Table of Contents

Chapter 1: Goods, Services, and Operations Management .......................................................................... 1

Chapter 2: Value Chains ................................................................................................................................ 2
Chapter 3: Measuring Performance in Operations ....................................................................................... 4
Chapter 4: Operations Strategy .................................................................................................................... 6
Chapter 6: Goods & Services Design ............................................................................................................. 7
Chapter 7: Process Selection, Design and Analysis ..................................................................................... 10
Chapter 8: Layout ........................................................................................................................................ 15
Chapter 10: Capacity ................................................................................................................................... 19
Chapter 14: Sequencing .............................................................................................................................. 22
Chapter 15: Quality tools ............................................................................................................................ 26
Chapter 16: Quality charts .......................................................................................................................... 29
Chapter 12: Inventory ................................................................................................................................. 34
Queuing Theory .......................................................................................................................................... 43
Chapter 9: Supply Chain .............................................................................................................................. 43
Chapter 17: Lean ......................................................................................................................................... 46

Chapter 1: Goods, Services, and Operations Management

Operation management is the managing of process, focusing on efficiency and productivity.

Good and services:

Durable good: a product that typically lasts at least three years (car, house, etc)
Non-durable good: a product that lasts less han three years (food, paper, etc)

Differences between good and services:

1. Goods are tangible, services are not

2. Customers participate in many services (heterogenous: different) → bring variation into the
system.
3. Demand for services is more difficult to predict and generally more volatile.
4. Services cannot be stored as physical inventory ( services have to be designed to ‘peak’
capacity, example: Mcdonald. Goods are designed to average capacity)
 5. Facility location (good: large, close to input to minimize cost of input. Services: tons, small,
close to customers to maximize revenues)

Service encounter is an ineraction between the customer and service provider, whch consist of one or
more moments of truth (the whole time, first interaction to last).

Moments of truth are he most important aspects of the service encounter. Example: delivery of goods,
politeness, hospitality, etc.

Consumer benefit package: clearly defined set of tangible and intangible features that the customer
recognizes, payfor, uses or experiences. It is made p of primary and peripheral aspects. Forexample: the
consumer benefit package of Starbuck:

Goods Services

Primary Coffees, drinks Espertise, timely, atmosphere

Food, music cds, cups, mugs,
Peripheral Wifi, drive thru
coffee bags

Process: sequence of activities that is intended to ccreate a cerain result. Most businesses have three
kind of processes:

1. Value creation process (biggest role)

2. Support process (purchasing, IT, inventory management, quality control)
3. General management process (accounting, HR, marketing)

Value chain: network of processes that create value for customers

History of Operation Management

Focus on efficiency → equality → customization and design → time → service and value →
sustainability → data and analytics.

Future of Operation Management

Globalization, Technology, Work force, Increasing customers’ expectation.

Chapter 2: Value Chains

Value chain – network of facilities and processes that describes the flow of goods, services, information,
and financial transactions from suppliers through the facilities and processes that create goods and
services and deliver them to the customer

Value chain: netwrok of things that helps produce a good or deliver a service.
Value is how much we need a thing. The thing mut have a function, style, quality points

𝑝𝑒𝑟𝑐𝑒𝑖𝑣𝑒𝑑 𝑏𝑒𝑛𝑒𝑓𝑖𝑡𝑠 (𝑐𝑜𝑛𝑐𝑒𝑝𝑡𝑢𝑎𝑙 𝑡ℎ𝑖𝑛𝑔)

Value = 𝑝𝑒𝑟𝑐𝑒𝑖𝑣𝑒𝑑 𝑠𝑎𝑐𝑟𝑖𝑓𝑖𝑐𝑒 (𝑒𝑚𝑜𝑡𝑖𝑜𝑛𝑎𝑙,𝑓𝑖𝑛𝑎𝑛𝑐𝑒,𝑒𝑡𝑐 … )

Supply chain: flow of physical goods

Supply Chain – portion of value chain that focuses primarily on the physical movement of goods and
material

Inputs → Conversion (most of the time the greatest part of value is added here) → Outputs

Operational structure of value chain

1. Centralized or decentralized

Centralized: uniform, risk reduction, price discounts, strategic focus, efficiency (Walmart)
Decentralized: focus on customization, flexibility, local control ( GE)

2. Outsourcing vs. Insourcing

Brand image, core competency, cost/ volume (economies of scale: the more you do smth, the faster you
can do it), quality, acesss to input, capacity, proprietary, differentiation

3. Vertical intergration

The degree to which you own your supply chain.

Forward: Apple retail stores (towards the customer)

Backward: If Apple started making plastic (towards the raw material)

4. Break-Even Analysis
 Used to determine when one is indifferent between two alternatives (Their profitabilities, costs,
revenues, customer satisfaction, etc are equal.)

Profit = Total Revenue – Total Cost

Total Revenue = P * Q
Total Cost = FC + (VC*Q) where,

P = price per unit

Q = quantity
FC = Fixed Cost
VC = Variable cost per unit

Break-even point is the quantity of which revenues and cost are equal.

5. Offshoring

Offshoring – an “internal” form of outsourcing when materials/services are produced outside of the U.S.
but control and ownership is maintained by the firm.

Chapter 3: Measuring Performance in Operations

All complex activities need a variety of performance measures as indicated in the airplane example at
the beginning of the chapter. A combination of forward looking and backward looking measures are
needed.

Interlinking – showing how one performance measure is related to another, as an example, as cost of
goods sold decreases, profit increase.

Good performance measures will have the following characteristics:

 Interlinked with the company’s goal, support mission, actionble, effective in forecasting, easy to
calculate, easy to understand, have an owner, valid and reliable.
𝑜𝑢𝑡𝑝𝑢𝑡
Productivity = 𝑖𝑛𝑝𝑢𝑡

Benchmarking : compare productivity calculated to industry standard, to competitors, to own history

and to the goals.

What affect productivity: motivation, material, processes

Value of a loyal customer

Cost of finding a new customer can range anywhere from 3 to 20 times the amount of keeping an
existing customer … just think of all the specials that new customers get from cell phone companies.
Companies have to spend loads of money on advertising, promotion and discounts to get new
customers.

We can estimate the value of a loyal customer by using the following formula:

VLC = (P)(CM)(RF)(BLC) where,

P = revenue per unit

CM = contribution margin to profit (%)

RF = repurchase frequency (# of purchases per year)

BLC = buyer’s life cycle in years, computed as 1/defection rate

Balance store card: measures that are inrwenal and external, forward-looking and backward-looking.

1. Financial measures (internal – backwards) (return on assets, profit, return on equity)

2. Customer measures (external – forwards) (customer loyalty, etc)
3. Innovation and learning (all 4) ( time between upgrades, number of new products)
4. Internal process (all 4) ( productivity, quality)

Service profit chain

Chapter 4: Operations Strategy

Competitive Advantage – denotes a firm’s ability to achieve market and financial superiority over its
competitors. It involves two things:

Design (long term – what customers want)

Infrastructure (short term - building capability to support wants and needs of customers)

Customer segmentation: dividing the customer base into different pools

Classification schemes of customer requirements:

Kano’s scheme:

1. Dissatisfiers: if they are present, they will not even try (minimum)
2. Satisfiers: attributes that satisfy the customer (better experience)
3. Delighters: good things that customer don’t expect.

Hill’s scheme

1. Order qualifiers: basic customer expectations, minimum performance level.

2. Order winners: what makes you win ( features and characteristics); features and
characteristics that differentiate one consumer benefit package from another and ultimately win the
customer’s business

How do customers evaluate goods and services?

1. Search attributes: info readily available

2. Experience: You can only judge when you use
3. Credence: Aspects of a good or service that the customer must believe in but cannot
personally evaluate even after purchase and consumption (medical check-up, etc)
All of these aspects must be kept in mind when designing goods or services. For services that are high in
experience and credence attributes customers will want to feel some assurance as they go through the
process, firms must realize this and design it into the service delivery.

Competitive priorities:

Low cost, Customer service, Convenience, Low cost (Walmart), Flexibility, Volume flexibility,
High performance (Lamborgini) , Conformance (Toyota), Design and innovation (Apple), Rapid delivery
(Fedex), On-time delivery (USPS), Product customization.

Core competencies – strengths that are unique to the firm based on their structure, products, past
experiences, human resources, etc.

Levels of strategy: **Note, not all businesses (particularly smaller ones) will have a separate business
and corporate strategy, they will essentially be one in the same.

Corporate strategy → Business unit (each product) strategy (cost, differentiation)→ Functional
strategy (HR, marketing, finance, etc)

Environmental Scanning – assessing the environment outside of the firm to see what opportunities and
threats exist (sometimes called SWOT analysis).

Chapter 6: Goods & Services Design

Why do you buy the products / services that you do?

Steps Involved in Design

Traditionally operations would not have been involved in the process until Step 4, but recently there has
been a shift towards operations getting involved early in the design process because of their process
expertise and knowing how characteristics of the consumer benefit package will interact with process,
materials, labor, etc.

One tool that works very well to help the transition from steps 2 to 4 is the House of Quality, sometimes
called Quality Function Deployment. It is a method that translates the customer’s voice into very
detailed and specific technical goods and services requirements. c

Some product design concepts:

 Quality & Value Engineering – Designing quality, value and cost avoidance into a good.
Value Analysis – analyzing a current system for ways to improve quality, value and cost
Failure Mode and Effects Analysis (FMEA) – list each component, the ways it can fail, the causes
of those failures, the effects of the failures and how they can be corrected
Product and process simplification – move towards eliminating the number and complexity of
components in a product and steps in a process
Design for Manufacturability – keep in mind the difficulty/simplicity of making the product when
designing it
Design for Environment – explicit consideration of green practices when designing products
Robust Design

Servicescape – the physical evidence a customer might use to form an impression.

When designing a service encounter there are four principal elements

1. Customer contact
2. Employee selection, development and empowerment
3. Recognition and Reward Systems
4. Service Recovery and Guarantee

Taguchi Loss Function vs. Goal Post Theory

This theory emphasizes the every deviation from the target matters, not just the deviations that cause a
“failure”.

Reliability

Serial: under normal condition: Rs (reliability) = (p1)(probability)(p2)(p3) .. (pn)

Parallel: back-up system: Rp = (p1) x (1-probability of failure) = (p1) x [1 – (1-p2) (1-p3)]

Chapter 7: Process Selection, Design and Analysis

Process design is important because they are long term decision that are not likely to change once you
made them and impact the productivityand worker morale.

Three generic operating strategies:

1. Make to stockL High volume, Low variety standardised good (Walmart, Sony, etc)
2. Make to order: Low volume, Highly customized (housebuilding, custom wedding dress, etc)
3. Assemble to order: Components are made ahead of time, final configuration is determined
by customer, Medium volume, Medium customizatiom (components can be made in mass production ->
low cost) (Chipotle, subway, etc)

Tradeoffs include: efficiency, cost, responsiveness, flexibility and time

Process choice must be linked to operating strategy.

Job Shop Batch Assembly Line Continuous Flow

Examples: pinball helmets cars rim for cars

Volume low -> -> High

Product Variety high -> -> Low

small amount, High amount,
Equipment -> ->
general equipment specialized
Job Flexibility high -> -> Low

Fixed Costs low -> -> high

Variable Costs high -> -> Low

design, flexibility, Conformance
Competencies customization, -> -> quality, low cost,
quality rapid delivery
Lead Time high -> -> Low

Keep in mind that all product’s and service’s go through life cycles and we must take that into account
when we choose (and re-choose) processes.
Process Design: Four levels

1.Task (tighten lug nuts on wheel

2.Activity (assemble wheel and mount to car)
3.Process (assemble car)
4.Value chain (make & sell car)

Process Design Steps:

1. Define purpose and objectives of the process

2. Create a process map of current conditions
3. Create and evaluate alternatives
4. Identify and define performance measures
5. Select appropriate equipment and technology
6. Develop an implementation plan

Process Mapping | Value Stream Mapping

This map can help us analyze which of these steps adds value to the customer and which the customer
would define as value-less.

Triangle: waiting
Square: process
Diamond: Choice/ decision

Assumption: 1. Deterministic
2. Steady state: inflow = outflow

I = R x T (I: number of customer in line, R: throughput - number of customer who actually go through the
process, T: flow time from the time you place your order to the time you receive it)
Reengineering : fundamental rethinking and radical redesign to achieve dramatic improvements

Continuous Improvement : constant, incremental redesign aimed at small achievements

Utilization: fraction of time a workstation or individual is busy

Re sources Demanded Demand Rate

Utilization (U) = =
Re source Availabili ty [ Service Rate*# Servers]

Throughput: Average number of entities completed per unit time, also known as the output rate
Bottleneck: work activity (or station or individual) that effectively limits throughput of the entire process

Flow Time | Cycle Time: average time it takes to complete one cycle of a process, as such, it depends
upon processing time as well as wait time (queue time)

Little’s Law

Work in Process Inventory (WIP) = Throughput (R) * Flow Time (T)

I=RxT

**Note this formula is based on averages and serves as a good baseline, however, whenever there is
variability in the system actual performance will vary from this estimate

Capability mapping

Capability mapping helps management visualize what a customer wants and what services the business
provides

Chapter 8: Layout

Facility layout: the specific arrangement of physical facilities.

It is important when:

A new facility is constructed

There is a significant change in demand
A new good or service is introduced to the customer benefits package
Different processes, equipment and/or technology are installed

Objectives:

Minimize delays in material handlings and customer movement

Maintain flexibility
Use labor and space effectively
Promote high employee morale and customer satisfaction
Minimize energy used and environment impact.
Provide for good housekeeping and maintainance
enhace sales as appropriate in manufacturing and service facilities.

A good layout should support the anility of operations to accomplish its mission.

Four major types of layouts

1. Product Layout – see Exhibit 8.1

 Used when all products follow the same sequence
Example – assembly line, Jason’s deli salad bar
Generally used for highly standardized products

Advantages Disadvantages

Specialized equipments Disruption

Lowmaterial handling Not flexible
Low labor skill Job satisfaction is low
Low work-in-progress inventory
Simple handling and controll

2.Process Layout – see Exhibit 8.2

Uses general purpose equipment

Can handle customized product variety and sequencing
Example – most offices, bank, hospitals

Advantages Disadvantages

Flexible planning and control

Generic material handling is expensive
worker satisfaction Higher skilled labour
Long processing time

3.Cellular Layout – see exhibit 8.3

Self contained groups of equipment dedicated to product families

Popularized by Toyota
Uses “group technology”
Automatic handling of materials
The worker follows the product

Advantages Disadvantages

One product family need highly skilled workforce

better job satisfaction pay salary more
higher quality small variation

4. Fixed Position Layout

Material, equipment and people move to job site

Examples – construction, ship building, etc
How does layout impact productivity?

Flow-blocking delay : one station produces products too fast, they run out of room to store output
Lack-of-work delay: B and C doesn’t have anything to do because A is not fast enough (ABC layout)

Assembly Line Balancing

Goal: Assign tasks (jobs) to workstations such that all demand can be met and all workstations have
roughly the same amount of work

Cycle Time: interval between successive outputs coming off the assembly line

Example – even though it would take hours to assemble a car from scratch, Ford can produce a
finished car roughly every 60 seconds

CT = A / R, where

A = available production time

R = output rate to meet demand

Once we know what our cycle time is and the time for all the individual activities, we can calculate the
theoretical minimum number of workstations needed:

Nmin =
t i
(always round up), where
CT
t i = sum of all individual task times

The assembly line problem is intractable when a realistic number of tasks are used, therefore, we have
to use heuristics.

How do we know if our solution is good? We can compute the following performance measures:

Total idle time = (N)(CT) - t i

Entire line efficiency =

t i

( N )(CT )
 Balance delay = 1 – efficiency
Nmin = Nactual

There are lots decision rules to use when allotting tasks to workstations, some of the most common
include:

1. Longest task time

2. Most # of activities that follow
3. Most time of activities that follow

Designing Process Layouts

Input: relationship chart

Method:

1.) Put stations that want to be close near each other and stations that shouldn’t be close far
apart….calculate “goodness” of solution.
2.) Try different layout and compare to previous ones
3.) Repeat until satisfied that you can not improve the solution

Workplace Design

OSHA – Occupational Safety and Health Act (1970)

Safety is a function of the job itself, surrounding environment and the worker → making job as safe as
possible.
Ergonomics: An applied science concerned with the characteristics of people that need to be considered
in designing things that they use in order that people and things will interact most effectively and
safely—called also human engineering, human factors engineering

Job Design

Sociotechnical Approach – create a job that allows for high level of performance as well as high level of
satisfaction

Job enlargement: give people more task with the same level of difficulty

Job rotation: work on one station for a certain time then go on, rotating jobs as the day goes on.

Job enrichment: verical expansion of job (cut the green → order fertilizer, burger flipper → order
potatoes)

Chapter 10: Capacity

Capacity

1. Maximum rate of output per time

2. Unit of resource availibility (seats at theater, etc.)

Economies of scale – the average unit cost of a good or service decreases as the capacity and/or
throughput increases

Diseconomies of scale – the average unit cost of a good or service increases as the capacity and/or
throughput increases

Safety capacity | Cushion capacity – amount of capacity reserved for unanticipated events

Safety Capacity = 100% - Utilization %

A special problem in service industries is the fact that peak demand (thus capacity requirements) can be
significantly higher than average demand
Capacity Measurement

Ci = Si + [Pi*Qi] where

Ci = capacity requirement for product/service i

Si = set-up required for product/service i
Pi = processing time for one unit of product/service i
Qi = amount demanded of product/service i

To get a total capacity measure for all products/services that must be processed by a resource we simply
sum up the individual capacity requirement

C= C i

Re sources Used Demand Rate

Utilization = 
Re sources Available [ Service Rate *# Servers]

Long Term Capacity Management Strategies

1.) Complementary goods and services – add goods with opposite seasons to smooth capacity
requirements, see exhibit 10.5
2.) Capacity Expansion – must remember that capacity often comes in “chunks”
Short-Term Capacity Management Strategies

Theory of constraints – focus on increasing throughput by maximizing utilization of the bottleneck

station

Constraints

1. Physical – employee/machine capability

2. Nonphysical -- management, scheduling, etc

Bottleneck – the workstation (or person) that effectively limits the capacity of the entire process
Chapter 14: Sequencing

Scheduling – refers to the assignment of start and completion times to a particular job, person or piece
of equipment

Sequencing – refers to determining the order in which jobs are processed

Staff Scheduling Heuristic

Employees work 5 days/wk

The two “days off” must be consecutive

We solve the problem by finding the two consecutive days with the least need and we assign some
giving them those two days off. We then update the daily need and repeat the process.
Appointment Systems

Why use them?

Making demand smooth

Average time → Safety time
Whether or not to overbook

Determining time interval

Overbooking

Sequencing – when you have multiple jobs ready to be processed which order should you do them in.

Performance Criteria

1. Process Focused

a. Minimize average flow time – amount of time a job spends in the shop
b. Minimize make-span – amount of time to process the entire set of jobs

2. Customer Focused

a. Minimize Lateness – difference between completion time and due date (NOTE – both
positive and negative differences matter, in other words, you get penalized for completing a job early)
b. Minimize Tardiness – difference between completion time and due date but only jobs
that are past due count, early jobs count as 0.

3. Cost Based

a. Add up all relevant costs – set-up time, changeover time, inventory, processing labor,
etc.

Fi   pij   wij  Ci  Ri
Flow Time =

Makespan = M = C – S

Lateness = Li = Ci - Di

Tardiness= Ti = Max(0, Li)

Sequencing Rules

1. Shortest Processing Time (SPT)

2. Earliest Due Date (EDD)
3. First Come First Serve (FCFS)
4. Fewest # of operations remaining (FNO)
 5.Least work remaining (LWR)
6. Least work at next queue (LWNQ)

No one sequencing rule is best across all the different performance metrics, therefore, we often must
try several different ones and pick the best.

Some generalities can be made

1. SPT and EDD work well in static environments

2. SPT tends to do well on Flow Time and Inventory measures
3. EDD does well on customer measures
4. FCFS is used in many service environments
5. LWNQ tries to keep a high downstream utilization
Two Resource Case

In this case all jobs are processed through two different resources in the same order
We can solve this problem optimally with Johnson’s Algorithm if our only concern is minimizing
makespan.
For all other performance criteria we have to try several different sequencing rules

Johnson’s Algorithm

1. Find the job with the shortest processing time at either resource
2. If this time corresponds to Resource #1, place the job as early in the schedule as possible, if the
time corresponds to Resource #2, place the job as late in the schedule as possible.
3. Repeat until all jobs are sequenced

Chapter 15: Quality tools

Definitions of quality are unique for every individual.

Some common themes:

Fitness for use

Conformance quality

Service Quality

1. Assurance
2. Empathy
3. Tangibles
4. Responsiveness
5. Reliability

Total Quality Management

 1. Focus on customers
2. Process focus based on continuous improvement and learning (kaizen)
3. Employee involvement – teamwork, participation and empowerment

Edward Deming – Focus on reducing variability

created 14 points as a basis for quality programs

PDSA cycle of improvement – scientific approach to quality improvement

Joseph Juran – advocated quality cost and measurement

use of statistical process control (SPC)

Philip Crosby – “Quality is free”

there is no such thing as quality economics – doing it right the first time is always right
“zero defects”
emphasize the expense of non-conformance

Gap model of service quality

Quality certification – ISO 9000:2000

 International quality organization
Document processes, set standards, measure compliance, document errors, continuous learning

Six Sigma – Find and eliminate cause of defects and errors by focusing on outputs that are critical to
customers and result in a clear financial return for the organization

Based on a statistical measure of 3.4 defects per million opportunities

# of defects dis cov ered

Defects per unit (dpu) =
# of units produced

Defects per million opportunities (dpmo) = DPU * 1,000,000

The service equivalent is errors per million opportunities (epmo)

Implementing Six Sigma

1. Emphasizing dpmo as the standard metric across all functions of organization

2. Providing extensive training and teamwork
3. Finding corporate quality sponsors – greenbelts and blackbelts
4. Creating process improvement experts
5. Ensuring intermediate metrics focus on business results
6. Setting stretch objectives

Scientific approach to problem solving: DMAIC cycle

Costs of quality

1. Extreme Failure

Replacement upgrade
customer dissatisfaction liability
reputation legal fee
expedite recall
compensation

2. Internal failure

Rework scrap
loss productivity price reduction

3. Appraisal cost

Quality inspection labour quality inspection materials and tools

SPC charts

4. Design cost
 Better materials better tools
more training poke-yoke (foolsproofing)
process improving

Seven QC tools

Chapter 16: Quality charts

Components of Quality Control Systems:

1.the standard of quality that is your goal (performance standard)

2. A mean of measuring actual performance
3. Comparison of the actual performance with the standard to form the basis for corrective action.

Quality at the Source : everybody is responsible for quality

Statistical Process Control (SPC) – method for monitoring quality of processes to help identify and
eliminate unwanted causes of variation.

Common variation | Random variation– small, random variations that are inherent in the system
because of the imperfections of materials, tools, machines, information, workers, environment, etc.
This variation is acceptable because it can not be eliminated (in the short term).

Assignable variation | Special cause variation – arises from external sources that are not inherent in the
process. This variation is not random. Something specific caused it and therefore investigation should
take place.

Control -- a process is said to be “in control” if only random variation exists. If a process is in control its
output is stable and predictable.

We can make two types of errors when determining whether a process is in control:

1. Type I error – concluding that a process is not in control when it actually is

Outcomes: stop the process and investigate the errors → scrap products that are good

2. Type II error – determining that a process is in control when it actually is not

Outcomes: defective products get to the customers

Note – processes should never be “fine-tuned” unless it has been demonstrated that the process is out
of control

Two types of metrics:

1. Continuous metric – something that can be measured and take a near infinite amount of values
(e.g. weight, height, length, etc)
2. Discrete metric – data that are counted (e.g. # of blemishes, pass/fail, etc)

Control Charts

Four types of charts: (1-2 variables chart; 3-4 attribute chart)

1. X-bar chart (mean)

2. R chart (range = max-min)
3. P chart (proportion effective)
4. C chart (count effective)

All charts will have: centerline, upper control limit, lower control limit.

The control limits separate random variation from assignable variation – in other words, the area
between them is the zone of acceptance
There are lots of rules that determine whether a process is in control. The following scenarios suggest
that a process is out of control.

When there are any points outside of the control limits

When the number of points above and below the centerline are not approximately equal
When there is either an increasing or decreasing trend in the data
8 points in a row either above or below the centerline
10 of 11 consecutive points either above or below the centerline
2 of 3 consecutive points very near the control limits

Continuous Metric Control Charts

 R charts and x-bar charts are generally done together.

 If either are out of control, then the entire process is out of control and the other chart does not
need to be done.
Chart Centerline UCL LCL

x i
X-bar x i 1
x  A2 R x  A2 R
k **A2, D3 and D4
are found in
k

R i
Appendix B
R R i 1
D4 R D3 R
k

N is the number of observation with in the samples, not the number of samples

If appears in control, only random variables exist

P-Charts

p i = proportion defective in sample i

p1  p 2   p k
Centerline = p =
k

Control Limits = p  3s p

( p)(1  p)
Where s p 
n

C-Charts:

c1  c2    c k
Centerline = C =
k

Control Limits = c3 c

Key issues in control chart design:

1.) Sample size

2.) Sampling frequency

Round negative number to 0

Capability Analysis – refers to the natural variation (ie – random variation) in a process and how it
performs compared some benchmark (e.g. customer specifications, design specifications, etc)
Capability Index – measures the ratio between the natural variation and variation allowed by
specifications.

NOTE: capability analysis can only be performed on a process that is in control!

There are two type of capability indices:

1. Cp, used when the process mean is centered on the specification target
2. Cpk, makes no assumptions

The Cpk and Cp will give you identical targets if the process is centered, so most people just use the Cpk

Decision Rule -- From a theoretical perspective, a capability value greater than or equal to 1 means the
process is capable. However, a value just above 1 does not allow for any process movement over time
(e.g. machines wearing out, people getting tired), so often companies will use a value of 1.33 or 1.67 for
the cut-off.

For both of these analyses, a process standard deviation is needed. If the standard deviation is not given,
it can be estimated using the following formula:

R

d2

UTL = upper specification limit

LTL = lower specification limit
  process mean
 UTL  LTL
Cp =
6

C pk  min C pl , C pu , where

  LTL UTL  
C pl  and C pu 
3 3

Chapter 12: Inventory

Types of Inventory

1.Raw Materials
2. Work In Process (WIP)
3. MRO (maintenance, repair and operating)
4. Finished Goods Inventory

Costs Involved

1. Holding cost/ carrying cost (pressure for low inventory)

- insurance
- material and warehousing handling
- taxes
- obsolecence

2. Ordering/ set-up cost (pressure for high inventory)

- labor
- transportation cost
- downtime
- labor to change equipment

3. Shortage cost (pressure for high inventory)

- loss of profits
- loss of customer’s goodwill
- expediting cost
- replacement cost
- loss of future sales

4. Purchase price (pressure for high inventory)

- quality discounts
Two Major Decisions

1.When to buy
2.How much to buy

Independent Demand – demand is derived directly from customers

Dependent Demand – demand is derived from the production or consumption of another product
Deterministic Demand – no uncertainty in demand
Stochastic Demand – demand can not be perfectly predicted
Static Demand – stable demand over time (no increase/decrease)
Dynamic Demand – demand that varies over time

Stockout – inability to satisfy demand, it can be handled one of two ways:

1. Backorder – customer is willing to wait

2. Lost sale – customer purchases item elsewhere

ABC Analysis: A method for dividing on-hand inventory into three classifications based on annual dollar
volume

A items – 15% of SKU, 70 to 80% of annual dollar volume

B items – 30% of SKU, 15% of annual dollar volume
C items – 55% of SKU, 5% of annual dollar volume

ABC Analysis helps managers figure out what items should be managed most closely

--Cycle counting, forecasting effort, etc.

Raw Data
Steps

1. Calculate column “E” – projected annual dollar usage

2. Sort column “E” in descending order
3. Calculate column “F” – cumulative dollar usage
4. Calculate column “G” – cumulative % of total
5. Note – columns “A” and “H” are helpful but not necessary
6. Divide the items into “A”, “B” and “C” looking for natural importance splits in the data and keeping in
mind (but not necessarily strictly following) the guidelines.

Performing Analysis:
Two major inventory systems:

Fixed Quantity systems – inventory level is monitored after every transaction, when inventory level falls
below a predetermined point (reorder point, “r”), a replenishment order is placed

Order quantity is fixed

Time between orders is variable

Fixed Period Systems – inventory level is monitored once per period (varying lengths), at the end of each
period, an replenishment order is placed to reach a target inventory amount

Order quantity is variable

Time between orders is fixed

Inventory Position (IP) = On hand inventory (OH) + Scheduled receipts (SR) – Backorders (BO)

Fixed Quantity Systems

Economic Order Quantity

Assumptions

1. Demand is known and constant

2. Lead time is known and constant
3. Receipt of inventory is in one lump sum
4. Quantity discounts are not available
5. Only relevant costs are holding cost and ordering/setup cost
Under these assumptions the inventory level can be graphed as follows:

And the relevant costs can be graphed as follows:

Note: At the EOQ, holding cost = setup/ordering cost

Annual Total Cost can be expressed as:

 D Q
TC = Co  C h , where
Q 2

D = annual demand
Q = order quantity
Co = setup / order cost
Ch = annual holding cost per unit

Because the total cost line is a continuous function with one “minimum point” we can solve for the Q
which minimized total cost by taking the derivative of the Total Cost equation with respect to Q.

d (TC )   DCo  Ch
  2
  0
dQ  Q  2

2 DCo
Ch
Thus Q* = = EOQ

Other useful formulas for this model:

Holding cost per unit, Ch = I * C where,

I = annual inventory holding cost as a %%

C = unit cost

Average Cycle Inventory = Q/2

Max Inventory = Q
Min Inventory = 0
Expected Number of Orders, N = D / Q
Expected Time Between Orders, T = # of working days per year / N

Determining When to Order

Reorder point – inventory level at which a replenishment order should be placed.

Generically speaking all the reorder point formulas use the same logic:

ROP = average demand during lead time + safety stock

We will learn four scenarios to calculate ROP:

Both demand and lead time are constant (this is the only one the book discusses)
Demand is variable, lead time is constant
Demand is constant, lead time is variable
Both demand and lead time are variable.
In scenario 1, everything is perfectly predictable so we don’t need any safety stock (just like the example
on the previous page).

For all other scenarios, we need safety stock to cover us when either demand or lead time is higher than
average.

For example, if demand were variable, our graph would look like:

In the cases where variability is present, the amount of safety stock we use will be dependent upon
what we want our service level to be.

Service level is defined as the probability that demand will NOT exceed supply during lead time.
ROP Formulas

Scenario 1 – when both demand and lead time is constant – remember no safety stock is needed so

ROP = d * LT

(NOTE: For all these formulas, d and LT must be expressed in the same unit of time).

Scenario 2 – when demand is variable, lead time is constant

d * LT  z dLT
ROP = , where

z is a function of desired service level, and

 dLT = standard deviation of demand during lead time =  d LT

Scenario 3 – demand is constant, lead time is variable

ROP = d * LT  zd LT

Scenario 4 – both demand and lead time are variable

ROP =
d * LT   
 z LT *  d2  d 2 *  LT
2

NOTE – when demand is variable and safety stock is used, the total cost function has to be updated in
order to reflect the amount of money a firm has tied up in safety stock. The book does NOT do this
 D Q
Co  Ch
TC = Q 2 + (SS*C ), where SS = safety stock
h

Fixed Period Systems

Review: Order period is fixed, amount to order is variable.

System looks like:

Often used when you purchase many items from the same supplier and want to combine shipments to
save on shipping costs, or, when the costs to maintain perpetual inventory level data is too costly to be
justified.

Target, M, = d(T+L), where

T = Time between orders = (Q*/D)

L = lead time

Because you are NOT constantly monitoring inventory, you will have to carry more safety stock than if
you were using a continuous review system. To get the amount to order simply subtract the amount
you have on hand, from the target level.

Single Period Model

Used when there is only one selling period

Solved using a technique called “marginal economic analysis” – compares cost of ordering one
additional unit with cost of not ordering one additional unit
Cs = cost per item of overestimating demand, ie. having too much inventory left over at the end of the
selling period – salvage value
Cu = cost per item of underestimating demand, ie. not having enough inventory and losing sales

cu
P(demand  Q*) 
cu  c s

Queuing Theory

Chapter 9: Supply Chain

The basic purpose of a supply chain is to coordinate the flow of material, services and information
across all the elements of the supply chain to maximize customer value.

SCOR Model

1. Plan : What are you looking for in suppliers? Cost? Quality ? do a credit check for healthy
suppliers.
2. Source : Evaluating suppliers
3. Make : Take the raw material and transform it
4. Deliver : logistic system, scheduling truck, routing
5. Return : system for return of defective material
Supply chain design: Make vs buy decision

Cost
Quantity (high make, low buy)
Quality
Differentiation/ standardization
Proprietary
Core competency
Proximity to the material/ customers
Capacity
Customer awareness

Efficient vs. Responsive Strategies

Efficient Responsive
Goal Cost Differentiation
Supplier Selection Few As needed
Process Assembly line or Continuous flow Job shop and batch
Mfg Strategy Made to Stock Made to Order
Inventory Large ot Sizes Smaller Lot Size
Lead Time Very Short Longer
Metrics Cost/ Units utilization (on time) Quality (customer service)

Push vs. Pull Systems

Push System – forecast for expected sales (produced) Ex: Car

Pull System – produced to customer’s order (just in time, EOQ, lean mtg)

Push/Pull Boundary – point of separation between push and pull

affects how responsive the supply chain is

examples of different strategies – GM vs Dell

Postponement – process of delaying product customization until the product/service is closer to the
customer end of the supply chain (modular design)

Advantages: you can produce standardized parts (lots, low cost)

able to customize the products

Bullwhip effect – demand variations increase as you move away from the customer, caused by both
rational reasons (lot sizing for economies of scale) and irrational ones (over-reacting to forecast error)
Vendor Managed Inventory: The supplier stocks the store up to the standard amount

Sole versus Multiple Sourcing: quantitive discount/ administrative process

Low potential obstruction

price incentives through competition
80/20 motorolla ?

Reverse Auctions

Electronic Data Interchange (EDI)

Channel Assembly (ex: IKEA): easier to put together → customers assemble the thing.

Lot size reductions & “milk runs”

Location Decision in Supply Chains

Primary Goals
Manufacturing firms
Service firms
Public services.

Cost and proximity to materials

Proximity to customers/ minimize revenue
Maximize coverage area

The decision where to locate is a hierarchical one

Global factors > Regional factors > Community factors > Site factors

Center of Gravity Method – can be used to support any of the three primary goals
C x
X W i i
C y
Y W
i i

W i W i

Chapter 17: Lean

Lean Operations – refers to approaches that focus on elimination of waste and smooth, efficient flows of
information and materials.

Basic principles:

1. Elimination of waste
2. Increase speed and response
3. Increased quality
4. Decreased in cost

The 7 wastes

1. Over production
2. Waiting time
3. Unnescessary transportation
4. Unneccessary processing
5. Unneccessary inventory
6. Unneccessary motion
7. Defects

Lean Tools

1. 5S: house keeping system, put a picture where everything should be, everything has a place
→ reducing time looking for tools)
2. Visual Controls (Kanban system) visual scheduling, purchasers don’t have to check, big bins
small bins (safety bins), send a paper to purchasers when the large bin is done.
3. Single Minute Exchange of Dies (SMED) tools reducing time to change parts to near zero
4. Single piece flow: EOQ = 1 (decrease Co to near 0)
5. Continuous Improvement (six system, SPC chart, DMAIC)
6. Total Productive Maintenance (maintainance so that machines don’t break)
7. Manufactured Good Recovery (Ex: kodak exposable cam)
Just-In-Time Operations

Push – produce material ahead of time to customer demand

Pull – production derived directly from actual demand

d ( p  w)(1   )
K= C , where

K = # of kanbans
d = average daily production rate
w = waiting time of Kanban cards (expressed in days)
p = processing time per part (expressed in days)
C = container size
α = safety factor, from 0 (minimal safety) to 1 (maximum safety)