School of Accountancy and Business Management: Production &/or Operations Management

Saint Louis University
SCHOOL OF ACCOUNTANCY AND BUSINESS MANAGEMENT

Department of Entrepreneurship, Human Resources Development and Management, and Marketing Management
Baguio City
SYLLABUS
MGMT 6
PRODUCTION &/or OPERATIONS MANAGEMENT
(3 units, 3 hours/week)
PRE-REQUISITE: 1. Process Layout: Load-Distance Method

College Algebra 2. Process Layout: Assembly Line Balancing
Principles of Organization and Management F. Total Quality Management (4hrs)
1. Concepts
2. Methodologies
COURSE DESCRIPTION: G. Operating and Controlling the P/O System – Part 1: Inventory Management:
This course introduces the strategic and tactical decisions involved in production and Independent Demand (6hrs)
operations management. It focuses on the concepts and tools that are used in making 1. Fixed-Order Quantity Model
decisions related to the planning and design, operation, and control of production or 2. Fixed-Order Interval Model
operations systems. 3. Single Period Model
COURSE OBJECTIVE: Midterm Examination (1hr)

The course aims to:
1. To develop a comprehensive understanding of the production/operations function and FINALS
to appreciate its role as well as its interdependency with the other functions in the
organization, and H. Operating and Controlling the P/O System – Part 2:
2. To equip with the key concepts and tools of production/operations management in 1. Inventory Management: Dependent Demand (7hrs)
decision-making. a. Waiting Line Management
3. To apply the concepts and techniques to enhance organizational effectiveness and b. Material Requirement Planning
competitiveness toward the dynamic industry changes and economic development 2. Project Management (10hrs)
COURSE REQUIREMENTS: Final Examination (1hr)

1. Quizzes, seat works and class activities
2. Grade Recitations and role playing (N.B.: Topics may change, add, or modify as deemed necessary to address to the current
3. Problem-solving exercises and assignments demands and developments in the industry as well as to the specific needs of the field of
4. Periodical examinations
specializations.)
TEACHING METHODOLOGIES: SUMMARY
1. Lecture UNIT TOPICS HOUR/S
2. Class Discussion PRELIMS
3. Group Dynamics A Overview of Production and Operations Management 04
4. Case Analysis and choreography B Productivity, Competitiveness, and Strategy 04
C Reliability and Availability 04
D Planning and Design of P/O Systems – Part1: Forecasting 05
COURSE OUTLINE: PRELIMINARY EXAMINATION 01
MIDTERMS
E Planning and Design of P/O Systems – Part 2: Facility Layout Design 07
PRELIMS F Total Quality Management 04
G Operating and Controlling the P/O System – Part1
Inventory Management: Independent Demand 6
A. Overview of Production and Operations Management (4hrs) MIDTERM EXAMINATION 1
1. Introduction FINALS
2. Functions within the Business Organizations H Operating and Controlling the P/O System – Part2
3. Differentiating Features of P/O Systems Inventory Management: Dependent Demand 7
Project Management 10
4. The Production/Operations Manager and Decision Making FINAL EXAMINATIONS 01
5. System Design and Operations Decision in P/OM TOTAL 54
6. Recent Trends in P/O Management
B. Productivity, Competitiveness, and Strategy (4hrs)
1. Productivity GRADING SYSTEM:
a. Productivity Measures Prelims % Midterms % Finals %
b. Improving Productivity CS 40 CS 50 CS 60
2. Competitiveness Exam 60 Exam 50 Exam 40
a. Keys to Competitiveness Total 100 Total 100 Total 100
3. Strategy N.B.: CS = Class Standing include quizzes(30%), seat works and class activities (20%),
a. Operations Strategy problem solving (30%), graded recitation (10%), role playing (5%), and attendance (5%)
b. Strategy Formulations
C. Reliability and Availability (4hrs)
D. Planning and Design of P/O Systems – Part1: Forecasting (5hrs) REFERENCE:
1. Overview of Qualitative Forecasting Methods Stevenson, William J., Operations Management, 10th edition, New York, U.S.A., The
2. Quantitative Forecasting Techniques McGraw-Hill Companies, Inc. 2009
a. Naïve, Moving Averages, Exponential Smoothing
b. Measuring Forecasting Accuracy Jacobs, F. Roberts, Richard B. Chase, and Nicholas J. Aquilano, Operations and Supply
Management, New York, U.S.A., The McGraw-Hill Companies, Inc. 2009
Preliminary Examination (1hr)
Heizer, Jay and Barry Render, Principles of Operations Management, 5th edition, Upper
Saddle river, New Jersey, Pearson Educational, Inc., 2004
MIDTERMS
Napoleon I. Barnachea Jr. AY 2011-2012 (07 November 2011)
E. Planning and Design of P/O Systems – Part 2: Facility Layout Design (7hrs) Email address: operationmgmt6@yahoo.com
PRODUCTION &/or OPERATIONS MANAGEMENT Page 1

A. Overview of Production and/or Operations Management (4hrs)
Introduction
Production conjures up images of factories, machines, and assembly lines.

Production/Operations Management, or more simply, Operations Management, is the management of system
or processes that create goods and/or provide service. Further, …….. ……… ………. involve scheduling of
activities, motivating employees, ordering and managing supplies, selecting and maintaining equipments,
satisfying quality standards, and—above all—……… ………. through short- and long-term planning.
Functions within the Business Organizations
An organization is a group of people working together to achieve common objectives. This basic definition
implies that at least for conditions must exist to have an organization:
a. There must be a …….. ……… ……... (community ) - two or more individuals;
b. These individuals must have …….. ……… (common objectives); i.e., they all agree on at least one
objective that is worth pursuing and achieving;
c. Each member of the group ……… (cooperation) to the best that he or she can to contribute towards the
achievement of their shared objectives; and
d. The group member …….. ………. (coordination), i.e., all of their efforts are interrelated and coordinated,
all aimed at the achievement of their common objectives.
All of these conditions must be present for an organization to exist. If only one or two or even three, but not
all, of these conditions exist, the organization, the organization, in its truest sense, does not exist.
Business Organization is formed to pursue goals that are achieved more efficiently by concerted efforts of
group of people than by individuals working alone. Business organizations are devoted to producing goods
and/or providing services. They may be for-profit or nonprofit organization. The primary activities of
business are
1. Commercial or ………… business engages in the “……….” and “………..” of goods. Its earnings are
primarily derived from the markup (profit margin) it adds to the cost of goods that is sold to the
customers.
2. Manufacturing business converts ………. ………… into finished goods that are to be sold for business or
personal used.
3. Service business performs or delivers service to clients in ………… for a fee.
A typical business organization has three basic functions: ………, ……….. and ………….. In addition to the
three primary functions, many organizations have a number of supporting functions, such as personnel,
accounting, and engineering.
Operations
The operations function consists of all activities directly related to producing goods or providing services. The
production functions exists not only in manufacturing and assembly operations, which are good-oriented,
but also in areas such as health care, transportation, food handling and retailing, which are primarily
service-oriented
The operations function involves the conversion of inputs into outputs.

Value added is the term used to describe the difference between the cost of inputs and the value or price of output
(value to the society, price that customers are willing to pay for those goods or services)
Examples of types of operations
Type of operations Examples

Good producing Farming, mining, construction, manufacturing, power
generation
Storage/Transportation Warehousing, trucking, mail service, moving taxis, buses,
hotels, airlines
Exchange Retailing, wholesaling, banking, renting or leasing, library
loans
Entertainment Films, radio and television, plays, concerts, recording
Communication Newspapers, radio and TV newscasts, telephone, satellites
Finance
The finance function comprises activities related to securing resources at favorable prices and allocating those
resources throughout the organization.
a. Budgeting. Budget must be periodically prepared to plan financial requirements. Budgets must sometimes be
adjusted, and performance relative to a budget must be evaluated.
b. Economic analysis of investment proposals. Evaluation of alternative investment in plant and equipment requires
inputs from both operations and finance people.
c. Provision of funds. The necessary funding of operation and the amount and timing of funding can be important and
even critical when funds are tight.
Marketing
Marketing consists of selling and/or promoting the goods or services of an organization. Marketing people make
advertising and pricing decisions. Marketing is also responsible for assessing customer wants and needs, and for
communicating those to operations people (short term) and to design people (long term).
Lead time is the time necessary to deliver an order or perform a service.
The functional areas are interdependent with P/O as the core functions
Finance
RESOURCES PRODUCTS CUSTOMERS

Accounting
Personnel
Money Goods Needs

Marketing
Manpower Services Wants
Purchasing P/O
Maintenance
Industrial
Engineering MIS

THE P/O MANAGER AND THE MANAGEMENT PROCESS
The P/O manager is the key figure in the P/O system: he or she has the ultimate responsibility for the creation
of goods or the provision of services. The P/O manager’s job is essentially MANAGERIAL PROCESS: He or she must
coordinate the use of resources through the management process of planning, organizing, directing, staffing, and
controlling. Examples of the responsibilities of a P/O manager:
PLANNING DIRECTING
 Capacity  Incentive plans
 Location  Issuance of work orders
 Products and services  Job assignments
 Make or buy
 Layout
 Projects
 Scheduling
ORGANIZING CONTROLLING
 Degree of centralization  Inventory control
 Subcontracting  Quality control
STAFFING
 Hiring/laying off
 Use of temporary employee and/or overtime
work
THE P/O MANAGER AND DECISION MAKING
The chief role of a P/O manager is that of planner and decision maker. The general approaches to decision making
includes the use of quantitative methods, analysis of trade-offs, and the systems approach.
The Use of Models
Model is an abstraction of reality; that is, a model presents a Tips to Understand Models
simplified version of something. (e.g., child’s toy car, wind
a. try to learn the purpose;
tunnels, formulas, graphs and charts, balance sheet and financial b. how it is used to generate results;
statements, and financial ratios. Common statistical models c. how these results are interpreted and used;
include descriptive statistics such as the mean, median, mode, and
range, and standard deviation, as well as random sampling, the d. what assumptions and limitations apply
normal distribution, and regression equation. Models are
classified as follows:
a. Physical model looks like their real-life counterparts. Examples include miniature cars, trucks, airplanes, toy
animals and trains, and scale-models. The advantage of these models is their visual correspondence with reality.
b. Schematic models are more abstract that their physical counterparts; that is, they have less resemblance to the
physical reality. Examples include graphs and charts, blueprints, pictures, and drawings. The advantage of
schematic model is that they are often relatively simple to construct and change. Moreover, they have some degree
of visual correspondence.

c. Mathematical models are the most abstract; they do not look at all like their real-life counterparts. Examples
include numbers, formulas, and symbols. These models are usually the easiest to manipulate, and they are
important forms of inputs for computers and calculators.
Benefits of using models Limitations of using models

a. easy to use and less expensive than dealing with a. Quantitative information may be emphasized at
the actual situations; the expense of qualitative information;
b. organize and sometimes quantify information b. Models may be incorrectly applied and the
and, in the process, often indicate areas where results misinterpreted. The widespread use of
additional information is needed; computerized models adds to this risk because
c. provide systematic approach to problem solving; highly sophisticated models may be place in the
d. increase understanding of the problem; hands of users who are not sufficiently grounded
e. enable managers to analyze “what if?” questions; in mathematics to appreciated the subtleties of a
f. require users to be very specific about objectives; particular model; thus, they are unable to fully
g. serve as a consistent tool for evaluation; comprehend the circumstances under which the
h. enable users to bring the power of mathematics to model can be successfully employed
bear on a problem;
i. provide a standardized format for analyzing a
problem
Quantitative Approaches
Quantitative approaches to problem solving often embody an attempt

to obtain mathematically optimum solutions to managerial problems.
a. Linear Programming and related mathematical techniques are

widely used for optimum allocation of scarce resources.
b. Queuing Techniques, which originated around 1920 in the
telephone industry but remained dormant until the 1950s and
1960d, are useful for analyzing situations in which waiting lines
forms.
c. Inventory Model, also popular after some early work, went
through long period of low interest but are now widely used to
control inventories.
d. Project Models such as PERT (program evaluation and review
technique) and CPM (critical path method) are useful for
planning, coordinating, and controlling large-scale projects.
e. Forecasting Techniques are widely used in planning and
scheduling.
f. Statistical Models are currently used in many areas of decision
making.
Analysis of Trade-Offs
Operations managers encounter decisions that can be described as trade-off decisions. For example, in deciding on the
amount of inventory stock, the manager must take into account the trade-off between increased level of customer
service that the additional inventory would yield and the increased cost required to stock that inventory. Similarly, in
selecting a piece of equipment, a manager must evaluate the merits of extra features relative to the cost of those extra
features.

 Analysis of trade-offs – P/O managers often encounter decisions that can be described as trade-off
decisions. Examples:
 Amount of inventory to stock
Increased customer service Increased costs to stock inventory
 Equipment selection
Merits of extra features Cost of extra features
 Scheduling of overtime
Increased output Higher costs of overtime
e.g., higher labor costs, lower productivity, lower

quality, greater risk of accidents
A System Approach
A system can be defined as a set of interrelated parts that must work together. In a business organization, the
organization is viewed as a system composed of subsystems (e.g. marketing subsystem), which in turn are composed of
lower subsystems. The system approach emphasizes interrelationships among subsystems, but its main theme is that the
whole is greater than the sum of its individual parts (synergy). Hence, from a system viewpoint, the output and
objectives of the organization as a whole take precedence over those of any one subsystem and should be optimized
even if this requires a less-than-optimum results in one or more subsystem.
Establishing Priorities
Recognition of priorities in problem solving means solving more important problems first. It is axiomatic that a
relatively few factors often account for the major share of a problem so that dealing with those factors will generally
have a disproportionately large impact on the results achieved. This is referred to as the pareto phenomenon, which
means that all things are not equal; some things (a few) will be very important for achieving an objective or solving a
problem, and other things (many) will not. The implication is that a manager should examine the situation, searching
for the few factors that will contribute the most to improvement, and concentrate in those; little or nothing will be
gained by focusing efforts on other, less important factors.

 Ethics – P/O managers have the responsibility to make ethical decisions. Ethical issues include:
1. Worker safety
 Providing adequate training, maintaining equipment in good working condition, maintaining a
safe working environment
2. Hiring and firing workers
 Don’t hire under false pretenses; e.g., promising a long-term job when that is not what is intended
3. Worker’s rights
 Respecting worker’s rights, dealing with worker problems quickly and fairly
4. Product safety
 Providing products that minimize the risk of injury to users or damage to property or the
environment
5. Quality
 Honoring warranties, avoiding hidden defects
6. The environment
 Obeying government regulations
7. The community
 Being a good neighbor and corporate citizen
8. Closing facilities
 Taking into account the impact on a community, and honoring commitments that have been made
The individual most directly responsible for making an organization’s resource productive, by skillfully guiding the
operation of productive systems, are managers. Three prominent theories developed to explain the role of managers are:
a. Functional is the traditional (classical) approach that holds that managers plan, organize, direct, and control the
activities of an organization.
b. Behavioral is human relations approach that emphasizes interpersonal relationships and organizational behavior.
Under it, managers work through other people to lead the activities of an organization.
c. Decision-making (system) is an approach that focuses upon the use of data and quantitative techniques for making
decisions that facilitate system goals. Managers are primarily decision makers within an operating system.
Managers must, of course, have a blend of functional (and technical) capability, behavioral competence to work with
people individually and in groups, and analytical skills to assess the situations.
Management is the process of developing decisions and taking actions to direct the activities people within an
organization toward common objectives.
System Design and Operations Decision in P/OM
Decision Area Basic Question

Planning and Design Decisions Decisions pertaining to planning the system
Operating and Control Decisions Decisions pertaining to running the system

Decision Areas in Production/Operations Management
Listed below are some of the major decision areas in production/operations management and the primary concern
addressed in each:
Major Decision Areas Primary Concerns

Quality Management How do we make sure that our products meet or exceed the requirements of
our customers?
Forecasting How many units of our products will be demanded by our customers or how
many customers may avail of our service in some future time?
Product or Service Design What products and product attributes would best satisfy our customers?
Process Selection and Design What’s the most effective and efficient way to create our products or provide
out services?
Capacity How large should our facility be; i.e., how many units of the product should it
be able to produce or how many customers should it be able to accommodate
at any given time?
Facility Location Where do we locate our facility: near supplier or near customers?
Facility Layout How do we arrange the various equipments, departments and workstations in
our facility?
Design of Work System How do we make a good fit between our workers, their work, and the work
environment to maintain their motivation and productivity?
Inventory Management Which of the inventory items should we prioritize and closely monitor? How
much of each we stock? When do we order or make each item and how
much do we order?
Scheduling Which worker, equipment, or workstation will perform which task, and
when or in what sequence?
Maintenance How do we maintain our equipment and facilities in good working
condition?
Project Management How do we finish the project on time, at minimum cost, and according to the
requirements of the client who commissioned it?
Designing and Operating Production Systems
System Design involves decisions that relates to system capacity, the geographic location of facilities, arrangement
of departments and placements of equipments within physical structures, product and service planning, and
acquisition of equipment.
System Operations involves management of personnel, inventory planning and control, scheduling, project
management, and quality assurance
* Operations managers has a vital stake in system design because system design essentially determines many of the
parameters of system operation
Differentiating Features of P/O Systems
a. Degree of Standardization
Standardized output means that there is a high degree of uniformity in goods or services. Standardized goods
include radios, televisions, computers, newspapers, canned foods, automobiles tires, pens, and pencils.
Standardized services include automatic car wash, televised newscasts, taped lectures, and commercial airlines
service.

Customized output means that the product or service is designed for a specific case or individual. Customized
goods are eyeglasses, custom-fitted clothing, window glass (cut to order), and customized draperies.
Customized services include tailoring, taxi rides, and surgery.
b. Type of Operations
Project is a set of activities directed toward a unique goal, usually large scale, with a limited time frame (such as
construction of a hospital).
Job Shop is an organization that renders unit or lot production or service with varying specifications, according
to customer the customer needs. (repair work, health care, tool and die shop)
Batch Processing is a system used to produce moderate volumes of similar items. (food processing; bakeries,
canneries; Paint manufacturers and printing press)
Repetitive Production is a production system that renders one or a few highly standardized products or services
(often lend themselves to automation or other use of specialized equipments)
Continuous processing is employed when a highly uniform products or service is produce or rendered.
Processing of chemicals, photographs films, newsprint, and oil products are all examples of this type of
operations.
c. Manufacturing versus Service Operations

Manufacturing implies production of a tangible output, such as automobile, a clock radio, a golf ball, and a
refrigerator—anything that we can see or touch. Service, on the other hand, generally implies an act. Such as
government, wholesale/retail, health care, personal services, business services, and education.
Manufacturing and service organizations differ chiefly because manufacturing is product-oriented and service
is act-oriented. The difference involves the following:
1. Customer contact
2. Uniformity of input
3. Labor content of jobs
4. Uniformity of output
5. Measurement of productivity
6. Quality assurance
Differences between manufacturing and service
Characteristics Manufacturing Service
Output Tangible Intangible

Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Measurement of productivity Easy Difficult
Opportunity to correct quality problems before
delivery to customer High Low

B. PRODUCTIVITY, COMPETITIVENESS, and STRATEGY
Module on Productivity
PRODUCTIVITY
Productivity relates to how effective an organization is in the use of its Productivity Measures
resource Product Yield
Productivity is an index that measures output (goods and service) relative to the input (labor, materials, energy, and other
resources) used to produce them. It is usually expressed as the ratio of output
to input: Productivity Measure
Productivity measures can be based on single input (partial productivity), on Output

Productivity = (1)
more than one input (multifactor productivity, on all inputs (total Input
productivity). Some examples of different types of measures of productivity
as shown below:
Some examples of partial productivity measures
Partial Output Output Output Output
Labor Productivity
Measures Labor Machine Capital Energy
Units of output per labor hour
Units of output per shift
Valued-added per labor hour
Multifactor Output Output
Peso value of output per labor hour Measures Labor + Labor + Capital + Energy
Machine Productivity Machines
Units of output per machine hour
Peso value of output per machine hour Total Good or services produced
Capital Productivity Measures All inputs used to produced them
Units of output per peso input
Peso value of output per peso input
Energy Productivity Determine the productivity of these cases:
Units of output per kilowatt-hour
Peso value of output per kilowatt-hour a. Four workers installed 720 square yards of carpeting in eight hours.
b. A machine produced 68 usable pieces in two hours.
FACTORS THAT AFFECTS PRODUCTIVITY
Calculations of multifactor productivity measures inputs and outputs using a
common unit of measurement, such as cost or value. For instance, the measure 1. Methods
might use cost of inputs and price of the outputs or units of output and time of 2. Capital
output:
3. Quality
Quantity of production at standard price Quantity of production 4. Technology
or
Labor cost + Material cost + Overhead Labor time + Machine time 5. Management
Determine the multifactor productivity for the combined input of labor and machine time using the following data: Output 16,000
units Input: Labor 65 hours and Machine 15 hours.
Output 16,000 u 200

Multifactor
= Labor + Machine = 65 hr + 15 hr = unit/hr
Productivity
=======
Solutions:
Yards of carpet installed 720 square yards

Productivity = =
Labor hours worked 4 workers x 8 hours/workers
720 yards 22.5 yards/hour
= =
32 hours ==========
Usable pieces 68 pieces 34 pieces/hour

Productivity = = =
Production time 2 hours ==========

Negative Impacts on Productivity (Theorists and researches)
1. A lower propensity to save and a higher propensity to consume, which slows capital formation and attracts foreign
goods.
2. Increasing government regulations add to the administrative (and nonproductive) burden of many companies.
3. There is increasing demand for services, which are often less productive than manufacturing operations. (e.g.,
Business Process Outsourcing Firms)
4. An emphasis on short-run performance (e.g., annual profits and sales) reduces the incentives to develop long-term
solutions to problems. In addition, in periods of inflation and increased costs of borrowed money, managers are
hesitant to commit funds for long periods of time because it reduces their flexibility to take advantage of other
opportunities that might arise in the meantime.
IMPROVING PRODUCTIVITY
A company or a department can take a number of key steps toward improving productivity
1. Develop productivity measure for all operations: measurement is the first steps in managing and
controlling an operation.
2. The capacity of the bottleneck operations is less than the combined capacities of the operations
that provide inputs, so units queue up waiting to be processed. Improvement in the bottleneck
operations will lead to increased productivity up to the point where the output rate of the bottleneck equals the
output of the operations feeding it.
3. Develop methods for achieving productivity improvements, such as soliciting ideas from workers (perhaps
organizing teams of workers, engineers, and managers), studying how other firms have increased productivity, and
reexamining the way work is done.
4. Establish reasonable goals for improvement
5. Make it clear that management supports and encourages productivity improvement. Consider incentives to reward
workers for contributions.
6. Measure improvements and publicize them.
7. Don’t confuse productivity with efficiency. Efficiency is a narrower concept that pertains to getting the most out of
a given set of resources; productivity is a broader concept that pertains to effective use of overall resources. For
example, an efficiency perspective on mowing a lawn given a hand mower would focus on the best way to use the
hand mower; a productivity perspective would include the possibility of using a power mower.
PRODUCTIVITY AND QUALITY
Quality impact on productivity: fewer defects

increase output and quality improvement PRODUCT YIELD AND PRODUCTIVITY
reduces input.
(total input) (% good units) + Equation 1.1
MEASURING PRODUCT YIELD AND Yield = (total input) (1 - % good units)
PRODUCTIVITY (% reworked)
Product yield is a measure of output used as
an indicator of productivity.
(direct manufacturing cost per unit)
(input) + (rework cost per unit)
1. It can be computed for the entire Product cost = Equation 1.2
(reworked units)
production process (or for one stage yield
in the process).
2. May include in product
manufacturing cost
3. Product quality would be monitored input (good quality, work-in-
Y= Equation 1.3
process product at stage i)
throughout the production process at
various stages.
Y= (I) (%g1) (%g2) (%g3) … (%gn) Equation 1.3a

THE QUALITY-PRODUCTIVITY RATIO (QPR)
This measure the effect of quality on productivity combines the concept of quality index number and product yield. It is
a quality index number that includes productivity and quality costs. QPR increase if either processing cost or rework
costs or both decreases. It increases if more good-quality units are produced relative to total product input.
THE QUALITY-PRODUCTIVITY RATIO (QPR)
good-quality units
QPR = (input) (processing cost) + × 100
(defective units) (rework cost)
Sample Problems
1. The NBJ motor company starts production for a particular type of motor with a steel motor housing. The
production process begins with 100 motors each day. The percentage of motors produced each day average
80% and the percentage of poor-quality motors that can be reworked is 50%. The company wants to know the
daily product yield and the effect on productivity if the daily percentage of good-quality motors is increase to
90%. (90 motors, 95 motors, a 10 percentage-point increase results in a 5.5% increase in productivity output.)
2. The NBJ motor company has direct manufacturing cost per unit of $30, and motors that are of inferior quality
can be reworked for $12 per unit. From example item #1. 100 motors are produced daily, 80 % (on average)
are good quality and 20% are defective. Of the defective motors, half can be reworked to yield good-quality
products. Through its quality-management program, the company has discovered a problem in it production
process that, when corrected (at a minimum cost), will increase the good-quality products to 90%. The
company wants to assess the impact on the direct cost per unit of improvement in product quality. ($34.67 per
motor, $32.21 per motor, The improvement in the production process as a result of the quality-management
program will result in a decrease of $2.46 per unit, or 7.1%, in direct manufacturing cost per unit as well as a
5.5% increase in product yield with a minimal investment in labor, plant, or equipment)
3. At the NBJ motor company, motors are produced in four-process. Motors are inspected following each stage,
with percentage yield (on average) of good-quality, work-in-process units as follows.
Average Percentage
Stage Good-Quality
1 0.93
2 0.95
3 0.97
4 0.92
The company wants to know the daily product yield for product input of 100 units per day. Furthermore, it
would like to know how many input units it would have to start with each day to result in a final daily yield of
100 good-quality unit.(78.8 motors, to achieve output of 100 good-quality motors, the production process
must start with approximately 127 motor.)
4. The NBJ motor company produces small motors at a processing cost of $30 per unit. Defective motors can be
reworked at a cost of $12 each. The company produces 100 motors per day and average 80% good-quality
motors, resulting in 20% defects, 50% of which can be reworked prior to shipping to customers. The company
wants to examine the effects of (1) increasing the production rate to 200 motors per day; (2) reducing the
process cost to $26 and rework cost to $10; (3) increasing, through quality improvement, the product yield of
good-quality products to 95%; and (4) the combination of 2 and 3. (2.89; 1. Increase input to production
capacity of 200 units has no effect; 2. Reduce processing cost to $26 and rework cost to $10, increase by 3.33;
3. Increase initial good-quality units to 95%, increase by 3.22; 4. Decrease costs and increase initial good-
quality units, increase by 3.71)

Name: Date:
Course & Year: Schedule:
Problem Sets on Productivity and Quality
1. A rice milling company has provided the following data. Compare the labor, raw materials and supplies, and total productivity
of 2009 and 2010.
2009 2010
Output: Sales value of production P 990,000 P1,575,000
Input: Labor 450,000 675,000
Raw materials and supplies 360,000 562,500
Capital equipment depreciation 31,500 54,000
Other 99,000 216,000
Which year did the company has a good yield?
2. The Dragon Fly Shoe Company manufactures a number of different styles of athletic shoes. Its biggest seller is the X-Pacer
running shoe. In 2008 Dragon Fly implemented a quality-management program. The company’s shoe production for the past
three years and manufacturing cost are as follows:
Only one-quarter of the defective

shoes can be reworked at a cost of Year
P50 a piece. Compute the 2008 2009 2010
manufacturing cost per good Units produced/input 32,000 34,600 35,500
product for each of the three years Manufacturing cost P13,900,000 P14,550,000 P15,275,000
and indicate the annual percentage Percentage good quality 78% 83% 90%
increase or decrease resulting from
the quality-management program.
3. The Oriental Heritage Furniture Company manufactures four-drawer oak filling cabinets Average
in six stages. In the first state, the boards forming the wall of the cabinet are cut; in the Percentage
second stage, the front drawer panels are woodworked; in the third stage, the boards are Stage Good Quality
sanded and finished; in the fourth stage, the boards are cleaned. Stained, and painted with
1 87%
a clear finish; in the fifth stage, the hardware for pulls, runners, and fitting is installed;
2 91%
and in the final stage, the cabinets are assembled. Inspection occurs at each stage of the
3 94%
process, and the average percentage of good-quality units are as follows.
4 93%
5 93%
The cabinets are produced in weekly production runs with a product input for 300 units. 6 96%
a. Determine the weekly product yield of good-quality cabinets.
b. What would weekly product input have to be in order to achieve a final weekly product yield of 300 cabinets?
4. In problem item #3, the Oriental Heritage Furniture Company has

investigated the manufacturing process to identify potential improvements Alternative Quality Improvement
that would improve the quality. The company has identified four alternatives, 1 Stage 1: 93%
each costing to P750, 000, as follows. 2 Stage 2: 96%, Stage 4: 97%
3 Stage 5: 97%, Stage 6: 98%
a. Which alternative would result in the greatest increase in product yield? 4 Stage 2: 97%
b. Which alternative would be the most cost effective?

Name: Date:
Productivity, Learning Curve and Linear Programming

1. A furniture manufacturing company has provided the following data. Compare the labor, raw materials and
supplies, and total productivity of 2008 and 2009.
2008 2009
Output: Sales value of production P 990,000 P1,575,000
Input: Labor 450,000 675,000
Raw materials and supplies 360,000 562,500
Capital equipment depreciation 31,500 54,000
Other 99,000 216,000
2. The Puck and Pawn Company manufacture arnis sticks and chess sets. Each arnis stick yields an incremental
profit of P90, and each chess set, P180. An arnis stick requires 4 hours of processing at machine center A and 2
hours at machine center B. A chess set requires 6 hours at machine center A, 6 hours at machine center B, and
1 hour at machine center C. Machine center A has a maximum of 130 hours of available capacity per day,
machine center B has 72 hours, and machine center C has 10 hours. If the company wishes to maximize profit,
how many arnis sticks and chess sets should be produced per day?
3. A job applicant is being tested for an assembly line position. Management feels that steady state times have been
approximately reached after 1,000 performances. Regular assembly-line workers are expected to perform the
task within four minutes.
a. If the job applicant performed the first test operation in 10 minutes and the second one is 9 minutes,
should this applicant be hired?
b. What is the expected time that the job applicant would take to finish the 10 unit?
c. What is the total expected time that the applicant would take to finish the 15 units?
d. What is a significant limitation of this analysis?

COMPETITIVENESS
Competitiveness is how effectively an organization meets the needs of consumers relative to other that offer similar
goods or services. Business organizations compete with one another in a variety of ways. Key among them is price,
quality, product or service differentiation, flexibility, and time to perform certain activities.
1. Price is the amount a customer must pay for the product or service. If all other factors are equal, customer will
choose the product or service that has the lower price. Organization that compete on price may settle for lower
profit margins, but most focus on lower profit margin, but most focus on lowering production costs.
2. Quality refers to materials and workmanship as well as design. Generally, it relates to the buyer’s perceptions of
how well the product or service will serve its purpose.
3. Product differentiation refers to any special features (e.g., design, cost, quality, ease of use, convenient location,
warranty) that cause a product or service to be perceived by the buyer as more suitable than a competitor’s product
or service.
4. Flexibility is the ability to respond to change. The better a company or department is at responding to change, the
greater this competitive advantages over another company that is not as responsive. The changes might relate to
increase or decreases in volume demanded, or to changes in product mix.
5. Time refers to a number of different aspects of an organization’s operations. One is how quickly a product or
service is delivered to a customer. Another is how quickly new product or services are developed and brought to the
market. And another is the rate at which improvement in products or processes are made.
STRATEGY
Mission is the reason for existence of an organization.
Mission statement is a clear statement of purpose that serves as a guide for strategy and decision making. It answers the
question, “What business are we in?”
Strategies and Tactics
Strategy is a plan for achieving organizational goals. Strategies provide focus for decision making. Generally speaking,
organizations have overall strategies called organization strategies, which relate to the entire organization, and they
also have functional strategies, which relate to each of the functional areas of the organization. The functional
strategies should support the overall strategies of the organization, just as the organizational strategies should support
the goals and mission of the organization.
Tactics is the methods and actions taken to accomplish strategies. They are more specific in nature than strategies, and
they provide guidance and direction for carrying out actual operations, which need the most specific and detailed
plan and decision making in an organization.
Figure 2-3
Planning and Decision Making GOALS
Is hierarchical in organizations MISSION
ORGANIZATIONAL
STRATEGY
Finance Marketing Operations
Tactics
FUNCTIONAL STRATEGIES
Finance Marketing Production
Operations Operations Operations

Operations Strategy is the approach, consistent with the organization strategy, which is used to guide the operations
functions. It is narrower in scope, dealing primary with the operations aspect of the organization.
Management Time Level of

level Horizon Scope detail Relates to
The Overall organization
Mission Top Long Broad Low Survival, profitability
Strategy Senior Long Broad Low Growth rate, market share
Production/Operations
Strategic Senior Moderate Broad Low
Product design, choice of
to long location, choice of
technology, new facilities
Tactical Middle Moderate Moderate Moderate Employment levels, output
levels, equipment
selection, facility layout
Operational Low Short Narrow High Scheduling personnel,
adjusting output rates,
inventory management,
purchasing
STRATEGIC MANAGEMENT PROCESS
STRATEGIC MANAGEMENT MODEL

Environmental Strategy Formulation Strategy Implementation Evaluation
Scanning & Control
External Vision -
Mission
Objectives
Reason for
Societal
existence
Environment: Strategie
General Forces What
results to Policies
Task Environment:
accomplish Plan to
Industry Analysis Programs
by when achieve the
mission and Broad
objectives
Budgets
guidelines
Internal for decision Activities
Procedures
making needed to
accomplish a Cost of the Performance
plan programs
Structure: Sequence of
Chain of Command Actual
steps
results
needed to do
Culture:
the job
Beliefs, expectation, values
Resources:
Asset, Skills, competencies,
knowledge
Feedback
STRATEGY FORMULATION
Distinctive competencies are those special attributes possessed by an organization that gives it a competitive edge. In
effect, distinctive competencies relate to the way the organizations compete. As noted previously, these can include
price (based on some combination of low cost of resources such as labor and materials, low operating cost, and low
production cost); quality (high performance or consistent quality); time (rapid delivery or on-time delivery);
flexibility (variety or volume); customer service; and location.

Environmental scanning is the considering of events and trends that present either threats or opportunities for the
organization. Generally these include competitor’s activity; changing consumer needs; legal, economic, political, and
environmental issues; the potential markets for new markets; and the like.
The organization must also take into account various internal factors that relate to All of these factors are external factors. The key factors are:
possible strengths and weaknesses. Among the key internal factors are;
1. Economic conditions. These include the general health and
1. Human Resources. These includes the skills and abilities of managers and direction of the economy, inflation and deflation, interest
workers; special talents (creativity, designing, problem solving); loyalty to rates, tax laws, and tariffs.
the organization; expertise; dedication; and experience. 2. Political conditions. These include favorable or unfavorable
2. Facilities and equipment. Capacities, location, age, and cost to maintain or attitudes towards business, political stability or instability,
replace can have significant impact on operations. and insurgencies.
3. Financial resources. Cash flow, access to additional funding, existing debt 3. Legal environment. This include antitrust laws, government
burden, and cost of capital are important considerations. regulations, trade restrictions, minimum wage laws, product
4. Customers. Loyalty, existing relationship, and understanding of wants and liability law and recent court experience, labor laws, and
needs are important. patents.
5. Products and services. These include existing product and services, and the 4. Technology. This can include the rate at which product
potential for new products and services innovations are occurring, current and future process
6. Technology. This includes existing technology, the ability to integrate new technology (equipment, materials handling), and design
technology, and the probable impact of technology on current and future technology.
operations. 5. Competition. This includes the number and strength of
7. Suppliers. Supplier relationships, dependability of suppliers, quality, competitors, the basis of competition (price, quality, special
flexibility, and service are typical considerations. features), and the ease of market entry.
8. Other. Other factors include patent, labor relations, company or product 6. Markets. This includes size, location, brand loyalties, ease of
image, distribution channels, relationships with distributors, maintenance of entry, and potential for growth, long-term stability, and
facilities and equipment, access to resources, and access to market. demographics.
NEW STRATEGIES
Traditional strategies of business organization have tended to emphasize cost minimization or product differentiation.
While not abandoning those strategies, many organizations are adopting new strategies that are based on quality
and/or time.
1. Quality based strategies focus on satisfying customer by integrating quality into all phases of the organization.
2. Time based strategies focus on reducing the time required to accomplish various activities (e.g., develop new
product or service and market them, respond to a change in customer demand, or deliver a product or perform a
service). The rationale is that by reducing time, costs are generally less, productivity is higher, quality tends to be
higher, product innovation appears on the market sooner, and customer service is improved.
TIME-BASED STRATEGIES
Organizations have achieved time reduction in some of the following:

1. Planning time. The time needed to react to a competitive threat, to develop strategies and select tactics, to approve
proposed change to facilities, to adapt to new technologies and so on.
2. Product or service design time: The time needed develop and market new or redesigned products or services
3. Processing time: The time needed to produce goods or provide services. This can involve scheduling, repairing
equipment, wasted efforts, inventories, quality, training and the like.
4. Changeover time: The time needed to change from producing one type of product or service to another. May
involve new equipment setting and attachments, different methods, equipment, schedules, or materials.
5. Delivery time: The time needed to fill orders.
6. Response time for complaints: These might be customer complaint about quality, timing of deliveries, and incorrect
shipments. These might also be complaints from employees about working conditions (e.g., safety, lighting, heat or
cold), equipment problems, or quality problems.
LEAN PRODUCTION
Lean Production is a new, time-based approach to the production of manufactured goods. In the earliest days of
manufacturing, goods were produced using craft production: a system in which highly-skilled workers use simple,
flexible tools to produce small quantities of customized goods or according to customer specification

Customized goods were relatively expensive to produce and did not lend themselves to high-volume production.
Over time, those methods were replaced by mass production: a system in which lower-skilled or semi-skilled workers
use specialized machinery to produce high volume of standardized goods. Such systems are intolerant to disruption,
which greatly increase the cost of operation. Consequently, buffers are built into these systems to offset such disruption.
Lean production system are so named because they use much less of certain resources than mass production system
use—less space, less inventory, and fewer workers—to produce comparable amount of output. Lean production is a
system that uses minimal amount of resources to produce a high volume of high-quality goods with some variety. Lean
production system uses a highly skilled workforce and flexible equipment. In effect, they incorporate advantage of both
mass production (high volume, low unit cost) and craft production (variety and flexibility). And quality is higher in
mass production.
Source: William J. Stevenson, Production/Operations Management, 5th edition, Irwin—McGraw-Hill, Boston, Massachusetts, 1996, Chapter 2, pp. 38-59.
LEARNING CURVE
LEARNING CURVE Module on Learning Curve
Learning curves are based on the premise that people and Learning Curve
organizations become better at their tasks as the tasks are
repeated. A learning curve graph displays labor-hours per unit Applying Learning Curve
versus the number of units produced. From it we see that the time
needed to produce a unit decreases, usually following a negative Strategic Implication of Learning Curve
exponential curve, as the person or company produces more
units. In other words, it takes less time to complete each additional unit a firm produces. However, we also see that the
time saving in completing each subsequent unit decreases. These are the major attributes of the learning curves.
Learning curves were first applied to industry in a report by T. P.

Wright of Curtis-Wright Corporation in 1936. Wright described
Cost /time per repetition
how direct labor cost of making a particular airplane decreased

with learning, a theory since confirmed by other aircraft
manufacturers. Regardless of the time needed to produce the first
plane, learning curves are found to apply various categories of
airframes (e.g., jet fighters versus passenger planes versus
bombers). Learning curves have since been applied not only to
labor bur also to a wide variety of other costs, including material
and purchased components. The power of the learning curve is so
significant that it plays a major role in many strategic related to
0 Number of repetitions (volume) employment levels, costs, capacity, and pricing.
The learning curve is based on the doubling of production. That
is, when producing doubles, the decrease in time per unit affects
the rate of learning curve. So, if the learning curve is an 80% rate,
the second unit takes 80% of the time of the first unit, the fourth unit takes 80% of the second unit, the eight unit takes
80% of the fourth unit, and so forth. This principle is shown as:
Time required for the nth unit = T x Ln (E-1)
where T = unit cost or unit time of the first unit

L = learning curve rate
n = number of times T is doubled
If the first unit of a particular product to 10 labor-hours, and if a 70% learning curve is present, the hours the fourth unit
will take require doubling twice—from 1 to 2 to 4. Therefore, the formula is
Hours required for unit 4 = 10 x (.7)2 = 4.9 hours
APPLYING THE LEARNING CURVE
Arithmetic Approach
The arithmetic approach is the simplest approach of learning curve problems. As we noted at the beginning of this
module, each time that production doubles, labor per unit declines by a constant factor, known as the learning rate. So,
if we know that the learning rate is 80% and that the first unit produced took 100 hours, the hours required the 2nd,
4th, 8th and 16th units are as follows
Nth Unit Produced Hours for Nth Unit

1 100.0
2 80.0 = (.8 x 100)
4 64.0 = (.8 x 80)
8 51.2 = (.8 x 64)
16 41.0 = (.8 x 51.2)
As long as we wish to find the hours required to produce N units and N is one of the doubled values, then this approach
works. Arithmetic analysis does not tell us how many hours will be needed to produce other units. For this flexibility,
we must turn to the logarithmic approach.
Logarithmic Approach
The logarithmic approach allows us to determine labor for any unit, TN, by the formula:
TN = T1(N b) (E-2)
where TN = time for the Nth unit

T1 = hours to produce the first unit
N= Nth unit
b= (log of the learning rate)/(log 2) = slope of the learning curve
The logarithmic approach allows us to determine the hours required for any unit produced, but there is a simpler
method
Learning-Curve Coefficient Approach
The learning-curve coefficient technique is embodied in Learning Curve Coefficient table and the following equation:
TN = T 1C (E-3)
where number of labor-hours required to produce the Nth unit

TN =
number of labor-hours required to produce the first unit
T1 =
learning-curve coefficient, where Coefficient, C = N(log of learning
C = rate/log2)
The learning-curve coefficient, C, depends on both the learning rate (70%, 75%, 80%, and so on) and the unit number
of interest.

STRATEGIC IMPLICATIONS OF LEARNING CURVES
1. Following an aggressive pricing policy
2. Focusing on continuing cost reduction and productivity improvement
3. Building on shared experience
4. Keeping capacity growing ahead of demand
LIMITATIONS OF LEARNING CURVES

1. Because leaning curves differ from company to company, as well as industry to industry, estimates for each
organization should be developed rather than applying someone else’s.
2. Learning curves are both based on the time necessary to complete the early units; therefore, those times must be
accurate. As current information becomes available, reevaluation is appropriate.
3. Any changes in personnel, design, or procedure can be expected to alter the learning curve, causing the curve to
spike up for a short time, even if it is going to drop in the long run.
4. While workers and process may improve, the same learning curves do not always apply to indirect labor and
material.
5. The culture of the workplace, as well as resources availability and changes in the process, may alter the learning
curve. For instance, as a project nears it end, worker interest and effort may drop, curtailing progress down the
curve,
Discussion and Review Questions
1. How might the following business specialist use learning curves: accountants, marketers, financial analysts, people
managers, and computer programmers?
2. As a manager, which learning percentage would you prefer (other things being equal) 110 percent or 60 percent?
Explain.
3. What difference does it make a customer wants a 10,000 unit ordered produced and delivered all at one time or 2,500
unit batches?
Problems-solving Exercises
1. Digitel produces a new telephone system with built-in TV screens. Its learning rate is 80%
a. If the first one took 56 hours, how long will it take Digitel to make the eleventh system?
b. How long will the first 11 system take in total?
c. As a purchasing agent, you expect to buy units 12 through 15 of the new phone system. What would be your
expected cost for the units if Digitel charges P30 for each labor-hour?
2. If the first time you performed a job took 60 minutes, how long will the eight hour job take if you are on an 80%
learning curve?
3. A job applicant is being tested for an assembly line position. Management feels that steady-state times have
approximately reached after 1,000 performances. Regular assembly line workers are expected to perform the task
within four minutes.
a. If the job applicant performed the first test operation in 10 minutes and the second one in 9 minutes, should this
applicant be hired?
b. What is the expected time that the job applicant would finish the tenth unit?
References:
th
Richard B. Chase, Nicholas J. Aquilano, and F. Robert Jacobs, Production and Operations Management: Manufacturing and Services, 8 edition,
Irwin/McGraw-Hill, Boston, 1998
th
William J. Stevenson, Production/Operations Management, 5 edition, Irwin—McGraw-Hill, Boston, Massachusetts, 1996, Chapter 2, pp. 38-59.

Appendix LC-A
Learning Curve Coefficients

Name: Date:
Problem Sets on Learning Curve
1. A job applicant is being tested for an assembly line position. Management feels that steady state
times have been approximately reached after 1,000 performances. Regular assembly-line workers
are expected to perform the task within four minutes.
a. If the job applicant performed the first test operation in 10 minutes and the second one is 9
minutes, should this applicant be hired?
b. What is the expected time that the job applicant would take to finish the 10 unit?
c. What is the total expected time that the applicant would take to finish the 15 units?
d. What is a significant limitation of this analysis?
2. A potentially large customer offered to subcontract assembly work which is profitable only if you
can perform the operations at an average time of less than 20 hours each. The contract is for
1,000 units. You run a test and do the first one in 50 hours and the second one in 40 hours.
a. How long would you expect it take to do the third one?
b. Would you take the contract? Explain
3. An initial pilot run of ten unit produces the following times:
Unit Number Time (minutes) Unit Number Time (minutes)

1 39 6 16
2 29 7 15
3 23 8 13
4 19 9 13
5 17 10 12
a. According to this pilot run, what is your estimate of the learning rate?
b. How much time will it take for the next 90 units?
c. How much time will it take to make the 2,000th unit?
N.B: Use another sheet (coupon bond) paper as deem necessary.

C. RELIABILITY AND AVAILABILITY
RELIABILITY
Module on RELIABILITY
It is the measure of the ability of a product, part, or system to perform
its intended function under a prescribed set of conditions (e.g., repeat Introduction
sale, product image and legal implication).
Quantifying Reliability
Introduction
Important aspect of reliability
1. Reliability as a probability
Probability is the percentage of chance that product may fail as it was intended to function.
2. Definition of failure
Failure is used to describe a situation in which an item does not perform as intended.
3. Prescribed operating condition

Normal operating conditions is the set of conditions under which an item’s reliability is specified. These include
load, temperature, and humidity ranges as well as operating procedures and maintenance schedules
Quantifying Reliability
Probability is used in two ways:
1. The probability that the product or system will function on any given unit.
2. The probability that the product or system will function for a given length of time
Independent events or components are events whose occurrence or non-occurrence does not influence each other.
Rule 1: If two or more events are independent and “success” is defined as the probability that all of the events occur,
then the probability of success is equal to the product of the probabilities of the events.
Example. Suppose a room has two lamps, but to have adequate both lamps must work (success) when turned
on. One lamp has a probability of working of .90, and the other has a probability of working of .80. The
probability that both will work is .90 x .80 = .72.
Lamp 1 Lamp 2
.90 .80
Redundancy involves the use of backup components to increase reliability.
Rule 2: If two events are independent and “success” is defined as the probability that at least one of the events will
occur, the probability of success is equal to the probability of either one plus 1.00 minus that probability multiplied by
the other probability.
Example. There are two lamps in a room. One has a probability of lightning when turned on of .90 and the
other has a probability of lighting when turned on of .80. Only single lamp is needed to light for “success.” If
one fails to light when turned on, the other lamp is turned on. Hence, one of the lamps is a backup in case the

other one fails. Either lamp can be treated as the backup; the probability of success will be the same. The
probability of success is .90 + (1 - .90) x .80 = .98. It the .80 light first, the computation would be .80 + (1 - .80)
+ .90 = .98.
.80
Lamp 2 (backup)
.90 Lamp 1
Rule 3: If three events are involved and “success” is defined as the probability that at least one of them occurs, the
probability of success is equal to the probability that the first one (any of the events), plus the product of 1.00 minus
that probability and the probability of the second event (any of the remaining events), plus the product of 1.00 minus
each of the first two probabilities and the probability the third event, and so on.
Example. Three lamps have probabilities of .90, .80, and .70 of lighting when turned on. Only one lighted lamp
is need for “success”; hence two of the lamps are considered to be backups.
The probability of success is .90 + (1 - .90) x .80 + (1 - .90) x (1 - .80) x 70 = .994
.70
Lamp 3 (backup)
.80
Lamp 2 (backup)
.90
Lamp 1
Determine the reliability of the system shown below.
.90 .92
.98 .90 .95

The system can be reduced to a series of three components
.98 .90 + .90(1 - .90) .95 + .92(1 - .95)
The system reliability is then the product of this 0.98 x 0.99 x 0.996 = 0.966
Probabilities are determined relative to a specified length of time. This approach is commonly used in product
warranties, which pertain to a given period of time after purchase of a product.
Reliability
Failure rate
Failure rate
e –T/MTBF
Mean of Time Between Failures (MTBF) is the average length of time between failures of a product or component.
P(no failure before T) = e –T/MTBF
where: e = Natural logarithm, 2.7183… ;

T = Length of service before failure; and
MTBF = Mean time between failure
T/MBTF
e
-
T/MBTF
e
-
T/MBTF
e
- Improving Reliability
T/MBTF T/MBTF T/MBTF
0.10 .9048 2.10 .1255 4.10 .0166

0.20 .8187 2.20 .1108 4.20 .0150 1. Improve component design
0.30 .7408 2.30 .1003 4.30 .0136
0.40 .6703 2.40 .0907 4.40 .0123
2. Improve production and/or
0.50
0.60
.6065
.5488
2.50
2.60
.0821
.0743
4.50
4.60
.0111
.0101
assembly techniques
0.70
0.80
.4966
.4493
2.70
2.80
.0672
.0608
4.70
4.80
.0091
.0082
3. Improve testing
0.90
1.00
.4066
.3679
2.90
3.00
.0550
.0498
4.90
5.00
.0074
.0067
4. Use redundancy
1.10
1.20
.3329
.3012
3.10
3.20
.0450
.0408
5.10
5.20
.0061
.0056
5. Improve preventive maintenance
1.30
1.40
.2725
.2466
3.30
3.40
.0369
.0334
5.30
5.40
.0045
.0041
procedures
1.50
1.60
.2231
.2019
3.50
3.60
.0302
.0273
5.50
5.60
.0037
.0033
6. Improve user education
1.70
1.80
.1827
.1653
3.70
3.80
.0247
.0224
5.70
5.80
.0030
.0027
7. Improve design.
1.90 .1496 3.90 .0202 5.90 .0025
2.00 .1353 4.00 .0183 6.00 .0022
Values of e –T/MTBF

The probability that failure will occur before time T is 1.00 minus that amount;
P(failure before T) = 1 - e –T/MTBF
Mean Time Between Failure (MTBF)
The theoretical MTBF of a disk drive represents the steady state failure rate of a large population of drives in volume
manufacture. This is the expected time after the initial burn-in phase that it will take a hardware component to fail due
to normal wear and tear.
Calculating Theoretical MTBFs
The theoretical MTBF of any hardware configuration can be calculated if you have the MTBFs of each component that
make up your configuration. For example, you can calculate the MTBF of your server if you have the MTBFs of main
CPU board, disk drives, server packaging, etc - a rather daunting task. Most discussions of server MTBF focus on disk
drive MTBFs for a several reasons. First of all, components with moving parts (such as disk drive actuators and motors)
typically have significantly lower MTBFs than non-moving components (such as memory chips or main CPU boards).
Because a server's theoretical MTBF is most influenced by the MTBF of the least reliable component as well as the sheer
number of components, disk drive MTBFs typically dominate the overall server configuration theoretical MTBF.
Theoretical MTBF decreases in proportion to the number of components that make up the server, so larger
configurations containing many disk drives by definition have a lower MTBF. Add to that the fact that disk drives
contain data that may be time-consuming or impossible to recreate, it is easy to see why disk drive reliability dominates
server reliability discussions.
The following examples illustrate the impact of disk drive MTBF on overall server MTBF.
A server's theoretical MTBF is calculated from the theoretical MTBFs of the components that make up at the server:
where
N = MTBF of each component
x = the number of components in the configuration
If one component, such as a disk drive, has a significantly lower MTBF than the rest of the population, its MTBF
dominates the overall server MTBF. For example, examine a server containing one CPU main board with an MTBF of
1,000,000 hours, and a single drive with an MTBF of 300,000 hours (we'll ignore the other components for simplicity's
sake). The server's MTBF is calculated as follows:
= 230,769 hours, close to the disk drive's MTBF
Even if all your components have high MTBFs, the overall configuration's overall MTBF is reduced in direct proportion
to the number of components in the configuration. For example, the MTBF of a storage subsystem consisting of two disk
drives with identical 300,000 hour MTBFs is:
= 150,000 hours, exactly half the MTBF of each disk drive
Similarly, a 10-drive configuration MTBF is one-tenth the MTBF of a single drive, or 30,000 hours, and a 100-drive
configuration is reduced to 3,000 hours.
http://www.voxtechnologies.com/RAID_Solutions_and_Advanced_CTI_Platform/mtbf.htm
Product life can sometimes be modeled by a normal distribution. The table provides areas under a normal curve from
(essentially) the left end of the curve to a specified point z, where z is a standardized value computed using the
formula:1
T – Mean wear-out time
z=
Standard deviation of wear-out time
AVAILABILITY is the fraction of time a piece of equipment is expected to be available for operation.
Mean time between failure (MTBF)

Availability =
Mean time between failure (MTBF) + Mean time to repair (MTR)
A copier is expected to be able to operate for 200 hours between repairs, and the mean repair time is expected to be two hours.
Determine the availability of the copier. Given that MTBF = 200 hours, and MTR = 2 hours
200 hours
Availability = = .99
200 hours + 2 hours
Implications for design are revealed by the availability formula:
1. Availability increases as the mean time between failures increases.

2. Availability increases as the mean repair time decreases.
1
Refer to the attach standard deviation (z) table.
Name: Date:
Problem Set on Reliability
1. A product design engineer must decide if a redundant component is cost-justified in a certain system. The
system in question has a critical component with a probability of 0.98 of operating. System failure would
involve a cost of P800, 000. For a cost of P4, 000, a switch could be added that would automatically
transfer the system to the backup component in the event of a failure. Should the backup be added if the
backup is also 0.98?
2. Due to extreme cost of interrupting production, a firm has two standby machines available in case of a
particular machine breakdown. The machine in use has a reliability of 0.94, and the backups have reliability
of 0.90 and 0.80. In the event of a failure, either backup can be pressed into service. If one fails, the other
backup can be used. Compute for the reliability.

3. A hospital has three independent fire alarm systems, with reliability of 0.95, 0.97, and 0.99. In the event of
fire, what is the probability that a warning would be given?
4. A weather satellite has an expected life of 10 years from the time it is placed into earth orbit. Determine its
probability of no wear-out before each of the following lengths of service. Assume the exponential
distribution is appropriate: a) 5 years, b) 12 years, c) 20 years, and d) 30 years.

5. What is the probability that the satellite describe in the problem item 4 will fail between 5 years and 12
years after being placed into the earth orbit?
6. One line of radial tires produced by a large company has a wear-out life that can be made using a normal
distribution with a mean of 25,000 miles and a standard deviation of 2,000 miles. Determine each of the
following: a) the percentage of tires that can be expected to wear out within ±2,000 miles of the average
(i.e., between 23,000 miles and 27,000 miles), b) the percentage of tires that can be expected to fail
between 26,000 miles and 29,000 miles, and c) for what tire life would you expect 4 percent of the tires to
have worn out? Note: (1) miles are analogous to time and are handled in exactly the same way; (2)
the term percentage refers to a probability.

STANDARD NORMAL PROBABILITY TABLE
The table shows the area to the left of a z-score:
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
-3.4 .0003 .0003 .0003 .0003 .0003 .0003 .0003 .0003 .0003 .0002
-3.3 .0005 .0005 .0005 .0004 .0004 .0004 .0004 .0004 .0004 .0003
-3.2 .0007 .0007 .0006 .0006 .0006 .0006 .0006 .0005 .0005 .0005
-3.1 .0010 .0009 .0009 .0009 .0008 .0008 .0008 .0008 .0007 .0007
-3.0 .0013 .0013 .0013 .0012 .0012 .0011 .0011 .0011 .0010 .0010
-2.9 .0019 .0018 .0018 .0017 .0016 .0016 .0015 .0015 .0014 .0014
-2.8 .0026 .0025 .0024 .0023 .0023 .0022 .0021 .0021 .0020 .0019
-2.7 .0035 .0034 .0033 .0032 .0031 .0030 .0029 .0028 .0027 .0026
-2.6 .0047 .0045 .0044 .0043 .0041 .0040 .0039 .0038 .0037 .0036
-2.5 .0062 .0060 .0059 .0057 .0055 .0054 .0052 .0051 .0049 .0048
-2.4 .0082 .0080 .0078 .0075 .0073 .0071 .0069 .0068 .0066 .0064
-2.3 .0107 .0104 .0102 .0099 .0096 .0094 .0091 .0089 .0087 .0084
-2.2 .0139 .0136 .0132 .0129 .0125 .0122 .0119 .0116 .0113 .0110
-2.1 .0179 .0174 .0170 .0166 .0162 .0158 .0154 .0150 .0146 .0143
-2.0 .0228 .0222 .0217 .0212 .0207 .0202 .0197 .0192 .0188 .0183
-1.9 .0287 .0281 .0274 .0268 .0262 .0256 .0250 .0244 .0239 .0233
-1.8 .0359 .0351 .0344 .0336 .0329 .0322 .0314 .0307 .0301 .0294
-1.7 .0446 .0436 .0427 .0418 .0409 .0401 .0392 .0384 .0375 .0367
-1.6 .0548 .0537 .0526 .0516 .0505 .0495 .0485 .0475 .0465 .0455
-1.5 .0668 .0655 .0643 .0630 .0618 .0606 .0594 .0582 .0571 .0559
-1.4 .0808 .0793 .0778 .0764 .0749 .0735 .0721 .0708 .0694 .0681
-1.3 .0968 .0951 .0934 .0918 .0901 .0885 .0869 .0853 .0838 .0823
-1.2 .1151 .1131 .1112 .1093 .1075 .1056 .1038 .1020 .1003 .0985
-1.1 .1357 .1335 .1314 .1292 .1271 .1251 .1230 .1210 .1190 .1170
-1.0 .1587 .1562 .1539 .1515 .1492 .1469 .1446 .1423 .1401 .1379
-0.9 .1841 .1814 .1788 .1762 .1736 .1711 .1685 .1660 .1635 .1611
-0.8 .2119 .2090 .2061 .2033 .2005 .1977 .1949 .1922 .1894 .1867
-0.7 .2420 .2389 .2358 .2327 .2296 .2266 .2236 .2206 .2177 .2148
-0.6 .2743 .2709 .2676 .2643 .2611 .2578 .2546 .2514 .2483 .2451
-0.5 .3085 .3050 .3015 .2s981 .2946 .2912 .2877 .2843 .2810 .2776
-0.4 .3446 .3409 .3372 .3336 .3300 .3264 .3228 .3192 .3156 .3121
-0.3 .3821 .3783 .3745 .3707 .3669 .3632 .3594 .3557 .3520 .3483
-0.2 .4207 .4168 .4129 .4090 .4052 .4013 .3974 .3936 .3897 .3859
-0.1 .4602 .4562 .4522 .4483 .4443 .4404 .4364 .4325 .4286 .4247
0.0 .5000 .4960 .4920 .4880 .4840 .4801 .4761 .4721 .4681 .4641
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
0.0 .5000 .5040 .5080 .5120 .5160 .5199 .5239 .5279 .5319 .5359
0.1 .5398 .5438 .5478 .5517 .5557 .5596 .5636 .5675 .5714 .5753
0.2 .5793 .5832 .5871 .5910 .5948 .5987 .6026 .6064 .6103 .6141
0.3 .6179 .6217 .6255 .6293 .6331 .6368 .6406 .6443 .6480 .6517
0.4 .6554 .6591 .6628 .6664 .6700 .6736 .6772 .6808 .6844 .6879
0.5 .6915 .6950 .6985 .7019 .7054 .7088 .7123 .7157 .7190 .7224
0.6 .7257 .7291 .7324 .7357 .7389 .7422 .7454 .7486 .7517 .7549
0.7 .7580 .7611 .7642 .7673 .7704 .7734 .7764 .7794 .7823 .7852
0.8 .7881 .7910 .7939 .7967 .7995 .8023 .8051 .8078 .8106 .8133
0.9 .8159 .8186 .8212 .8238 .8264 .8289 .8315 .8340 .8365 .8389
1.0 .8413 .8438 .8461 .8485 .8508 .8531 .8554 .8577 .8599 .8621
1.1 .8643 .8665 .8686 .8708 .8729 .8749 .8770 .8790 .8810 .8830
1.2 .8849 .8869 .8888 .8907 .8925 .8944 .8962 .8980 .8997 .9015
1.3 .9032 .9049 .9066 .9082 .9099 .9115 .9131 .9147 .9162 .9177
1.4 .9192 .9207 .9222 .9236 .9251 .9265 .9279 .9292 .9306 .9319
1.5 .9332 .9345 .9357 .9370 .9382 .9394 .9406 .9418 .9429 .9441
1.6 .9452 .9463 .9474 .9484 .9495 .9505 .9515 .9525 .9535 .9545
1.7 .9554 .9564 .9573 .9582 .9591 .9599 .9608 .9616 .9625 .9633
1.8 .9641 .9649 .9656 .9664 .9671 .9678 .9686 .9693 .9699 .9706
1.9 .9713 .9719 .9726 .9732 .9738 .9744 .9750 .9756 .9761 .9767
2.0 .9772 .9778 .9783 .9788 .9793 .9798 .9803 .9808 .9812 .9817
2.1 .9821 .9826 .9830 .9834 .9838 .9842 .9846 .9850 .9854 .9857
2.2 .9861 .9864 .9868 .9871 .9875 .9878 .9881 .9884 .9887 .9890
2.3 .9893 .9896 .9898 .9901 .9904 .9906 .9909 .9911 .9913 .9916
2.4 .9918 .9920 .9922 .9925 .9927 .9929 .9931 .9932 .9934 .9936
2.5 .9938 .9940 .9941 .9943 .9945 .9946 .9948 .9949 .9951 .9952
2.6 .9953 .9955 .9956 .9957 .9959 .9960 .9961 .9962 .9963 .9964
2.7 .9965 .9966 .9967 .9968 .9969 .9970 .9971 .9972 .9973 .9974
2.8 .9974 .9975 .9976 .9977 .9977 .9978 .9979 .9979 .9980 .9981
2.9 .9981 .9982 .9982 .9983 .9984 .9984 .9985 .9985 .9986 .9986
3.0 .9987 .9987 .9987 .9988 .9988 .9989 .9989 .9989 .9990 .9990
3.1 .9990 .9991 .9991 .9991 .9992 .9992 .9992 .9992 .9993 .9993
3.2 .9993 .9993 .9994 .9994 .9994 .9994 .9994 .9995 .9995 .9995
3.3 .9995 .9995 .9995 .9996 .9996 .9996 .9996 .9996 .9996 .9997
3.4 .9997 .9997 .9997 .9997 .9997 .9997 .9997 .9997 .9997 .9998
Thanks to: http://www.stat.psu.edu/~herbison/stat200/stat200_model_demo/supplements/NormalTable.html

D. PLANNING AND DESIGNING OF PRODUCTION &/or OPERATIONS SYSTEMS
Process Selection
It refers to the way an organization chooses to produce its goods or provide its services. Essentially it involves choice
of technology and related issues, and it has implications for capacity planning, layout of facilities, equipment, and
design of work system.
Make or Buy. A number of factors are

usually considered.
1. Available capacity.
2. Expertise
3. Quality considerations
4. The nature of demand
5. Cost
Figure 7. Process selection and system design
Types of Processing
1. Continuous processing system produces large volume of one highly standardized item.
There is little or no processing variety. Sugar is produced by a continuous processing system.
2. Repetitive/assembly operations can be thought of as semi-continuous because they tend to
involve long runs of one or few similar items. The output of these operations is fairly standard,
involving very little processing variety.
3. Batch processing is sometimes referred to as an intermittent processing system processing
system because many jobs are performed with frequent shifting from one job to another.
Intermittent system tends to have a high to moderate processing variety range.
4. Job shops are also considered as intermittent processing system because small quantities are
produced.
5. Projects are special case—a type of processing that is employed to handle a non-routine job
encompassing a complex set of activities.
Match the Process and the Product
Product variety High Moderate Low Very low

Equipment High Moderate Low Very low
flexibility
Low Volume
Job Shop
Moderate Volume
Batch
High Volume
Repetitive
assembly
Very High Volume
Continuous flow
Table 1. Matching the process with product variety, equipment flexibility, and volume requirements.

Automation
It is the substitution of machinery for human labor. Machinery includes sensing and control devices that enable
it to operate automatically.
Computer-Aided Manufacturing (CAM)

It refers to the use of computer in process control, ranging from robots to automated quality control. These
systems replace human functions with machine functions.
1. Numerically controlled (N/C) machines are programmed to follow a set of processing instructions based on
mathematical relationships that tell the machine the details of the operations to be performed.
2. Computerized numerical control (CNC) where individual machines have their own computer.
3. Direct numerical control (DNC) one computer may control a number of N/C machines.
4. Robot consists of three parts: a mechanical arm, a power supply, and a controller.
5. Flexible manufacturing system (FMS) is a group of machines that includes supervisory computer control,
automatic material handling, and possibly robots, or other automated processing equipment. A group of
machines designed to handle intermittent process requirements and produce a variety of similar products.
6. Computer-integrated manufacturing (CIM) is a system for linking a broad range of manufacturing
activities through an integrating computer system, including engineering design, flexible manufacturing
system, and production planning and control (not all elements are absolutely necessary).
Operation Strategy
Management of technology is where managers must work with technical experts, asking questions and increasing
their understanding of the benefits and limitations of sophisticated processing equipment and technology, and
ultimately make decisions themselves.
Capacity Planning
The capacity of an operating unit is an important piece of information for planning purposes. It enables
managers to quantify production capability in terms of inputs or output, and thereby make other decisions or plan
related to those quantities.
Capacity refers to an upper limit or ceiling on the load that an operating unit can handle.
Importance of Capacity Decisions
1. relates to the potential impact on the ability of the organization to meet future demand.
2. stems from the relationship between capacity and operating cost.
3. also lies in the initial cost involved, of which capacity is usually a major determinant.
4. stems from the often required long-term commitment of resources and the fact that, once they are
implemented, it may be difficult or impossible to modify those decisions without incurring major cost.
Defining and Measuring Capacity

Defining capacity:
1. Design capacity: the maximum output that can possibly be attained.
2. Effective capacity: the maximum possible output given a product mix, scheduling difficulties, machine
maintenance, quality factors, ad so on.
3. Actual output; the rate of output actually achieved. It cannot exceed effective capacity and is often less than
effective capacity due to breakdowns, defective output, shortages of materials, and similar factors.

Measures of capacity
Business Inputs Outputs
Auto Labor hours, machine hours Number of car per shift

manufacturing Furnace size Tons of steel per day
Steel mill Refinery size Gallons of fuel per day
Oil refinery Number of acres, number of Bushels of grain per acre per year, gallons of milk
Farming cows per day
Restaurant Number of tables, seating Number of meals served per day
Theater capacity Number of tickets sold per performance
Retail Sales Number of seats Revenue generated per day
Square feet of floor space
Measures of system effectiveness

1. Efficiency is the ratio of actual output to effective capacity.
Actual output
Efficiency =
Effective capacity
2. Utilization is the ratio of actual output to design capacity.
Actual output
Utilization =
Design capacity
Example Problem
Given the information below, compute for the efficiency and the utilization of the vehicle repair department.
Design capacity = 50 trucks per day

Effective capacity = 40 trucks per day
Actual output = 36 trucks per day
Actual output 36 units per day

Efficiency = = 90 %
Effective capacity = 40 units per day
36 units per
Actual output
day
Utilization = = 72 %
= 50 units per
Design capacity
day
Thus, compared with the effective capacity of 40 units per day, 36 per day looks pretty good. However, compared with
the design capacity of 50 units per day, 36 units per day is much less impressive although probably more meaningful.

Determinants of Effective Capacity
1. Facilities factors such as design of facilities, including size and provision for expansion, transportation cost, distance
to market, labor supply, energy sources, room for expansion, likewise, layout of the working area and
environmental factors such as heating, lighting, and ventilation.
2. Product/Service Factors can have a tremendous influence on capacity. The particular mix of products or service
rendered must also be considered since different items will have different rates of output.
3. Process factors. The quantity capability of a process is an obvious determinant of capacity. A subtler determinant is
the influence of output quality.
4. Human Factor. The task that make up a job, the variety of activities involved, and the training, skills, and
experience required to perform a job all have an impact on the potential and actual output. Employee motivation
has a very basic relationship to capacity, as do absenteeism and labor turnover.
5. Operations Factors. Scheduling problems may occur when an organization has differences in equipment
capabilities among alternatives pieces of equipment or differences in job requirements. Inventory stocking
decisions, late deliveries, acceptability of purchased materials and parts, and quality inspection and control
procedures also can have an impact on effective capacity.
6. External factors. Product standards, especially minimum quality and performance standards can restrict
management’s options for increasing and using capacity. Thus, pollution standard on products and equipments
often reduce-effective capacity, as does paperwork required by government regulatory agencies by engaging
employees in nonproductive activities.
A. Facilities 4. Motivation
1. Design 5. Compensation
2. Location 6. Learning rates
3. Layout 7. Absenteeism and labor turnover
4. Environment E. Operational
B. Product or Service 1. Scheduling
1. Design 2. Materials management
2. Product and Service Mix 3. Quality assurance
C. Process 4. Maintenance policy
1. Quantity capabilities 5. Equipment breakdown
2. Quality capabilities F. External Factors
D. Human Factors 1. Product standards
1. Job content 2. Safety regulations
2. Job design 3. Unions
3. Training and experience 4. Pollution control standards
Table 2. Factors that determine effective capacity
Determining Capacity Requirements

1. Long term considerations relate to overall level of capacity, such as facility size;
2. Short-term considerations relate to probable variations in capacity requirement created by such thing as seasonal,
random, and irregular fluctuations in demand.
Developing Capacity Alternatives

1. Design flexibility into systems.
2. Take a “big picture” approach to capacity changes.
3. Prepare to deal with capacity “chunks.”
4. Attempt to smooth out capacity requirements.
5. Identify the optimal operating level.

Evaluating Alternatives
1. Calculating Processing Requirement
example:
A department works one 8-hour shift, 250 days a year, and has these figures for usage of a machine that is
currently being considered:
Standard processing Processing time needed

Product Annual Demand
time per unit (hour) (hour)
#1 400 5.0 2,000

#2 300 8.0 2,400
#3 700 2.0 1,400
--------
5,800
Working one 8-hour shift, 250 hours a year provides an annual capacity of 8 x 250 = 2,000 hours per year.
We can see that three of these machines would be needed to handle the required volume.
5,800 hours
= 2.90 machines
2,000 hours/machine
2. Cost-Volume Analysis
Cost-volume analysis focuses on a relationship between cost, revenue, and volume of output. The purpose of cost-
volume analysis is to estimate the income of an organization under different operating conditions. It is particularly
useful as a tool for comparing capacity alternatives.
a. Fixed costs tend to remain constant regardless of volume of output. (Examples include rental costs, property
taxes, equipment costs, heating and cooling expenses, and certain administrative costs).
b. Variable costs vary directly with volume of output. The major components of variable costs are generally
materials and labor costs.
c. Break-even point is the volume of output at which total costs and total revenue are equal.
d. Step costs are costs that increase stepwise as potential volume increases.
e. Formulas:
TC = FC + VC x Q (2-1)
TR = R x Q (2-2)
P = TR – TC
(2-3)
= R x Q – (FC + VC x Q)
SP + FC
Volume = (2-5)
R - VC
FC
QBEP = (2-6)
R - VC

FC = Fixed cost Q = Quantity or volume of output
VC = Variable cost per unit QBEP = Break-even quantity
TC = Total cost P = Profit
TR = Total revenue SP = Specified profit
R = Revenue
Table 3. Cost-volume symbol
Example:
The owner of Old-Fashioned Berry Pies, S. Simon, is contemplating adding a new line of pies, which will be
require leasing new equipment for a monthly payment of $6,000. Variable cost would be $2.00 per pie, and pies would
retail for $7.00 each.
a. How many pies must be sold in order to break even?
b. What would the profit (loss) be if 1,000 pies are made and sold in a month?
c. How many pies must be sold to realize a profit of $4,000?
FC = $6,000, VC = $2 per pie, Rev = $7 per pie
a. Break-even quantity
FC $6,000
QBEP = = = 1,200 pies/month
Rev - VC $7 - $2
b. Quantity
For Q = 1,000, P = rev x Q – (FC + VC X Q)
= $7 x 1,000 – ($6,000 + $2 X 1,000) = -$1,000
c. Break-even profit
P = $4,000 solve for Q in the preceding equation:
$4,000 = $7Q – ($6,000 + $20)
Rearranging terms, we obtain
$50Q = $10,000 Q = 2,000 pies
3. Financial Analysis
a. Cash flow refers to the difference between the cash-received from sales (of goods or services) and other sources
(e.g., sale of old equipment) and the cash outflow for labor, materials, overhead, and taxes.
b. Present value expresses in current value the sum of all future cash flow of an investment proposal
c. Payback is a crude but widely used method that focuses on the length of time it will take for an investment to
return its original cost.
d. Present value (PV) method summarizes the initial cost of an investment, its estimated annual cash flows, and
any expected salvage value in a single value called the equivalent current value, taking into account the time
vale of money (i.e., interest rates)

e. Internal rate of return (IRR) summarizes the initial costs, expected annual cash flows, and estimated future
salvage value of an investment proposal in an equivalent interest rate. In other words, this method identifies the
rate of return that equates the estimated future returns and the initial cost.
4. Decision Theory is a helpful tool for financial comparison of alternatives under condition of risk or uncertainty.
5. Waiting-line analysis. Analysis of waiting lines is often useful for designing service systems. Waiting lines have a
tendency to form in a wide variety of service systems (e.g., airport ticket counters, telephone calls to a cable
television company, and hospital emergency rooms). The lines are symptoms of bottlenecks operations. Analysis is
useful in helping managers choose a capacity level that will be cost-effective through balancing the cost of having
customer wait with the cost of providing additional capacity. It can aid in the determination of expected costs for
various levels of service capacity.
Problem Solving on Break Even Analysis
1. Make or buy. A firm’s manager must decide whether to make or buy a certain item use in the production of
vending machines. Cost and volume estimates are as follows:
Make Buy
Annual fixed cost P6,750,000 None
Variable cost per unit P2,700 P 3,600
Annual volume (units) 12,000 12,000
a. Given these data, should the firm buy or make this item?
b. There is a possibility that volume could change in the future. At what volume would the manager be indifferent
between making and buying?
2. A publishing company for a textbook found out that their monthly expenses are P200, 000.00 and P100.00 on
every textbook. If each textbook is sold at P 160.00
a. Formulate the cost function, revenue function, and profit function.

b. Find the break-even volume, cost, and profit.
c. Show the break-even graph and interpret.
d. If the company produce and sell 1,000 books, do they have a gain or a loss? How much?
e. If they could sell 20,000 books, how much is the gain or loss?
f. If the company forecast revenue of P 3,000,000.00 for the next month, how much will be the profit.
3. An important process in the economic progress of a country is the replacement of human effort with machines. If it
cost P15 to move one cubic yard of soil for building a dam by human effort while P5 to do the same job with a
machine plus a fixed cost of P1,000. a) Find the cost function for human and machine effort. b) Sketch the break-
even graph and interpret. c) Find the minimum number of cubic yard of soil required for replacing human effort
with a machine.

DECISION MAKING
A. The Decision Process b. Decision Making Under Uncertainty

a. Cause of Poor Decisions c. Decision Making Under Risk
b. Decision Environments d. Decision Trees
B. Decision Theory e. Expected Value of Perfect Information
a. Decision Making Under Certainty f. Sensitivity Analysis
The Decision Process

Most successful decision making follows a process that consists of these steps:
1. Identify the problem. The focal point of the process, unless done carefully, the remaining steps can be misdirected.
It may be directed towards removing the symptoms of the problem rather than the actual problem, allowing the
problem to resurface later. Solutions may address the basic problem, not the symptoms.
2. Specify objectives and the criteria for choosing a solution. The decision maker must identify the criteria by which
proposed solutions will be judged. Common criteria often relates to costs, profits, return on investment, increased
productivity, risk, common image, impact on demand, or similar variables.
3. Develop alternatives. In the search for alternatives, there is always the danger that one or more potentially superior
alternatives will be overlooked. Consequently, the optimal alternative may turn out to be less than optimum. As a
general rule, efforts expended n carefully identifying alternatives can yield substantial dividends in terms of the
overall decision.
4. Analyze and compare alternatives is often enhanced by the use of mathematical or statistical techniques.
5. Select the best alternative will depend on the objectives of the decision maker and the criteria that are being used to
evaluate alternatives.
6. Implement the chosen alternative (solution) simply means carrying out the actions indicated by the chosen
alternatives. Many decision makers use this approach by default: By the time they get around to making a decision,
it’s too late!
7. Monitor the results to ensure that desired results are achieved. Effective decision making requires that the results of
the decision be monitored to make sure that the desired consequences have been achieved. If they have not, the
decision maker may have to repeat the entire process; or perhaps a review of the situation may reveal an error in
implementation, an error in calculations, or a wrong assumption that will allow the situation to be remedied
quickly.
The decision process is not always completed in a sequential manner. Instead, there is usually a certain amount of
backtracking and feedback, especially in terms of developing and analyzing alternatives.
Cause of Poor Decisions
1. failures can be traced to some combination of mistakes in the decision process;

2. bounded rationality (the limitation on decision making caused by costs, human abilities, time, technology, and
availability of information); and
3. suboptimization (the result of different departments each attempting to reach a solution that is optimum for that
department).

Decision Environments
Certainty means that relevant parameters such as costs, capacity, and demand have known values. Example, profit per
unit is P5. You have an order for 200 units. How much profit will you make?
Risk means that certain parameters have probabilistic outcomes. Example, profit is P5 per unit. Based on previous
experience, there is a 50 percent chance of an order for 100 units and a 50 percent chance of an order for 200 units.
What is the expected profit?
Uncertainty means that it is impossible to assess the likelihood of various possible future events. Example, profit is P5
per unit; the probabilities of potential demands are unknown.
Decision Theory
Decision theory represents a general approach to decision making. Decisions that lend themselves to a decision theory
approach tend to be characterized by these elements:
1. A set of possible future conditions exist that will have a bearing on the results of the decision.
2. A list of alternatives for the manager to choose from.
3. A known payoff for each alternative under each possible future condition.
In order to use this approach, a decision maker would employ this process;
1. Identify the possible future conditions (e.g., demand will be low, medium, or high; the number of contracts
awarded will be one, two, or three; the competitor will or will not introduce a new product). These are called states
of nature.
2. Develop a list of possible alternatives, one of which may be to do nothing.
3. Determine or estimate the payoff associated with each alternative for every possible future condition.
4. If possible, estimate the likelihood of each possible future condition.
5. Evaluate alternatives according to some decision criterion (e.g., maximize expected profit), and select the best
alternative
Payoff table is a table showing the expected payoffs for each alternative in every possible state of nature.
Possible future demand

Alternatives
Low Moderate High
Small facility P10 P10 P10
Medium facility 7 12 12
Large facility (4) 2 16
* Present value in P million

Decision Making Under Certainty
When it is known for certain which of the possible future conditions will actually happen the decision is usually
relatively straightforward: Simply choose the alternative that has the best payoff under that state of nature. This is
illustrated in the following example.
Determine the best alternative in the preceding payoff table, if it is known with certainty that demand will be: (a) low,
(b) moderate, (c) high.
Choose the alternative with the highest payoff. Thus, if we know demand will be low, we would elect to build the small
facility and realize a payoff of $10 million. If we know demand will be moderate, a medium facility would yield the
highest payoff (P12 million versus either P10 million or P2 million). For high demand, a large facility would provide
the highest payoff.
Decision Making Under Uncertainty

At the opposite extreme is complete uncertainty: no information is available on how likely the various state of nature
are. Under those conditions, four possible decision criteria are maximin, maximax, laplace, and minimax regret. These
approaches can be defined as follows:
Maximin – Determine the worst possible payoff for each alternative, and choose the alternative that has the “best
worst.” The maximin approach is essentially a pessimistic one because it takes into account only the worst possible
outcome for each alternative. The actual outcome may not be as bad as that, but this approach establishes a
“guaranteed minimum.”
Maximax – Determine the best possible payoff, and choose the alternative with that payoff. The maximax approach is
an optimistic, “go for it” strategy; it does not take into account any payoff other than the best.
La Place – Determine the average payoff for each alternative, and choose the alterative with the best average. The La
Place approach treats the states of nature as equally likely.
Maximax regret – Determine the worst regret for each alternative, and choose the alternative with the “best worst.”
The main weakness of these approaches (except for La Place) is that they do not take into account all of the payoffs.
Instead, they focus on the worst or best, and so they lose some information. The weakness of La Place is that it treats
all states of nature as equally likely. Still, for a given set of circumstances, each has certain merits that can be helpful
to a decision maker.
Referring to the preceding payoff table, determine which alternative would be chosen under each of these strategies: (a)
maximin, (b) maximax, (c) laplace.
Possible future demand Row total Row average

Alternatives (in $ million) (in $ million)
Low Moderate High
Small facility P10 P10 P10 P30 P10.00
Medium facility 7 12 12 31 10.33
Large facility (4) 2 16 14 4.67
* Present value in P million

Solution:
1. The worst payoffs for the alternatives are shown at the table. Hence, since P10 million is the best, choose to build
the small facility using the maximin strategy.
2. The best payoffs are shown at the table. The best overall payoff is the P16 million in the third row. Hence, the
maximax criterion leads to building a large facility.
3. For the La Place criterion, first find the row totals, and then divide each of these amount by the number of states of
nature (three in this case). Since the medium facility has the highest average, it would be chose under the La Place
criterion.
Determine which alternative would be chosen using a maximax regret approach to the capacity planning program.
The first step in this approach is to prepare a table of opportunity losses, or regrets (the difference between a given
payoff and the best payoff in the same column). To do this, subtract every pay off in each column from the largest
possible payoff in that column. For instance, in the first column the largest possible payoff is 10, so each of the three
numbers in that column must be subtracted from 10. Going down to the column, the regrets will be 10 – 10 = 0, 10 –
7 = 3, 10 – (-4) = 14. In the second column, the largest positive payoff is 12. Subtracting each pay of from 12 yields
the following; 2, 0, and 10. In the third column, 16 is the largest payoff. The regrets are 6, 4, and 0. These are
summarized in a regret table:
Possible future demand Regrets (in $ millions)

Alternatives
Low Moderate High Low Moderate High Worst
Small facility P10 P10 P10 P0 P 2 P6 P6
Medium facility 7 12 12 3 0 4 4
Large facility (4) 2 16 14 10 0 12
The second step is to identify the worst regret for each alternative. For the first alternative, the worst is 6; for the
second, the worst is 4; and for the third, the worst is 14.
The best of these “worst” would be chosen using minimax regret. The lowest regret is 4, which is for a medium
facility. Hence, that alternative would be chosen.
Decision Making Under Risk
Between the two extreme of certainty and uncertainty lies the case of risk. The probability of occurrence for each state
of nature can be estimated. (Note that because the states are mutually exclusive and collectively exhaustive, these
probabilities must add to 1.00) A widely used approach under such circumstances is the expected monetary value
criterion. The expected value is computed for each alternative, and one with the highest expected value is selected. The
expected value is the payoffs for an alternative where each pay is weighted by the probability for the relevant state of
nature. Thus, the approach is:
Expected monetary value criterion (EMV) – Determine the expected payoff of each alternative, and choose the
alternative that has the best expected payoff.

Using the expected monetary value criterion, identify the best alternative for the previous payoff table for these
probabilities: Low = 0.30, moderate = 0.50 and high = 0.20.
To find the expected value of each alternative by multiplying the probability of occurrence for each state of nature by
the payoff for that state of nature and summing them:
EV small = 0.30 (P10) + 0.50 (P10) + 0.20 (P10) = P10

EV medium = 0.30 (P7) + 0.50 (P12) + 0.20 (P12) = P10.50
EV large = 0.30 (P-4) + 0.50 (P2) + 0.20 (P16) = $ 3
Decision Trees
A decision tree is a schematic representation of the alternatives available to a decision maker and their possible
consequences
Example of a Decision Trees
Exercise: Try making a decision tree for your college plans in the next five years or so.

Expected Value of Perfect Information
In certain situations, it is possible to ascertain which state of nature will actually occur in the future. The question to
consider is whether the cost of the option will be less than the expected gain due to delaying the decision (e.g., the
expected payoff above the expected value). The expected gain is the expected value of perfect information, or EVPI,
which is the difference between the expected pay under certainty and the expected payoff under risk.
One possible ways of obtaining perfect information depend somewhat on the nature of the decision being made. For
example, information about consumer preferences might come from market research, additional information about a
product could come from product testing, legal experts might be called on.
There are two ways to determine the EVPI. One is to compute the expected payoff under certainty and subtract the
expected payoff under risk. That is<
Expected value of
Expected payoff Expected payoff
perfect = -
under certainty under risk
information
A second approach is to use the regret table to compute the EVPI. To do this, find expected regret for each alternative.
The minimum expected regret is equal to the EVPI
Sensitivity Analysis
Sensitive analysis provides a range of probability over which the choice of alternative would remain the same. The
approach illustrated here is useful when there are two states of nature. It involves constructing a graph and then using
algebra to determine a range of probabilities for which a given solution is best. In effect, the graph provides a visual
indication of the range of probability over which the various alternatives are optimal, and the algebra provides exact
values of the endpoints of the ranges.
Given the following table, determine the range of probability for state of nature #2, that is, P(2), for which each
alternative is optimal under the expected-value approach.
State of #2 12 2 8
Nature #1 4 16 12
Alternative A B C
First, plot each alternative to P(2). To do this, plot #1 value on the left side of the graph and the #2 value on the right
side. For instance, for alternative A, plot 4 on the left side of the graph and 12 on the right side. Then connect these two
points with a straight line. The three alternatives are plotted on the graph shown below.
16 16
14 14
12 12
10 10
Payoff #1 Payoff #2
8 8
6 6
4 4
2 B best C best A best
2
0 0.2 0.4 0.6 0.8 1.0
P (2)
The slope and equations are:
#1 #2 Slope Equation
A 4 12 12 – 4 = +8 4 + 8P(2)
B 16 2 2 – 16 = -14 16 – 14P(2)
C 12 8 8 – 12 = -4 12 – 4P(2)
If 16 – 14P(2) = 12 – 4P92); then 4 = 10P(2). Solving, you obtain P(2) = 0.40. Thus, alternative B is best from P(2) = 0
up to P(2) = 0.40. B and C are equivalent at P(2) = 0.40
Alternative C is best from that point until its line intersects alternative A’s line. To find that intersection set those two
equations equal and solve for P(2). Thus, 4 + 8P(2) = 12 – 4P(2). Rearranging terms, you have 12P(2) = 8. Solving,
you obtain P(2) = 0.67. Thus, alternative C is best from P(2) > 0.40 up to P(2) = 0.67, where A and C are equivalent .
For values P(2) greater than 0.67 up to P(2) = 1.0, A is best.
Note: if a problem calls for ranges with respect to P(1), find the P(2) range as above, and then subtract each P(2) from
1.00 (e.g., 0.40 becomes 0.60, and 0,67 becomes 0.33)
Problem Set for Decision Making:
1. Assume the payoffs represent profits.
Alternative locations for new

A B C
warehouse
New bridge built 1 2 4
No new bridge 14 10 6
a. Determine the alternative that would be chosen under each of these decision criteria: maximin, maximax, and laplace
b. Using graphical sensitivity analysis, determine the probability for new bridge for which each alternative would be
optimal.
c. Using the information in the payoff table, develop a table of regrets, and then: a) determine the alternative that would
be chosen under minimax regret, and b) determine the expected value of perfect information using the regret table,
assuming that the probability of a new bridge being built is 0.60.
d. Using the probabilities of 0.60 for a new bridge and 0.40 for no new bridge, compute the expected value of each
alternative in the payoff table, and identify the alternative that would be selected under the expected-value approach.
e. Suppose that the values in the payoff table represent cost instead of profits.
i. Determine the choice that you would make under each of these strategies: maximin, minimin, and La Place.
ii. Develop the regret table, and identify the alternative chosen using each alternative the EVPI if P(new bridge) = 0.60
iii. Using sensitivity analysis, determine the range of P(no new bridge) for which each alternative would be optimal.
iv. If P(new bridge) = 0.60 and P(no new bridge) = 0.40, find the alternative chosen to minimize expected cost.
2. A small building contractor has recently experienced two successive years in which work opportunities exceeded the
firm’s capacity. The contractor must now make a decision on capacity for the next year. He has estimated profits under
each of the two states of nature he believes might occur, as shown in the table below.
Next year’s High P60* P80 P70

demand Low 50 20 40
Alternative Do nothing Expand Subcontract
* Profit in P millions
a. Which alternative should be selected if the decision criterion is: Maximax, maximin, La Place, and minimax regret
b. Suppose after a certain amount of discussion with an accountant, the contractor is able to subjectively assess the
probabilities of low and high demand: P(low) = 0.30 and P(high) = 0.70.
i. Determine the expected profit of each alternative. Which alternative is best? Why?
ii. Analyze the problem using a decision tree. Show the expected profit of each alternative on the tree.
iii. Computer for the expected value of perfect information. How could the contractor use this knowledge?
c. Subsequently, construct a graph that will enable you to perform sensitivity analysis on the problem. Over what range
of P(high) would the alternative of doing nothing be best? Expand? Subcontract?
3. A researcher of a marketing agency has assemble the following payoff table of estimated profits:
Receive P10* P8 P5 P0
Contract
Not receive -2 3 5 7
Alternative MP1 MP2 MP3 MP4
* Cost in millions of Peso.
Relative to the probability of not receiving the contract, determine the range of probability for each of the proposal would
maximize expected profit.

PLANNING & DESIGNING OF P/O SYSTEM - Part I: FORECASTING
Pedagogical Objectives: By the end of this topic discussion, the student should be able to:
4. Define forecasting;
5. Discuss why demand forecasting is important in managing the P/O system;
6. Identify the basic types of forecasting models and describe some forecasting techniques under each model;
7. Forecast using quantitative techniques; and
8. Evaluate the effectiveness of a forecasting technique.
Definition
Forecasting is the art and science of predicting future situations. It may involve taking historical data and
projecting them into the future with sort of mathematical model. It may be a _______________ or intuitive prediction
of the future. It may involve combination of these, that is, a mathematical model adjusted by a manager’s
______________ _______________.
Types of Forecasts
Organizations use three types of forecasts in planning and anticipating the future of their operations.
1. _______________ forecasts address the business cycle by predicting inflation rates, money supplies, housing
starts, and other planning indicators.
2. _______________ forecasts are concerned with rates of technological progress, which can result in the birth of
exciting new products, requiring new plants and equipment.
3. _______________ forecasts are projections of demand for a company’s product or services. These forecasts,
also called sales forecasts, drive a company’s production capacity and scheduling systems and serve as inputs to
financial, marketing, and human resource planning.
Why Forecast Demand?
1. To plan for the system in terms of product design, process design, capacity planning and equipment investment
and replacement.
2. To plan the use of the system which includes _______________ requirements for materials, products and
services; and _______________ schedules and varying labor and materials?
Forecasting Time Horizons
1. ________________ forecast. This forecast has a time span of up to one year, but is generally less than three
months; it is used for planning, purchasing, job scheduling, workforce levels, job assignments, and production
levels.
2. ________________ forecast. An intermediate forecast generally spans for three months up to three years. It is
used in sales planning and budgeting, cash budgeting and analyzing various operating plans.
3. ________________ forecast. Generally three years or more in time span, these forecasts are used in planning
for new products, capital expenditures, facility location or operation expansion, and research and development.

The Influence of Product Life Cycle
Another factor to consider when developing sales forecasts, especially longer ones, is the product’s life cycle. Products,
and even services, do not sell at a constant level throughout their span of life. Most successful products pass through
four stages: (1) introduction, (2) growth, (3) maturity, and (4) decline.
Products in the first two stages of their life cycle need longer forecasts than those in the maturity and decline
stages. Forecasts are useful in projecting different staffing levels, inventory levels, and factory capacity as the product
passes from the first to the last stage.
Types of Forecasting Models
1. _________________ Models
a. _________________. This method solicits input from customers or potential customers regarding their
future purchasing plans. It can help not only in preparing a forecast, but also in improving product
design and planning new products.
b. __________________. In this approach, each sales person estimates what sales will be in his or her
region or sales territory. These forecasts are then reviewed to ensure the realistic and then combined at
the district and national levels to reach an overall forecast estimates.
c. __________________. Under this method, the opinions of a group of high-level managers, often in
combination with statistical models, are pooled to arrive at a group estimate of demand.
d. __________________. There are three different types of participants in the Delphi method: decision-
makers, staff personnel, and respondents. The decision-makers usually consist of a group of five (5) to
ten (10) experts who will be making the actual forecast. The staff personnel assist the decision-makers
by preparing, distributing, collecting, tabulating, and summarizing a series of questionnaires and
survey results. The respondents are a group of people, often located in different places, whose
judgments are valued and are being sought. This group provides inputs to the decision-makers before
the forecast is made.
2. _________________ Models
a. __________________ Models. Time-series models predict on the assumption that the future is a
function of the past. In other words, they look at what happened over a period of time and use a series
of past data to make a forecast.
 Naïve forecast
 Moving averages
 Simple moving average
 Weighted average
 Exponential smoothing
b. __________________ Models. Causal models, such linear regression, incorporate the variables or
factors that might influence the quantity being forecast. For example, a causal model for appliance sales
might include factors such as new housing starts, advertising budget, and competitor’s price.
 Simple regression
 Multiple regression
Mean Absolute Deviation is a measure used to evaluate the accuracy of a forecasting model.
Associative or Causal Models
 Regression Analysis is a forecasting technique that establishes a relationship between variables In this discussion,
we consider only:
1. Two variables; say, x and y
2. A linear relationship between them

where: y = dependent variable, e.g., Demand, Sales
x = independent variable, e.g., Time, Advertising, Price,
Unemployment, etc.,
 Slope-intercept form of a line y = a + bx

y
y = a + bx
where:
a = y-intercept
b = slope of the line; rate of change of y with ∆y
respect to x
nΣxy - ΣxΣy b=∆

b=
nΣx2 – (Σx)2 ∆
∆x
a
a= Σy - bΣx
n x
N.B.: Linear regression may be applied only when the relationship between two variables is linear or nearly so. In other
words, the regression line: y = a + bx may be used to forecast values of y for any given value of x only if there is a
significant relationship, i.e., high correlation, between x and y .
Question: But how do we know if the linear relationship between x and y is significant
Answer: By calculating the correlation coefficient, r.
nΣxy - ΣxΣy
r=
[nΣx2 – (Σx)2] [nΣy2 – (Σy)2]
If |r| is Then
0.90 – 1.00 very high correlation Thus, for our purposes, the regression line: y = a + bx may be
0.70 – 0.89 high correlation used to forecast values of y for any given value of x only when
0.40 – 0.69 moderate correlation
|r| is greater than or equal to 0.70.
0.20 – 0.39 low correlation
0.00 – 0.19 slight correlation
 NAÏVE APPROACH
Ft = the demand forecast for period t
F t = At – 1  MEAN ABSOLUTE DEVIATION (MAD) A t – 1 = the actual demand for period t – 1
n n = the average period
 SIMPLE MOVING AVERAGE
n
MAD = Σ |A
i=1
i - Fi| Ai
Wi
= the actual demand for period i
= the weight to be multiplied to the
Ft =
ΣA
i=1
i n α
Ft – 1
actual demand for period i
= the exponential smoothing constant
n = the demand forecast for period t - 1
 WEIGHTED MOVING AVERAGE
n
Ft = Σ W A , where 0 ≥ W
i=1
i i i ≥ 1 and Σ W = 1.00
i
 EXPONENTIAL SMOOTHING
Ft = Ft – 1 + α(At – 1 - Ft – 1), where 0 ≥ α ≥ 1

FORECASTING – Time Series
The following data show the number of liters of gasoline sold by Petron in Baguio City for the past 12 weeks.
Forecast*
Actual Naïve SMA WMA ES, α = 0.30 Linear trend

Week Demand*
F |A - F| F |A - F| F |A - F| F |A - F| F |A - F|
1 17
2 21
3 19
4 23
5 18
6 16
7 20
8 18
9 22
10 20
11 15
12 22
13
MAD
* 1,000 liters
1. Forecast demand using the naïve approach.
2. Forecast demand using 3-week simple moving average model.
3. Using a weight of 0.40 for the most recent observation, 0.30 for the second most recent, 0.20 for the third most
recent, and 0.10 for the fourth most recent, forecast demand using 4-week weighted moving average model.
4. Forecast demand using exponential smoothing model with α = 0.30.

5. Forecast demand using linear trend analysis.
6. Calculate the MAD for each of the above forecasting models. Which forecasting model would you recommend
to Petron’s manager? Why?
7. What demand forecast would you recommend for week 13?

FORECASTING –Linear Regression
Don Henrico’s Pizza is interested in establishing the relationship between its advertising and sales on the
following data:
Quarter Advertising Sales

(P100,000) (PMillion)
1 4 1
2 10 4
3 15 5
4 12 4
5 8 3
6 16 4
7 5 2
8 7 1
9 9 4
10 10 2
1. Can Don Henrico’s Pizza use linear regression analysis to forecast its future sales given a planned advertising
expenditure?
2. Determine the estimated equation of the regression line that defines the relationship between sales and
advertising.
3. If Don Henrico’s Pizza advertising expense is expected to be P1,100,000.00, what would be the corresponding
sales forecast?
4. If Don Henrico’s Pizza spends five percent of sales on pizza boxes, how much boxes, in peso volume, should its
operations manager order for the next quarter?
Quantitative Forecasting
The following table represents sales data for palm oil ( in hundred gallons) sold by a grocery store.
Month Sales 1. Given a choice on whether to use the naïve approach; a 5-month SMA
1 40 model; a WMA model with weights 0.20, 0.30, and 0.50; and an ES
2 48 model with α = 0.60 and a forecast of 3,600 galloons in the first
3 40 month; which model would you use? Why?
4 45
5 50 2. Based on your decision in item 1, what should be the forecast for
6 49 month 11?
7 46
8 57 3. Would you recommend using linear regression forecasting model for
9 54 this time series data? Why?
10 62
4. If the linear regression may be used, what would be the forecast for
month 16?

E. TOTAL QUALITY MANAGEMENT
Learning Objectives – After completing this topic, you should be able to:
1. Describe TQM.
2. Give an overview of problem solving.
3. Give an overview of process improvement.
4. Describe and use various quality tools.
Total Quality Management – a philosophy that involves everyone in an

organization in a continual effort to improve quality and achieve customer
satisfaction.
2 Key Philosophies
1. Continuous improvement – seeks to make never-ending

improvements to the process of converting inputs into
outputs.
2. Customer satisfaction – involves meeting or exceeding

customer expectations.
Description of the TQM Approach
1. Find out what customers want. Integrate the customer’s voice in the decision-making process. Be sure to
include the internal customer (the next person in the process) as well as the external customer (the final
customer).
2. Design a product or service that will meet or exceed what customers want. Make it easy to use and easy to
produce.
3. Design a production process that facilitates doing the job right the first the first time. Determine where
mistakes are likely to occur and try to prevent them. When mistakes do occur, find out why so that they are less
likely to occur again. Strive to make the process “mistake-proof.”
4. Keep track of results, and use those to guide improvement in the system. Never stop trying to improve.
5. Extend these concepts to suppliers and to distribution.

Other Elements of the TQM Approach
1. Continual improvement
2. Competitive benchmarking
3. Employee empowerment
4. Team approach
5. Decisions based on facts rather than opinions
6. Knowledge of quality tools
7. Supplier quality
 Quality at the source
Comparing the Cultures of TQM vs. Traditional Organizations
ASPECT TRADITIONAL TQM

 Overall mission  Maximize return on investment  Meet or exceed customer
 Emphasis on short term satisfaction
 Objectives  Balance of long term and short
 Not always open; sometimes term
 Management inconsistent objectives  Open; encourages employee
 Issue orders; enforce input; consistent objectives
 Coach, remove barriers, build
 Role of manager  Not highest priority; maybe trust
unclear  Highest priority; important to
 Customer requirements  Assign blame; punish identify and understand
 Not systematic; individuals  Identify and resolve
 Problems
 Erratic  Systematic; teams
 Problem solving  Continual
 Adversarial
 Improvement
 Narrow, specialized; much  Partners
 Suppliers individual effort  Broad, more general; much team
 Jobs  Product oriented effort
 Focus  Process oriented

Problem Solving
 To be successful, problem-solving efforts should follow a standard
approach.
 An important aspect of problem solving in the TQM approach is
eliminating the cause so that the problem does not reoccur.
 Users of the TQM approach often like to think of problems as
“opportunities for improvement.”
Basic Steps in Problem Solving
Step 1 Define the problem and establish an improvement goal.
Give problem definition careful consideration; don’t rush through this step because this will serve as
the focal point of problem-solving efforts.
Step 2 Collect data.
The solution must be based on facts. Possible tools include check sheets, scatter diagram, histogram, run
chart, and control chart.
Step 3 Analyze the problem.
Possible tools include Pareto chart, cause-and-effect diagram.
Step 4 Generate potential solutions.
Methods include brainstorming, benchmarking, interviewing, and surveying.
Step 5 Choose a solution.
Be sure what the criteria are for choosing a solution. (Refer to the goal established in Step 1). Apply
criteria to potential solutions and select the best one.
Step 6 Implement the solution.
Keep everyone informed.
Step 7 Monitor the solution to see if it accomplishes the goal.
If not, modify the solution or return to Step 1. Possible tools include control chart and run chart.
Process Improvement
 A systematic approach that involves documentation, measurement, and analysis for the purpose of improving
the functioning of a process.
 Typical goals of process improvement include: increasing customer satisfaction, achieving higher quality,
reducing waste, reducing cost, increasing productivity, and speeding up the process.

The Plan-Do-Study-Act (PDSA) Cycle or the Deming Wheel – is the conceptual basis for continuous improvement
activities.
Basic Steps of the PDSA Cycle
 Plan. Begin by studying the current process. Document

that process. Then collect data to identify problems. Next,
survey data and develop a plan for improvement. Specify
measures for evaluating the plan.
 Do. Implement the plan, on a small scale if possible.
Document any changes made during this phase. Collect data
systematically for evaluation.
 Study. Evaluate the data collection during the do phase.
Check how closely the results match the original goals of the
plan phase.
 Act. If the results are successful, standardize the new
method and communicate the new method to all people
associated with the new process. Implement training for the
new method. If the results are unsuccessful, revise the plan and
repeat the cycle, or cease the project.
Seven (7) Basic Quality Tools
1. Check Sheet
 A tool for recording and organizing data to
identify a problem.
 For identifying types of defects, when and
where they occur.
2. Flowchart
 A diagram of the steps in a process.
 For identifying possible points in the process
where problems occur.
3. Scatter Diagram
 A graph that shows the degree and direction
of relationship between two variables.
 May point to a cause of a problem.
4. Histogram
 A chart of an empirical frequency
distribution.
 Can be useful in getting a sense of the
distribution of observed values; if the
distribution is symmetrical, what the range of
values is, and if there is any unusual values.

5. Pareto Analysis
 A technique for classifying problem areas according to degree of importance, and focusing on the most
important.
6. Control Chart
 A statistical chart of time-ordered values of a sample statistic.
 Can be used to monitor if the process output is in control or out of control.
7. Cause-and-effect Diagram
 Also called fishbone or Ishikawa diagram.
 Used to search for the cause(s) of a problem.
SPC TOOLS COMMONLY USED FOR PROBLEM SOLVING AND CONTINUOUS IMPROVEMENT
1. Process Flow Chart – A picture which describes the main steps, branches and eventual outputs of a process
2. Pareto Analysis – A coordinated approach for identifying, ranking, and working to permanently eliminate defects.
Focuses on important error sources. 80/20 rule: 80 percent of the problems are due to 20 percent of the causes.
Frequency Percentage
100%
50%
A B C D F G 0%

3. Run Chart – A time sequence chart showing plotted values of a characteristic.
4. Histogram – A distribution showing the frequency of occurrences between the high and low range of data.
5. Scatter Diagram – Also known as a correlation chart. A graph of the value of one characteristic versus another
characteristic.
6. Check Sheet – An organized method for recording data.
ITEMS A B C D E F G
_____ √√ √ √ √
_____ √√√ √√√ √√

7. Cause and Effect Diagram – A tool that uses a graphical description on the process elements to analyze potential
sources of process variation.
Machine Man
Environment Effect
Method Material
8. Control Charts – A time sequence chart showing plotted values of a statistic, including a central line and one or
more statistically derived control limits.
Attribute or variable
Process-out-of-control
UCL
Process mean
Process-in-control
LCL
LCL
Process-out-of-control
Time
STATISTICAL PROCESS CONTROL
A visual display called a control chart is used to plot values of a measure of process performance (e.g., the time
directory assistance operator spends with a caller) to determine if the process is in control (e.g., the time is less than 30
seconds in the operator example).
The steps in constructing and using quality-control chart can be summarized as:
1. Decide on some measure of service system performance.
2. Collect representative historical data from which estimates of the population mean and variance for the system
performance measure can be made.
3. Decide on a sample size, and using the estimates of population mean and variance, calculate (by convention) 3
standard deviation control limits.
4. Graph the control chart as a function of sample mean values versus time.
5. Plot sample means collected at random on the chart, and interpret the results as follows:
a. Process in control
b. Process out of control. In this case:
i. Evaluate the situation
ii. Take corrective action
iii. Check results of action
6. Update the control chart on a periodic basis, and incorporate recent data.

Control charts for means fall into two categories based on the type of performance measure. A variable control chart
(X-chart) records measurements that permit fractional values, such as length, time, or weight. An attribute control chat
(p-chart) records discrete data, such as the number of defects or errors as a percentage.
Statistical Process Control Problems
Sample size x-chart R-chart

n A2 D3 D4
2 1.880 0 3.267
3 1.023 0 2.574
4 0.577 0 2.282
5 0.729 0 2.114
5 0.483 0 2.004
7 0.419 0.076 1.924
8 0.373 0.136 1.864
9 0.337 0.184 1.816
10 0.308 0.223 1.777
12 0.266 0.283 1.717
14 0.235 0.328 1.672
16 0.212 0.363 1.637
18 0.194 0.391 1.608
20 0.180 0.415 1.585
22 0.167 0.434 1.566
24 0.157 0.451 1.548
Table 1.1 Variable Control Chart Constants
Table 1.2 RISK IN QUALITY-CONTROL DECISIONS

Quality-control decision
True state of service Take corrective action Do nothing
Process in control Type I error (producer’s risk) Correct decision
Process out of control Correct decision Type II error (consumer’s risk)
Control chart is a visual display that is used to plot values of a measure of process performance (e.g., the time a
directory assistance operator spends with a caller) to determine if the process is in control (e.g., the time is less than 30
seconds in the operator example). For example, Figure 1.1 shows a control chart that is used to monitor emergency
ambulance response time. This chart is a daily plot of mean response time that permits monitoring performance for
unusual deviations from the norm. When a measurement falls outside the control limits—that is, above the upper
control limit (UCL) or below the lower control limit (LCL)—the process is considered to be out of control: consequently,
the system is in need of attention.
Example 1-1: Control Chart for Variables (x-chart)

The quality-control chart for mean ambulance response time shown in Figure 1.1 is an example of a variable measure.
It is based on taking a random sample of four ambulance calls each day to calculate a sample mean response time to
monitor performance. The range of the sample values (i.e., the difference between the highest and the lowest values)
will be used instead of the standard deviation to calculate the control limits. Assume that past records of ambulance
system performance yield an estimated population mean response time of 5.0 minutes, with an estimated average range
of 3.1minutes. Appropriate formulas for calculating the control limits for an x-chart using the R range as a substitute
for the standard error of the mean are
UCL = x + A2R
LCL = x + A2R
where x = estimate of population mean

R = estimate of population range
A2 = value from Table 1.2 for sample size n

For ambulance response time control chart shown in Figure 1.1, the control limits for a sample size of four are
calculated as follows:
UCL = x + A2R = 5.0 + (0.729)(3.1) = 7.26

LCL = x + A2R = 5.0 - (0.729)(3.1) = 2.74
We also could monitor the variance of the ambulance response times using the range (i.e., the largest value minus the
smallest value in the sample) as a measure of variance. A range or R-chart can be constructed in a manner similar to
the x-chart by using the following formulas:
UCL = D4R
LCL = D3R
where R = estimate of population range

D4 = UCL value from Table 1.2 for sample size n
D3 = LCL value from Table 1.2 for sample size n
For our ambulance case, the range control limits are calculated using the constants in Table 1.2 for a sample size of
four:
UCL = D4R = (2.282)(3.1) = 7.1

LCL = D3R = (0)(3.1) = 0
x
7.26 Upper control limit (UCL)
Mean response time, minutes
x
x
5.0 x
x
x x
x
2.74 Lower control limit (LCL)
4 5 6 7 1 2 3 8
Time, days
Figure 1.1 x-chart for ambulance response.

Name: Date:
Problem Set for Statistical Process Control
1. Control Chart for Variable

To be come productive, Resort International is interested in setting standards for the time that telephone reservation clerks
spend with vacationers making tour arrangements. Collecting data on the amount of time the reservation clerk spend with
customers has been proposed to determine the mean time and average range as well as to establish a process control chart for
this operation. The table below records the time in minutes that reservation clerks spent answering calls as found by observing
one call each day during a typical week. The fifth row contains the X values for each day. The last row contains the range (i.e.,
high-low) values for each day (e.g., the high for Monday was 14 and the low was 5, yielding a range of 9). Compute for a)
population mean and range, b) establish the control limits for an x-chart when sampling four random calls each day for each
clerk, c) construct an R-chart, and d) plot the average call time.
Clerk Monday Tuesday Wednesday Thursday Friday

Alice 5 11 12 13 10
Bill 6 5 12 10 13
Janice 14 13 10 9 9
Mike 8 6 9 12 14
̅ 8.25 8.75 10.75 11.0 11.5
Range 9 8 3 4 5
2. Control Chart for Attribute

A regional airline is concerned about its record of on-time performance. The Memphis hub experience 20 flight operations
each day of the week, with the following record of on-time departures for the previous 10 days: 17, 16, 18, 19, 16, 15, 20, 17,
18, and 16. Prepare a p-chart with a sample consisting of 1 week’s average on-time departure percentage.
3. The time to make beds at a motel should fall into an agreed-on range of times. A sample of four maids was selected, and the
time needed to make a bed was observed on three different occasions:
Service time, seconds

Maid Sample 1 Sample 2 Sample 3
Ann 120 90 150
Linda 130 110 140
Marie 200 180 175
Michael 165 155 140
a. Determine the upper limit and lower limit for an X-chart and an R-chart with a sample size of four.
b. After the control chart was established, a sample of four observations had the following times in seconds: 185, 150, 192,
and 178. Is corrective action needed?
4. The management of the Diners Delight franchised restaurant chain is in the process of establishing quality-control chart for
the time that each customer is given to each customer. Management thinks the length of time that each customer is given
should remain within certain limits to enhance service quality. A sample of six service people was selected, and the customer
service they provide was observed four times. The activities that the service people were performing were identified, and the
time to service one customer was recorded as noted below:
Service time, seconds

Sample 1 Sample 2 Sample 3 Sample 4
Service person
1 200 150 175 90
2 120 85 105 75
3 83 93 130 150
4 68 150 145 175
5 110 90 75 105
6 115 65 115 125
a. Determine the upper and lower control limits for an X-chart and an R-chart with a sample size of 6.
b. After the control chart was established, a sample of six service people was observed and the following customer service
times in seconds were recorded: 180, 125, 110, 98, 156, and 190. Is corrective action called for?

TIP TOP MARKET
Tip Top Market is a regional chain of supermarkets located in the Southeastern United States. Karen Martin, manager of one of the
stores, was disturbed by the large number of complaints from customers at her store, particularly on Tuesdays, so she obtained
complaint records form the store’s customer service desk for the last eight Tuesdays.
Assume you have been asked to help analyzed the data and to make recommendations for improvement. Analyze the data using a
check sheet, a Pareto diagram, and run charts. Then construct a cause-and-effect diagram for the leading category on your Pareto
diagram.
On July 15, changes were implemented to reduce out-of-stock complaints, improve store maintenance, and reduce checkout line or
pricing problems. Do the results of the last two weeks reflect improvement?
Base on your analysis; prepare a list of recommendations that will address customer complaints.
June 1 double charged on hard rolls meat not fresh found keys in parking lot
out of orange yogurt long wait at check out overcharged on melon lost keys
bread stale wrong price on item wrong price on sale item
checkout lines too long overcharged overcharged on corn
overcharged fish didn’t smell right July 6 wrong price on baby food
double charged overcharged on special out of straws out of 18 oz. Tide
meat smelled strange couldn’t find aspirin out of bird food out of Tip Top tissues
charged for item not purchased undercharged overcharged on butter checkout lines too long
couldn’t find the sponges checkout lines too long out of masking tape out of romaine lettuce
meat tasted strange out of diet cola stockboy was helpful out of Tip Top toilet paper
store too cold meat smelled bad lost child out of red peppers
light out in parking lot overcharged on eggs meat looked bad out of Tip Top napkins
produce not fresh bread not fresh overcharged on butter out of apricots
lemon yogurt pass sell date didn’t like music out of Swiss chard telephone out of order
couldn’t find rice lost wallet too many people in store out of cocktail sauce
milk past sell date overcharged on bread out of bubble bath water on floor
stock clerk rude out of Dial soap out of onions
cashier not friendly store too warm out of squash
out of maple walnut ice cream June 22 price not as advertised out of iceberg lettuce
something green in meat milk past sales date need to open more checkout out of Tip Top paper towels
didn’t like music store too warm shopping carts hard to steer
checkout line too slow foreign object in meat debris in aisles
store too cold out of Drano July 27
eggs cracked out of Chinese cabbage out of bananas
June 8 couldn’t find lard store too warm reported accident in parking lot
fish smelled funny out of 42 oz. Tide floors dirty and sticky wrong price of cranapple juice
out of diet bread fish really bad out of Diamond chopped walnuts out of carrots
dented can windows dirty out of fresh figs
out of hamburger rolls couldn’t find oatmeal out of Tip Top napkins
fish not fresh out of Bounty paper towels July 13 out of Tip Top straws
cashier not helpful overcharged on orange juice wrong price on spaghetti windows dirty
meat tasted bad lines too long at checkout water on floor out of iceberg lettuce
ATM ate card couldn’t find shoelaces store looked messy dislike store decorations
slippery floor out of Smucker’s strawberry jam store too warm out of Tip Top lunch bags
music too loud out of Frosty Flakes cereals checkout lines too long out of vanilla soy milk
undercharged out of Thomas’ English Muffins cashier not friendly wanted to know who won the
out of roses out of Cheese Doodles lottery
meat spoiled triple charged store too warm
overcharged on two items June 29 out of Saran Wrap oatmeal spilled in bulk section
store too warm checkout line too long out of Dove Bars telephone out of order
out of rice out of Dove soap undercharged out of Tip Top tissues
telephone out of order out of Bisquick out of brown rice water on floor
overcharged eggs cracked out of mushrooms out of Tip Top paper towels
rolls stale store not clean overcharged out of Tip Top toilet paper
bread past sale date store too cold checkout wait too long spaghetti sauce on floor
cashier to slow shopping cart broken out of Peter Pan crunchy peanut
out of skim milk couldn’t find aspirin butter
June 15 charged wrong price out of Tip Top lunch bags
wanted smaller size restroom not clean out of Tip Top straws
too cold in store couldn’t find sponges
out of Wheaties checkout lines slow
out of Minute Rice out of 18 oz. Tide
cashier rude out of Campbell’s turkey soup July 20
fish tasted fishy out of pepperoni sticks out of cucumbers
ice cream thawed checkout lines too long checkout lines too slow

Template of Quality Tools Required in the Case:
A. Check sheet
Complaint Category description Frequency of occurrence
category
A Out of stock merchandise
B Expired or spoiled stock
C Cashier related complaints – lines, charging…
D Missing stocks
E Undesirable store ambiance – temperature, lighting…
F Poor customer service by other personnel
G Equipment related complaints
B. Pareto diagram (based on check sheet data)
Cumulative frequency of occurrence

•
• 100 %
•
Frequency of occurrence
A B C D E F (For illustration only)
C. Run chart (only for the category with the highest frequency of occurrences)
Frequency of occurrence
• •
•
• •
• • •
0 (For illustration only)

6/1 6/8 6/15 6/222 6/29 7/6 7/13 7/20 (time)
D. Control chart (only for the category with the highest frequency of occurrences)
E. Cause-and-effect diagram (only for the category with the highest frequency of occurrences)
F. List of recommendations (five alternative course of actions to address the most probable cause of the complain
category with the highest frequency of occurrence).
(Nota Bene: Group output should be written in intermediate paper. List the group member’s names that are only present)
F. PLANNING & DESIGNING OF P/O SYSTEM - Part II: FACILITY LAYOUT DESIGN
Learning Objectives
At the end of this module material, student should be able to;
1. Determine facility layout designs
2. List the advantages of good layout
3. Recognize the considerations of a good layout
4. Describe the basic types of layouts
5. Develop simple process layout
6. Solve simple line balancing problem
7. Solve load × distance problem
Facility Layout
Facility layout is the designing of ……….. or configuration of departments, ……….., and equipment that constitute the
……….. process to enhance the ………… of the system and smoothen the ………. ……… of the product and/or
service.
Advantage of a Good Layout

1. Fewer ………..
2. ……….. material flow
3. Better ……….
4. Reduce material handling ………..
5. Reduce ……….
6. Effective ……….. utilization
Consideration of a Good Layout

1. ……….. and ……….. requirements. Capacity decisions are the pre-requisite to a good layout. Only when we know
the personnel, machines, and equipment required that we can proceed with the layout and provide space for each
components of the conversion system.
2. Environmental and ……….. Decisions may be required about windows, planters, and height of partitions to
facilitate airflow or ……….. to reduce noise, …………., to provide privacy, and so on.
3. Flows of ……….. Decisions about the best way to facilitate communications must be also made. This may require
decision about proximity as well as open ……….. versus half-heights dividers versus private offices.
4. Cost of ……….. between various areas. There may be unique considerations related to the difficulty of movements
or the importance of certain areas being adjacent to each other.
5. ………… ………….. equipment. Decisions are also required about equipment to be used; such as conveyors,
cranes, forklifts, and carts to deliver material or mail correspondences.
Type of Manufacturing and Service Operations

1. Intermittent operations include conversion system that produced ……….. volumes, but .......... variety of items or
services (such as: ……….., …………, ………… and so on).
2. Continuous operations composed of conversion system that produced ……….. of one or few standardize items;
examples are …………, ………….., and ……………
3. Project is used to plan and coordinate ……….. jobs with relatively ………… life span for instance ………….,
………….., and …………..
Simple Process Layout
1 2 3
A C E
4 5 6
B D F
Location Workstation to be assigned

Designing Product Layout
Line Balancing
Line balancing (Yamazumi) is the process of assigning ……….. to ……….. that have approximately equal time
requirements.
Cycle time is the ……….. time allowed at each workstation to complete its sets of task or a unit.
Here is a simple definition and example of line balancing:

Everyone is doing the same amount of work
Doing the same amount of work to customer requirement
Variation is ‘smoothed’
No one overburdened
No one waiting
Everyone working together in a BALANCED fashion
Here we see operator number 1 over-producing, thus

creating the other 6 wastes
We simply re-balance the work content (Re-distribute some In the example shown above, the Yamazumi exercise
of the work), Using a Yamazumi board as is often known. looks incredibly simple—so why doesn’t every do it?
There are two vital pre-requisite to balancing a line which must be in place before a Yamazumi exercise can take place.
These are Takt Time and Standard Work
Takt Time
Takt Time comes from a German word ‘takt’meaning rhythm or beat. It is a term often associated with the takt the
conductor sets so that the orchestra plays in unison. Takt Time is used to match the pace of work to the average pace of
customer demand. Takt is not a number that can be measured (Misconception #1), and is not to be mistaken with Cycle
Time, which is the time it takes to complete one task. Cycle Time may be less than, more than, or equal to Takt Time.
You can never measure Takt Time with a stop watch. You must calculate it. The formula for Takt Time is:
Net Available Time per Day

Takt Time =
Customer Demand per Day

Takt Time is expressed as “seconds per piece”, indicating that customers are buying a product once every so many
seconds. Takt Time is not expressed as “pieces per second” (Misconception #2). By pacing production to this rate of
customer demand, Lean Manufacturing seeks to minimize was and ensure on-time at a low cost.
Takt time is the production “Drumbeat” bases on customer demand.
Standard Work
Whether you use standard work combination tables, standard work instruction sheets or any other standard work
documentation will depend upon the type of work involved.
Standard work instruction sheets provide a detailed description of HOW to do a particular step of a work operation.

Benefits of the pre-requisites:
Takt time maximizes the productivity due to: Standard operations provides:
1. Easily managed processes 1. Capable and repeatable processes
2. Output of each process matches customer 2. Process control at source
demand 3. Improves accuracy of planning
4. Better adherence to plans
5. A platform from which continuous
improvement can be made
6. Reduce costs
http://www.beyondlean.com/line-balancing.html date retrieved 04 May 2011 21:54:27
A Yamazumi chart is a stacked bar chart that shows the balance of cycle time workloads between a number of
operators typically in an assembly line or work cell. The Yamazumi chart can be either for a single product or multi
product assembly line.
Yamazumi is a Japanese word that literally means to stack up.
Toyota uses Yamazumi work balance charts to visually present the work content of a series of tasks and facilitate work
balancing and the isolation and elimination of non value added work content.
Source: http://www.acsco.com/Yamazumi.htm date retrieved 04 May 2011 21:59:24
SOME USEFUL FORMULA:

Operating time per day
Output rate =
Cycle time
The task times govern the range of possible cycle times. The ……….. cycle time is equal to the ………. task time, and
the maximum cycle time is equal to the sum of the task times.
Operating time per day
Cycle time =
Desire output rate
As a general rule, the cycle time is determined by the desired output; that is, a desired output level is selected, and the
cycle time
Sum of task times
Theoretical minimum number of stations =
Cycle time
Precedence diagram is a diagram that shows the elemental tasks and their precedence requirements.
Two widely used measure of effectiveness are
1. The percentage of idle time of the line. This is sometimes referred to as the balance delay. It can be computed as
follows;
Idle time per cycle
Percentage of idle time = × 100
Actual number of workstations × Cycle time
In effect, this is the average idle time divided by the cycle time, multiplied by 100. Note that cycle time refers to the
actual cycle time that is achieved.
2. The efficiency of the line. This is computed as follows

Efficiency = 100 – Percentage of idle time
Sample Problem:
Task Immediate follower Task time (in minutes)
a b 0.2
b e 0.2
c d 0.8
d f 0.6
e f 0.3
f g 1.0
g h 0.4
h end 0.3
∑t = 3.8
Using the information contained in the table shown, do each of the following:
1. Draw a precedence diagram.
2. Assuming an eight-hour workday, compute the cycle time needed to obtain an output of 400 units per day.
3. Determine the minimum number of workstations required.
4. Assign task to workstation using this rule: Assign tasks according to greatest number of following tasks. In case of a
tie, use the tiebreaker of assigning the task with the longest procession time first.
5. Compute the resulting percent idle time and efficiency of the system.
Precedence diagram:
a b e
0.2 0.2 0.3
f g h
c 1.0 0.4 0.3

d
0.8 0.6
Cycle time
OT 480 minutes per day
CT = = = 1.2 minutes per day
D 400 units per day
Number of workstation
D×∑t 400 units per day × 3.8 minutes
Nmin = = = 3.17 workstations
OT 480 minutes per day
Schedule of idle time

Time Assign (task
Station remaining Eligible Will fit time) Idle time
1 1.2 a,c a,c a(0.2)
1.0 c,b c,b c(0.8)
0.2 b,d b b(0.2)
0.0 e,d none - 0.0
2 1.2 e,d e.d d(0.6)
0.6 e e e(0.3)
0.3 f none - 0.3
3 1.2 f f f(1.0)
0.2 g none - 0.2
4 1.2 g g g(0.4)
0.8 h h h(0.3)
0.5 - - - 0.5
1.0
Percentage of idle time

IT 1.0 minute per cycle
% IT = = = 0.2083
Nactual × CT 4 stations × 1.2 minutes per cycle
Efficiency of the line balance

Efficiency = 100 % - percent of idle time Efficiency = 100 -20.83 = 79 %

Closeness Rating
A : Absolutely necessary
E : Especially important
I : Important
O : Ordinary closeness OK
U : Unimportant
X : Undesirable
• Assignment of the closeness rating is

subjective.
Rule of thumb:
• Very few A and X relationships should Richard Muther developed a more general approach to the problem, which allows for
be assigned. (no more than 5% of the subjective input from analysts or managers to indicate the relative importance of
closeness ratings to be an A and X). each combination of department pairs. In practice, the letters on the grid are often
• No more than 10% should be an E. accompanied by numbers that indicate the reason for each assignment; they are
omitted here to simplify the illustrations. Muther suggests the following list.
• No more than 15% to be an I.
• No more than 20% to be an O. 1. Use same equipment or facilities
• This means that about 50% of the 2. Share the same personnel or records
relationships should be U. 3. Sequence of work flow
4. Ease of communication
5. Unsafe or unpleasant conditions
6. Similar work performed
Sample Problem for Closeness Rating
Closeness rating
1. Arrange six departments into a 2 x 3 grid so that 2. Using the information given in preceding
these conditions are satisfied: 1 close to 2, 5 close problems, develop a Muther-type grid using the
to 2 and 6, 2 close to 5, and 3 not close to 1 or 2. letters A, O, and X. Assume that any pair of
combination not mentioned have an O rating.
Load Distance Technique
Minimizing Transportation Costs or Distance
Assumption: Costs are direct, linear function of distance.
Sample Problem
Assign the three departments to location A, B, and C, which are separated by the distance shown in Table 2, in such a
way that transportation cost is minimized. If it cost per meter to move any load is P5, compute for the daily
transportation cost
Use this heuristic rule: Assign departments with the greatest interdepartmental workflow first.

Table 1. Location (Distance) Table 2. Department (Load)
To A B C To 1 2 3
From From
A - 20 40 1 - 10 80
B 20 - 30 2 20 - 30
C 40 30 - 3 90 70 -
Representation :
Analysis:
2
Workflow Distance
C Department (Load) Trip (meters)
40m
30m 3-1 90 A-B 20
1-3 80 B-A 20
3-2 70 B-C 30
A 2-3 30 C-B 30
B 3 1 2-1 20 A-C 40
20m 1-2 10 C-A 40
Solution:
Department Number of Loads to Location Distance (meters) to Load × Distance Cost
1 2:10 A C:40 400
3:80 B:20 1600
2 1:20 C A:40 800
3:30 B:30 900
3 1:90 B A:20 1800
2:70 C:30 2100
7600 P38000
Transportation Model
Sample Transportation Problem
The transportation problem involves finding the lowest-cost plan Warehouse
for distributing stocks of goods or supplies from multiple A B C D
Factory Supply
destinations that demand the goods or supplies. The transportation 4 7 7 1
model can be used to determine how to allocate the supplies 1 100
available from the various factories to the warehouse that stock or
demand those goods, in such a way that total shipping cost (time, 12 3 8 8
distance) is minimized. 2 200
The information needed to use the model consists of the following: 8 10 16 5
1. A list of the origins and each one’s capacity or supply 3 150
quantity per period.
2. A list of the destinations and each one’s demand period.
3. The unit cost of shipping items from each origin to each Demand 80 90 120 160
destination.
Transportation model must satisfy these assumptions:
1. The items to be shipped are homogeneous (i.e., they are the same regardless of their source of destination),
2. Shipping cost per unit is the same regardless of the number of units shipped, and
3. There is only one route or mode of transportation being used between each source and each destination.
The description of the technique of the major steps in the process in this order:
1. Obtain an initial solution (using intuitive lowest cost approach or greedy method, northwest technique, and so
on)
2. Testing the solution of optimality
a. Evaluating empty cell : Stepping-stone method
b. Evaluating empty cell : The Modified Distribution method
3. Improving suboptimal solutions
WAITING LINE MANAGEMENT
“This Book of the Law shall not depart from your mouth, but you shall meditate in it day and night, that you may
observe to do according to all that is written in it.” Joshua 1:8
Learning Objectives
1. Discuss the basic elements of waiting line problems
2. Provide standard steady-state formula for solving waiting line problems
Economics of the Waiting Line Problem
1. Cost Effectiveness Balance. Initially, with minimal service capacity, the waiting line cost is at a maximum. As service
capacity increased, there is a reduction in the number of customer in the line and in their waiting times, which decrease
waiting line costs.
2. Practical View of Waiting Lines. One important variable is the number of arrivals over the course of the hours that
the service system is open. From the service delivery viewpoint, customers demand varying amounts of service, often
exceeding normal capacity. We can have some control over arrivals in variety of ways. For example, we can have a short
line (such as a drive-in at a fast-food restaurant with only several spaces), we can establish specific hours for specific
customers, or we can run specials. For the server, we can affect service time by using faster or slower server, faster or
slower machines, different tooling, different material, different layout, faster setup time, and so on. The essential point is
waiting line are not a fixed condition of a productive system but are to a very large extent within the control of the system
management design.
The Queuing System
The queuing system consists of essentially of three major components:
The source of population and the way customers arrive at the system
Customer Arrival: Arrival at a service system may be drawn from a finite or an infinite
1. Population Source
a. Finite Source refers to the limited-size customer pool that will use the service and, at times, form a line. The reason
for this finite classification is important because when a customer leaves its position as a member for the population
(a machine breaking down and requiring service, for example), the size of the user group is reduced by one, which
reduces the probability of the next occurrence. Conversely, when a customer is serviced and returns to the user group,
the population increases and the probability of a user requiring service also increases. This finite class of problems
requires a separate set of formulas from that of the infinite population case.
b. Infinite Population is one large enough in relation to the service system so that the population size caused by
subtraction or addition to the population (a customer needing service customer returning to the population) does not
significantly affect the system probabilities.

2. Distribution of Arrivals. When describing a waiting system, we need to define the manner in which customer or the
waiting units are arranged for service.
a. Arrival rate. Waiting line formulas generally require and arrival rate, or the number of units per period (such as an
average of one every six minutes). A constant arrival distribution is periodic, with exactly the same time period
between successive arrivals. In productive system, about the only arrivals that truly approach a constant interval
period are those that are subject to machine control. Much more common variable (random) arrival distribution.
b. Viewpoints in observing arrivals at a service facility
i. First, we can analyze the time between successive arrivals to see if the times follow some statistical distribution.
Usually, we assume that the time between arrivals is exponentially distributed.
Exponential Distribution. In the first case, when arrivals at a service facility occur in a purely random fashion,
a plot of the inter-arrival times yields an exponential distribution. The probability function is:
ƒ(t) = λe-λt
where λ is the mean number of arrivals per time period; e is the natural algorithm (2.7183), and t is the arrival
time.
ii. Second, we can set some time length (T) and try to determine how many arrivals might enter the system within T.
We typically assume that the number of arrivals per time is Poisson distributed.
(λT)ne-λt
PT(n) = n! is defined as n(n-1)(n-2)…(2)(1)
n!
Poisson is a discrete distribution (smoothed curve, the curve become smoother as n becomes large) because n
refers to the number of arrival in a system, and this must be an integer. (For example, there cannot be 1.5 arrivals).
Also not that the exponential and Poisson distribution can be derived from one another, the mean and variance of
the Poisson distribution are equal and denote by λ . The mean of the exponential distribution is 1/λ and its
variance is 1/λ2. (Remember that the time between arrivals is exponentially distributed and the number
of arrivals per unit of time is Poisson distributed.)
3. Other Arrival Characteristics
a. Arrival patterns. The arrivals at a system are far more controllable that is general. The simplest of all arrival-control
devices is the posting of business hours. Some service demands are clearly uncontrollable, such as emergency media
demand on a city’s hospital are controllable to some extent by, say, keeping ambulance drivers in the service region
informed of the status of their respective host hospital.
b. Size of arrival. A single arrival may be thought of as a one unit. (A unit is the smallest number handled.) A batch
arrival is some multiple of the unit, such as a block of 1,000 shares on the PSE, a case of eggs at the processing plants,
or a family party at a restaurant.
c. Degree of patience. A patient arrival is one who waits as long as necessary until the service facility is ready to serve
him or her. (Even if arrivals grumble and behave impatiently, the fact that they wait is sufficient to label them as
patient arrivals for the purpose of waiting line theory.) These are two classes of impatient arrivals. Member of the first
class arrive, survey both the service facility and the length of the line, and then decide to leave. Those in the second
class arrive, view the situation, join the waiting line, and then, after some period of time, depart. The behavior of the
first type is termed balking, while the second is termed reneging.

The Servicing System
The Queuing System consists primarily of the waiting line(s) and the available number of servers. The following discusses
issues pertaining to waiting line characteristics and management, line structure, and service rate.
1. The Waiting Line. Factors to be consider with waiting lines include the line length, number of lines, and queue
discipline.
a. Length. In practical sense, an infinite line simply one that is very long in terms of the capacity of the service system.
Examples in infinite potential length are a line of vehicles backed up for miles at a bridge crossing and customer who
must form a line around the block as they wait to purchase tickets at a theater. Gas station, loading docks, and parking
lots have limited line capacity caused by legal restriction or physical space characteristics.
b. Number of Lines. A single line or single file is, of course, one line only. The term multiple line refers to the single lines
that form in front of two or more servers or to single lines that converge at some central redistribution point.
c. Queue Discipline. A queue discipline is a priority rule or set of rules for determining the order of service to
customers in a waiting line. The rules selected can have a dramatic effect on the system’s overall performance. The
number of customer in line, the average waiting time, the range of variability in waiting line, and the efficiency of the
service facility are just a few of the factors affected by the choice of priority rules. (First come; first serve (FCFS), shortest
processing time, reservation first, emergencies first, highest-profit customer first, largest orders first, best customer first, longest waiting time in
line, seniority or disable lane, and soonest promised date are some examples of priority rules.)
2. Service Time Distribution. Another important feature of the waiting structure is the time the customer or unit spends
with the server once the service has started. Waiting line formulas generally specify service rate as the capacity of the server
in number of units per time period (such as 12 completions per hour) and not as service time, which might average five
minutes each. A constant service time rules states that each service takes exactly the same time. As in constant arrivals, this
characteristic is generally limited to machine-controlled operations. When service times are random, a good approximation
of them can be given by the exponential distribution. When using the exponential distribution as an approximation of the
service times, we will refer to μ as the average number of units or customers that can be served per time period.
3. Line Structure. The flow of items to be serviced may go through a single line, multiple lines, or some mixtures of the
two. The choice of format depends partly on the volume of customers served and partly on the restrictions imposed by
sequential requirements governing the order in which service must be performed.
a. Single channel, single phase e.g., one-person barbershop

b. Single channel, multiple phase e.g., car wash (vacuuming, wetting, washing, rinsing, drying, window
cleaning, and parking)
c. Multiple channel, single phase e.g., bank teller’s windows and checkout counters in high-volume
department stores
d. Multiple channel, multiple phase e.g., admission of hospital patients
e. Mixed. Under this general heading we consider two categories (1) multiple-to-single channel structures
(e.g., toll gate in NLEX, bridge crossing, or subassembly lines) and (2) alternate path structure.
The condition of the customer exiting the system (back to source population or not?)
Once a customer is served, two exit fates are possible: (1) the customer may return to the source population and immediately
become a competitive candidate for service again: or (2) there may be a low probability of reservice. The first case can be
illustrated by a machine that has been routinely repaired and returned to duty but may break down again: the second can be
illustrated by a machine that has been overhauled or modified and has a low probability of reservice over the near future. In a

lighter vein, we might refer to the first as the “recurring-common-cold case” and to the second as the “appendectomy-only-
one case.”
Waiting Line Method
Measures of Waiting Line Performance
They relate to potential customer dissatisfaction and costs.

1. The average number of customer waiting, either in line or in the system.
2. The average time customer waits, either in line or in the system.
3. System utilization, which refers to the percentage of capacity utilized.
4. The implied cost of a given level of capacity and its related waiting line.
5. The probability that an arrival will have to wait for service.
Infinite Model
All assume a Poisson arrival rate. Moreover, the model pertains to a system operating under steady-state conditions; that is, they
assume the average arrival and service rate are stable. The four model are described below
Properties of Some Specific Waiting Line Models
Permissible
Source Arrival Queue Service
Model Layout Service Phase Queue Typical Example
Population Pattern Discipline Pattern
Length
1 Single channel Single Infinite Poisson FCFS Exponential Unlimited Drive-in teller at bank;
one-lane toll bridge:
2 Single channel Single Infinite Poisson FCFS Constant Unlimited Roller coaster rides in
amusement part
3 Multiple channel Single Infinite Poisson FCFS Exponential Unlimited Parts counter in auto
agency
4 Single channel Single Finite Poisson FCFS Exponential Unlimited Machine breakdown and
repair in a factory
Infinite-Source Symbols
Symbols Represents Symbols Represents
λ Customer arrival rate Wq The average time customer wait in line

μ Service rate per server Ws The average time customers spend in the system
Lq The average number of customer waiting for (waiting in line and service time)
service 1/ μ Service time
Ls The average number of customer in the P0 The probability of zero units in the system
system(waiting and/or being served) Pn The probability of n units in the system
r The average number of customer being serve M The number of servers (channels)
ρ The system utilization LMAX The maximum expected number waiting in line
Basic Relationships
1. System Utilization: This refers to the ratio of demand (as measured by the arrival rate) to supply or capacity (as
measured by the product of the number of servers, M, and the service rate, μ).
λ
ρ=
Mμ

2. The average number of customer being served:
λ
r=
μ
{Note: λ and μ must be in the same units (e.g., customers per hour, customer per minute)}
According to Little’s Law, for stable system, the average number of customer in line or in the system is equal to the average
customer arrival rate multiplied by the average time in line or in system. That is,
Ls = λ Ws and Lq = λ Wq
3. The average number of customer

a. Waiting in line for service: Lq (Model dependent. Obtain using a table or formula.)
b. In the system (line plus being served): Ls = Lq + r
4. The average time customers are

a. Waiting in line:
Lq
Wq =
λ
b. In the system:
1 Ls
Ws = Wq + =
μ λ
Sample Problem Sets for Waiting Line Management
1. Customers arrive at a bakery at an average rate of 16 per hour on weekday mornings. The arrival distribution can be
described by a Poisson distribution with a mean of 16. Each clerk can serve a customer in an average of three minutes;
this time can be described by an exponential distribution with a mean of 3.0 minutes.
a. What are the arrival and service rate?
b. Compute the average number of customer being served at anytime.
c. Supposed it has been determined that the average number of customer waiting in line is 3.2. Compute the average
number of customer in the system (i.e., waiting in line or being served), the average time customers wait in line, and
the average time in the system.
d. Determine the system utilization for M = 1, 2, and 3 servers.
2. An airline is planning to open satellite ticket desk in a new shopping plaza, staffed by one ticket agent. It is estimated that
request for tickets and information will average 15 per hour, and request will have a Poisson distribution. Service time is
assumed to be exponentially distributed. Previous experience with similar satellite operation suggests that mean service
time should be average about three minutes per request. Determine each of the following.
a. System utilization.
b. Percentage of time the server (agent) will be idle.
c. The expected number of customer waiting to be served.
d. The average time customer will spend in the system.
e. The probability of zero customers in the system and the probability of four customers in the system.
customer)/(60
rate is given in
e) P0 = .25 P4
1.2 customers;
Ws 0.20 hours
16 minutes; d)
then taking its
approximately
2. a) p=.75; b)
customers per
customers per
or 12 minutes
M=2 p = .60,
hour) = 1/15
first restating
25 percent c)
M=3 p = .40
M=4 p = .30
customers d)
the problem:
changed to a
customer, or
a)The arrival
hourly rate by
reciprocal is
service time
hour; b) r =
minutes per
minutes per
comparable
Answers: 1.
12 minutes,
c) Ls = 4.8
the time in
Wq = 0.20
customers,
reciprocal.
= 1/μ. Its
hour. The
hours and
hours per
Ws 0.267
Lq= 2.25
hours or
Thus, (4
= .079
can be
μ= 15
λ= 18

Name: Score:
Course & Year: Schedule: Date:
Problem Set for Waiting Line Management
1. Noel O. Pan Jr. Lube Inc. operates a fast lube and oil change garage. On a typical day, customers arrive at
the rate of three per hour and lube jobs are performed at an average rate of one every 15 minutes. The
mechanics operate as a team on one car at a time. Assuming Poisson arrivals and exponential service, find.
a. Utilization of the lube team.
b. The average number of cars in line.
c. The average time a car waits before it is lubed.
d. The total time it takes to go though the system (that is, waiting in line plus lube time).
e. The average number of cars in the system.
f. The average time a car is lubed.
g. The probability of no car to be lubed and oil changed in the garage.
h. The probability that five cars being lubed and oil changed in the garage.
2. Barnachea Bus Liner is planning to open satellite ticket desk in a Shoe Mart City - Baguio, staffed by one
ticket agent. It is estimated that request for tickets and information will average 15 per hour, and request
will have a Poisson distribution. Service time is assumed to be exponentially distributed. Previous experience

with similar satellite operation suggests that mean service time should be average about three minutes per
request. Determine each of the following.
a. System utilization.
b. Percentage of time the server (agent) will be idle.
c. The expected number of customer waiting to be served.
d. The average time customer will spend in the system.
e. The average number of customer being served.
f. The expected time a customer will wait in the line.
g. The probability of zero customers in the system.
h. The probability of four customers in the system.
3. Barney Taxi and Hauling Service plans to have cabs at Victory Liner station. The expected arrival rate is 4.8
customers per hour, and the service rate (including return time to the station) is expected to be 1.5 per hour.
How many cabs will be needed to achieve an average time in line of 20 minutes or less?

G. OPERATING & CONTROLLING THE P/O SYSTEM - Part II: PROJECT MANAGEMENT
Project: a unique, one time operational activity or effort.
Project Planning Order System

The general management process is concerned with the planning,
organization, and control of an ongoing process or activity such as the
production of a product or delivery of a service. Project Management is
Hardware Software Personnel
different in that it requires a commitment of resources and people to an
important undertaking that is not repetitive and involves a relatively short period
of time, after which the management effort is dissolved. A project has a unique
purpose, it is temporary, and it draws resources from various areas in the
organization; as a result, it s subject to more uncertainty than the normal
management process. Thus, the features and characteristics of the project
management process tend to be unique.
Project management encompasses three other major processes—planning,
scheduling, and control. It also includes a number of the more prominent
elements of these processes.
1. Planning ( Project Team, Work Breakdown Structure, Responsibility Organizational Breakdown Structure (OBS): a chart that shows which
Assignment Matrix) organizational units are responsible for work items.
2. Scheduling (Gantt Chart, CPM/PERT)
3. Control (Stay on Schedule, Risk Analysis and Quality Control, Cost Responsibility Assignment Matrix (RAM): shows who is responsible for the
Control) work in a project.
Elements of a Project Plan WBS Activities – Hardware/Installation

Project plans generally include the following basic elements. 1.1.1 1.1.2
♣ Objectives – a detailed statement of what the project is to accomplish and Area Tech/ 1.1.3 1.1.4
OBS Units Prep Engineer Wiring Connections
how it will achieve the company’s goal and meet the strategic plan; and
an estimate of when it needs to be completed, the cost and the return.
Hardware engineering 3 1 1 1
♣ Project scope – a discussion of how to approach the project, the Systems engineering 3 3
technological and resource feasibility, the major task involved, and a Software engineering 2
preliminary schedule; includes a justification of the project and what Technical support 1 3 2 2
constitutes project success. Electrical staff 2 2 3 3
♣ Contract requirements – a general structure of managerial, reporting, and Hardware vendor
performance responsibilities, including a detailed list of staff, suppliers, Quality manager 3 3 3
Customer/supplier
subcontractors, managerial requirements and agreements, reporting liaison 3
requirements, and a projected organizational structure. Level of responsibility: 1 = overall responsibility, 2 = performance responsibility, and 3 =
♣ Schedules – a list of all major events, tasks, and subschedules, from support
which a master schedule is developed.
♣ Resources – the overall project budget of all resources requirements and For global projects to successful, cultural differences, idiosyncrasies, and
procedures for budgetary control. issues must be considered as important parts of the planning process.
♣ Personnel – identification and recruitment of personnel required for the
project team, including special skills and training.
♣ Control – procedure for monitoring and evaluating progress and Project Scheduling
performance including schedules and cost.
♣ Risk and problem analysis – anticipating and assessing uncertainties, Gantt chart: a graph or bar chart with a bar for each project activity that shows
problems, and potential difficulties that might increase the risk of project the passage of time. It has been a popular project scheduling tool since its
delays and/or failure and threaten project success. inception and is still widely used today. It is the direct precursor of the
CPM/PERT technique.
Project teams are made up of individuals from various areas and departments
Month
within a company. 0 2 4 6 8 10
Activity
Matrix organization: a team structure with members from functional areas, 1.Design house and obtain financing
depending on the skills required.
2..Lay foundation
Project manager is often under great pressure (time and budgetary constraints) 3.Order and receive materials
Scope statement: a document that provides an understanding, justification, and 4..Build house
expected results of a project. 5.Select paint
Statement of work: a written description of the objective of a project (use for 6.Select carpet
determining work performance and for bidding of the subcontractors and
7.Finish work
suppliers)
1 3 5 7 9
Work breakdown structure (WBS): breaks down a project into components, Month
subcomponents, activities, and tasks.

Slack: the amount of time an activity can be delayed without delaying the project.
Both CPM and PERT are derivatives of the Gantt chart, and are very similar.
Project Control However these are the differences:
Project control is the process of making sure the project progresses toward a
successful completion. It requires that the project be monitored and progress be 1. With CPM a single estimate for activity was used that did not allow for any
measured so that any deviations from the project plan, and particularly the project variation in activity times—activity times were treated as if they were known
schedule, are minimized. If the project is found to be deviating form the plan—that for certain, or “deterministic’. With PERT, multiple time estimates were used
is, it is not on schedule, cost overruns are occurring, activity results are not as for each activity that allowed for variation in activity times—activity times were
expected, and so on—then corrective actions must be taken. The following are the treated as “probabilistic.”
key elements of project control: 2. In PERT, activities were represented as arcs, or arrowed lines, between two
1. Time Management: the process of making sure the project schedule does not nodes or circles, whereas in CPM activities were represented as the nodes or
slip and it is on time. This requires monitoring of individual activity schedules circles.
and frequent updates. If the schedule is being delayed on an extent that
jeopardizes the project success, then the project manager may have to shift CPM/PERT uses a network to depict the precedence relationships among activities.
resources to accelerate critical activities.
Project Network
Time-cost tradeoff: activities may have slack time, and resources can be 1. Activity-on-node (AON): nodes represent activities, and arrows show
shifted from them to activities that are not on schedule, however, this can also precedence relationships.
push the project cost above budget.
2. Cost Management: is often closely tied to time management because of the Lay 
Dummy
time cost tradeoff occurrences. If the schedule is delayed, costs tend to foundation
Build Finish
increase in order to get the project back on schedule. 2 0 house work
3 1 1
    1
3. Quality Management: quality management and control are an integral part of 3
the project management process. The process requires that project work be Design house Order and 3 1
monitored for quality and that improvements be made as the project and obtain receive Select
progresses just the same as in a normal production or manufacturing financing materials carpet

Select
operation. Poor-quality work increases the risk of project failure, just as a paint
defective part can result in a defective final product if not corrected. Dummy activity is inserted into the network to show a precedence relationship, but it
does not represent any actual passage of time
4. Performance Management: the process of monitoring a project and
developing timed (i.e., daily, weekly, monthly) status reports to make sure that
goals are being met and the plan is being followed. It compares planed target Wrong Correct
dates for events, milestones, and work completion with dates actually
achieved to determine whether the project is on schedule or behind schedule. 3
Lay
Key measures of performance include deviation from the schedule, resource Lay Dummy
foundation
usage, and cost overruns. foundation
Earned value analysis (EVA) is a standard procedure for numerically 2 3 2 4

measuring a project’s progress, forecasting its completion date and cost and
Order Order
measuring schedule and budget variation. Example given, “schedule
materials materials
variance” compares the work performed during a time period with the work
that was schedule to be performed, and “cost variance” is the budgeted cost
of work performance minus the actual cost of the work. 2. Activity-on-arrow (AOA): arrows represent activities and nodes are events for
points in time.
5. Communication: communication needs for project and program management
control in today’s global business environment tend to be substantial and
complex. The distribution of design documents, budget and cost documents, Lay Build house
plans, status reports, schedules, and schedule changes in a timely manner is foundation 2 4
often critical to project success.
Finish
6. Enterprise Project Management: refers to the management and control of a work
companywide portfolio of projects. In the enterprise approach to managing 1 7
projects, a company’s goals are achieved through the coordination of Activity
simultaneous projects. The company grows, changes, and adds value by number
systematically implementing projects of all types across the enterprise.
Design house Activity
and obtain 3 5 6 time
CPM/PERT
financing
Critical Path Method (CPM), developed in 1956 by research team at E.I. du Pont de Order and Select Select
Nemours & Company, Inc., to initiate a project to developed a computerized receive paint carpet
system to improve the planning, scheduling, and reporting of the company’s materials
engineering programs (including plant maintenance and construction projects)
The Critical Path
Program Evaluation and Review Technique (PERT) developed by research team
from Navy Special Project Office, and consulting firm developed a similar A network path is a sequence of connected activities that runs from the start to the end of
network approach for the design of management control system for the the network. The network in preceding illustration has several paths through it. In fact,
development of the Polaris Missile Project (a ballistic missile-firing nuclear close observations of this network show for paths, identified as A, B, C, and D:
submarine).

A: 1-2-4-7 activity 3 were delayed for one month, the activity could still be completed by month 5
B: 1-2-5-6-7 without delaying the project completion time.
C: 1-3-4-7
D: 1-3-5-6-7 Activity LS ES LF EF Slack S
Critical path is the longest path through a network; it is the minimum project completion *1 0 0 3 3 0
time. *2 3 3 5 5 0
3 4 3 5 4 1
Path A: 1-2-4-7 *4 5 5 8 8 0
3 + 2 + 3 + 1 = 9 months 5 6 5 7 6 1
Path B: 1-2-5-6-7 6 7 6 8 7 1
3 + 2 + 1 + 1 + 1 = 8 months *7 8 8 9 9 0
Path C: 1-3-4-7
3 + 1 + 3 + 1 = 8 months * = critical path
Path D: 1-3-5-6-7
3 + 1 + 1 + 1 + 1 = 7 months It shows there is no slack for the activities on the critical path (marked with an
asterisk); activities not on the critical path have slack.
Conditions:
1. Activity 3 will start at 3 months Shared slack means that the sequence of activities 3-5-6 can be delayed two months
2. Activity 4 will start at 5 months jointly without delaying the project, but not three months.
3. Activity 6 will start at 6 months
4. Activity 7 will finish at 9 months Slack is beneficial to the project manager because it enables resource to be
temporarily diverted from activities with slack and used for other activities that might be
Activity Scheduling delayed for various reasons or for which the time estimate has proved to be inaccurate..
Activity Earliest Earliest The times for the network activities are simply estimates, for which there is usually not
number start finish a lot of historical basis (since project tends to be unique undertakings). As such, activity
(AN) (ES) (EF) time estimates are subject to quite a bit of uncertainty. However, the uncertainty inherent
in activity time estimates can be reflected to a certain extent by using probabilistic time
estimates instead of the single, deterministic estimates.
1 0 3
3 0 3 Probabilistic Activity Times
Activity Latest It is rare that activity time estimates can be made with certainty. Project activities are
Latest likely to be unique with little historical evidence that can be used as a basis to predict
duration start
finish activity times. Probabilistic time estimates reflect uncertainty of activity times.
(AD) (LS)
Node configurations In the PERT-type approach to estimate activity times, three time estimates for each
1. Earliest start time (ES): the earliest time an activity can start. activity are determined, which enables us to estimate the mean and variance of a beta
distribution of the activity times.
Earliest start time = maximum (Earliest finish time of immediate predecessors)
Earliest finish time = ES + t Beta distribution: a probability distribution traditionally used in CPM/PERT. We
assume that the activity times can be described by a beta distribution for several
2. Forward pass: starts at the beginning of a CPM/PERT network to determine the reasons:
earliest activity times. 1. The beta distribution mean and variance can be approximated with three time
3. Earliest finish time (EF): is the earliest time plus the activity time. estimates.
4. Latest start time (LS): the latest time an activity can start without delaying critical 2. The beta distribution is continuous, but has not predetermined shape (such as the bell
path time. shape of the normal curve). It will take on the shape indicated—that is, be skewed—
by the time estimates given.
Latest start time = LF + t
Earliest finish time = minimum (Latest start time of immediate following activities
The three times estimates for each activity are the most likely time (m), the optimistic
5. Latest finish time (LF): the latest time an activity can be completed and still time (a), and the pessimistic time (b). The most likely time is a subjective estimate of the
maintain the project critical path time. activity time that would most frequently occur if the activity were repeated many times.
6. Backward pass: determines latest activity times by starting at the end of a The optimistic time is the shorter possible time to complete the activity if everything went
CPM/PERT network and working forward. right. The pessimistic time is the longest possible time to complete the activity assuming
everything went wrong. The person most familiar with an activity or the project manager
makes these “subjective” estimates to the best of his or her knowledge and ability.
Activity Slack
These three times estimates are used to estimate the mean and variance of a beta
Notice that for the activities on the critical path, the earliest times and latest times are distribution, as follows.
equal. This means that these activities on the critical path must start exactly on time and
cannot be delayed at all. If the start of any activity on the critical path is delayed, then the a + 4m + b
Mean (expected time) =
overall project time will be increased. The activities on the critical path can be determined 6
by seeing for which activities ES=LS or EF= LF. For activities not on the critical path for 2
which the earliest and latest start times (or earliest and latest finish times), are not equal, b–a
Variance: 2 =
slack time exists. 6
Slack is the amount of time an activity can be delayed without affecting the overall
project duration. In effect, it is extra time available for completing an activity. where:
a= optimistic time
Slack (S) is computed using either of the following formulas: S = LS – ES or S = LF – m= most likely time
EF. For example, the slack for activity 3 is S = LS – ES = 4 – 3 = 1 month. If the start of b= pessimistic time

2 = 2 2 + 2 5 + 2 8 + 211
Example of a project network with probabilistic time estimates: = 1.00 + 0.11 + 1.78 + 4.00
= 6.89 weeks
Probabilistic Network Analysis

1 4
6,8,10 2,4,12 The CPM/PERT method assumes that the activity times are statistically independent,
8 10 which allows us to sum the individual expected activity times and variance to get an
3,7,11 1,4,7
expected project time and variance. It is further assumed that the network mean and
variance are normally distributed. This assumption is based on the central limit theorem
of probability, which for CPM/PERT analysis and our purpose states that if the number of
2 5 9 11 activities is large enough and the activities are statistically independent, then the sum of
S F the means of the activities along the critical path will approach the mean of a normal
3,6,9 2,3,4 2,4,6 1,10,13
distribution.
Probabilistic analysis of a CPM/PERT network is the determination of the probability

6 that the project will be completed within a certain period given the mean and variance of
3,4,5 a monthly distributed project completion time. The value Z is computed using the
3 following formula:
1,3,5
x–µ
Z=
7
2,2,2 where:
= variance
x= tp = project time
Solution µ= The proposed project time
Z= Number of standard deviation x is from the mean
As an example of the computation of the individual activity mean times and variance,
consider activity 1. The three time estimates (a = 6, m = 8, b = 10) are substituted in the Normal Distribution of Project Time
formula as follows:
a + 4m + b 6 + 4(8) + 10 Probability
t= = = 8 weeks
6 6
Z
2 2
b-a 10 - 6
2 = = = 4/9 week µ = tp x
6 6
Activity Time Estimates for the example above: Project Crashing and Time-Cost Trade-Off
Mean
Time Estimates (weeks) Variance The project manager is frequently confronted with having to reduce the scheduled
time
Activity a m b t 2 completion time of a project to meet a deadline. In other words, the manager must finish
1 6 8 10 8 0.44 the project sooner than indicated by the CPM/PERT network analysis. Project duration
2 3 6 9 6 1.00 can often be reduced by assigning more labor to project activities, in the form of
3 1 3 5 3 0.44 overtime, and by assigning bore resources (material, equipment, and so on). However
4 2 4 12 5 2.78 additional labor and resources increase the project cost. Thus, the decision to reduce the
5 2 3 4 3 0.11 project duration must be base on an analysis of the tradeoff between time and cost.
6 3 4 5 4 0.11 Project crashing is a method for shortening the project duration by reducing the time of
7 2 2 2 2 0.00 one (or more) of the critical project activities to less than its normal activity time. This is
8 3 7 11 7 1.78 reduction in the normal activity time is referred to as crashing. Crashing is achieved by
9 2 4 6 4 0.44 devoting more resources, usually measured in terms of dollars, to the activities to be
10 1 4 7 4 1.00 crashed.
11 1 10 13 9 4.00
Crashing; reducing project time by expending additional resources.
Activity Earliest and Late Times and Slack
Activity t 2 ES EF LS LF S Project crashing
1 8 0.44 0 8 1 9 1
2 6 1.00 0 6 0 6 0 Objective: the objective of project crashing is to reduce project duration while minimizing
the cost of crashing. Since the project completion can be shorten only by crashing
3 3 0.44 0 3 2 5 2
activities on the critical path, it may turn out that not all activities. However, as activities
4 5 2.78 8 13 16 21 8
are crashed. The critical path may change, requiring crashing of previous noncritical
5 3 0.11 6 9 6 9 0
6 4 0.11 3 7 5 9 2 activities to reduce the project completion time even further.
7 2 0.00 3 5 14 16 11
Normal activity cost: cost required to complete the activity
8 7 1.78 9 16 9 16 0
9 4 0.44 9 13 12 16 3
10 4 1.00 13 17 21 25 8 Crash time: an amount of time an activity is reduced.
11 9 4.00 16 25 16 25 0
Crash cost: is the cost of reducing activity time.
Critical Path = 2-5-8-11 (no available slack times)
Activity 1 can be crashed a total of five weeks (normal time – crash time = 12 – 7 = 5
To determine the project variance, we sum the variance for the activities on the critical
weeks) at a total crash cost of $2000 (crash cost – normal cost = $5000 - $3000 =
path.
$2000). Dividing the total crash cost by the total allowable crash time yields the crash
cost of per week. Total crash cost / total crash time = $2000/5weeks = $400 per week.
PROBLEM SET FOR PROJECT MANAGEMENT
Name: Date:
Course & Year: Schedule: Score:
The School of Information and Computing Science at Saint Louis University has outgrown its offices in
the Diego Silang Building (S) and is moving to Maryheights Campus – Bakakeng (D), which has more space.
The move will take place during the three-week break between end of summer semester and the beginning of
the first semester. Movers will be hired from the university’s physical plant to move the furniture, boxes of
books, and files that the faculty will pack. The school has hired a local retail computer firm to move its office
computers so they will not be damaged. Following is a list of activities, their precedence relationships, and
probabilistic time estimates for this project:
Activity Time Estimate

Activity Description Predecessor a m b (days)
a Pack “D” offices - 1 3 5 ___
b Network “D” offices - 2 3 5 ___
c Pack “S” offices - 2 4 7 ___
d Movers move “D” offices a 1 3 4 ___
e Paint and clean “D” offices d 2 5 8 ___
f Move computers b, e 1 2 2 ___
g Movers move “S” offices b, c, e 3 6 8 ___
h Computer installation f 2 4 5 ___
i Faculty move and unpack g 3 4 6 ___
j Faculty set up computers and offices h, i 1 2 4 ___
1. Calculate the most probable or mean time. Indicate the answer on the table above.
2. Construct the Network Diagram in the space provided below. Avoid DUMMIES, and ERASURES.
Determine the early start and the early finish of each activity. What is earliest finish of the project?

3. Reconstruct the Network Diagram in the space provided below. Determine the late start and the late finish
of each activity. What is the latest start of the project?
4. Tally the results following the table below.

Slack
Early Start Early Finish Late Start Late Finish (LS – ES) or Is it the
Activity (ES) (EF) (LS) (LF) (LF – EF) Critical Path?
CRITICAL PATH:
5. Compute for the expected project completion.
6. Determine the variance of the activity.
7. Determine the probability of completing the project in 18 days or less.

i. OPERATING & CONTROLLING THE P/O SYSTEM – Part I: INVENTORY MANAGEMENT
Learning Objectives: After completing this module, student should be able to:
1. Define inventory, inventory management, quantity discount;
2. Identify types of inventory;
3. List some reasons why organizations have inventory;
4. Discuss the concerns and objective of inventory management;
5. List the two basic inventory decisions;
6. List requirements for effective inventory management;
7. Discuss the relevant inventory costs;
8. Discuss the two general types of inventory systems
9. Classify inventory systems
10. Do computations related to inventory management and quantity discount
Inventory refers to stock or store of goods, may relate to work-in- process goods
Types of Inventories
1. Raw materials and purchased parts
2. Work-in-process or partially completed goods
3. Finished goods (manufacturing firms) or merchandise (retail stores)
4. Replacement parts, tools, accessories, and supplies
5. Goods-in-transit to warehouse or end user (customers)
Why Organization has Inventory
1. To meet anticipated …………..
 ………… stocks are held to satisfy expected average demand
2. To protect against ………..
 ………… stocks, which are stocks in excess of average demand to compensate for variability in demand
and lead time, can reduce the risk of shortages.
3. To smooth ……….. requirements
 ………… inventories are stored during ……….. periods to meet overly high requirements during certain
seasonal periods.
4. To ………. components of the production to distribution system
 ……….. inventories are stocked between successive operations to maintain continuity of succeeding
operations in case of ………. in preceding operations
 Raw materials and supplies inventories serve as ………. between the supplier and the firm
 Work-in-process inventories serve as buffer between successive workstations
 Finished goods inventories serve as buffer between the firm and its customer requirements
5. To permit …………
 ……….. inventories exist through the production to distribution system due to the fact that production
operations time (i.e., they are not instantaneous).
6. As a result of taking advantage of ……… ……….
 To minimize purchasing and ………… costs, a firm may buy in quantities that exceed immediate
requirements. This necessitates storing the excess for later use.
The Concerns of Inventory Management

1. ………. of the stock when needed – to maximize level of customer service
2. ………. of ordering and carrying the inventory – to maximize inventory costs

The Objective of Inventory Management
 To achieve satisfactory level of customer service while keeping inventory costs within reasonable bounds: i.e.,
try to achieve a ……….. between the concerns of inventory management
The Basic Inventory Management Decisions

1. ……….. ……….. (size) – How much to order
2. ……….. ……….. (timing) – When to order
Requirements for Effective Inventory Management

1. A system to ……….. …………. of the inventory on hand and on order.
2. A reliable ………. ……….. that includes an indication of possible forecast error.
3. Knowledge of ………. ………. and lead time variability.
4. Reasonable estimates of inventory ……….. …………, ……….. ………...., and ………… ………..
5. A ………… ………… for prioritizing inventory items.
The Relevant Inventory Management Costs
1. Cost of the item or ………. costs
 The sum paid to the supplier for the item received
 The direct manufacturing cost
 ……….. if the item unit cost is constant for all quantities ordered
 ……….. if the item unit cost varies with quantity ordered, e.g., quantity discount
2. Ordering or set up or ……… costs
 The costs incurred by placing an order for and receiving the item or incurred as setup costs when items is
manufactured
 Include cost of postage, phone calls to vendors, labor cost in purchasing and accounting, receiving costs,
records keeping and purchase order supplies
3. Carrying or holding or ………. costs
 The costs associated with having the inventory on hand
 Include insurance, warehouse rentals, heating and lighting, taxes, losses due to pilferages, spoilages, or
breakages
 ………. cost for having capital tied up in inventory
4. Stockout or ……….. costs
 The costs associated with demand when stocks have depleted
 Loss of sales
Classification System
An important aspect of inventory management is that items held in inventory are not of equal
importance in terms of pesos invested, profit potential, sales or usage volume, or stock-out
penalties. It would be unrealistic to devote equal attention to each of these items. A more
reasonable approach would be to allocate control efforts according to the relative importance
of the various items in inventory.
The A-B-C Approach classifies inventory items according to some measure of importance,
usually annual peso usage (i.e., peso value per unit multiplied by annual usage rate) and then
allocates control efforts accordingly. Three classes of items are used:

A (very important) – generally account about 15% to 20% of the number of items in inventory but about 60% to 70% of
the peso usage. A items should receive close attention through frequent review of amount on hand and control over
withdrawals, where possible, to make sure that customer service levels are attained.
B (moderately important)
C (least important) may account for about 60% of the number of items but only about 10% of the peso usage as an
inventory. C items should receive only loose control (two-bin system, bulk orders)
The A-B-C concept can be applied as a guide to cycle counting, which is a physical count f items in inventory. The
purpose of cycle counting is to reduce discrepancies between the amounts indicated by inventory records and the
actual quantities of inventory on hand. Accuracy is important because inaccurate records can lead to disruptions in
production, poor customer service, and unnecessarily high inventory carrying costs.
The key concerns of cycle counting for management are:
1. How much accuracy is needed?

2. When should cycle counting be performed?
3. Who should do it?
PERPETUAL SYSTEM versus PERIODIC SYSTEM
Feature Perpetual System Periodic System

1. Record keeping  Perpetual; counted each time an  Periodic; counted only at review period;
addition or withdrawal is made involves ‘loose monitoring’ of inventory
2. Resources required to  More, since perpetual record keeping

maintain
3. Size of inventory  Less that of the periodic system  More than that of the perpetual system,
since safety stock is added to avoid
stockouts in between review periods
4. Type of inventory system  For higher-priced, critical or
important items
Inventory System
1. Perpetual System
Inventory Model Inventory Decision Formula
 Fixed-Order Quantity or  How much to order?
Economic Order Quantity (EOQ) EOQ is constant; the same 2 DCo 2 DCo
model quantity ordered each time EOQ  
Ch iC
 When to order?
Order is placed when the quantity
on hand drops to the reorder level R  dL
(R)
2. Periodic System
Inventory Model Inventory Decision Formula
 Fixed-Time Period or Fixed-Order  How much to order? q  d (T  L)  SS  I
Interval model q is variable; the order quantity
varies each time an order is placed SS  z T  L
 When to order?
Order is placed when the review
period (T) arrives

Assumption of the Basic Economic Order Quantity (EOQ) Model
1. There is only one item involved

2. Annual demand (usage) is known
3. Demand (usage) rate is uniform
4. The item unit cost does not vary with the order size (no quantity discounts)
5. Each order is received in a single delivery
6. Lead time is know and does not vary
7. Ordering or setup cost is the same regardless of the amount ordered
8. Inventory holding cost is based on average inventory level
9. All demands for the item will be satisfied (no stock out, no backorder)
Symbols used in the Basic EOQ Model
TC = Total annual inventory cost Co = Setup or ordering cost, P/order

D = Annual demand, units Ch = Annual holding or carrying cost per
C = Cost per unit of the item, P/unit unit of average, P/unit (often holding
Quantity to be ordered (the optimum cost is expressed as percentage of the
amount is the economic order item unit cost, such that Ch = iC,
quantity, EOQ) where i is the percent carrying cost)
R = Reorder point, units L = Lead time, days
Q D
TC  Ch  Co
2 Q
Quantity Discount
Quantity discounts are the price reduction for large orders offered to customers to induce them to buy in large
quantities.
Ex. Price list for a extra-wide gauze strips of Bayombong Surgical Supply Company
Order Quantity Price per box

1 to 44 P 80
45 to 69 68
70 or more 56

The customer must weigh the potential benefits of reduced purchase price and fewer orders that will result from
buying in large quantities against the increase in carrying costs caused by higher average inventories. The buyer’s goal
with quantity discounts is to select the order quantity that will minimize total costs (i.e., sum of carrying cost, ordering
cost, and purchasing cost).
Total cost = Carrying cost + Ordering cost + Purchasing cost

Q D
TC  Ch  Co  PD P = unit price
2 Q
Sample Problem
The maintenance department of a large hospital uses about 816 cases of liquid cleanser annually. Ordering costs are
P480, carrying cost are P160 per case a year, and the new price schedule indicates that orders of less than 50 cases will
cost P800 per case, 50 to 79 cases will cost P720 per case, 80 to 99 cases will cost P680 per case, and larger orders will
cost P640 per case. Determine the optimal order quantity and the total cost.
Solution:
D = 816 cases per year Co = P480 Ch = P160 per case per year
Range Price
< 50 P 800
50 to 79 720
80 to 99 680
100 > 640
( )( )
Economic Order Quantity = = = 70 cases
The 70 cases can be bought at P720 per case since 70 falls in the range of 50 to 79 cases. The total cost to purchase 816
cases per year, at the rate of 70 cases per order will be:
TC = Carrying cost + Ordering cost + Purchasing cost
TC70 = Ch + Co + PD = 160 + 480 + 720(816) = P598, 716
Since lower cost ranges exist, each must be checked against the minimum cost generated by 70 cases at P720 each. In
order to buy at P680 per case, at least 80 cases must be purchased. The total cost at 80 cases will be;
TC80 = Ch + Co + PD = 160 + 480 + 680(816) = P566, 176
To obtain a cost of P640 per case, at least 100 cases per order are required. The total cost will be;
TC100 = Ch + Co + PD = 160 + 480 + 640(816) = P534, 157
Therefore, since 100 cases per order yields the lowest total cost, 100 cases is the overall optimal order quantity.
Exercise
Benguet Electric Company uses 4,000 toggle switches a year. Switches are priced as follows: 1 to 499, P36 each; 500 to
999, P34 each; and 1,000 or more, P32.80 each. It costs approximately P720 to prepare an order and receive it, and
the carrying costs are 18% of purchase price per unit on an annual basis. Determine the optimal order quantity and the
total annual cost.

Single-Period Independent Demand Inventory Model
When managers are faced with one-time inventory buys, the so-called "Newsboy Model" can be an important tool for analysis. The
name comes from the classical problem faced by newspaper vendors on a daily basis. These vendors must place a one-time order
for the next day's papers with no chance of reordering – setting up the presses again would be cost prohibitive. Since demand for
the next day is unknown, the newspaper vendor may order "too much" or "not enough". If this vendor orders too much, then s/he
will face the cost of being overstocked. Likewise, if the vendor orders too few papers, then s/he will incur the cost of being
understocked. The vendor is interested in balancing these two costs so that expected profit is maximized.
The too-much cost, or the cost of being overstocked, Cos, includes the cost of the leftover product net of any salvage value. This
salvage value might be negative, though, in the case of having to dispose of excess, useless product. If the newsboy must take his
leftover papers to the dump, there is a cost of taking them there. The not-enough cost, or the cost of being understocked, Cus,
includes the lost profit from sales not made and the cost of the loss of customer goodwill. Although the amount of goodwill lost is
difficult to estimate, it needs to be accounted for in some manner.
There are many similar situations under which managers face this same kind of dilemma. When a specialized piece of equipment
is purchased, a one-time spare parts order may be placed at the same time. The local grocery store buys bread once a day and
many other perishable products on a regular basis. Airlines must decide how many reservations to take for a given flight – they
may overbook since they don't know how many people will actually show up and use their reservation.
Marginal Analysis Approach
A marginal analysis approach compares the marginal profit (MP) of selling one more unit with the marginal loss (ML) associated with that
additional unit of inventory. If P is the probability that one more unit is sold, then the decision rule is
If (P)MP ³ (1-P)ML, then stock one more unit.

With some algebra,
(P)MP ³ ML - (P)ML
(P)MP + P(ML) ³ ML
P (MP + ML) ³ ML
P ³ ML / (MP + ML)
An Example
A hardware store makes a once-a-year buy of “live” Christmas trees. The trees are purchased at a
cost of $10 each and sell for $38 each. Management of the store estimates demand to average 400
units and to vary between 300 and 500 trees, with any amount in that range equally likely. The
demand distribution is shown in the adjacent exhibit. For every tree leftover at the end of the season,
the store pays a $1 disposal fee, while for every tree short, it estimates that it loses $2 in lost customer
goodwill.
To find the best quantity to stock, the equation for P is used.
P ³ ML / (MP + ML)
The marginal loss, ML (or the cost of overstocking, or the cost of having too much) is the cost of buying the tree plus the disposal cost. The
marginal profit, MP (or the cost of understocking, or the cost of not having enough) is the cost of lost goodwill and lost profit. Therefore,
ML = $10 + $1 = $11,
MP = $28 + $2 = $30, and thus,
P ³ 11 / [ 30 + 11 ] = 0.27.
P= 0.27 is the probability that one more unit will sell, or the right-hand tail of the distribution.
Thus, the probability of meeting demand is 1-P, or 0.73, the left-hand tail of the distribution. For
the uniform distribution, the target inventory level is 0.73(500-300) + 300 = 446, as shown in
the adjacent exhibit. In the language of the current situation, the hardware store wants to cover
73% of the possible demand situations. Notice that the cost of being understocked, the MP, is
significantly higher than the cost of being overstocked, the ML. Therefore, the preference would
be for overstocking, or stocking more than the expected demand of 400 units.

FIXED – ORDER QUANTITY MODEL
1. Given the following data: annual demand, D = 1,000 units; ordering cost, S = P200 per order; holding cost,
H = P50 per unit per year; lead time, L = 5 days; and cost per unit, C = P500.
a. Find the economic order quantity.
b. Find the reorder point.
c. What would be your ordering policy for this item?
d. Find the total annual inventory cost,
2. A fastfood outlet uses 120 eight-ounce plastic cups each day and plans to be open 360 days a year. The cups
cost P9per dozen; Ordering costs are P200 order; and carrying costs are 50 percent of the item unit cost
(since space is a premium).
a. Find the economic order quantity, if delivery is instantaneous.
b. Currently, cups are ordered every 30 days. 1) Compare the current ordering quantity against the optimal
order quantity; and 2) Compare the current against the optimal total annual inventory cost. Which
ordering policy is more advantageous in terms of cost savings? By how much?
3. A toy manufacturer uses approximately 32,000 silicon chips annually. The chips are used at a steady rate
during the 240 days the plant operates. Annual holding cost is P27 per chip and ordering cost is P1, 080.
a. Find the economic order quantity.
b. Find the reorder point.
c. What would be your ordering policy for this item?
d. Find the total annual cost of ordering and carrying silicon chips.
4. Each year, Barney Company purchases 20,000 units of an item that costs P640 per unit. The cost of placing
an order is P480, and the cost to hold the item in inventory for one year is P50.
a. Calculate the economic order quantity.
b. What is the average inventory level, assuming that the minimum inventory level is zero?
c. Determine the total annual ordering cost and the total annual holding cost for the item if the economic
order quantity is used.
5. A large bakery buys sugar in 50-kilograms bags. The bakery uses an average of 1,344 bags a year. Preparing
an order and receiving a shipment of sugar involves a cost of P135. Annual carrying costs are P630 per bag.
The bakery operates 280 days per year.
a. Determine the economic order quantity.
b. What is the average number of bags on hand?
c. When should the bakery order for more sugar?
d. How many times per year will the bakery order for sugar?
FIXED – TIME PERIOD MODEL
1. A drug store orders its antibiotics every two weeks when salesperson visits from one of the pharmaceutical
companies. Amoxicillin is one of its most prescribed antibiotics, with an average daily demand of 1,500
capsules. The standard deviation of daily demand was derived by examining prescriptions filled over the last
three months and was found to be 500 capsules. It takes nine days for the order to arrive. The drug store
manager has set a service level of 99 percent. The sales person has just arrived, and there are currently
25,000 capsules in stock.
a. How much additional stock must be carried to minimize the risk of stock out?
b. How many capsules of Amoxicillin should be ordered if lot size per order is 100 capsules?
2. The weekly demand for a product is 770 units. The standard deviation of daily demand is 10 units. The firm
reviews its inventory every 28 days. Each order for the product arrives 9 days after placement. At the time
of review, there are 10 units backorder. If 95 percent of all demand is to be satisfied from items in stock.
a. How many units should be the safety stock?
b. What is the product’s inventory status?
c. How many units should be ordered for this period?
QUANTITY DISCOUNT
1. Benguet Electric Cooperative, Inc. uses 4,000 toggle switches a year. Switches are priced as follows: 1 to
499, P36 each; 500 to 999, P34; and 1,000 or more, P32.80 each. It costs approximately P720 to prepare an
order and receive it, and the carrying costs are 18% of purchase price per unit on an annual basis. Determine
the optimal order quantity and the total annual cost.
2. A small manufacturing firm uses roughly 3,400 pounds of chemical dye a year. Currently the firm purchases
300 pounds per order and pays P150 per pound. The supplier has just announced that orders of 1,000 pounds
or more will be filled at a price of P100 per pound. The manufacturing firm incurs a cost of P5, 000 each
time it submits an order and assigns an annual holding cost of 17 percent of the purchase price per pound.
a. Calculate the order size that will minimize the total cost.
b. If the supplier offered the discount at 1,500 pounds instead of 1,000 pounds, what order size would
minimize total cost?
SINGLE-PERIOD INVENTORY MODEL
1. The local supermarket buys lettuce each day to ensure really fresh produce. Each morning any lettuce that is
left from the previous day is sold to a dealer that resells it to farmers who use it to feed their animals. This
week the supermarket can buy fresh lettuce for Php200 a box. The lettuce is sold for Php500 a box. Past
history says that tomorrow’s demand for lettuce average 250 boxes with a standard deviation of 34 boxes.
How many boxes of lettuce should the supermarket purchase tomorrow?
2. Semper Fidelis Pizza orders all of its pepperoni, olives, anchovies, and mozzarella cheese to be shipped
directly from Italy. An American distributor stops by every four weeks to take orders. Because the orders
are shipped directly from Italy, they take three weeks to arrive.
Semper Fidelis Pizza orders an average of 150 pounds of pepperoni each week, with a standard
deviation of 30 pounds. Semper Fidelis prides itself on offering only the best-quality ingredient and a high
level of service, so it wants to ensure a 98 percent probability of not stocking out on pepperoni.
Assume that the sales representative just walked in the door and there are currently 500 pounds of
pepperoni in the walk-in cooler. How many pounds of pepperoni would you order?
PREPARED & ADAPTED: napoleon i barnachea jr second semester ay 2011-2012 october 26, 2011 18:13:37

School of Accountancy and Business Management: Production &/or Operations Management

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Saint Louis University

SCHOOL OF ACCOUNTANCY AND BUSINESS MANAGEMENT

PRE-REQUISITE: 1. Process Layout: Load-Distance Method

COURSE OBJECTIVE: Midterm Examination (1hr)

COURSE REQUIREMENTS: Final Examination (1hr)

PRODUCTION &/or OPERATIONS MANAGEMENT Page 1

Production conjures up images of factories, machines, and assembly lines.

Functions within the Business Organizations

PRODUCTION &/or OPERATIONS MANAGEMENT Page 2

Examples of types of operations

Type of operations Examples

Lead time is the time necessary to deliver an order or perform a service.

RESOURCES PRODUCTS CUSTOMERS

Money Goods Needs

PRODUCTION &/or OPERATIONS MANAGEMENT Page 3

THE P/O MANAGER AND DECISION MAKING

The Use of Models

PRODUCTION &/or OPERATIONS MANAGEMENT Page 4

Benefits of using models Limitations of using models

Quantitative approaches to problem solving often embody an attempt

a. Linear Programming and related mathematical techniques are

PRODUCTION &/or OPERATIONS MANAGEMENT Page 5

 Amount of inventory to stock

Increased customer service Increased costs to stock inventory

Merits of extra features Cost of extra features

Increased output Higher costs of overtime

e.g., higher labor costs, lower productivity, lower

PRODUCTION &/or OPERATIONS MANAGEMENT Page 6

System Design and Operations Decision in P/OM

Decision Area Basic Question

Operating and Control Decisions Decisions pertaining to running the system

PRODUCTION &/or OPERATIONS MANAGEMENT Page 7

Major Decision Areas Primary Concerns

Designing and Operating Production Systems

Differentiating Features of P/O Systems

PRODUCTION &/or OPERATIONS MANAGEMENT Page 8

c. Manufacturing versus Service Operations

Differences between manufacturing and service

Characteristics Manufacturing Service

Output Tangible Intangible

PRODUCTION &/or OPERATIONS MANAGEMENT Page 9

Productivity measures can be based on single input (partial productivity), on Output

Output 16,000 u 200

Yards of carpet installed 720 square yards

Usable pieces 68 pieces 34 pieces/hour

PRODUCTION &/or OPERATIONS MANAGEMENT Page 10

PRODUCTIVITY AND QUALITY

Quality impact on productivity: fewer defects

PRODUCTION &/or OPERATIONS MANAGEMENT Page 11

THE QUALITY-PRODUCTIVITY RATIO (QPR)

PRODUCTION &/or OPERATIONS MANAGEMENT Page 12

Problem Sets on Productivity and Quality

Which year did the company has a good yield?

Only one-quarter of the defective

a. Determine the weekly product yield of good-quality cabinets.

4. In problem item #3, the Oriental Heritage Furniture Company has

b. Which alternative would be the most cost effective?

PRODUCTION &/or OPERATIONS MANAGEMENT Page 13

Productivity, Learning Curve and Linear Programming

d. What is a significant limitation of this analysis?

PRODUCTION &/or OPERATIONS MANAGEMENT Page 14

Mission is the reason for existence of an organization.

Strategies and Tactics