inventory for 95% Service Level

? Average On-HandOHavg= TI-dL=424-(52belts)(3wks) = 268 belts

? Annual Total Cost (P System)

Comparison of continuous review systems and periodic review systemCRS has no review period and a smaller average inventory investment. PRS means lesswork because inventory balances are only reviewed and updated periodically.

Single-period inventory modelDesigned for use with products that are highly perishable (bederfelijk)Characteristics single-period model:

1. Sold at regular price only during single-time period;2. Demand is highly variable but follows a known probability distribution;3. Salvage (berging) value of these products is less than its original cost.

Inventory decisions about perishable products (like newspapers) can be made using thesingle-period inventory model. The expected payoff is calculated to assist the quantitydecision.

SPI Model Example: Tee shirts are purchase in multiples of 10 for a charity event for $8each. When sold during the event the selling price is $20. After the event their salvagevalue is just $2. From past events the organizers know the probability of selling differentquantities of tee shirts within a range from 80 to 120

Payoff TableProb. Of Occurrence.20 .25 .30 .15 .10Customer Demand 80 90 100 110 120# of Shirts Ordered Profit

80 $960 $960 $960 $960 $960 $96090 $900 $1080 $1080 $1080 $1080 $1040

Buy 100 $840 $1020 $1200 $1200 $1200 $1083110 $780 $ 960 $1140 $1320 $1320 $1068120 $720 $ 900 $1080 $1260 $1440 $1026

Sample calculations:Payoff (Buy 110)= sell 100($20-$8) ((110-100) x ($8-$2))= $1140Expected Profit (Buy 100)= ($840 X .20)+($1020 x .25)+($1200 x .30) +

($1200 x .15)+($1200 x .10) = $1083

ABC Inventory ClassificationA method for determining level of control and frequency of review of inventory items

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4 steps for an ABC inventory analysis1. Calculate annual dollar usage for each item;2. List items in descending order based on annual dollar usage;3. Calculate cumulative annual dollar volume;4. Classify items into groups.

Justifying smaller order quantities? JIT or Lean Systems would recommend reducing order quantities to the lowest

practical levels? Benefits from reducing Qs:

? Improved customer responsiveness (inventory = Lead time)? Reduced Cycle Inventory? Reduced raw materials and purchased components

? Justifying smaller EOQs:

? Reduce Qs by reducing setup time (S).

Inventory record accuracy2 Methods are available for checking inventory record accuracy:

1. Periodic counting;2. Cycle counting.

Periodic counting (physical counting) disadvantages: The job is often rushed and isdone by employees not trained for checking inventory. Inventory record errors areincreased rather than reduced.

Cycle counting counting inventory throughout the year: Series of mini-physical

inventories done daily. A-items are counted most frequently.

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2DSQ?


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Cycle counting is a method for maintaining accurate inventory records. Determining whatand when to count are major decisions.

Chapter 13: Aggregate Planning / Production PlanningThe Aggregate (complexe) Plan identifies the resources needed by operations to supportthe marketing Plan.The aggregate plan is usually updated and reevaluated monthly by the operations group.

Sales and operations planning integrates plans from all functional areas and regularlyevaluates company performance. Engineering plan support the research anddevelopment of new products introduced in marketing plan and subsequently planned forin the aggregate plan.

Master Production Schedule (MPS)The anticipated production schedule for the company expressed in specific configurations,quantities, and dates.

Types of aggregate plans

Level Aggregate Plans planning approach > same quantity each time period.Inventory & backorders used to absorb demand fluctuations:

? Maintains a constant workforce? Sets capacity to accommodate average demand? Often used for make-to-stock products like appliances? Disadvantage - builds inventory and/or uses back orders

Chase Aggregate Plans planning approach > varies production to meet demand:? Produces exactly what is needed each period? Sets labor/equipment capacity to satisfy period demands? Disadvantage - constantly changing short term capacity

Hybrid Aggregate Plans - options using various combinations of inventory,backorders, and capacity to achieve cost and customer service objectives:

? Uses a combination of options? Options should be limited to facilitate execution? May use a level workforce with overtime & temps? May allow inventory buildup and some backordering? May use short term sourcing

Aggregate Planning OptionsDemand based options respond to demand fluctuations through inventory /

backorders, of by shifting demand pattern? Reactive: uses finished goods inventories and backorders for fluctuations


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? Proactive: shifts the demand patterns to minimize fluctuations e.g. earlybird dinner prices at a restaurant

Capacity based options allow to change its current operating capacity? Uses overtime, undertime, subcontracting, hiring, firing, and part-timers

cost and operational implications

Overtime Work beyond normal operation hours that usually require a premium be paidto workers. Expensive option and should only be used short-term.Undertime condition occurring when there are more people on the payroll than areneeded to produce planned output.Both options -> Cost of labor per unit increases

Evaluating current situationWhen considering different options, its important to evaluate current situation in termsof point of departure, magnitude of the change, and duration of the change.

? Point of departure, percentage of normal capacity is currently using;? Magnitude of the change, relative size of the change is needed;? Duration of the change.

Point of departure if operating at 100% of normal capacity and need to increasecapacity by 10% -> simple option such as overtimeMagnitude of change smaller changes are easier to implement such are increasingworkforceDuration of change if duration is a brief seasonal surge, hiring temporary workersmakes sense

Developing Aggregate Plan (AP)Step 1- Choose strategy: level, chase, or HybridStep 2- Determine the aggregate production rate

Step 3- Calculate the size of the workforceStep 4- Test the plan as follows:? Calculate Inventory, expected hiring/firing, overtime needs? Calculate total cost of plan

Step 5- Evaluate performance: cost, service, human resources, and operations

Strategies exist that can smooth demand patterns and capacity can be changed by usingshort term measures like OT (overtime) and UT (undertime). APs are developed using a5 step process starting with a desired option and ending with evaluations of costs andcustomer service.

Aggregate plans for companies with tangible products (Plans A, B, C, D)Problem Data


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? Plan A: Level aggregate plan using inventories and back ordersFirst calculate the level production rate (14400/8=1800)

Plan A Evaluation

? Back orders were 13.9% of demand (1380)? Worst performance was period 2 at 21% of demand

? Marketing will not be satisfied at these levels? Workable plan for operations

? No employees hired or fired, no overtime or undertime needed, and outputis constant

? No human resource problems are anticipated

? Plan B: Level plan using inventories but no back orders

Plan B Evaluation? Plan B costs $240K (16%) more than plan A and has ending inventory of 7980

units? To be fair, Plan B built 1920 additional units ($192K) which will be sold later? Plan B costs $2.58 more per unit (2.5%)

3

45

678

9

10

111213

1415

161718

1920

21

22

2324

25

26

272829

3031323334

35

36

D E F G H I J K L M

Plan A: Level Aggregate Plan, Using Inventories and Backorders

Compute Level Production RateTotal Demand 14400

Less: Beginning Inventory 0Total Net Demand 14400

Average Demand Per Period 1800


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? Marketing satisfied by 100% service level? Workable Operations and HR plan- hire 12, no OT or UT, and level production

? Plan C: Chase aggregate plan using hiring and firing

Plan C Evaluation? Costs an additional $2 per unit more than Plan B? Marketing is satisfied again by 100% service level? From Operations and HR standpoint, not easy to implement:

? Need space, tools, equipment for up to 120 people in period 6 and onlyhave 60 people in period 4

? High training costs and potential quality problems? Low morale likely due to poor job security

? Plan D: Hybrid plan using initial workforce and overtime as neededThis is basically a level plan using OT to avoid backorders

Plan D Evaluation? Cost is only $.61 (.6%) more than Plan A with a reasonable increase in ending

inventory (+1440)? Marketing is satisfied as well with 100% service level? Not difficult for Operations to implement? Does not need excessive overtime

? Uses overtime in just periods 1 and 2 (7%, 20%)? Aggregate Plan Objective: Keep customer service high and costs low

Aggregate Plans for Service Companies with Non-Tangible Products- Plans E, F, GProblem Data

91

92

93

9495

9697

9899

100

101

102

103

104

105106

107

108109

110111112

113

114

D E F G H I J K L M N

Plan D: Hybrid Aggregate Plan, Using Initial Workforce and Overtime as Needed

Compute Regular Time Production RateNumber of Employees 90

Units per Employee per Period 20

Regular Time Product ion per Period 1800

Detailed Plan Computations1 2 3 4 5 6 7 8 Total

Total Demand in Period 1920 2160 1440 1200 2040 2400 1740 1500 14400

Net Demand After Inventory Considered 1920 2160 1440 840 1080 1680 1620 1320

Regular Time Production 1800 1800 1800 1800 1800 1800 1800 1800 14400

Overtime Production Needed 120 360 0 0 0 0 0 0 480

Ending Inventory 0 0 360 960 720 120 180 480 2820

Cost Calculations for Plan CRegular time labor cost $1,440,000

Overtime labor cost $72,000Inventory holding cost $28,200

Back order cost $0Hiring cost $0Firing cost $0

Total Cost $1,540,200

Period


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Plan E -Level aggregate Plan with No Back Orders, No tangible productAny demand not satisfied is lost to competitors, so company must meet all demand. It islikely that high undertime will lower employee morale. When we use overtime, we reduceundertime.

Plan F Hybrid with Initial Workforce and OT as Needed

Costs reduced by $77K and undertime to an average of 20%

Cost per service call reduced to $41.13 (-$5.02)

Plan G- Chase Plan with Hiring and Firing

Total cost reduced by $114K over Plan F, utilization improved to 100%, and cost perservice call now $33.72 (-$7.41)Workforce fluctuates from 30-69 people- morale problemsSolution? Compare smaller permanent workforce, more OT??

The Aggregate plan must balance several perspectives:1. Costs;2. Customer service;3. Organizational effectiveness;4. Workforce Moral.

26

2728

2930

313233343536

3738

39

D E F G H I J K L M

Plan F: Hybrid Aggregate Plan Using Initial Workforce and Overtime as Needed

Detailed Plan Computations

1 2 3 4 5 6 7 8 TotalDemand (calls) 2400 1560 1200 2040 2760 1680 1320 2400 15360

Serv ice hours needed 9600 6240 4800 8160 11040 6720 5280 9600 61440Regular t ime hours of capaci ty 9600 9600 9600 9600 9600 9600 9600 9600 76800

Overtime hours needed 0 0 0 0 1440 0 0 0 1440Undertime hours 0 3360 4800 1440 0 2880 4320 0 16800

Cost Calculations for Plan F

Regular time labor cost $614,400Overtime labor cost $17,280

Total Cost $631,680

Period

4567

8910

11

12131415

1617181920

2122

23

2425

26

2728

A BCost Data

Regular time labor cost per hour $8.00Overtime labor cost per hour $12.00

Subcontracting cost per unit (labor only) $60.00

Hiring cost per employee $250.00Firing cost per employee $150.00

Capacity Data

Beginning workforce (employees) 60Service standard per call (hours) 4Regular time available per period (hours) 160

Overtime available per period (hours) 24

Demand Data (calls)

Period 1 2400Period 2 1560Period 3 1200

Period 4 2040Period 5 2760

Period 6 1680

Period 7 1320Period 8 2400

Total Number of Periods 8


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Difference between APs for manufacturers and service companies involve the advantageof using inventories to absorb demand changes.

Master Production Schedule (MPS)Shows how many products or services are planned for each time period, based on the

resources authorized in the aggregate plan. The master scheduler develops the schedulebased on available capacity.

Demand management includes a companys forecasting, order entry and so forth. Itcaptures all activities that use manufacturing capacity. The aggregate plan supports themarketing plan.

Role of the mpsAggregate plan:? Specifies the resources available (e.g.: regular workforce, overtime,

subcontracting, allowable inventory levels & shortages)Master production schedule:? Specifies the number & when to produce each end item (the anticipated build

schedule)? Disaggregates the aggregate plan

The authorized MPS is a critical input into the MRP system. The MPS tells the MRP systemwhat the company plans to build and when.

Master Scheduling ObjectivesThe Master Scheduler must:? Maintain the desired customer service level? Utilize resources efficiently? Maintain desired inventory levels

The Master Schedule must:? Satisfy customer demand? Not exceed Operations capacity? Work within the constraints of the Aggregate Plan

Developing an MPSThe MPS system logic calculates when replenishment quantities are needed. MPS recordsare summed to show the total proposed workload.The MPS specifies the products to be built in each time period. The schedule feasibility ischecked against rough-cut capacity.

MPS record

Projected Available = beginning inventory + MPS shipments - forecasted demand

Rough-Cut capacity planning (RCCP)


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Process of converting the master production schedule into requirements for keyresources such as direct labor and machine time

This workload is compared against demonstrated capacity.Demonstrated capacity proven capacity calculated from actual performance data

Capacity planning using overall planning factors (CPOPF) is a simple, rough-cut capacityplanning technique. It develops a planning factor for each critical resource based onhistorical data.Procedure for using CPOPF:

1. determine planning factors:

2. calculate workload generated by this schedule;3. calculate total capacity needs for each resource for each time period;4. calculate individual workcenter capacity needs based on historical percentage

allocation.

Step 2:

Step 3:

Step 4:

builtunitsofnumber

modelbuildinghoursDLTotalFactorPlanningLaborDirect ?


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Evaluating and accepting the MPSTo evaluate the MPS:

In terms of customer service, promised customer delivery dates are metFor effective se of resources, enough capacity is available to meet scheduleIn terms of cost, the MPS will be compared with the aggregate plan.

If MPS needs add. resources, company not achieve objectives in marketing

Before you go onThe master scheduler uses a rough-cut capacity planning technique to calculate whetherthe company has the capacity to meet the proposed MPS.If the proposed MPS is feasible, it is evaluated in terms of customer service, effective useof resources, and inventory investment.If the proposed MPS is accepted, it becomes the authorized MPS. If capacity isinsufficient, either the MPS is modified or capacity is expanded.

Using the MPSOrder promising process of making order delivery commitments

Available-to-promise (ATP) uncommitted portion of a companys inventory and plannedproduction, maintained in the MPS to support order promising.

? Master schedulers use Available-to-Promise system logic when promising orderdelivery dates to customers.

ATPAction Bucket = (beginning inventory + MPS shipment) less (customer orders beforenext replenishment). Available in period 1.ATP=MPS shipment Customer orders between current MPS shipment and nextscheduled replenishment in periods 3,5,7,8, & 11.

Using ATP recordsATP records show how much inventory is available to satisfy customer demand, so yourcompany bases its delivery promises to customers on these records.

Week BI 1 2 3 4 5 6 7 8 9 10 11 12

Forecast 50 50 50 50 75 75 75 75 50 50 50 50

Customer orders 35 25 25 20 0 15 0 0 10 0 0 10

Projected available 110 60 10 85 35 85 10 60 110 60 10 85 35

Available- to-promise 50 80 110 125 115 115

MPS 125 125 125 12

Documents

summary OM reid.pdf