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Operations Management

Operations Management

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Course Outline
Introduction to Operations Management Forecasting System and work Design Quality Supply Chain Management Inventory Management and Scheduling Project Management Manufacturing and Service Technologies


Operations Management
Course Programme:
10 hours lectures, discussions and presentations 2 hours group presentation


Operations Management
Assessment Method:
10% Attendance 10% Class participation 30% Student¶s group assignment 30% Student¶s individual assignment 20% Written examination


Operations Management
William J Stevenson. Operations Management (9th Edition). The McGraw-Hill Companies Inc. ISBN 0-07-304191-2


Group and Individual Assignment 

You need to be a member of one of the study groups Each study group will conduct a case study on any operation at its own choice The study group should comment and recommend what measures can be made in order to improve the efficiency & effectiveness of the operation. A presentation will be made in last session followed by a written reports with not less than 1,000 words in English or 1,500 words in Chinese. You should submit the assignment not later than a month counting from the last session The report should include:
Background of the operation you are going to study What challenges they are facing ahead What areas they perform well and what areas they perform poor What suggestions you would make in order to improve the efficiency & effectiveness of the operation


Key terms to understand
Order winner and order qualifier  5 key attributes in good operations management 

Quality Cost Time Flexibility Agility

Operations Management
The management of systems or processes that create goods and/or provide services





The difference between the cost of inputs and the value or price of outputs.
Value added
Inputs Land Labor Capital Transformation/ Conversion process

Outputs Goods Services

Feedback Feedback

GoodsGoods-service Continuum

Steel production Home remodeling Auto Repair Maid Service Teaching Automobile fabrication Retail sales Appliance repair Manual car wash Lawn mowing

High percentage goods Low percentage service

Low percentage goods High percentage service


Food Processor Inputs Raw Vegetables Metal Sheets Water Energy Labor Building Equipment Processing Cleaning Making cans Cutting Cooking Packing Labeling Outputs Canned vegetables 11 .

nurses Hospital Medical Supplies Equipment Laboratories Processing Examination Surgery Monitoring Medication Therapy Outputs Healthy patients 12 .Hospital Process Inputs Doctors.

Manufacturing or Service? Tangible Act 13 .

Delivery of Services    Production of goods ± tangible output Delivery of services ± an act Service job categories Government Wholesale/retail Financial services Healthcare Personal services Business services Education 14 .Production of Goods vs.

Key Differences 1. 6. 5. 8. 7. 2. 4. 3. Customer contact Uniformity of input Labor content of jobs Uniformity of output Measurement of productivity Production and delivery Quality assurance Amount of inventory 15 .

Manufacturing v Service Characteristic Output Customer contact Uniformity of input Labor content Uniformity of output Measurement of productivity Opportunity to correct quality problems High Manufacturing Service Tangible Low High Low High Easy High Intangible High Low High Low Difficult Low 16 .

Scope of Operations Management  Operations Management includes: Forecasting Capacity planning Scheduling Managing inventories Assuring quality Motivating employees Deciding where to locate facilities And more . . 17 . .

 The operations function Consists of all activities directly related to producing goods or providing services 18 .

recording Newspapers. radio and television newscasts. manufacturing. banking. leasing. construction. mail service. wholesaling. moving. library. radio and television. trucking. satellites 19 Exchange Entertainment Communication . airlines Retailing. renting. hotels. power generation Warehousing. loans Films. concerts. mining. telephone. buses.Types of Operations Operations Goods Producing Storage/Transportation Examples Farming. taxis.

U. Service Employment Year Mfg. Manufacturing vs.S. Service 45 79 21 50 72 28 55 72 28 60 68 32 65 64 36 70 64 36 75 58 42 80 44 46 85 43 57 90 35 65 95 32 68 00 30 70 100 80 P er c e n t 60 40 20 0 45 50 55 60 65 70 75 80 85 90 95 00 Year 20 .

Responsibilities of Operations Management Planning ± ± ± ± ± ± ± ± ± ± ± Capacity Location Products & services Make or buy Layout Projects Scheduling Inventory Quality Costs Productivity Organizing ± Degree of centralization ± Process selection Staffing ± Hiring/laying off ± Use of Overtime Directing ± Incentive plans ± Issuance of work orders ± Job assignments Controlling/Improving 21 .

Key Decisions of Operations Managers        What What resources/what amounts When Needed/scheduled/ordered Where Work to be done How Designed Who To do the work How How Much 22 .

Decision Making System Design ± ± ± ± ± capacity location arrangement of departments product and service planning acquisition and placement of equipment 23 .

Decision Making System operation ± personnel ± inventory ± scheduling ± project management ± quality assurance 24 .

Decision Making Models  Quantitative approaches  Analysis of trade-offs  Systems approach  25 .

± Physical ± Schematic ± Mathematical Tradeoffs What are the pros and cons of models? 26 .Models A model is an abstraction of reality.

less expensive  Require users to organize  Systematic approach to problem solving  Increase understanding of the problem  Enable ³what if´ questions  Specific objectives  Consistent tool  Power of mathematics  Standardized format  27 .Models Are Beneficial Easy to use.

Quantitative Approaches ‡ Linear programming ‡ Queuing Techniques ‡ Inventory models ‡ Project models ‡ Statistical models 28 .

Systems Approach ³The whole is greater than the sum of the parts.´ SubSub-optimization 29 .

80% of problems are caused by 20% of the activities.Pareto Phenomenon ‡ A few factors account for a high percentage of the occurrence of some event(s). How do we identify the vital few? 30 . ‡ 80/20 Rule .

Business Operations Overlap Operations Marketing Finance 31 .

Operations Interfaces Industrial Engineering Distribution Maintenance Purchasing Operations Public Relations Legal Personnel Accounting MIS 32 .

Historical Evolution of Operations Management Industrial revolution (1770¶s)  Scientific management (1911)  Mass production Interchangeable parts Division of labor Human relations movement (1920-60)  Decision models (1915. 1960-70¶s)  Influence of Japanese manufacturers  33 .

e-commerce. e-business Management technology Globalization Management of supply chains Agility 34 .Trends in Business  Major trends The Internet.

Simple Product Supply Chain Suppliers¶ Suppliers Direct Suppliers Final Consumer Producer Distributor Supply Chain: A sequence of activities And organizations involved in producing And delivering a good or service 35 .

00 $1.46 $1.15 $0.15 $0.15 $0.08 $1.21 $1.08 $0.23 $0.A Supply Chain for Bread Stage of Production Farmer produces and harvests wheat Wheat transported to mill Mill produces flour Flour transported to baker Baker produces bread Bread transported to grocery store Grocery store displays and sells bread Total Value-Added Value Added $0.29 Value of Product $0.38 $0.29 36 .08 $0.54 $0.08 $0.

Other Important Trends Ethical behavior  Operations strategy  Working with fewer resources  Cost control and productivity  Quality and process improvement  Increased regulation and product liability  Lean production  37 .


Historical Milestones in OM The Industrial Revolution  Post-Civil War Period  Scientific Management  Human Relations and Behaviorism  Operations Research  The Service Revolution  39 .

40 . largely replaced human and water power for factories.The Industrial Revolution     The industrial revolution developed in England in the 1700s. Adam Smith¶s The Wealth of Nations in 1776 touted the economic benefits of the specialization of labor. Thus the late-1700s factories had not only machine power but also ways of planning and controlling the tasks of workers. The steam engine. invented by James Watt in 1764.

The Industrial Revolution       The industrial revolution spread from England to other European countries and to the United Sates. the old cottage system of production had been replaced by the factory system. In 1790 an American. developed the concept of interchangeable parts. . The first great industry in the US was the textile industry. In the 1800s the development of the gasoline engine and electricity further advanced the revolution. Eli Whitney. By the mid-1800s. . . more 41 .

By post-Civil War the following developments set the stage for the great production explosion of the 20th century: increased capital and production capacity the expanded urban workforce new Western US markets an effective national transportation system 42 .Post-Civil War Period   During the post-Civil War period great expansion of production capacity occurred.

and routing sequences were used to organize the shop. Stopwatch studies were conducted to precisely set standard output per worker on each task. and learning ability were determined. work methods. Supervisors were carefully selected and trained. strength. Material specifications. Incentive pay systems were initiated. His shop system employed these steps: Each worker¶s skill.Scientific Management  Frederick Taylor is known as the father of scientific management. 43 .

Ford Motor Company¶s operation embodied the key elements of scientific management: standardized product designs mass production low manufacturing costs mechanized assembly lines specialization of labor interchangeable parts 44 .Scientific Management  In the 1920s.

Human Relations and Behavioralism    In the 1927-1932 period. researchers in the Hawthorne( ) Studies realized that human factors were affecting production. Researchers and managers alike were recognizing that psychological and sociological factors affected production. 45 . From the work of behavioralists came a gradual change in the way managers thought about and treated workers.

After the war. OR helps operations managers make decisions when problems are complex and wrong decisions are costly. Military operations research (OR) teams were formed to deal with the complexity of the deployment. industry. government. equipment. operations researchers found their way back to universities. «) had to be deployed.Operations Research     During World War II. supplies. and consulting firms. 46 . enormous quantities of resources (personnel.

The Service Revolution       The creation of services organizations accelerated sharply after World War II. 47 . Investment per office worker now exceeds the investment per factory worker. more than two-thirds of the US workforce is employed in services. Thus there is a growing need for service operations management. Today. About two-thirds of the US GDP is from services. There is a huge trade surplus in services.

better decisions over greater distances 48 .The Computer Revolution       Explosive growth of computer and communication technologies Easy access to information and the availability of more information Advances in software applications such as Enterprise Resource Planning (ERP) software Widespread use of email More and more firms becoming involved in E-Business using the Internet Result: faster.

and Cost Challenges Rapid Expansion of Advanced Technologies Continued Growth of the Service Sector Scarcity of Operations Resources Social-Responsibility Issues 49 . Customer Service.Today's Factors Affecting OM       Global Competition Quality.

Operations Management William J. Stevenson 8th edition 50 .

Forecasts affect decisions and activities throughout an organization Accounting. finance Human resources Marketing MIS Operations Product / service design 51 .FORECAST:   A statement about the future value of a variable of interest such as demand.

workloads New products and services 52 . services Schedules. MRP. strategy IT/IS systems.Uses of Forecasts Accounting Finance Human Resources Marketing MIS Operations Product/service design Cost/profit estimates Cash flow and funding Hiring/recruiting/training Pricing. promotion.

53 .    Assumes causal system past ==> future Forecasts rarely perfect because of randomness Forecasts more accurate for groups vs. individuals Forecast accuracy decreases as time horizon increases I see that you will get an A this semester.

Elements of a Good Forecast Timely Reliable Accurate Written 54 .

Steps in the Forecasting Process ³The forecast´ Step 6 Monitor the forecast Step 5 Prepare the forecast Step 4 Gather and analyze data Step 3 Select a forecasting technique Step 2 Establish a time horizon Step 1 Determine purpose of forecast 55 .

uses historical data assuming the future will be like the past Associative models .uses subjective inputs Time series .Types of Forecasts  Judgmental .uses explanatory variables to predict the future 56   .

Judgmental Forecasts      Executive opinions Sales force opinions Consumer surveys Outside opinion Delphi method Opinions of managers and staff Achieves a consensus forecast 57 .

Time Series Forecasts Trend .caused by unusual circumstances  Random variations .long-term movement in data  Seasonality .caused by chance  58 .short-term regular variations in data  Cycle ± wavelike variations of more than one year¶s duration  Irregular variations .

Forecast Variations Irregular variatio n Trend Cycles 90 89 88 Seasonal variations 59 .

. The forecast for any period equals the previous period¶s actual value.. We sold 250 wheels last week. next week we should sell.... give me a minute.... Now.. 60 .Naive Forecasts Uh.

Naïve Forecasts Simple to use  Virtually no cost  Quick and easy to prepare  Data analysis is nonexistent  Easily understandable  Cannot provide high accuracy  Can be a standard for accuracy  61 .

Uses for Naïve Forecasts  Stable time series data F(t) = A(t-1)  Seasonal variations F(t) = A(t-n)  Data with trends F(t) = A(t-1) + (A(t-1) ± A(t-2)) 62 .

Techniques for Averaging    Moving average Weighted moving average Exponential smoothing 63 .

Moving Averages  Moving average ± A technique that averages a number of recent actual values. 64 . n MAn =  §1 Ai i= n Weighted moving average ± More recent values in a series are given more weight in computing the forecast. updated as new values become available.

Moving Averages  Moving average ± n MAn = Period 1 2 3 4 5 6 §1 Ai i= n Sales Average Forecast for next period 40 41 42 123/3 41 ? ? ? 65 .

Moving Averages  Moving average ± n MAn = Period 1 2 3 4 5 6 §1 Ai i= n Actual 41 42 42 Sales Average Forecast for next period 40 41 123/3 41 42 42 ? ? 66 .

Moving Averages  Moving average ± n MAn = Period 1 2 3 4 5 6 §1 Ai i= n Actual 41 42 42 44 Sales Average Forecast for next period 40 41 42 123/3 41 125/3 41.67 42 44 ? 67 .

67 ? 68 .Moving Averages  Moving average ± n MAn = Period 1 2 3 4 5 6 §1 Ai i= n Actual 41 42 42 44 43 Sales Average Forecast for next period 40 41 123/3 41 42 42 125/3 41.67 44 128/3 42.

67 44 128/3 42.Moving Averages  Moving average ± n MAn = Period 1 2 3 4 5 6 §1 Ai i= n Actual 41 42 42 44 43 43 Sales Average Forecast for next period 40 41 123/3 41 42 42 125/3 41.67 43 129/3 43 69 .

Simple Moving Average Actual 47 45 43 41 39 37 35 1 2 3 4 5 6 7 n MA5 MA3 8 9 10 11 12 MAn = §1 Ai i= n 70 .

Weighted Moving Averages  Weighted Moving average ± n WMAn= Period 1 2 3 4 5 6 Sales 40 41 42 ? ? ? Weight 20% 30% 50% Result §1 A*wi i= Forecast Actual 71 .

3 42 72 .3 21 41.Weighted Moving Averages  Weighted Moving average ± n WMAn= Period 1 2 3 4 5 6 Sales 40 41 42 ? ? ? Weight 20% 30% 50% §1 A*wi i= Result Forecast Actual 8 12.

8 44 73 .6 21 §1 A*wi i= Result Forecast Actual 41.Weighted Moving Averages  Weighted Moving average ± n WMAn= Period 1 2 3 4 5 6 Sales 40 41 42 42 ? ? Weight 20% 30% 50% 8.2 12.

4 12.Weighted Moving Averages  Weighted Moving average ± n WMAn= Period 1 2 3 4 5 6 Sales 40 41 42 42 44 ? Weight §1 A*wi i= Result Forecast Actual 20% 30% 50% 8.6 22 43 43 74 .

2 21.1 43 75 .4 13.Weighted Moving Averages  Weighted Moving average ± n WMAn= Period 1 2 3 4 5 6 Sales 40 41 42 42 44 43 Weight §1 A*wi i= Result Forecast Actual 20% 30% 50% 8.5 43.

Exponential Smoothing Ft = Ft-1 + E(At-1 . 76 . Therefore.Ft-1) ‡ Premise--The most recent observations might have the highest predictive value. we should give more weight to the more recent time periods when forecasting.

E is the % feedback  77 .Exponential Smoothing Ft = Ft-1 + E(At-1 .Ft-1) Weighted averaging method based on previous forecast plus a percentage of the forecast error  A-F is the error term.

Ft-1) = Next Period Ft-1= Previous Period E !Smoothing Constant At-1 = Actual Result Previous Period Ft 78 .Exponential Smoothing Ft = Ft-1 + E(At-1 .

Problem Ft = Ft-1 + E(At-1 .10 At-1 = 44 79 .Exponential Smoothing .Ft-1) Ft = Result of formula Ft-1= 42 E !Smoothing = .

Exponential Smoothing .20 80 .10(44-42) Ft = 42 + .10(2) Ft = 42 + .Problem Ft = Ft-1 + E(At-1 .20 Ft = 42.Ft-1) Ft = 42 + .

10(-.Ft-1) Ft = 43 + .Exponential Smoothing .Problem Ft = Ft-1 + E(At-1 .080 Ft = 42.92 81 .80) Ft = 43 + -.10(42.20-43) Ft = 43 + .

8 -1.39 41.66 4.55 43.92 Alpha = 0.25 42.4 Error 42 41.2 41.66 41.73 41.Exponential Smoothing Period 1 2 3 4 5 6 7 8 9 10 11 12 Actual 42 40 43 40 41 39 46 44 45 38 40 Alpha = 0.36 41.92 -0.75 1.92 -2 1.92 41.15 -2.53 82 .20 -1.53 40.09 5.13 43.00 1.92 41.93 -4.1 Error 42 41.88 41.15 41.15 2.87 -5.85 42.07 42.61 2.09 40.36 -1.45 1.92 41.73 -2.8 41.92 -0.73 -2.88 -1.Example 3 .

1 9 10 11 12 Period 83 .Picking a Smoothing Constant Actual 50 E!.4 Dem and 45 40 35 1 2 3 4 5 6 7 8 E !.

Common Nonlinear Trends Parabolic Exponential Growth 84 .

Linear Trend Equation Ft Ft = a + bt 0 1 2 3 4 5 t     Ft = Forecast for period t t = Specified number of time periods a = Value of Ft at t = 0 b = Slope of the line 85 .

( § t) 2 § y .§ t § y b = n§ t 2 .Calculating a and b n § (ty) .b§ t a = n 86 .

Linear Trend Equation Example t W eek 1 2 3 4 5 7 t = 15 ( 7 t) 2 = 2 2 5 7 t 2 t 1 4 9 16 25 = 55 2 y S a le s 150 157 162 166 177 7 y = 812 ty 150 314 486 664 885 7 ty = 2 4 9 9 87 .

15(812) 12495-12180 b = = = 6.5 + 6.3t 88 .6.225 275 -225 812 .3(15) a = = 143.3 5(55) .Linear Trend Calculation 5 (2499) .5 5 y = 143.

Associative Forecasting  Predictor variables .minimizes sum of squared deviations around the line   89 .technique for fitting a line to a set of points Least squares line .used to predict values of variable interest Regression .

90 .Linear Model Seems Reasonable X 7 2 6 4 14 15 16 12 14 20 15 7 Y 15 10 13 15 25 27 24 20 27 44 34 17 Computed relationship 50 40 30 20 10 0 0 5 10 15 20 25 A straight line is fitted to a set of sample points.

Forecast Accuracy  Error .difference between actual value and predicted value Mean Absolute Deviation (MAD) Average absolute error   Mean Squared Error (MSE) Average of squared error  Mean Absolute Percent Error (MAPE) Average absolute percent error 91 .

MSE. and MAPE MAD = § Actual  forecast n MSE = § ( Actual  forecast) n -1 §.MAD.

Actual  forecas t n / Actual*100) 2 MAPE = 92 .

86 1.26 MAD= MSE= MAPE= 2.41 0.28 93 .89 10.28 0.75 10.46 1.46 1.Example 10 Period 1 2 3 4 5 6 7 8 Actual 217 213 216 210 213 219 216 212 Forecast 215 216 215 214 211 214 217 216 (A-F) 2 -3 1 -4 2 5 -1 -4 -2 |A-F| 2 3 1 4 2 5 1 4 22 (A-F)^2 4 9 1 16 4 25 1 16 76 (|A-F|/Actual)*100 0.94 2.90 0.92 1.

Controlling the Forecast  Control chart A visual tool for monitoring forecast errors Used to detect non-randomness in errors  Forecasting errors are in control if All errors are within the control limits No patterns. are present 94 . such as trends or cycles.

Sources of Forecast errors Model may be inadequate  Irregular variations  Incorrect use of forecasting technique  95 .

Tracking Signal ‡Tracking signal ±Ratio of cumulative error to MAD §(Actual-forecast) Tracking signal = MAD Bias ± Persistent tendency for forecasts to be Greater or less than actual values. 96 .

Choosing a Forecasting Technique No single technique works in every situation  Two most important factors  Cost Accuracy  Other factors include the availability of: Historical data Computers Time needed to gather and analyze the data Forecast horizon 97 .

Exponential Smoothing 98 .

Linear Trend Equation 99 .

Simple Linear Regression 100 .

DESIGN OF WORK SYSTEMS McGraw-Hill/Irwin 101 Operations Management. . All rights reserved. Stevenson Copyright © 2005 by The McGraw-Hill Companies. by William J. Eighth Edition. Inc.

Job Design  Job design involves specifying the content and methods of job What will be done Who will do the job How the job will bob will be done Where the job will be done Ergonomics 102 .

Design of Work Systems       Specialization Behavioral Approaches to Job Design Teams Methods Analysis Motions Study Working conditions 103 .

Job Design Success Successful Job Design must be:     Carried out by experienced personnel with the necessary training and background Consistent with the goals of the organization In written form Understood and agreed to by both management and employees 104 .

Simplifies training 1. Minimum responsibilities 3.Specialization in Business: Advantages For Management: 2. Low education and skill requirements 2. Low wage costs For Labor: 1. Little mental effort needed 105 . High productivity 3.

Difficult to motivate quality ForLabor: 1. disruptive self-fulfillment tactics. Little opportunity for turnover. Little control over work absenteeism. Monotonous work 2. poor attention to quality 106 . possibly resulting in 3. Worker dissatisfaction. high 4. Limited opportunities for advancement 2.Disadvantages ForManagement: 1.

by vertical loading 107 .Behavioral Approaches to Job Design  Job Enlargement Giving a worker a larger portion of the total task by horizontal loading  Job Rotation Workers periodically exchange jobs  Job Enrichment Increasing responsibility for planning and coordination tasks.

Motivation and Trust  Motivation Influences quality and productivity Contributes to work environment  Trust Influences productivity and employeemanagement relations 108 .

Teams  Benefits of teams Higher quality Higher productivity Greater worker satisfaction  Self-directed teams Groups of empowered to make certain changes in their work process 109 .

Methods Analysis  Methods analysis Analyzing how a job gets done Begins with overall analysis Moves to specific details 110 .

quality problems) 111 . accidents.g.Methods Analysis The need for methods analysis can come from a number of different sources: Changes Changes Changes Other in tools and equipment in product design or new products in materials or procedures factors (e.

Install new methods 7. Follow-up to ensure improvements have been achieved 1. Propose new methods 6. Identify 112 . Analyze the job 5.Methods Analysis Procedure the operation to be studied 2. Study and document current method 4. Get employee input 3.

Analyzing the Job  Flow process chart Chart used to examine the overall sequence of an operation by focusing on movements of the operator or flow of materials  Worker-machine chart Chart used to determine portions of a work cycle during which an operator and equipment are busy or idle 113 .

FLOW PROCESS CHART ANALYST PAGE Job Requisition of petty cash D. Kolb 1 of 2 Details of Method Requisition made by department head Put in ³pick-up´ basket To accounting department Account and signature verified Amount approved by treasurer Amount counted by cashier Amount recorded by bookkeeper Petty cash sealed in envelope Petty cash carried to department Petty cash checked against requisition Receipt signed Petty cash stored in safety box 114 .

115 .Motion Study Motion study is the systematic study of the human motions used to perform an operation.

Motion Study Techniques  Motion study principles .use of motion pictures and slow motion to study motions that otherwise would be too rapid to analyze Charts    116 .basic elemental motions into which a job can be broken down Micromotion study .guidelines for designing motion-efficient work procedures Analysis of therbligs .

3. 2. 4. Eliminate unnecessary motions Combine activities Reduce fatigue Improve the arrangement of the workplace Improve the design of tools and equipment 117 . 5.Developing Work Methods 1.

Working Conditions T e m p e ra tu re & H u m id i t y V e n t il a t io n I l lu m in a t i o n C o lo r 118 .

Working Conditions (cont¶d) Noise & Vibration Work Breaks Safety Causes of Accidents 119 .

Work Measurement      Standard time Stopwatch time study Historical times Predetermined data Work Sampling 120 .

Compensation  Time-based system Compensation based on time an employee has worked during a pay period  Output-based (incentive) system Compensation based on the amount of output an employee produces during a pay period 121 .

Form of Incentive Plan      Accurate Easy to apply Consistent Easy to understand Fair 122 .

Compensation    Individual Incentive Plans Group Incentive Plans Knowledge-Based Pay System Management Compensation 123  .

by William J.PRODUCT AND SERVICE DESIGN McGraw-Hill/Irwin 124 Operations Management. All rights reserved. Stevenson Copyright © 2005 by The McGraw-Hill Companies. . Eighth Edition. Inc.

Product and Service Design  Major factors in design strategy Cost Quality Time-to-market Customer satisfaction Competitive advantage Product and service design ± or redesign ± should be closely tied to an organization¶s strategy 125 .

Product or Service Design Activities Translate customer wants and needs into product and service requirements  Refine existing products and services  Develop new products and services  Formulate quality goals  Formulate cost targets  Construct and test prototypes  Document specifications  126 .

liability.Reasons for Product or Service Design      Economic Social and demographic Political. or legal Competitive Technological 127 .

Objectives of Product and Service Design   Main focus Customer satisfaction Secondary focus Function of product/service Cost/profit Quality Appearance Ease of production/assembly Ease of maintenance/service 128 .

Designing For Operations  Taking into account the capabilities of the organization in designing goods and services 129 .

IRS Product liability Uniform commercial code   Ethical Releasing products with defects Environmental EPA 130 . OSHA. and Environmental Issues  Legal FDA. Ethical.Legal.

Products carry an implication of merchantability and fitness. Commercial Code . Uniform 131 .Regulations & Legal Considerations Product Liability .A manufacturer is liable for any injuries or damages caused by a faulty product.

Designers Adhere to Guidelines Produce designs that are consistant with the goals of the company  Give customers the value they expect  Make health and safety a primary concern  Consider potential harm to the environment  132 .

Other Issues in Product and Service Design Product/service life cycles  How much standardization  Product/service reliability  Range of operating conditions  133 .

Life Cycles of Products or Services Saturation Maturity Deman d Decline Growth Introduction Time 134 .

service or process  Standardized products are immediately available to customers 135 .Standardization  Standardization Extent to which there is an absence of variety in a product.

handling.Advantages of Standardization  Fewer parts to deal with in inventory & manufacturing Design costs are generally lower Reduced training costs and time More routine purchasing. and inspection procedures    136 .

Advantages of Standardization (Cont¶d)   Orders fillable from inventory Opportunities for long production runs and automation Need for fewer parts justifies increased expenditures on perfecting designs and improving quality control procedures. 137  .

High cost of design changes increases resistance to improvements. Decreased variety results in less consumer appeal.Disadvantages of Standardization  Designs may be frozen with too many imperfections remaining.   138 .

Mass Customization ‡ Mass customization: A strategy of producing standardized goods or services. but incorporating some degree degree of customization Delayed differentiation Modular design 139 .

Delayed Differentiation ‡ Delayed differentiation is a postponement tactic Producing but not quite completing a product or service until customer preferences or specifications are known 140 .

Modular Design Modular design is a form of standardization in which component parts are subdivided into modules that are easily replaced or interchanged. It allows: easier diagnosis and remedy of failures easier repair and replacement simplification of manufacturing and assembly 141 .

part. or system does not perform as intended  Normal operating conditions: The set of conditions under which an item¶s reliability is specified 142 . or system to perform its intended function under a prescribed set of conditions  ailure: Situation in which a product. part.Reliability  Reliability: The ability of a product.

Improving Reliability ‡ Component design ‡ Production/assembly techniques ‡ Testing ‡ Redundancy/backup ‡ Preventive maintenance procedures ‡ User education ‡ System design 143 .

Product Design      Product Life Cycles Robust Design Concurrent Engineering Computer-Aided Design Modular Design 144 .

Robust Design Robust Design: Design that results in products or services that can function over a broad range of conditions 145 .

Central feature is Parameter Design.  Determines:  factors that are controllable and those not controllable their optimal levels relative to major product advances 146 .Taguchi Approach Robust Design  Design a robust product Insensitive to environmental factors either in manufacturing or in use.

New product/service 147 . Expansion of an existing product/service 3. Clone of a competitor¶s product/service 4.Degree of Newness 1. Modification of an existing product/service 2.

Degree of Design Change Type of Design Change Modification Expansion Clone New Newness of the organization Low Low High High Newness to the market Low Low Low High 148 .

4. 9. 5. 6. Idea generation Feasibility analysis Product specifications Process specifications Prototype development Design review Market test Product introduction Follow-up evaluation 149 .Phases in Product Development Process 1. 2. 8. 3. 7.

Idea Generation Supply chain based Ideas Competitor based Research based 150 .

151 .Reverse Engineering Reverse engineering is the dismantling and inspecting of a competitor¶s product to discover product improvements.

152 . Development converts results of applied research into commercial applications. Applied Research achieves commercial applications.Research & Development (R&D)  Organized efforts to increase scientific knowledge or product innovation & may involve: Basic Research advances knowledge about a subject without near-term expectations of commercial applications.

Manufacturability  Manufacturability is the ease of fabrication and/or assembly which is important for: Cost Productivity Quality 153 .

Designing for Manufacturing Beyond the overall objective to achieve customer satisfaction while making a reasonable profit is: Design for Manufacturing(DFM) The designers¶ consideration of the organization¶s manufacturing capabilities when designing a product. The more general term design for operations encompasses services as well as manufacturing 154 .

Concurrent Engineering Concurrent engineering is the bringing together of engineering design and manufacturing personnel early in the design phase. 155 .

Computer-Aided Design  Computer-Aided Design (CAD) is product design using computer graphics. 3 to 10 times creates a database for manufacturing information on product specifications provides possibility of engineering and cost analysis on proposed designs 156 . increases productivity of designers.

Product design Design for manufacturing (DFM)  Design for assembly (DFA)  Design for recycling (DFR)  Remanufacturing  Design for disassembly (DFD)  Robust design  157 .

Recycling Recycling: recovering materials for future use  Recycling reasons  Cost savings Environment concerns Environment regulations 158 .

Service Design Service is an act  Service delivery system  Facilities Processes Skills  Many services are bundled with products 159 .

Service Design  Service design involves The physical resources needed The goods that are purchased or consumed by the customer Explicit services Implicit services 160 .

and skills needed to provide a service  Product bundle The combination of goods and services provided to a customer  Service package The physical resources needed to perform the service 161 . processes.Service Design   Service Something that is done to or for a customer Service delivery system The facilities.

Differences Between Product and Service Design Tangible ± intangible  Services created and delivered at the same time  Services cannot be inventoried  Services highly visible to customers  Services have low barrier to entry  Location important to service  162 .

Translate performance specifications into design specifications 5. Conceptualize service package components 3. Determine performance specifications 4. Identify 163 . Translate design specifications into delivery specifications 2.Phases in Service Design 1.

Service Blueprinting  Service blueprinting A method used in service design to describe and analyze a proposed service  A useful tool for conceptualizing a service delivery system 164 .

6. 2. 4. 5. Establish boundaries Identify steps involved Prepare a flowchart Identify potential failure points Establish a time frame Analyze profitability 165 .Major Steps in Service Blueprinting 1. 3.

4. 3. 8. 9. 6. 2. 5. Consistent with the organization mission User friendly Robust Easy to sustain Cost effective Value to customers Effective linkages between back operations Single unifying theme Ensure reliability and high quality 166 .Characteristics of Well Designed Service Systems 1. 7.

Challenges of Service Design Variable requirements  Difficult to describe  High customer contact  Service ± customer encounter  167 .

168 .Quality Function Deployment  Quality Function Deployment Voice of the customer House of quality QFD: An approach that integrates the ´voice of the customerµ into the product and service development process.

The House of Quality Correlation matrix Design requirements Customer requirements Relationship matrix Competitive assessment Specifications or target values 169 .

5 ft/lb. Window X X Energy needed to close door Check force on level ground Energy needed to open door * Strong positive Positive Negative Strong negative X = Us A = Comp.House of Quality Example Correlation: X X X X Water resistance Door seal resistance Engineering Characteristics Accoust. A B = Comp. 9 Reduce energy to 7.5 ft/lb X X AB AB XAB A XB X A B 10 6 Maintain current level 6 Reduce force to 9 lb. 2 Maintain current level 3 Maintain current level Relationships: Strong = 9 Medium = 3 Small = 1 Technical evaluation (5 is best) 5 4 3 2 1 B A X BA X B A X B X A BXA BA X 170 . B (5 is best) 1 2 3 4 Competitive evaluation Customer Requirements Easy to close Stays open on a hill Easy to open Doesn¶t leak in rain No road noise Importance weighting Target values 5 7 5 3 3 2 Reduce energy level to 7. Trans.

The Kano Model Kano Model Customer Satisfaction Excitement Expected Must Have Customer Needs 171 .

Use multiple-use platforms 4. Look for continual improvement 6. Increase emphasis on component commonality 2. Package products and services 3. Shorten time to market 172 .Operations Strategy 1. Consider tactics for mass customization 5.

Shorten Time to Market 1. Use concurrent engineering 173 . Use standardized components 2. Use technology 3.


Learning Objectives     Explain the meaning of TQM Identify the costs of Quality Describe the evolution of TQM Identify Quality leaders and their contributions 175 .

Learning Objectives    Identify key features of the TQM philosophy Describe tools identifying and solving quality problems Describe quality awards and quality certifications 176 .

universal definition of quality 5 common definitions include      Conformance to specifications Fitness for use Value for price paid Support services Psychological criteria 177 .Defining Quality    Definition of quality is dependent on the people defining it There is a lack of a single.

g.Defining Quality  5 Ways Conformance to specifications  Does product/service meet targets and tolerances defined by designers? Evaluates performance for intended use Evaluation of usefulness vs. Ambiance. friendly staff 178  Fitness for use   Value for price paid   Support services   Psychological  . price paid Quality of support after sale e. prestige.

reliability.Manufacturing Quality vs. Service Quality  Manufacturing quality focuses on tangible product features  Conformance. consistency 179 . features  Service organizations produce intangible products that must be experienced  Quality often defined by perceptional factors like courtesy. promptness. friendliness. waiting time. performance.

Cost of Quality   Quality affects all aspects of the organization Quality has dramatic cost implications of.  Quality control costs   Prevention costs Appraisal costs Internal failure costs External failure costs  Quality failure costs   180 .

Cost of Quality 4 Categories  Early detection/prevention is less costly  May be less by a factor of 10 181 .

Evolution of TQM New Focus 182 .

Quality Gurus 183 .

TQM Philosophy     TQM Focuses on identifying quality problem root causes Encompasses the entire organization Involves the technical as well as people Relies on seven basic concepts of  Customer focus  Continuous improvement  Employee empowerment  Use of quality tools  Product design  Process management  Managing supplier quality 184 .

g. 6 sigma  Continuous Improvement    Benchmarking Employee Empowerment  Empower all employees.TQM Philosophy . e. external and internal customers 185 . e.concepts  Focus on Customer   Identify and meet customer needs Stay tuned to changing needs. fashion styles Continuous learning and problem solving. Kaizen.g.

assessment. & implementation tools Studying practices at best in class companies  Understanding Quality Tools    Plan-Do-Study-Act 186 .TQM Philosophy Concepts (continued)  Team Approach   Teams formed around processes 8 to 10 people Meet weekly to analyze and solve problems Ongoing training on analysis. and correction.

Ways of Improving Quality  Plan-Do-Study-Act Cycle (PDSA)   Also called the Deming Wheel after originator Circular. never ending problem solving process Tools typically taught to problem solving teams Used to translate customer preferences to design  Seven Tools of Quality Control   Quality Function Deployment  187 .

implement new process  Act   188 . data.PDSA Details  Plan    Evaluate current process Collect procedures. identify problems Develop an improvement plan. performance objectives Implement the plan trial basis  Do   Study  Collect data and evaluate against objectives Communicate the results from trial If successful.

PDSA   (continued) Cycle is repeated After act phase. start planning and repeat process 189 .

Seven Tools of Quality Control        Cause-and-Effect Diagrams Flowcharts Checklists Control Charts Scatter Diagrams Pareto Analysis Histograms 190 .

Cause-and-Effect Diagrams   Called Fishbone Diagram Focused on solving identified quality problem 191 .

Flowcharts   Used to document the detailed steps in a process Often the first step in Process Re-Engineering 192 .

per machine.Checklist  Simple data check-off sheet designed to identify type of quality problems at each work station. per operator 193 . per shift.

Control Charts   Important tool used in Statistical Process Control Chapter 6 The UCL and LCL are calculated limits used to show when process is in or out of control 194 .

Scatter Diagrams   A graph that shows how two variables are related to one another Data can be used in a regression analysis to establish equation for the relationship 195 .

Pareto Analysis  Technique that displays the degree of importance for each element Named after the 19th century Italian economist Often called the 80-20 Rule Principle is that quality problems are the result of only a few problems e.g. 80% of the problems caused by 20% of causes    196 .

Histograms  A chart that shows the frequency distribution of observed values of a variable like service time at a bank drive-up window Displays whether the distribution is symmetrical (normal) or skewed  197 .

Product Design .Quality Function Deployment    Critical to ensure product design meets customer expectations Useful tool for translating customer specifications into technical requirements is Quality Function Deployment (QFD) QFD encompasses       Customer requirements Competitive evaluation Product characteristics Relationship matrix Trade-off matrix Setting Targets 198 .

Quality Function Deployment (QFD) Details  Process used to ensure that the product meets customer specifications Voice of the engineer Voice of the customer Customer-based benchmarks 199 .

House of Quality  Adding trade-offs. targets & developing product specifications Trade-offs Targets Technical Benchmarks 200 .QFD .

Reliability  critical to quality   Reliability is the probability that the product. service or part will function as expected No product is 100% certain to function properly Reliability is a probability function dependent on sub-parts or components 201 .

. . (Rn) RS = reliability of the product or system R1 = reliability of the components  Increase reliability by placing components in parallel 202 .Reliability  critical to quality Reliability of a system is the product of component reliabilities RS = (R1) (R2) (R3) .

Reliability  critical to quality  Increase reliability by placing components in parallel Parallel components allow system to operate if one or the other fails RS = R1 + (R2* Probability of needing 2nd component) 203 .

Process Management     Quality products come from quality sources Quality must be built into the process Quality at the source is belief that it is better to uncover source of quality problems and correct it TQM extends to quality of product from company s suppliers 204 .

Quality Awards and Standards  Malcolm Baldrige National Quality Award (MBNQA) The Deming Prize ISO 9000 Certification ISO 14000 Standards    205 .

Motorola Corp. Ritz-Carlton 206 . FedEx.What Is It?     Award named after the former Secretary of Commerce Regan Administration Intended to reward and stimulate quality initiatives Given to no more that two companies in each of three categories.MBNQA. IBM. service. Xerox. 3M.. and small business Past winners. manufacturing.

The Deming Prize  Given by the Union of Japanese Scientists and Engineers since 1951  Named after W. Edwards Deming who worked to improve Japanese quality after WWII   Not open to foreign companies until 1984 Florida P & L was first US company winner 207 .

000 companies have been certified   ISO 14000: Focuses on a company s environmental responsibility 208 .ISO Standards  ISO 9000 Standards:        Certification developed by International Organization for Standardization Set of internationally recognized quality standards Companies are periodically audited & certified ISO 9000:2000 QMS Fundamentals and Standards ISO 9001:2000 QMS Requirements ISO 9004:2000 QMS .Guidelines for Performance More than 40.

and under-reliance on SPC methods 209   .Why TQM Efforts Fail  Lack of a genuine quality culture Lack of top management support and commitment Over.

TQM Within OM   TQM is broad sweeping organizational change TQM impacts        Marketing providing key inputs of customer information Finance evaluating and monitoring financial impact Accounting provides exact costing Engineering translate customer requirements into specific engineering terms Purchasing acquiring materials to support product development Human Resources hire employees with skills necessary Information systems increased need for accessible information 210 .

and Genichi Taguchi 211 . Armand V. Edwards Demings. identifying the causes of quality problems. Kaoru Ishikawa. Philip B. Feigenbaum. Shewhart. W. Crosby. internal and external costs Seven TQM notable individuals include Walter A. Joseph M. Juran. and building quality into the production process Four categories of quality cost of prevention.TQM Highlights    TQM is different from the old concept of quality as it focus is on serving customers. appraisal.

continuous improvement. employee empowerment.Continued     Seven features of TQM combine to create TQM philosophy. process management. use of quality tools. 212 .TQM Highlights . product design. and managing supplier quality QFD is a tool used to translate customer needs into specific engineering requirements Reliability is the probability that the product will functions as expected The Malcom Baldridge Award is given to companies to recognize excellence in quality management. customer focus.

Quality Control 213 .

Phases of Quality Assurance Inspection before/after production Acceptance sampling Inspection and corrective action during production Process control Quality built into the process Continuous improvement The least progressive The most progressive 214 .

Inspection How Much/How Often  Where/When  Centralized vs. On-site  Inputs Transformation Outputs Acceptance sampling Process control Acceptance sampling 215 .

Inspection Costs Cost Total Cost Cost of inspection Cost of passing defectives Optimal Amount of Inspection 216 .

Where to Inspect in the Process      Raw materials and purchased parts Finished products Before a costly operation Before an irreversible process Before a covering process 217 .

safety Waiting times Accuracy. timeliness Appearance. productivity Cleanliness Appearance Health regulations Safe.Examples of Inspection Points Type of business Fast Food Inspection points Cashier Counter area Eating area Building Kitchen Hotel/motel Parking lot Accounting Building Main desk Supermarket Cashiers Deliveries Characteristics Accuracy Appearance. courtesy Quality. quantity 218 . well lighted Accuracy.

Statistical Process Control: Statistical evaluation of the output of a process during production Quality of Conformance: A product or service conforms to specifications 219 .

Control Chart  Control Chart Purpose: to monitor process output to see if it is random A time ordered plot representative sample statistics obtained from an on going process (e.g. sample means) Upper and lower control limits define the range of acceptable variation 220 .

Control Chart Abnormal variation due to assignable sources Out of control UCL Mean Normal variation due to chance Abnormal variation due to assignable sources LCL 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Sample number 221 .

222 .Statistical Process Control  The essence of statistical process control is to assure that the output of a process is random so that future output will be random.

Statistical Process Control  The Control Process Define Measure Compare Evaluate Correct Monitor results 223 .

Statistical Process Control  Variations and Control Random variation: Natural variations in the output of a process. created by countless minor factors Assignable variation: A variation whose source can be identified 224 .

Sampling Distribution Sampling distribution Process distribution Mean 225 .

74% W W 226 .44% 99.Normal Distribution W!Standard deviation W W Mean 95.

Control Limits Sampling distribution Process distribution Mean Lower control limit Upper control limit 227 .

 Type II error Concluding a process is in control when it is not.SPC Errors  Type I error Concluding a process is not in control when it actually is. 228 .

Type I Error E/2 E/2 Mean E!Probability of Type I error LCL UCL 229 .

Observations from Sample Distribution UCL LCL 1 2 Sample number 3 4 230 .

X bar charts  Range control charts Used to monitor the process dispersion R charts 231 .  Mean control charts Used to monitor the central tendency of a process.Control Charts for Variables Variables generate data that are measured. measured.

Mean and Range Charts (process mean is shifting upward) Sampling Distribution UCL x-Chart LCL Detects shift UCL R-chart LCL Does not detect shift 232 .

Mean and Range Charts Sampling Distribution (process variability is increasing) UCL x-Chart LCL Does not reveal increase UCL R-chart LCL Reveals increase 233 .

counted.Control chart used to monitor the proportion of defectives in a process c-Chart .Control chart used to monitor the number of defects per unit  Attributes generate data that are counted. 234 .Control Chart for Attributes  p-Chart .

Use of p-Charts  When observations can be placed into two categories. Good or bad Pass or fail Operate or don¶t operate  When the data consists of multiple samples of several observations each 235 .

or errors per item Cracks or faults per unit of distance Breaks or Tears per unit of area Bacteria or pollutants per unit of volume Calls. chips. non-occurrences cannot be counted. Scratches. failures per unit of time 236 . dents. complaints.Use of c-Charts  Use only when the number of occurrences per unit of measure can be counted.

Use of Control Charts  At what point in the process to use control charts What size samples to take What type of control chart to use Variables Attributes   237 .

Run Tests   Run test ± a test for randomness Any sort of pattern in the data would suggest a non-random process All points are within the control limits the process may not be random  238 .

Nonrandom Patterns in Control charts Trend  Cycles  Bias  Mean shift  Too much dispersion  239 .

13 Counting Up/Down Runs (8 runs) U U D U D U D U U D 240 .12 Counting Above/Below Median Runs (7 runs) B A A B A B B B A A B Figure 10.Counting Runs Figure 10.

Process Capability  Tolerances or specifications Range of acceptable values established by engineering design or customer requirements  Process variability Natural variability in a process  Process capability Process variability relative to specification 241 .

Process variability exceeds specifications 242 .Process Capability Lower Specification Upper Specification A. Process variability matches specifications Lower Specification Upper Specification B. Process variability Lower Upper well within specifications Specification Specification C.

Cp = process width Cp = Upper specification ± lower specification 6W 243 .Process Capability Ratio specification width Process capability ratio.

7 ppm Upper specification 1350 ppm 1.7 ppm Process mean +/.6 Sigma 244 .3 Sigma +/.3 Sigma and 6 Sigma Quality Lower specification 1350 ppm 1.

Improving Process Capability Simplify  Standardize  Mistake-proof  Upgrade equipment  Automate  245 .

246 . Process may not be stable Process output may not be normally distributed Process not centered but Cp is used 3. 2.Limitations of Capability Indexes 1.

Statistical Process Control (SPC) Invented by Walter Shewhart at Western Electric  Distinguishes between  common cause variability (random) special cause variability (assignable)  Based on repeated samples from a process 247 .

Empirical Rule -3 -2 -1  +1 +2 +3 68% 95% 99.7% 248 .

e. X bar. R. and c Have a center line that is the overall average Have limits above and below the center line at 3 standard deviations (usually) Upper Control Limit (UCL) Center line Lower Control Limit (LCL) 249 . p.. i.Control Charts in General    Are named according to the statistics being plotted.

Variables Data Charts  Process Centering X bar chart X bar is a sample mean X ! n §X i !1 i n  Process Dispersion (consistency) R chart R is a sample range R ! max( X i )  min( X i ) 250 .

X bar charts Center line is the grand mean (X double m bar) §Xj  Points are X barsW ! W / n j !1 x  X! m UCL ! X  zW x -OR- LCL ! X  zW x UCL ! X  A2 R LCL ! X  A2 R 251 .

R Charts Center line is the grand mean (R bar)  Points are R  D3 and D4 values are tabled according to n (sample size)  UCL ! D4 R LCL ! D3 R 252 .

then limits are used ³forever´  253 .Use of X bar & R charts Charts are always used in tandem  Data are collected (20-25 samples)  Sample statistics are computed  All data are plotted on the 2 charts  Charts are examined for randomness  If random.

Attribute Charts  c charts ± used to count defects in a constant sample size n UCL ! c  z c §c c! i !1 m ! centerline LCL ! c  z c 254 .

Attribute Charts  p charts ± used to track a proportion (fraction) defective pi ! m n §x i !1 i n §p p! j !1 §x m ! ij nm ! centerline p (1  p ) UCL ! p  z n p (1  p ) LCL ! p  z n 255 .

Process Capability The ratio of process variability to design specifications Natural data spread -3 -2 Lower Spec -1 µ +1 +2 Upper Spec +3 The natural spread of the data is 6 256 .


distribution.Supply Chains & SCM   A supply chain is the network of all the activities involved in delivering a finished product/service to the customer Sourcing of: raw materials. sales data. warehousing. order entry. delivery Supply Chain Management is the vital business function that coordinates all of the network links Coordinates movement of goods through supply chain from suppliers to manufacturers to distributors Promotes information sharing along chain like forecasts. assembly. & promotions 258 .

planning.Components of a Supply Chain  External Suppliers± source of raw material Tier one supplier supplies directly to the processor Tier two supplier supplies directly to tier one Tier three supplier supplies directly to tier two  Internal Functions include ± processing functions Processing. shipping  External Distributors transport finished products to appropriate locations Logistics managers are responsible for traffic management and distribution management 259 . purchasing. quality.

Includes.Components of a Supply Chain  External Distributors transport finished products to appropriate locations Logistics managers are responsible for managing the movement of products between locations. traffic management ± arranging the method of shipment for both incoming and outgoing products or material  distribution management ± movement of material from manufacturer to the customer  260 .

A Basic Supply Chain 261 .

The Bullwhip Effect   Bullwhip effect . price fluctuations.the inaccurate or distorted demand information created in the supply chain Causes are generated by: demand forecasting updating. rationing and gaming 262 . order batching.

The Bullwhip Effect  Counteracting the Effect: Change the way suppliers forecast product demand by making this information available at all levels of the supply chain Share real demand information (POS terminals) Eliminate order batching Stabilize pricing Eliminate gaming 263 .

and pointof-sales demand information  E-commerce and e-business ± uses internet and web to transact business  264 .Issues Affecting Supply Chain Management Information technology ± enablers include the Internet. intranets and extranets. EDI. bar code scanners. Web.

Types of E-Commerce E-commerce is defined as the use of the Internet and the Web to transact business  Two types of e-commerce are  Business-to-business (B2B) and Business-to-consumer (B2C) 265 .

especially during the product design and development 266 .Types of E-Commerce  Business-to-Business (B2B) Evolution: Automated order entry systems started in 1970¶s Electronic Data Interchange (EDI) started in the 1970¶s Electronic Storefronts emerged in the 1990¶s Net Marketplaces emerged in the late 1990¶s  Benefits of B2B E-Commerce Lower procurement administrative costs. Low-cost access to global suppliers Lower inventory investment due to price transparency/reduced response time Better product quality because of increased cooperation between buyers and sellers.

or service directly to customers Affiliate ± companies receive a referral fee for directing business to an affiliate 267 .Types of E-Commerce   Business-to-Consumer (B2C): On-line businesses try to reach individual consumers B2C revenue model sources Advertising ± Web site offers providers and opportunity to advertise Subscription ±Web site charges a subscription fee for access to the site Transaction ± company receives a fee for executing a transaction Sales ± a means of selling goods. information.

SCM Factors  SCM must consider the following trends. improved capabilities. sustainable eco-efficiency. & realities: Consumer Expectations and Competition ± power has shifted to the consumer Globalization ± capitalize on emerging markets Government Regulations and E-Commerce ± issues of Internet government regulations Environment Implications of E-Commerce ± recycling. and waste minimization 268 .

Global SCM Factors  Managing extensive global supply chains introduces many complications Geographically dispersed members . lack of skilled labor. inflation can be high Infrastructure issues like transportation. communication.increase replenishment transit times and inventory investment Forecasting accuracy complicated by longer lead times and different operating practices Exchange rates fluctuate. & scarce local material supplies Product proliferation created by the need to customize products for each market 269 .

Sourcing Issues   Which products to produce in-house and which are provided by other supply chain members Vertical integration ± a measure of how much of the supply chain is owned by the manufacturer Backward integration ± owning or controlling of sources of raw material and component parts Forward integration ± owning or control the channels of distribution  Vertical integration related to levels of insourcing or outsourcing products or services 270 .

Outsourcing  What questions need to be asked before sourcing decisions are made? Is product/service technology critical to firm¶s success? Is product/service a core competency? Is it something your company must do to survive? 271 .Insourcing vs.

Make or Buy Analysis  Analysis will look at the expected sales levels and cost of internal operations vs. cost of purchasing the product or service Total Cost of Outsourcin g : TC Buy ! FC Buy  .

Buy v Q VC Total Cost of Insourcing : TC Make ! FC Make  .

Make v Q VC Indifferen ce Point : FC Buy  .

Buy v Q ! FC Make  .

Make v Q VC VC 272 .

They can buy the bagels for $0. If they buy from the local bakery they will need airtight containers at a fixed cost of $1000 annually.000 bagels Since the costs are equal at 56. FCBuy + (VCBuy x Q) = FCMake + (VCMake x Q) $1.000 bagels.000 + ($0.000 bagels.000 + ($0. It will cost them $0.15 per bagel to make.40 each.15 x Q) Q = 56.Example: Make-or-Buy analysis. they should make the bagels in-house 273 .000 annually. The believe they will sell 60. Their first decision is whether they should make the bagels on-site or by the bagels from a local bakery. have decided to open a bagel shop.      Mary and Sue wants to know if they should make or buy the bagels.000 bagels and Mary and Sue expect to use 60.Mary and Sue.40 x Q) = $15. If they make the bagels in-house they will need a small kitchen at a fixed cost of $15.

The Role of Purchasing  Purchasing role has attained increased importance since material costs represent 50-60% of cost of goods sold Ethics considerations is a constant concern Developing supplier relationships is essential Determining how many suppliers to use Developing partnerships 274 .

Critical Factors in Successful Partnership Relations  Critical factors in successful partnering include. Impact ± attaining levels of productivity and competitiveness that are not possible through normal supplier relationships Intimacy ± working relationship between two partners Vision ± the mission or objectives of the partnership 275 .

Critical Factors in Successful Partnership Relations Have a long-term orientation Are strategic in nature Share information Share risks and opportunities  Share a common vision Share short/long term plans Driven by end-customer needs Benefits of Partnering Early supplier involvement (ESI) in the design process Using supplier expertise to develop and share cost improvements and eliminate costly processes Shorten time to market 276 .

consolidation.Supply Chain Distribution  Warehouses involved in supply chain distributions and include Plant warehouses Regional warehouses Local warehouses  Warehouses can either be General ± used for long-term storage Distribution ± used for short-term storage. and product mixing 277 .

Supply Chain Distribution continued Transportation consolidation ± warehouses consolidate less-thantruckload (LTL) quantities into truckload (TL) quantities  Product mixing ± warehouse value added customer service of grouping a variety of products into a direct shipment to the customer  278 .

Supply Chain Distribution continued Services are offered can improve customer service by moving goods closer to the customer and thus reducing replenishment time  Crossdocking or movement of material without storage and order-picking material while still performing the receiving and shipping functions.  279 .

Supply Chain Distribution continued   Radio Frequency Identification Technology (RFID) ± automated data collection technology which relies on radio waves to transfer data between reader and RFID tag Third-party Service Providers ± ease of developing an electronic storefront has allowed the discovery of suppliers from around the world 280 .

Integrated SCM  Implementing integrated SCM requires: Analyzing the whole supply chain Starting by integrating internal functions first Integrating external suppliers through partnerships  Manufacturer¶s Goals Reduce costs Reduce duplication of effort Improve quality Reduce lead time Implement cost reduction program Involve suppliers early Reduce time to market  Supplier¶s Goals Increase sales volume Increase customer loyalty Reduce cost Improve demand data Improve profitability 281 .

Return on investment  Profitability  Market share  Revenue growth  Additional measures Customer service levels  Inventory turns  Weeks of supply  Inventory obsolescence  282 .Supply Chain Measurements  Measuring supply chain performance Traditional measures include.

Supply Chain Performance Measurement Customer demands for better-quality requires company¶s to develop ways to measure improvements  Some measurements include  Warranty costs Products returned Cost reductions allowed because of product defects Company response times Transaction costs 283 .

Current Trends in SCM  Increased use of electronic marketplace such as E-distributors ± independently owned net marketplaces having catalogs representing thousands of suppliers and designed for spot purchases E-purchasing ± companies that connect on-line MRO suppliers to business who pay fees to join the market. usually for long-term contractual purchasing 284 .

285 .Current Trends in SCM continued  Increased use of electronic marketplace such as Value chain management ± automation of a firm¶s purchasing or selling processes Exchanges ± marketplace that focuses on spot requirements of large firms in a single industry Industry consortia ± industry-owned markets that enable buyers to purchase direct inputs from a limited set of invited suppliers  Decreased supply chain velocity due to greater distances with greater uncertainty and generally less efficient.

the Internet. EDI. intranet. RFID. and extranets Purchasing is responsible for sourcing materials Operations use timely demand information to more effectively plan production schedules 286 .SCM Across the Organization       SCM changes the way companies do business. Accounting shares SCM benefits due to inventory level decreases Marketing benefits by improved customer service levels Information systems are critical for information sharing through PSO data.

the more distortion that is possible. price fluctuations. and rationing 287 . order batching. The bullwhip effect distorts product demand information passed between levels of the supply chain. either as a customer or as a supplier. Supply chains include all the processes needed to make a finished product.SCM Highlights   Every organization is part of a supply chain. from the extraction of raw materials through the sale to the end user. The more levels that exist. SCM is the integration and coordination of these efforts. Variability results from updating demand estimates at each level.

B2B and B2C electronic commerce enable supply chain management. Allowing for efficient sourcing and lower transaction costs. bar-code scanners. Net marketplaces bring together thousands or suppliers and customers. EDI. intranets. and POS data are SCM enablers. 288 .SCM Highlights (continued)   Many issues affect supply chain management. The Internet. the WEB. extranets.

causing greater uncertainty in delivery times. Purchasing is involved in sourcing decisions and developing strategic long-term partnerships.  Purchasing has a major role in SCM. 289 .SCM Highlights (continued)  Global supply chains increase geographic distances between members.

it is imperative that buyers avoid any appearance of unethical behavior or conflict of interest. Companies make insourcing and outsourcing decisions. Since buyers are in a position to influence or award business. These make-or-buy decisions are based on financial and strategic criteria.SCM Highlights (continued)   Ethics in supply management is an ongoing concern. 290 .

intimacy. risks. The warehouses provide transportation. 291 . Supply chain distribution requires effective warehousing operations. technologies. and vision are critical to successful partnering.SCM Highlights (continued)   Partnerships require sharing information. product mixing. and opportunities. and service. Impact. consolidation.

SCM Highlights (continued)  Integrated SCM usually begins with the manufacturer integrating internal processes first. 292 . The. The last step is integrating the external distributors. the company tries to integrate the external suppliers.

SCM Highlights (continued)   A company needs to evaluate the performance of its supply chain.) and other measures that reflect the objectives of the SC are used. it is likely that supply chain velocity will decrease. 293 . profitability. market share. It is possible that a more strategic and integrated approach is needed to advance SCM to the next level. The emergence of net marketplaces has significantly affected SCM. customer service levels. As supply chains become longer. etc. Regular performance metrics (ROI.



294 Operations Management, Eighth Edition, by William J. Stevenson Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

Need for Location Decisions 

Marketing Strategy Cost of Doing Business Growth Depletion of Resources


Nature of Location Decisions 

Strategic Importance
Long term commitment/costs Impact on investments, revenues, and operations Supply chains 

Profit potential No single location may be better than others Identify several locations from which to choose 

Expand existing facilities Add new facilities Move

Making Location Decisions
Decide on the criteria  Identify the important factors  Develop location alternatives  Evaluate the alternatives  Make selection 


Location Decision Factors
Regional Factors Community Considerations

Multiple Plant Strategies

Site-related Factors


Regional Factors
Location of raw materials  Location of markets  Labor factors  Climate and taxes 


Community Considerations
Quality of life  Services  Attitudes  Taxes  Environmental regulations  Utilities  Developer support 


Site Related Factors
Land  Transportation  Environmental  Legal 


Multiple Plant Strategies
Product plant strategy  Market area plant strategy  Process plant strategy 


Comparison of Service and Manufacturing Considerations
Cost Focus Transportation modes/costs Energy availability, costs Labor cost/availability/skills Building/leasing costs

Revenue focus Demographics: age,income,etc Population/drawing area Competition Traffic volume/patterns Customer access/parking


³Made in USA´ Currency fluctuations    Just-in-time manufacturing techniques Microfactories Information Technology 304 .S.Trends in Locations  Foreign producers locating in U.

transportation 305 . Stability issues Living circumstances for foreign workers / dependents Religious holidays/traditions Possible buy locally sentiment Resources Level of training and education of workers Work practices Possible regulations limiting number of foreign employees Language differences Availability and quality of raw materials.Foreign Government Cultural Differences Customer Preferences Labor a. Policies on foreign ownership of production facilities Local Content Import restrictions Currency restrictions Environmental regulations Local product standards b. energy.

Evaluating Locations  Cost-Profit-Volume Analysis Determine fixed and variable costs Plot total costs Determine lowest total costs 306 .

Location Cost-Volume Analysis  Assumptions Fixed costs are constant Variable costs are linear Output can be closely estimated Only one product involved 307 .

0 0 .0 0 .Example 1: Cost-Volume Analysis Fixed and variable costs for L o a tio n F ix e fourcpotential locationsd A B C D $ 2 1 1 2 C 5 0 5 0 o s 0 .0 t 0 0 0 0 0 0 0 0 V a r ia b le C o s t $ 1 1 3 0 2 0 3 5 308 .0 0 .

0 0 0 ) T o ta l C o s ts $ 3 6 0 .Example 1: Solution F ix e d C o s ts A B C D $ 2 5 0 .0 0 0 309 .0 0 0 3 5 0 .0 0 0 ) 3 0 (1 0 .0 0 0 1 0 0 .0 0 0 ) 3 5 (1 0 .0 0 0 ) 2 0 (1 0 .0 0 0 V a r ia b le C o s ts $ 1 1 (1 0 .0 0 0 5 5 0 .0 0 0 1 5 0 .0 0 0 2 0 0 .0 0 0 4 0 0 .

Example 1: Solution $(000) 800 700 600 500 400 300 200 100 0 0 D B C A A Superior C Superior B Superior 2 4 6 8 10 12 14 16 Annual Output (000) 310 .

Evaluating Locations  Transportation Model Decision based on movement costs of raw materials or finished goods  Factor Rating Decision based on quantitative and qualitative inputs  Center of Gravity Method Decision based on minimum distribution costs 311 .

. Stevenson Copyright © 2005 by The McGraw-Hill Companies. Inc. All rights reserved. Eighth Edition.PROCESS SELECTION AND FACILITY LAYOUT McGraw-Hill/Irwin 312 Operations Management. by William J.

Introduction  Process selection Deciding on the way production of goods or services will be organized  Major implications Capacity planning Layout of facilities Equipment Design of work systems 313 .

Process Selection and System Design Forecasting Capacity Planning Facilities and Equipment Product and Service Design Process Selection Layout Technological Change Work Design 314 .

Process Strategy ‡ Key aspects of process strategy ± ± ± Capital intensive ± equipment/labor Process flexibility Adjust to changes ± ± ± Design Volume technology 315 .

Process Selection Batch    Variety How much Flexibility What degree Job Shop Repetitive Volume Expected output Continuous 316 .

Process Types  Job shop Small scale  Batch Moderate volume  Repetitive/assembly line High volumes of standardized goods or services  Continuous Very high volumes of non-discrete goods 317 .

Product ± Process Matrix Process Type Low volume Unique (one of a kind) Appliance repair Emergency room Commercial bakery Classroom Lecture Low volume Higher Multiple volume Products Standardized product Very high volume Commodity product Not feasible Job Shop Batch Repetitive Automotive assembly Automatic carwash Continuous (flow) Not feasible Oil refinery Water purification 318 .

Product ± Process Matrix Dimension Low volume Unique (one of a kind) Low volume Multiple Products Higher volume Standardized product Very high volume Commodity product Job variety Process flexibility Unit cost Volume of output Very High Very High Very High Very High Moderate Moderate Moderate Low Low Low Low High Very low Very low Very low Very low 319 .

Automation  Automation: Machinery that has sensing and control devices that enables it to operate Fixed automation Programmable automation 320 .

Automation ‡ Computer-aided design and manufacturing systems (CAD/CAM) ‡ Numerically controlled (NC) machines ‡ Robot ‡ Manufacturing cell ‡ Flexible manufacturing systems(FMS) ‡ Computer-integrated manufacturing (CIM) 321 .

and equipment. with particular emphasis on movement of work (customers or materials) through the system 322 . work centers.Facilities Layout  Layout: the configuration of departments.

Importance of Layout Decisions Requires substantial investments of money and effort  Involves long-term commitments  Has significant impact on cost and efficiency of short-term operations  323 .

The Need for Layout Decisions Inefficient operations For Example: High Cost Bottlenecks Changes in the design of products or services Accidents The introduction of new products or services Safety hazards 324 .

The Need for Layout Design (Cont¶d) Changes in environmental or other legal requirements Changes in volume of output or mix of products Morale problems Changes in methods and equipment 325 .

Basic Layout Types     Product layouts Process layouts Fixed-Position layout Combination layouts 326 .

and workers.Basic Layout Types  Product layout Layout that uses standardized processing operations to achieve smooth. rapid. and equipment are moved as needed 327 . materials. highvolume flow  Process layout Layout that can handle varied processing requirements  Fixed Position layout Layout in which the product or project remains stationary.

Product Layout Raw materials or customer Material and/or labor Station 1 Material and/or labor Station 2 Material and/or labor Station 3 Material and/or labor Station 4 Finished item Used for Repetitive or Continuous Processing 328 .

Advantages of Product Layout High rate of output  Low unit cost  Labor specialization  Low material handling cost  High utilization of labor and equipment  Established routing and scheduling  Routing accounting and purchasing  329 .

Disadvantages of Product Layout Creates dull. repetitive jobs  Poorly skilled workers may not maintain equipment or quality of output  Fairly inflexible to changes in volume  Highly susceptible to shutdowns  Needs preventive maintenance  Individual incentive plans are impractical  330 .

A U-Shaped Production Line In 1 2 3 4 5 Workers 6 Out 10 9 8 7 331 .

A Dept. C Dept. B Dept. F Used for Intermittent processing Job Shop or Batch 332 . E Dept. D Dept.Process Layout Process Layout (functional) Dept.

Product Layout Product Layout (sequential) Work Station 1 Work Station 2 Work Station 3 Used for Repetitive Processing Repetitive or Continuous 333 .

Advantages of Process Layouts Can handle a variety of processing requirements  Not particularly vulnerable to equipment failures  Equipment used is less costly  Possible to use individual incentive plans  334 .

Disadvantages of Process Layouts        In-process inventory costs can be high Challenging routing and scheduling Equipment utilization rates are low Material handling slow and inefficient Complexities often reduce span of supervision Special attention for each product or customer Accounting and purchasing are more involved 335 .

Cellular Layouts  Cellular Production Layout in which machines are grouped into a cell that can process items that have similar processing requirements  Group Technology The grouping into part families of items with similar design or manufacturing characteristics 336 .

Functional vs. Cellular Layouts Dimension Number of moves between departments Travel distances Travel paths Job waiting times Throughput time Amount of work in process Supervision difficulty Scheduling complexity Equipment utilization Functional many longer variable greater higher higher higher higher lower few Cellular shorter fixed shorter lower lower lower lower higher 337 .

Other Service Layouts Warehouse and storage layouts  Retail layouts  Office layouts  338 .

339 .Design Product Layouts: Line Balancing Line Balancing is the process of assigning tasks to workstations in such a way that the workstations have approximately equal time requirements.

Cycle Time Cycle time is the maximum time allowed at each workstation to complete its set of tasks on a unit. 340 .

Determine Maximum Output OT Output capacity = CT OT ! operating time per day D = Desired output rate OT CT = cycle time = D 341 .

Determine the Minimum Number of Workstations Required N = (D)( § t) OT = sum of task times §t 342 .

0 min. a c 0. b d 0. A Simple Precedence Diagram e 0.Precedence Diagram Precedence diagram: Tool used in line balancing to display elemental tasks and sequence requirements 0. 343 .2 min.7 min. 1.1 min.5 min.

0 minute Assign tasks in order of the most number of followers 344 .10 into three workstations. Use a cycle time of 1.Example 1: Assembly Line Balancing  Arrange tasks shown in Figure 6.

2 0.5 0.3 a.5 Station Idle Time 2 3 345 .5 0.3 0.0 0.0 1.0 0.3 0. c c none b d e Assign Task a c b d e Revised Time Remaining 0.2 1.2 0.9 0.0 0.9 0.0 0.Example 1 Solution Workstation 1 Time Remaining Eligible 1.

Calculate Percent Idle Time Idle time per cycle Percent idle time = (N)(CT) Efficiency = 1 ± Percent idle time 346 .

Count the number of tasks that follow Assign tasks in order of greatest positional weight.Line Balancing Rules Some Heuristic (intuitive) Rules: Assign tasks in order of most following tasks. Positional weight is the sum of each task¶s time and the times of all following tasks. 347 .

2 0.3 348 .4 h 0.6 e c d f 1.0 g 0.Example 2 0.2 0.3 a 0.8 b 0.

Solution to Example 2 Station 1 Station 2 Station 3 Station 4 a c b e f d g h 349 .

30/hr. 30/hr. 30/hr. 1 min. 1 min. 30/hr. 1 min. 1 min. 30/hr. 60/hr. 30/hr. 30/hr. 1 min. Bottleneck 30/hr. 2 min.Parallel Workstations 1 min. 1 min. 1 min. Parallel Workstations 350 . 60/hr.

Distance between locations 4. List of departments 2. Amount of money to be invested 5. List of special considerations 6. Projection of work flows 3.Designing Process Layouts Information Requirements: 1. Location of key utilities 351 .

Example 3: Interdepartmental Work Flows for Assigned Departments 30 1 170 3 10 0 2 A B C 352 .

work travels to dedicated process centers 353 .Process Layout Milling Assembly & Test Grinding Drilling Plating Process Layout .

Functional Layout 222 444 Mill 222 111 444 222 Drill 1111 2222 Grind 3333 111 333 111 333 Assembly 111 Lathes Heat treat Gear cutting 111 444 354 .

4444 cut .Cellular Manufacturing Layout -1111 Lathe Mill Drill Heat treat Heat treat Heat treat Drill Gear -1111 cut Assembly 355 222222222 Mill Drill Grind .3333 44444444444444 Mill Gear .2222 3333333333 Lathe Mill Grind .

All rights reserved. by William J. Stevenson Copyright © 2005 by The McGraw-Hill Companies. Inc.CAPACITY PLANNING FOR PRODUCTS AND SERVICES McGraw-Hill/Irwin 356 Operations Management. Eighth Edition. .

Capacity Planning Capacity is the upper limit or ceiling on the load that an operating unit can handle.  The basic questions in capacity handling are:  What kind of capacity is needed? How much is needed? When is it needed? 357 .

Impacts ability to meet future demands Affects operating costs Major determinant of initial costs Involves long-term commitment Affects competitiveness Affects ease of management Globalization adds complexity Impacts long range planning 358 . 3.Importance of Capacity Decisions 1. 2. 6. 8. 7. 5. 4.

process. or facility is designed for  Effective capacity Design capacity minus allowances such as personal time. 359 . maintenance.Capacity  Design capacity maximum output rate or service capacity an operation. and scrap  Actual output rate of output actually achieved--cannot exceed effective capacity.

Efficiency and Utilization Actual output Efficiency = Effective capacity Actual output Utilization = Design capacity Both measures expressed as percentages 360 .

Efficiency/Utilization Example Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day Actual output = 36 units/day = 40 units/ day Efficiency = 90% Effective capacity Actual output Design capacity = Utilization = 72% 36 units/day 50 units/day = 361 .

Determinants of Effective Capacity Facilities  Product and service factors  Process factors  Human factors  Operational factors  Supply chain factors  External factors  362 .

Strategy Formulation        Capacity strategy for long-term demand Demand patterns Growth rate and variability Facilities Cost of building and operating Technological changes Rate and direction of technology changes Behavior of competitors Availability of capital and other inputs 363 .

4. 2. Amount of capacity needed Timing of changes Need to maintain balance Extent of flexibility of facilities Capacity cushion ± extra demand intended to offset uncertainty 364 .Key Decisions of Capacity Planning 1. 3.

2. 4.Steps for Capacity Planning 1. 6. Estimate future capacity requirements Evaluate existing capacity Identify alternatives Conduct financial analysis Assess key qualitative issues Select one alternative Implement alternative chosen Monitor results 365 . 3. 7. 8. 5.

Available 2. Nature of demand 5. Expertise capacity considerations 4. Cost 6. Quality 366 .Make or Buy 1. Risk 3.

3.Developing Capacity Alternatives 1. 6. 5. 367 . 2. Design flexibility into systems Take stage of life cycle into account Take a ³big picture´ approach to capacity changes Prepare to deal with capacity ³chunks´ Attempt to smooth out capacity requirements Identify the optimal operating level 4.

increasing output rate results in decreasing average unit costs  Diseconomies of scale If the output rate is more than the optimal level.Economies of Scale  Economies of scale If the output rate is less than the optimal level. increasing the output rate results in increasing average unit costs 368 .

Evaluating Alternatives
Production units have an optimal rate of output for minimal cost. Average cost per unit

Minimum average cost per unit

Minimum cost


Rate of output

Evaluating Alternatives
Minimum cost & optimal operating rate are functions of size of production unit. Average cost per unit


Medium plant

Large plant


Output rate

Planning Service Capacity 

Need to be near customers
Capacity and location are closely tied 

Inability to store services
Capacity must be matched with timing of demand 

Degree of volatility of demand
Peak demand periods


Cost-Volume Relationships

Amount ($)

Fixed cost (FC) 0 Q (volume in units)

Cost-Volume Relationships
Amount ($) 0

Q (volume in units)

Cost-Volume Relationships
Amount ($) 0

BEP units Q (volume in units)

Break-Even Problem with Step Fixed Costs

3 machines 2 machines 1 machine Quantity Step fixed costs and variable costs.

Break-Even Problem with Step Fixed Costs
BEP2 TC 3 TC 2 1 BEP


Quantity Multiple break-even points

Assumptions of Cost-Volume Analysis
1. 2. 3. 4. 5. 6.

One product is involved Everything produced can be sold Variable cost per unit is the same regardless of volume Fixed costs do not change with volume Revenue per unit constant with volume Revenue per unit exceeds variable cost per unit


Financial Analysis 

Cash Flow - the difference between cash received from sales and other sources, and cash outflow for labor, material, overhead, and taxes. Present Value - the sum, in current value, of all future cash flows of an investment proposal. 


8 0 0 379 .0 0 0 2 .0 2 .0 2 .Calculating Processing Requirements P ro d u c t Annual D em and S ta n d a rd p r o c e s s in g tim e p e r u n it ( h r .4 0 0 5 .) #1 #2 #3 400 300 700 5 .4 0 0 1 .) P r o c e s s in g tim e n e e d e d (h r.0 8 .

Eighth Edition. Stevenson Copyright © 2005 by The McGraw-Hill Companies. All rights reserved. Inc. .INVENTORY MANAGEMENT McGraw-Hill/Irwin 380 Operations Management. by William J.

Inventory: a stock or store of goods Independent Demand A Dependent Demand B(4) C(2) D(2) E(1) D(3) F(2) Independent demand is uncertain. 381 . Dependent demand is certain.

Types of Inventories    Raw materials & purchased parts Partially completed goods called work in progress Finished-goods inventories (manufacturing firms) or merchandise (retail stores) 382 .

Types of Inventories (Cont¶d)   Replacement parts. tools. & supplies Goods-in-transit to warehouses or customers 383 .

Functions of Inventory   To meet anticipated demand To smooth production requirements To decouple operations To protect against stock-outs   384 .

Functions of Inventory (Cont¶d)   To take advantage of order cycles To help hedge against price increases To permit operations To take advantage of quantity discounts 385   .

Objective of Inventory Control  To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds Level of customer service Costs of ordering and carrying inventory 386 .

Effective Inventory Management     A system to keep track of inventory A reliable forecast of demand Knowledge of lead times Reasonable estimates of Holding costs Ordering costs Shortage costs  A classification system 387 .

Inventory Counting Systems  Periodic System Physical count of items made at periodic intervals  Perpetual Inventory System System that keeps track of removals from inventory continuously. thus monitoring current levels of each item 388 .

Two containers of inventory.Bar code printed on a label that has 0 information about the item to which it is attached  214800 232087768 389 . reorder when the first is empty  Universal Bar Code .Inventory Counting Systems (Cont¶d) Two-Bin System .

Key Inventory Terms Lead time: time interval between ordering and receiving the order  Holding (carrying) costs: cost to carry an item in inventory for a length of time. usually a year  Ordering costs: costs of ordering and receiving inventory  Shortage costs: costs when demand exceeds supply  390 .

mod. A .very important B .least important High Annual $ value of items Low A B C Few Many Number of Items 391 . important C .ABC Classification System Classifying inventory according to some measure of importance and allocating control efforts accordingly.

Cycle Counting   A physical count of items in inventory Cycle counting management How much accuracy is needed? When should cycle counting be performed? Who should do it? 392 .

Economic Order Quantity Models    Economic order quantity model Economic production model Quantity discount model 393 .

Assumptions of EOQ Model       Only one product is involved Annual demand requirements known Demand is even throughout the year Lead time does not vary Each order is received in a single delivery There are no quantity discounts 394 .

The Inventory Cycle Q Quantity on hand Profile of Inventory Level Over Time Usage rate Reorder point Receive order Place Receive order order Place Receive order order Time Lead time 395 .

Total Cost Annual Annual Total cost = carrying + ordering cost cost TC = Q H 2 + DS Q 396 .

Cost Minimization Goal The Total-Cost Curve is U-Shaped Annual Cost Q D TC ! H  S 2 Q Ordering Costs QO (optimal order quantity) Order Quantity (Q) 397 .

Q OPT = 2DS = H 2(Annual Demand)(Order or Setup Cost) Annual Holding Cost 398 .Deriving the EOQ Using calculus. we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.

Q OPT = 2DS = H 2(Annual Demand)(Order or Setup Cost) Annual Holding Cost 399 .Minimum Total Cost The total cost curve reaches its minimum where the carrying and ordering costs are equal.

Economic Production Quantity (EPQ) Production done in batches or lots  Capacity to produce a part exceeds the part¶s usage or demand rate  Assumptions of EPQ are similar to EOQ except orders are received incrementally during production  400 .

Economic Production Quantity Assumptions Only one item is involved  Annual demand is known  Usage rate is constant  Usage occurs continually  Production rate is constant  Lead time does not vary  No quantity discounts  401 .

Economic Run Size Q0 ! p 2DS H p u 402 .

Total Costs with Purchasing Cost (PD) Annual Annual + Purchasing TC = carrying + ordering cost cost cost TC = Q H 2 + DS Q + PD 403 .

Total Costs with Purchase Cost (PD) Cost Adding Purchasing cost TC with PD doesn¶t change EOQ TC without PD PD 0 EOQ Quantity 404 .

Total Cost (TC) with Constant Carrying Costs (CC) Total Cost TCa TCb TCc Decreasing Price CC a.b.c OC EOQ Quantity 405 .

the item is reordered Safety Stock .When to Reorder with EOQ Ordering  Reorder Point . Service Level .Probability that demand will not exceed supply during lead time.When the quantity on hand of an item drops to this amount.Stock that is held in excess of expected demand due to variable demand rate and/or lead time. 406   .

Determinants of the Reorder Point The rate of demand  The lead time  Demand and/or lead time variability  Stockout risk (safety stock)  407 .

Safety Stock Quantity Maximum probable demand during lead time Expected demand during lead time ROP Safety stock reduces risk of stockout during lead time Safety stock LT Time 408 .

Reorder Point (ROP) The ROP based on a normal Distribution of lead time demand Service level Risk of a stockout Probability of no stockout Expected demand 0 ROP Safety stock z Quantity z-scale 409 .

Fixed-Order-Interval Model
Orders are placed at fixed time intervals  Order quantity for next interval?  Suppliers might encourage fixed intervals  May require only periodic checks of inventory levels  Risk of stockout 


Fixed-Interval Benefits
Tight control of inventory items  Items from same supplier may yield savings in: 

Ordering Packing Shipping costs 

May be practical when inventories cannot be closely monitored

Fixed-Interval Disadvantages
Requires a larger safety stock  Increases carrying cost  Costs of periodic reviews 


Single Period Model 

Single period model: model for ordering of perishables and other items with limited useful lives Shortage cost: generally the unrealized profits per unit Excess cost: difference between purchase cost and salvage value of items left over at the end of a period

Single Period Model 

Continuous stocking levels
Identifies optimal stocking levels Optimal stocking level balances unit shortage and excess cost 

Discrete stocking levels
Service levels are discrete rather than continuous Desired service level is equaled or exceeded

Operations Strategy 

Too much inventory
Tends to hide problems Easier to live with problems than to eliminate them Costly to maintain 

Wise strategy
Reduce lot sizes Reduce safety stock


Economic Production Quantity
Production & Usage Production & Usage






Scheduling Operations 

Companies differentiate based on product volume and product variety Differentiation affects how the company organizes its operations Each kind of company operation needs different scheduling techniques Scheduling has specific definitions for routing, bottleneck, due date, slack and queue

Scheduling Definitions 

The operations to be performed, their sequence, the work centers, & the time standards 


A resource whose capacity is less than the demand placed on it

Due date:
When the job is supposed to be finished

The time that a job can be delayed & still finish by its due date

A waiting line

High-Volume Operations 

High-volume, also called flow operations, like automobiles, bread, gasoline can be repetitive or continuous
High-volume standard items; discrete or continuous with smaller profit margins Designed for high efficiency and high utilization High volume flow operations with fixed routings Bottlenecks are easily identified Commonly use line-balancing to design the process around the required tasks

Low-Volume Operations 

Low-volume, job shop operations, are designed for flexibility.
Use more general purpose equipment Customized products with higher margins Each product or service may have its own routing (scheduling is much more difficult) Bottlenecks move around depending upon the products being produced at any given time

Low-Volume Tool ± Gantt Charts 

Developed in the early 1900¶s by Henry Gantt Load charts (see below Figure 15-1)
Illustrates the workload relative to the capacity of a resource Shows today¶s job schedule by employee


Note that design and pilot run both finished late and feedback has not started yet. 423 .Gantt Chart (continued)  Progress charts: Illustrates the planned schedule compared to actual performance Brackets show when activity is scheduled to be finished.

but helps identify bottlenecks in a proposed schedule to enable proactive management  Finite loading: Allows only as much work to be assigned as can be done with available capacity ± but doesn¶t prepare for inevitable slippage 424 .Scheduling Work .Work Loading  Infinite loading: Ignores capacity constraints.

Other Scheduling Techniques   Forward Scheduling ± starts processing immediately when a job is received Backward Scheduling ± begin scheduling the job¶s last activity so that the job is finished on due date 425 .

Monitoring Work Flow Input/Output Control   I/O control is a capacity-control technique used to monitor work flow at individual work centers Monitors how well available capacity is used and provides insight into process problems Period 6 800 780 -20 -40 Period 6 800 780 -20 -70 80 7 820 810 -10 -50 8 800 810 10 -40 Figure 15-6 Input/output report for work center 101 Input Information (in hours) 4 5 Planned Input 800 750 Actual Input 750 780 Deviation -50 30 Cumulative deviation 0 -50 -20 Output information (in hours) Planned output Actual output Deviation Cumulative deviation Backlog (in hours) 4 800 800 0 0 50 5 800 750 -50 -50 80 0 100 7 800 850 50 -20 40 8 800 825 25 5 25 426 .

How to Sequence Jobs    Which of several jobs should be scheduled first? Techniques are available to do short-term planning of jobs based on available capacity & priorities Priority rules: Decision rules to allocate the relative priority of jobs at a work center Local priority rules: determines priority based only on jobs at that workstation Global priority rules: also considers the remaining workstations a job must pass through 427 .

first served (LCFS) Earliest due date (EDD) Shortest processing time (SPT) Longest processing time (LPT) Critical ratio (CR): (Time until due date)/(processing time) Slack per remaining Operations (S/RO) Slack /(number of remaining operations) 428 .Commonly Used Priorities Rules        First come. first served (FCFS) Last come.

Example Using Shortest processing time (SPT). Earliest due date (EDD) Example Using SPT and EDD at Jill's Machine Shop-Work Center 101 Job Time Days to SPT Rule EDD Rule Job Number (includes Setup & Run Time) Due Date Sequence Sequence EZE101 AZK111 AZK111 3 days 3 BRU872 EZE101 BRU872 2 days 6 AZK111 DBR664 CUF373 5 days 8 DBR664 BRU872 DBR664 4 days 5 FID448 CUF373 EZE101 1day 4 CUF373 FID448 FID448 4 days 9 429 .

2.How to Use Priority Rules 1. third and so on 430 . Decide which priority rule to use List all jobs waiting to be processed with their job time Using priority rule determine which job has highest priority then second. 3.

# measures responsiveness and work-in-process inventory    Makespan: The time it takes to finish a batch of jobs. Job tardiness: How long after the due date a job was completed. or behind schedule. on. avg. avg. measure of efficiency Job lateness: Whether the job is completed ahead of.Measuring Scheduling Performance  Job flow time: Time a job is completed minus the time the job was first available for processing. flow time measures responsiveness  Average # jobs in system: Measures amount of work-in-progress. measures due date performance 431 .

Scheduling Performance Calculations Job A finishes on day 10 Job B finishes on day 13  Job C finishes on day 17 Job D ends on day 20 Calculation mean flow time: MFT= (sum job flow times)/ # of jobs = (10+13+17+20)/4 = 60/4 = 15 days  Calculating average number of jobs in the system: Average # Jobs =(sum job flow times)/ # days to complete batch = (60)/20 = 3 job  Makespan is the length of time to complete a batch Makespan = Completion time for Job D minus start time for Job A = 20 ± 0 = 20 days 432 .

)   Lateness and Tardiness are both measures related to customer service Average tardiness is a more relevant Customer Service measurement as illustrated below Example 15-5 Calculating job lateness and job tardiness Completion Date 10 13 17 20 Job A B C D Due Date 15 15 10 20 Average Lateness -5 -2 7 0 0 Tardiness 0 0 7 0 1.75 433 .Performance Calculations (Cont.

Comparing Shortest Processing time (SPT) and Slack per remaining Operations (S/RO) Performance Measures using SPT Job Time at Work Center 301 (days) 3 7 6 4 2 5 27 Job A B C D E F Total Due date (days from now) 15 20 30 20 22 20 Avg.2 Scheduling Sequence 2 6 5 3 1 4 E done at end of day 2 A end of day 5 D at end of day 9 F at end of C at end of day 14 day 20 B done at end of day 27 434 .85 Lateness (days) -10 7 -10 -11 -20 -6 -8. Job Flow Total Job Flow Time Makespan Avg. # Jobs SPT Completion Date 5 27 20 9 2 14 12.3 Tardiness (days) 0 7 0 0 0 0 1.83 77 27 2.

# Jobs Completion Lateness Tardiness Date (days) (days) 10 -5 0 7 -13 0 27 -3 0 21 1 1 17 -5 0 15 -5 0 16.167 97 27 3. Job Flow Total Job Flow Time Makespan Avg.0 0.33 3.Comparing Shortest Processing time (SPT) and Slack per remaining Operations (S/RO) (cont.75 4.25 2.59 B done at end of day 7 A at end F at end of E at end of D at end of of day 10 day 15 day 17 day 21 C done at end of day 27 435 .) Performance Measures Using S/RO Job Time Remaining at Work Remaining Number Center Job Time at Slack of Operations 301 Other Work Due date Time After Work Job (days) Center (days) (days from now) (days) Center 301 A 3 6 15 6 2 B 7 8 20 5 4 C 6 5 30 19 3 D 4 3 20 13 2 E 2 7 22 13 3 F 5 5 20 10 3 Total 27 S/RO 2 1 4.5 Scheduling Sequence 2 1 6 5 4 3 Avg.17 -5.

schedule that job in the last available position in the job sequence When you schedule a job eliminate it from further consideration Step 3 ± Repeat step 2 until you have put all activities for the job in the schedule 436 . schedule that job in the earliest available position in the job sequence If the shortest processing time is for 2nd activity.Sequencing Jobs through Two Work Centers ±Johnson¶s Rule  Johnson¶s Rule ± a technique for minimizing makespan in a two-stage. unidirectional process Step 1 ± List the jobs and the processing time for each activity Step 2 ± Find the shortest activity processing time among the jobs not yet scheduled    If the shortest Processing time is for a 1st activity.

Activity 1 Activity 2 Mopping (days) Waxing (days) Hall Adams Hall 1 2 Bryce Building 3 5 Chemistry Building 2 4 Drake Union 5 4 Evans Center 4 2 Johnson's Activity 1 Activity 2 Sequence Mopping (days) Waxing (days) Adams Hall (A) 1 2 Chemistry Building (C) 2 4 Bryce Building (B) 3 5 Drake Union (D) 5 4 Evans Center (E) 4 2 Activity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Mopping A C C B B B D D D D D E E E E Waxing A A C C C C B B B B B D D D D E437E . She needs to finish in 20 days. The job requires mopping (1st activity) and waxing (2nd activity) of each building. Vicki wants to minimize the time it takes her crews to finish cleaning (minimize makespan) the five buildings.Johnson¶s Rule Example: Vicki¶s Office Cleaners does the annual major cleaning of university buildings.

Scheduling Bottlenecks    In the 1970¶s Eli Goldratt introduced optimized production technology (OPT) OPT focused on bottlenecks for scheduling & capacity planning Definitions: Throughput: quantity of finished goods that can be sold Transfer batch: quantity of items moved at the same time from one resource to the next Process batch: quantity produced at a resource before switching to another product 438 .

Optimized production technology (OPT) Principles Balance the process rather than the flow  Non-bottleneck usage is driven by some other constraint in the system  Use and activation of a resource are not the same  A hour lost at a bottleneck is lost forever. but an hour lost at a non-bottleneck is a mirage  439 .

OPT Principles .  440 . Lead times are the result of the schedule and are not predetermined .continued Bottleneck determine throughput and inventory in system  The transfer batch does not need to be equal to the process batch  The process batch should be variable  Consider all constraints simultaneously.

5.Theory of Constraints  1. TOC is an extension of OPT ± theory is that a system¶s output is determined by its constraints Identify the bottleneck(s) in the process Exploit (fully utilize) the bottleneck(s) Subordinate all other decisions to Step 2 Schedule non-bottlenecks to support maximum use of bottleneck activities Elevate the Bottleneck(s) Do not let inertia set in 441 . 3. 4. 2.

or part-time employees 442 .Scheduling for Service Organizations  Demand management: Appointments & reservations Posted availability Delayed services or backlogs (queues)  Managing service capacity: Staff for peak demand (if cost isn¶t prohibitive) Floating employees or employees on call Temporary. seasonal.

Find the pair of days with the lowest total needed 443 . This example shows how a staff of six people can be scheduled. and Brown developed a technique for scheduling a seven day operation giving each employee two consecutive days off.  Step 1 ± Find out the minimum number of employees needed for each day of the week (1) Day of the week Number of staff needed M 4 T 5 W Th 5 3 F 5 Sa Su 2 3  Step 2 ± Given the above requirements.Developing a Workforce Schedule: Tibrewala. Philippe. calculate the number of employees needed for each pair of consecutive days (1) Pair of Consecutive Days Total of Staff needed Monday & Tuesday 9 employees Tuesday & Wednesday 10 employees Wednesday & Thursday 8 employees Thursday & Friday 8 employees Friday & Saturday 7 employees Saturday & Sunday 5 employees  Step 3 .

)  Step 4 ± Update the number of employees you still need to schedule for each day (2) Day of the week Number of staff needed M 3 T 4 W Th 4 2 F 4 Sa Su 2 3  Step 5 ± Using the updated staffing needs. repeat steps 2 through 4 until you have satisfied all needs (2) Pair of Consecutive Days Total of Staff needed Monday & Tuesday 7 employees Tuesday & Wednesday 8 employees Wednesday & Thursday 6 employees Thursday & Friday 6 employees Friday & Saturday 6 employees Saturday & Sunday 5 employees 444 .Workforce Scheduling (cont.

Scheduling (cont.) M T W Th F Sa Su (3) Day of the week M T W Th F Sa Su(4) Day of the week Number of staff needed 2 3 3 1 3 2 3 Number of staff needed 1 2 3 1 2 1 2 (3) Pair of Consecutive Days Monday & Tuesday Tuesday & Wednesday Wednesday & Thursday Thursday & Friday Friday & Saturday Saturday & Sunday Total of Staff needed 5 employees 6 employees 4 employees 4 employees 5 employees 5 employees (4) Pair of Consecutive Days Monday & Tuesday Tuesday & Wednesday Wednesday & Thursday Thursday & Friday Friday & Saturday Saturday & Sunday Total of Staff needed 3 employees 5 employees 4 employees 3 employees 3 employees 5 employees 445 .

Schedule (cont.) (5) Day of the week M T W Th F Sa Su(6) Day of the week M T W Th F Sa Su Number of staff needed 0 1 2 0 1 1 2Number of staff needed 0 1 1 0 0 0 1 (5) Pair of Consecutive Days Monday & Tuesday Tuesday & Wednesday Wednesday & Thursday Thursday & Friday Friday & Saturday Saturday & Sunday Total of Staff needed 1 employees 3 employees 2 employees 1 employees 2 employees 3 employees (6) Pair of Consecutive Days Monday & Tuesday Tuesday & Wednesday Wednesday & Thursday Thursday & Friday Friday & Saturday Saturday & Sunday Total of Staff needed 1 employees 2 employees 1 employees 0 employees 0 employees 1 employees 446 .

Final Schedule (7) Day of the week M T W Th F Sa Su Number of staff needed 0 0 0 0 0 0 0 Employees 1 2 3 4 5 6 M x x x x off x T x x x x off x W x x off x x x Th x x off x x x F x x x x x off Sa off off x off x off Su off off x off x x    This technique gives a work schedule for each employee to satisfy minimum daily staffing requirements Next step is to replace numbers with employee names Manager can give senior employees first choice and proceed until all employees have a schedule 447 .

Scheduling Across the Organization  Scheduling executes a company¶s strategic business plan and affects functional areas throughout the company Accounting relies on schedule information and completion of customer orders to develop revenue projections 448 .

Scheduling Across the Organization .continued Marketing uses schedule effectiveness measurement to determine whether the company is using lead times for competitive advantage Information systems maintains the scheduling database Operations uses the schedule to maintain its priorities and to provide customer service by finishing jobs on time 449 .

450 . Finite loading loads jobs up to a predetermined capacity level. Rules related to due dates tend to minimize the maximum tardiness of the jobs. Scheduling in the high-volume environment is typically done through line design and balancing. mean job lateness. Loading can be done using forward or backward scheduling Priority rules are used to make scheduling decisions.Scheduling Highlights    Different kinds of environments need different scheduling techniques. and average number of jobs in system. Scheduling in a low-volume environment typically involves the use of priority rules. SPT always minimizes mean job flow times. Shop loading techniques included infinite or finite loading.

When scheduling bottleneck systems. Johnson¶s Rule is a effective technique for minimizing makespan when two successive workstations are needed to complete the process. mean job tardiness. makespan. mean job lateness. the basic principles of OPT apply. Mean flow time. and the average number of jobs in the system measure the effectiveness of schedules. 451 .Scheduling Highlights    Performance measures reflect the priorities of the organization. TOC expands OPT into a managerial philosophy of continuous improvement.

and Brown constructs workforce schedules when a company uses full-time employees.Scheduling Highlights   Service organizations use different techniques such as appointments. reservations. operates seven days each week. and gives its employees two consecutive days off 452 . A method developed by Tibrewala. Phillippe. and posted schedules for effective use of service capacity.


Project Management Applications  What is a project? Any unique endeavor with specific objectives With multiple activities With defined precedent relationships With a specific time period for completion  Examples? A major event like a wedding Any construction project Designing a political campaign 454 .

Project Life Cycle   Conception: identify the need Feasibility analysis or study: costs benefits. and risks Planning: who. how long. what to do? Execution: doing the project Termination: ending the project 455    .

but individual tasks are routine (tasks¶ duration = deterministic) 456  .Network Planning Techniques  Program Evaluation & Review Technique (PERT): Developed to manage the Polaris missile project Many tasks pushed the boundaries of science & engineering (tasks¶ duration = probabilistic) Critical Path Method (CPM): Developed to coordinate maintenance projects in the chemical industry A complex undertaking.

Both PERT and CPM  Graphically display the precedence relationships & sequence of activities Estimate the project¶s duration Identify critical activities that cannot be delayed without delaying the project Estimate the amount of slack associated with non-critical activities 457    .

Network Diagrams  Activity-on-Node (AON): Uses nodes to represent the activity Uses arrows to represent precedence relationships 458 .

Activity A B C D E F G H I J K Description Develop product specifications Design manufacturing process Source & purchase materials Source & purchase tooling & equipment Receive & install tooling & equipment Receive materials Pilot production run Evaluate product design Evaluate process performance Write documentation report Transition to manufacturing Immediate Duration Predecessor (weeks) None 4 A 6 A 3 B 6 D 14 C 5 E&F 2 G 2 G 3 H&I 4 J 2 459 .Step 1-Define the Project: Cables By Us is bringing a new product on line to be manufactured in their current facility in some existing space. The owners have identified 11 activities and their precedence relationships. Develop an AON for the project.

Diagram the Network for Cables By Us 460 .Step 2.

Step 3 (a).Add Deterministic Time Estimates and Connected Paths 461 .

Step 3 (a) (Continued): Calculate the Path Completion Times Paths Path duration ABDEGHJK 40 ABDEGIJK 41 ACFGHJK 22 ACFGIJK 23 The longest path (ABDEGIJK) limits the project¶s duration (project cannot finish in less time than its longest path) ABDEGIJK is the project¶s critical path 462   .

Some Network Definitions       All activities on the critical path have zero slack Slack defines how long non-critical activities can be delayed without delaying the project Slack = the activity¶s late finish minus its early finish (or its late start minus its early start) Earliest Start (ES) = the earliest finish of the immediately preceding activity Earliest Finish (EF) = is the ES plus the activity time Latest Start (LS) and Latest Finish (LF) = the latest an activity can start (LS) or finish (LF) without delaying the project completion 463 .

ES. EF Network 464 .

LS. LF Network 465 .

Calculating Slack Activity A B C D E F G H I J K Late Finish 4 10 25 16 30 30 32 35 35 39 41 Early Finish 4 10 7 16 30 12 32 34 35 39 41 Slack (weeks) 0 0 18 0 0 18 0 1 0 0 0 466 .

Revisiting Cables By Us Using Probabilistic Time Estimates Activity A B C D E F G H I J K Description Develop product specifications Design manufacturing process Source & purchase materials Source & purchase tooling & equipment Receive & install tooling & equipment Receive materials Pilot production run Evaluate product design Evaluate process performance Write documentation report Transition to manufacturing Optimistic time 2 3 2 4 12 2 2 2 2 2 2 Most likely time 4 7 3 7 16 5 2 3 3 4 2 Pessimistic time 6 10 5 9 20 8 2 4 5 6 2 467 .

Using Beta Probability Distribution to Calculate Expected Time Durations   A typical beta distribution is shown below. note that it has definite end points The expected time for finishing each activity is a weighted average optimistic  4.

time ! 6 468 .most likely  pessimistic Exp.

Calculating Expected Task Times optimistic  4.

83 3.most likely  pessimistic Expected time ! 6 Activity A B C D E F G H I J K Optimistic time 2 3 2 4 12 2 2 2 2 2 2 Most likely time 4 7 3 7 16 5 2 3 3 4 2 Pessimistic time 6 10 5 9 20 8 2 4 5 6 2 Expected time 4 6.83 16 5 2 3 3.17 4 469 2 .17 6.

Network Diagram with Expected Activity Times 470 .

17 23.Estimated Path Durations through the Network Activities on paths ABDEGHJK ABDEGIJK ACFGHJK ACFGIJK  Expected duration 44.83 23.83 weeks 471 .34 ABDEGIJK is the expected critical path & the project has an expected duration of 44.66 44.

Adding ES and EF to Network 472 .

Gantt Chart Showing Each Activity Finished at the Earliest Possible Start Date 473 .

Adding LS and LF to Network 474 .

Gantt Chart Showing the Latest Possible Start Times if the Project Is to Be Completed in 44.83 Weeks 475 .

Estimating the Probability of Completion Dates     Using probabilistic time estimates offers the advantage of predicting the probability of project completion dates We have already calculated the expected time for each activity by making three time estimates Now we need to calculate the variance for each activity The variance of the beta probability distribution is: 2 ¨po¸ !© ¹ 6 º ª 2 where p=pessimistic activity time estimate o=optimistic activity time estimate 476 .

00 477 .25 0.25 0.44 1.00 0.00 0.11 0.36 0.Project Activity Variance Activity A B C D E F G H I J K Optimistic 2 3 2 4 12 2 2 2 2 2 2 Most Likely 4 7 3 7 16 5 2 3 3 4 2 Pessimistic 6 10 5 9 20 8 2 4 5 6 2 Variance 0.69 1.78 1.44 0.

J.H.Variances of Each Path through the Network Path Number 1 2 3 4 Activities on Path A.G.G.E.C.k A.I.J.96 2.F.C.K Path Variance (weeks) 4.B.H.K A.G.E.24 2.D.38 478 .D.K A.B.J.82 4.G.F.J.I.

Calculating the Probability of Completing the Project in Less Than a Specified Time   When you know: The expected completion time Its variance You can calculate the probability of completing the project in ³X´ weeks with the following formula: specified time  path expected time ¨ DT  EFP ¸ ¹ !© z! © ¹ 2 path standard time P ª º Where DT = the specified completion date 2 EFPath = the expected completion time of the path Path ! variance of path 479 .

66 weeks ¸ ¹ ! 1.I.B.C.D.000 1.g.H.k A.J.E.9222 1.G.G.D.K A.9357 0.K A.F.G.J.E.K Path Variance z-value (weeks) 4.Example: Calculating the probability of finishing the project in 48 weeks   Use the z values in Appendix B to determine probabilities ¨ 48 weeks  44.J.24 2.B.4215 16.96 2.5216 1. probability for path 1 is ! © ¹ ª 4.52 z © e.82 º Path Number 1 2 3 4 Activities on Path A.000 480 .38 1.C.F.I.5898 15.G.H.82 4.J.9847 Probability of Completion 0.

Reducing Project Completion Time  Project completion times may need to be shortened because Different deadlines Penalty clauses Need to put resources on a new project Promised completion dates  Reduced project completion time is ³crashing´ 481 .

Reducing Project Completion Time .continued  Crashing a project needs to balance Shorten a project duration Cost to shorten the project duration  Crashing a project requires you to know Crash time of each activity Crash cost of each activity Crash cost/duration = (crash cost-normal cost)/(normal time ± crash time) 482 .

weeks of reduction 1 1 0 2 2 1 0 0 1 2 0 Reduce cost per week 3.Reducing the Time of a Project (crashing) Activity Normal Time (wk) 4 6 3 6 14 5 2 2 3 4 2 Normal Cost ($) 8.400 5.000 30.000 28.000 Crash Time 3 5 3 4 12 4 2 2 2 2 2 Crash Cost ($) 11.000 35.000 1.000 5.500 6.000 5.200 483 0 A B C D E F G H I J K .000 4.000 0 2.000 6.000 1500 0 0 1.000 6.000 4.000 60.000 24.000 72.000 6.000 6.000 5.000 5.000 6.000 4.000 6.000 Max.000 4.

   Crashing Costs are considered to be linear Look to crash activities on the critical path Crash the least expensive activities on the critical path first (based on cost per week) Crash activity I from 3 weeks to 2 weeks $1000 Crash activity J from 4 weeks to 2 weeks $2400 Crash activity D from 6 weeks to 4 weeks $4000 Recommend Crash Cost $7400  Question: Will crashing 5 weeks return more in benefits than it costs? 484 .Crashing Example: Suppose the Cables By Us project manager wants to reduce the new product project from 41 to 36 weeks.

Crashed Network Diagram 485 .

The Critical Chain Approach  The Critical Chain Approach focuses on the project due date rather than on individual activities and the following realities: Project time estimates are uncertain so we add safety time Multi-levels of organization may add additional time to be ³safe´ Individual activity buffers may be wasted on lower-priority activities A better approach is to place the project safety buffer at the end Original critical path Activity A Activity B Activity C Activity D Activity E Critical path with project buffer Activity A Activity B Activity C Activity D Activity E Project Buffer 486 .

Adding Feeder Buffers to Critical Chains    The theory of constraints. the basis for critical chains. Time buffers can be put between bottlenecks in the critical path These feeder buffers protect the critical path from delays in non-critical paths 487 . focuses on keeping bottlenecks busy.

Project Management OM Across the Organization     Accounting uses project management (PM) information to provide a time line for major expenditures Marketing use PM information to monitor the progress to provide updates to the customer Information systems develop and maintain software that supports projects Operations use PM to information to monitor activity progress both on and off critical path to manage resource requirements 488 .

Pert and CPM determine the critical path of the project and the estimated completion time. software programs are available to identify the critical path. On large projects. Pert uses probabilistic time estimates. and termination. Two network planning techniques are PERT and CPM. Each project goes through a five-phase life cycle: concept. planning. 489 . CPM uses deterministic time estimates. one time event of some duration that consumes resources and is designed to achieve an objective in a given time period.Project Management Highlights     A project is a unique. feasibility study. execution.

The critical chain approach removes excess safety time from individual activities and creates a project buffer at the end of the critical path. To reduce the length of the project (crashing).Project Management Highlights (continued)    Pert uses probabilistic time estimates to determine the probability that a project will be done by a specific time. we need to know the critical path of the project and the cost of reducing individual activity times. 490 . Crashing activities that are not on the critical path typically does not reduce project completion time.

491 .

Wi-Fi 802.2G.11 «.3G. 492 .

493 .

494 .

495 .

496 .

GPS 497 .

UPC ) 4 7 1 0 1 2 3 4 5 6 7 8 8 OCR-B 498 .Barcode (Universal Product Code.

499 .

RFID   > >      500 .

RFID t 501 .

BI( ) 502 .




Quantitative approach (Management by figures) (Management by indicators) (Management by dashboard) 3. Mixed approach 506 . Qualitative approach 2.DECISION MAKING & PROBLEM SOLVING 1.

BI(  ) BI Business Intelligence 507 .

BI(  )  508 .

BI(   ) Have data Understand how to intepret data 509 .

  (Key Performance Indicators) 510 .

The Balanced Scorecard    1 4 2 3 511 .

000 $3.100.000 $3.48% 512 .Financial Perspective Objective Measures Initiatives Target Performance Actual Performance $2.000 6% 6.420.000.000 $2.000.

513 . 90% 2 87% 2 2. 2.Customer Perspective Objective Measures Initiatives Target Performance 6% Actual Performance 7% 1. 1.

Internal Business Process Perspective Objective Measures Initiatives Target Performance 78% Actual Performance 79.3% 30 92% 30 90% 4 3 514 .

3% 90% 90% 515 .Internal Business Process Perspective Objective Measures Initiatives Target Performance 78% Actual Performance 79.

Learning and Growth Perspective Objective Measures Initiatives Target Performance 80% 2 90% 92% Actual Performance 88% 2 85% 90% 90% 90% 516 .

   517 .

OLAP: Cube 1 2 3 4 518 .

/ / / 519 .

BI(  )  520 .

‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Trace (Track & ) 521 .


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