4 5 6 7 Merged

Process Strategy
7
Anjar Priyono, PhD.
Operations Management
Department of Management
Universitas Islam Indonesia
Copyright © 2017 Pearson Education, Ltd. 7-1

Process Strategy
The objective is to create a process

to produce offerings that meet
customer requirements within cost
and other managerial constraints

Process Strategies
► How to produce a product or provide a
service that
► Meets or exceeds customer requirements
► Meets cost and managerial goals
► Has long term effects on
► Efficiency and production flexibility
► Efficiency and flexibility are in conflict according
to trade off theory.
► Costs and quality
► The same case occurs between cost and quality
Process, Volume, and Variety
Figure 7.1 Volume
Low Repetitive High
Volume Process Volume
High Variety
one or few units Process Focus—tailor made Mass Customization
per run, projects, job shops (machine, print, (difficult to achieve, but
(allows hospitals, restaurants) huge rewards)
customization) Arnold Palmer Hospital Dell Computer
Variety (flexibility)
Tailor made: one product for one

customer.
Changes in
Modules
modest runs, Repetitive
standardized (autos, motorcycles,
modules home appliances)
Harley-Davidson
Standardized
products-- Poor Strategy
Changes in Product Focus
(Both fixed and (CocaCola botling
Attributes (such as variable costs
grade, quality, size, company, commercial
are high) baked goods, steel, glass,
thickness, etc.)
long runs only beer)
Copyright © 2017 Pearson Education, Ltd. Frito-Lay 7-4
Process, Volume, and
Variety product process matrix
Figure 7.1 Volume
Low Repetitive High
Volume Process Volume
High Variety
one or few units Process Mass Customization
per run, Focus—tailor made (difficult to achieve, but
(allows projects, job shops huge rewards)
customization) (machine, print, Dell Computer
Variety (flexibility)
hospitals,
restaurants)
Arnold Palmer
Changes in Hospital
Modules
modest runs, Repetitive
standardized (autos, motorcycles,
modules home appliances)
Harley-Davidson
Standardized
products-- Poor Strategy
Changes in Product Focus
(Both fixed and (commercial baked goods,
Attributes (such as variable costs
grade, quality, size, steel, glass, beer)
are high) Frito-Lay
thickness, etc.)
long runs only
The advantages and
disadvantages
Product focus:
Advantage: high volume
Disadvantage: standardized product/there is no variation.
Process focus:
Advantage: high variation
Disadvantage: low volume

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

many ways they may be implemented
Process Focus
► Examples: plane and ambulance manufacturing process
► Facilities are organized around specific activities or
processes
► General purpose equipment and skilled personnel
► Production system needs high degree of product flexibility
► Typically high costs and low equipment utilization
► Product flows may vary considerably making planning and
scheduling a challenge
► The output of process focus: low volume, high variety.

Many inputs
Process Focus (surgeries, sick patients,
baby deliveries, emergencies)
(low-volume, high-variety,
Many departments and
intermittent processes) many routings
Arnold Palmer Hospital
Figure 7.2(a) Many different outputs

(uniquely treated patients)
Repetitive Focus
► Facilities often organized as assembly
lines
► Characterized by modules with parts and
assemblies made previously
► Modules may be combined for many
output options
► Less flexibility than process-focused
facilities but more efficient
Copyright © 2017 Pearson Education, Ltd. 7 - 10

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

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

Roller testing
Crating

Product Focus
► Example: bottling company, sugar company.
► Facilities are organized by product
► High volume but low variety of products (the
product are standardized)
► Long, continuous production runs enable efficient
processes
► Typically high fixed cost but low variable cost high
fixed cost because the set up of facilities supported
with automation require a lot of cost the facility
require high fixed cost but low variable cost.
► Generally less skilled labor generally, require
specific or specialized skills to run automated
process and specific equipment.
Few inputs
Product Focus (corn, potatoes, water,
seasoning)
(high-volume, low-variety,
continuous process)
Frito-Lay
Output variations in size, shape,

Figure 7.2(c) and packaging
(3-oz, 5-oz, 24-oz package
labeled for each material)
Comparison between product
and process focus
Product focus (eg. Repetitive focust Process focus
Bottling company, (eg.
bakery firm). Ambulance,
airplance
manufacturing
firm).
roduct variation Low, standardized High,
product innovative
products
xed cost High Low
ariable cost Low High
ools and equipment Specific tools and Multipurpose
equipment tools and
equipment
kills & knowledge of Specific and specialized Multi skills and
mployee skills and knowledge knowledge
Copyright © 2017 Pearson
ompetitive Education,
Efficiency, lowLtd.cost, Innovation, 7 - 15
Mass Customization
► The rapid, low-cost production of
goods and service to satisfy
increasingly unique customer desires
► Combines the flexibility of a process
focus with the efficiency of a product
focus

Many parts and
Mass component inputs
(chips, hard drives,
Customization software, cases)
Many modules
(high-volume, high-variety)
Dell Computer
Figure 7.2(b) Many output versions

(custom PCs and notebooks)
Mass Customization
TABLE 7.1 Mass Customization Provides More Choices Than Ever
NUMBER OF CHOICES
ITEM 1970s 21ST CENTURY
Vehicle styles 18 1,212
Bicycle types 8 211,000
iPhone mobile game apps 0 1,200,000
Web sites 0 634,000,000
Movie releases per year 267 1551
New book titles 40,530 300,000+
Houston TV channels 5 185
Breakfast cereals 160 340
Items (SKUs) in supermarkets 14,000 150,000
High-definition TVs 0 102

Mass Customization
► Imaginative product design
► Flexible process design
► Tightly controlled inventory
management
► Tight schedules
► Responsive partners in the
supply-chain

Focused Processes
► Focus brings efficiency
► Focus on depth of product line
rather than breadth
► Focus can be
► Customers
► Products
► Service
► Technology

Selection of Equipment
▶ Decisions can be complex as alternate

methods may be available
▶ Important factors may be
► Cost ► Quality
► Cash flow ► Capacity
► Market stability ► Flexibility

Flexibility
► Flexibility is the ability to respond

with little penalty in time, cost, or
customer value
► May be a competitive advantage
► May be difficult and expensive
► Without it, change may mean starting
over

Process Analysis and Design
► Is the process designed to achieve a
competitive advantage?
► Does the process eliminate steps
that do not add value?
► Does the process maximize
customer value?
► Will the process win orders?

► Flowchart
► Shows the movement of materials
► Harley-Davidson flowchart
► Time-Function Mapping
► Shows flows and time frame

Process Chart
Figure 7.5

► Value-Stream Mapping (VSM)

► Where value is added in the entire
production process, including the supply
chain
► Extends from the customer back to the
suppliers

Service Blueprinting
► Focuses on the customer and provider
interaction
► Defines moment of truth – moment of
truth is the critical time when the
service provider and the customers
interact.
► Each level has different management
issues
► Identifies potential failure points

Service Process Matrix
Degree of Customization
Figure 7.8
Low High
Mass Service Professional Service
Private Traditional
banking orthodontics
Commercial
banking
High General-
purpose law firms
Degree of Labor intensity
Full-service
stockbroker
Digitized
Boutiques orthodontics
Retailing
Service Factory Law clinics Service Shop

Limited-service Specialized
stockbroker hospitals
Warehouse and Fast-food Fine-dining
catalog stores restaurants Hospitals
Low restaurants
Airlines
No-frills
airlines

Mass Service and Professional Service

► Labor involvement is high
► Focus on human
resources—develop your human
resource
Degree of Customization
► Selection and training highly Low
Mass Service
High
Professional Service
Private
banking
Traditional
important
orthodontics
Commercial
banking
High General-
Full-service purpose law
stockbroker firms
Digital
Degree of Labor
Personalized services
Retailing
► Service Factory
Limited-service
stockbroker
Law clinics Service Shop
Specialized
hospitals
Warehouse and Fast-food
catalog stores Fine-dining
Low restaurants Hospitals
restaurants
Airlines
No-frills
airlines

Service Factory and Service Shop

► Automation of standardized services
► Restricted offerings
► Low labor intensity responds well to
process technology and Degree of Customization
scheduling Low
Mass Service
High
Professional Service
Private
banking
Traditional
orthodontics
Commercial
banking
Tight control required to High General-

purpose law
► Full-service
stockbroker firms
Digital
Degree of Labor
Retailing
maintain standards Service Factory

Limited-service
stockbroker
Law clinics Service Shop
Specialized
hospitals
Warehouse and Fast-food
catalog stores Fine-dining
Low restaurants Hospitals
restaurants
Airlines
No-frills
airlines

TQM In Services
► Service quality is more difficult to
measure than the quality of goods
► Service quality perceptions depend on
1) Intangible differences between
products
2) Intangible expectations customers
have of those products

Service Quality
The operations manager must
recognize:
► SERVQUAL method, SERVPERF
(service performance) method.
► The tangible component of services is
important
► The service process is important
► The service is judged against the
customer’s expectations
► Exceptions will occur
Determinants of Service
Quality
Table 6.5
Reliability involves consistency of performance and dependability
Responsiveness concerns the willingness or readiness of employees to provide service
Competence means possession of the required skills and knowledge to perform the
service
Access involves approachability and ease of contact
Courtesy involves politeness, respect, consideration, and friendliness
Communication means keeping customers informed and listening to them
Credibility involves trustworthiness, believability, and honesty
Security is the freedom from danger, risk, or doubt
Understanding/knowing the customer involves making the effort to understand the
customer's needs
Tangibles include the physical evidence of the service

That’s all

Project Management
3
Anjar Priyono, PhD.

Outline
► Global Company Profile:
Bechtel Group
► The Importance of Project

Management
► Project Planning
► Project Scheduling
► Project Controlling

Project Characteristics
► Single unit
► Many related activities
► Difficult production planning and
inventory control
► General purpose equipment
► High labor skills

Examples of Projects
► Building Construction
► Research Project
Project Planning
► Establishing objectives
► Defining project
► Creating work
breakdown structure
► Determining
resources
► Forming organization
© 2014 Pearson Education, Inc. 3-5

Project Organization
► Often temporary structure
► Uses specialists from entire company
► Headed by project manager
► Coordinates activities
► Monitors schedule
and costs
► Permanent
structure called
‘matrix organization’

Project Organization
Most Helpful When:
1. Work can be defined with a specific goal
and deadline
2. The job is unique or somewhat unfamiliar
to the existing organization
3. The work contains complex interrelated
tasks requiring specialized skills
4. The project is temporary but critical to the
organization
5. The project cuts across organizational
lines
Matrix Organization
Marketing Operations Engineering Finance
Project 1
Project 2
Project 3
Project 4

The Role of
the Project Manager
Highly visible
Responsible for making sure that:
1) All necessary activities are finished in order
and on time
2) The project comes in within budget
3) The project meets quality goals
4) The people assigned to the project receive
motivation, direction, and information
The Role of
the Project Manager
Highly visible Project managers should be:
Responsible for making sure that:
Good coaches ►
1) All necessary activities

► Goodare finished in order
communicators
and on time ► Able to organize activities
2) The project comes from a variety

in within of disciplines
budget
3) The project meets quality goals
4) The people assigned to the project receive
motivation, direction, and information
Critical path and project
scheduling

Work Breakdown Structure
Level
1. Project
2. Major tasks in the project
3. Subtasks in the major tasks
4. Activities (or “work packages”)
to be completed

Work Breakdown Structure
Develop Windows 8
Level 1 1.0
Operating System
Software Cost Management System

Level 2 1.1 1.2 1.3
Design Plan Testing
Develop GUIs Design Cost Module

Level 3 1.1.1 1.2.1 1.3.1
Tracking Reports Testing
Ensure Compatibility Develop Defect

with Earlier Versions 1.1.2 Cost/Schedule 1.2.2 Testing 1.3.2
Interface
Compatible with
Level 4 1.1.2.1
Windows 7
(Work packages)
Compatible with 1.1.2.2
Windows Vista
Compatible with Figure 3.3

Windows XP 1.1.2.3

Purposes of Project Scheduling
1. Shows the relationship of each activity to

others and to the whole project
2. Identifies the precedence relationships
among activities
3. Encourages the setting of realistic time and
cost estimates for each activity
4. Helps make better use of people, money,
and material resources by identifying critical
bottlenecks in the project
Project Management
Techniques
► Gantt chart
► Critical Path Method (CPM)
► Program Evaluation and Review
Technique (PERT)

A Simple Gantt Chart
Time
J F M A M J J A S
Design
Prototype
Test
Revise
Production

Service For a Delta Jet
Passengers Deplaning
Baggage claim
Baggage
Container offload
Fueling Pumping
Engine injection water
Cargo and mail
Container offload
Galley servicing Main cabin door
Aft cabin door
Lavatory servicing
Aft, center, forward
Drinking water Loading
Cabin cleaning First-class section
Cargo and mail Economy section
Container/bulk loading
Flight services Galley/cabin check
Operating crew Receive passengers
Aircraft check
Baggage Loading
Passengers Boarding
0 10 20 30 40
Time, Minutes
Figure 3.4
Project Controlling
► Close monitoring of
resources, costs,
quality, budgets
► Feedback enables
revising the project plan
and shift resources
► Computerized tools
produce extensive
reports
© 2014 Pearson Education, Inc. 3 - 18

PERT and CPM
► Network techniques
► Developed in 1950s
► CPM by DuPont for chemical plants (1957)
► PERT by Booz, Allen & Hamilton with the
U.S. Navy, for Polaris missile (1958)
► Consider precedence relationships and
interdependencies
► Each uses a different estimate of activity
times

Six Steps PERT and CPM
1. Define the project and prepare the
work breakdown structure
2. Develop relationships among the
activities – decide which activities must
precede and which must follow others
3. Draw the network connecting all of the
activities

Six Steps PERT and CPM
4. Assign time and/or cost estimates to
each activity
5. Compute the longest time path through
the network – this is called the critical
path
6. Use the network to help plan,
schedule, monitor, and control the
project

A Comparison of AON and
AOA Network Conventions
Activity on Activity Activity on
Node (AON) Meaning Arrow (AOA)
A comes before
(a) A B C B, which comes
before C A B C
A A
A and B must both
(b) C be completed
before C can start C
B B
B
B and C cannot
(c) A begin until A is B
completed A
C C
C and D cannot A C
A C begin until both
(d) A and B are
completed
B D B D
C cannot begin until

both A and B are
A C completed A C
(e) D cannot begin until Dummy activity
B is completed
B D A dummy activity is
introduced in AOA B D
B and C cannot
begin until A is
completed
A B D D cannot begin A B D
until both B and C
(f) are completed Dummy
A dummy activity C
C activity
is again
introduced in AOA

AON Example
Table 3.1 Milwaukee Paper Manufacturing’s Activities and Predecessors
IMMEDIATE
ACTIVITY DESCRIPTION PREDECESSORS
A Build internal components —
B Modify roof and floor —
C Construct collection stack A
D Pour concrete and install frame A, B
E Build high-temperature burner C
F Install pollution control system C
G Install air pollution device D, E
H Inspect and test F, G
© 2014 Pearson Education, Inc. 3 - 25

AON Network for
Milwaukee Paper
Activity A
A
(Build Internal Components)
Start
Activity B
Start B (Modify Roof and Floor)
Activity
Figure 3.5

AON Network for
Milwaukee Paper
Activity A Precedes Activity C
A C
Start
B D
Activities A and B Figure 3.6

Precede Activity D
AON Network for
Milwaukee Paper
F
A C
E
Start H
B D G
Arrows Show Precedence Figure 3.7

Relationships
Determining the Project Schedule
Perform a Critical Path Analysis

► The critical path is the longest path
through the network
► The critical path is the shortest time in
which the project can be completed
► Any delay in critical path activities delays
the project
► Critical path activities have no slack time

Table 3.2 Time Estimates for Milwaukee Paper Manufacturing

ACTIVITY DESCRIPTION TIME (WEEKS)
A Build internal components 2
B Modify roof and floor 3
C Construct collection stack 2
D Pour concrete and install frame 4
E Build high-temperature burner 4
F Install pollution control system 3
G Install air pollution device 5
H Inspect and test 2
Total time (weeks) 25

Perform a Critical Path Analysis
Earliest start (ES) = earliest time at which an activity can
start, assuming all predecessors have
been completed
Earliest finish (EF) = earliest time at which an activity can
be finished
Latest start (LS) = latest time at which an activity can start
so as to not delay the completion time of
the entire project
Latest finish (LF) = latest time by which an activity has to be
finished so as to not delay the
completion time of the entire project

Activity Format Figure 3.9
Activity Name
or Symbol
A Earliest
Earliest ES EF
Start Finish
Latest LS LF Latest
Start 2 Finish
Activity Duration
Forward Pass
Begin at starting event and work forward
Earliest Start Time Rule:
► If an activity has only a single immediate

predecessor, its ES equals the EF of the
predecessor
► If an activity has multiple immediate
predecessors, its ES is the maximum of all
the EF values of its predecessors
ES = Max {EF of all immediate predecessors}

Forward Pass
Begin at starting event and work forward
Earliest Finish Time Rule:
► The earliest finish time (EF) of an activity is

the sum of its earliest start time (ES) and its
activity time
EF = ES + Activity time

ES/EF Network for Milwaukee
Paper
ES EF = ES + Activity time
Start
0 0

Paper
EF of A =
ES ES of A + 2
of A
A
Start 0 2
0 0

Paper
A
0 2
2 EF of B =
ES ES of B + 3
0
Start
0 of B
B
0 0 3
3
Paper
A C
0 2 2 4
2 2
Start
0 0
B
0 3

Paper
A C
0 2 2 4
2 2
Start
0 0
= Max (2, 3) D
0
3 7
B
0 3
3
4
Paper
A C
0 2 2 4
2 2
Start
0 0
B D
0 3 3 7
3 4

Table 3.2 Time Estimates for Milwaukee Paper Manufacturing

ACTIVITY DESCRIPTION TIME (WEEKS)
A Build internal components 2
B Modify roof and floor 3
C Construct collection stack 2
D Pour concrete and install frame 4
E Build high-temperature burner 4
F Install pollution control system 3
G Install air pollution device 5
H Inspect and test 2
Total time (weeks) 25

Paper
A C F
0 2 2 4 4 7
2 2 3
Start E H
0 0 4 8 13 15
0 4 2
B D G
0 3 3 7 8 13
3 4 5
Figure 3.10
Backward Pass
Begin with the last event and work backwards
Latest Finish Time Rule:
► If an activity is an immediate predecessor for

just a single activity, its LF equals the LS of the
activity that immediately follows it
► If an activity is an immediate predecessor to
more than one activity, its LF is the minimum
of all LS values of all activities that
immediately follow it
LF = Min {LS of all immediate following activities}
Backward Pass
Begin with the last event and work backwards
Latest Start Time Rule:
► The latest start time (LS) of an activity is the

difference of its latest finish time (LF) and its
activity time
LS = LF – Activity time

LS/LF Times for
Milwaukee Paper
A C F
0 2 2 4 4 7
2 2 3
Start E H
0 0 4 8 13 15
13 15
0 4 2
B LS = LF
D – Activity timeG
0 3 3 7 8 13
3 4 5 LF = EF
of Project
LS/LF Times for
Milwaukee Paper
A C F
0 2 2 4 4 7
10 13
2 2 3
Start E H
0 0
LF 4= Min(LS
8 of 13 15
following activity) 13 15
0 4 2
B D G
0 3 3 7 8 13
3 4 5

LS/LF Times for
LF = Min(4, 10)
Milwaukee Paper
A C F
0 2 2 4 4 7
2 4 10 13
2 2 3
Start E H
0 0 4 8 13 15
4 8 13 15
0 4 2
B D G
0 3 3 7 8 13
8 13
3 4 5

LS/LF Times for
Milwaukee Paper
A C F
0 2 2 4 4 7
0 2 2 4 10 13
2 2 3
Start E H
0 0 4 8 13 15
0 0 4 8 13 15
0 4 2
B D G
0 3 3 7 8 13
1 4 4 8 8 13
3 4 5

Computing Slack Time
After computing the ES, EF, LS, and LF times for
all activities, compute the slack or free time for
each activity
► Slack is the length of time an activity can be

delayed without delaying the entire project
Slack = LS – ES or Slack = LF – EF

TABLE Milwaukee Paper’s Schedule and Slack Times
3.3
EARLIEST EARLIEST LATEST LATEST ON
START FINISH START FINISH SLACK CRITICAL
ACTIVITY ES EF LS LF LS – ES PATH
A 0 2 0 2 0 Yes
B 0 3 1 4 1 No
C 2 4 2 4 0 Yes
D 3 7 4 8 1 No
E 4 8 4 8 0 Yes
F 4 7 10 13 6 No
G 8 13 8 13 0 Yes
H 13 15 13 15 0 Yes

Activities with zero slack are on the critical path. It:
► Starts at the first activity in the project
► Terminates at the last activity in the project
► Includes only critical activities

TABLE Milwaukee Paper’s Schedule and Slack Times
3.3
EARLIEST EARLIEST LATEST LATEST ON
START FINISH START FINISH SLACK CRITICAL
ACTIVITY ES EF LS LF LS – ES PATH
A 0 2 0 2 0 Yes
B 0 3 1 4 1 No
C 2 4 2 4 0 Yes
D 3 7 4 8 1 No
E 4 8 4 8 0 Yes
F 4 7 10 13 6 No
G 8 13 8 13 0 Yes
H 13 15 13 15 0 Yes

Critical Path for
Milwaukee Paper
A C F
0 2 2 4 4 7
0 2 2 4 10 13
2 2 3
Start E H
0 0 4 8 13 15
0 0 4 8 13 15
0 4 2
B D G
0 3 3 7 8 13
1 4 4 8 8 13
3 4 5

ES – EF Gantt Chart
for Milwaukee Paper
1 2 3 4 5 6 7 8 9 10 11 12
13 14 15 16
A Build internal
components
B Modify roof and floor
C Construct collection
stack
D Pour concrete and
install frame
E Build
high-temperature burner
F Install pollution control
system
G Install air pollution
device
H Inspect and test

LS – LF Gantt Chart
for Milwaukee Paper
1 2 3 4 5 6 7 8 9 10 11 12
13 14 15 16
A Build internal
components
B Modify roof and floor
C Construct collection
stack
D Pour concrete and
install frame
E Build
high-temperature burner
F Install pollution control
system
G Install air pollution
device
H Inspect and test

Variability in Activity Times
► CPM assumes we know a fixed time

estimate for each activity and there is
no variability in activity times
► PERT uses a probability distribution for
activity times to allow for variability

► Three time estimates are required

► Optimistic time (a) – if everything goes
according to plan
► Pessimistic time (b) – assuming very
unfavorable conditions
► Most likely time (m) – most realistic
estimate

Estimate follows beta distribution
Expected activity time:
t = (a + 4m + b)/6
Variance of activity completion times:
v = [(b – a)/6]2

Computing Variance
TABLE 3.4 Time Estimates (in weeks) for Milwaukee Paper's Project
MOST
OPTIMISTIC LIKELY PESSIMISTIC EXPECTED TIME VARIANCE
ACTIVITY a m b t = (a + 4m + b)/6 [(b – a)/6]2
A 1 2 3 2 .11
B 2 3 4 3 .11
C 1 2 3 2 .11
D 2 4 6 4 .44
E 1 4 7 4 1.00
F 1 2 9 3 1.78
G 3 4 11 5 1.78
H 1 2 3 2 .11

Probability of Project
Completion
Project variance is computed by
summing the variances of critical
activities
σ2p = Project variance
= ∑(variances of activities
on critical path)

Completion
Project variance is computed by
summing the variances of critical
Project variance
activities
σ2p = .11 + .11 + 1.00 + 1.78 + .11 = 3.11
Project standard deviation

σp = Project variance
= 3.11 = 1.76 weeks

Completion
PERT makes two more assumptions:
► Total project completion times follow a

normal probability distribution
► Activity times are statistically independent

Completion
Figure 3.12
Standard deviation = 1.76 weeks
15 Weeks
(Expected Completion Time)

Completion
What is the probability this project can
be completed on or before the 16 week
deadline?
Z = –Due
/σp Expected
date
= (16 weeks
date – 15
of completion
weeks)/1.76
Where Z is the number of
standard deviations the due
= 0.57 date or target date lies from the
mean or expected date
Completion
From Appendix I
What is the probability
.00 .01 .07this
.08 project can
be completed on or.50399
.1 .50000 before .52790
the 16.53188
week
deadline? .2 .53983 .54380 .56749 .57142
Z = −due /σp expected date
.5 .69146 .69497 .71566 .71904
date of completion
.6 .72575
= (16 .72907
wks − 15.74857 .75175
wks)/1.76
= 0.57
Where Z is the number of
standard deviations the due
date or target date lies from the
mean or expected date
Completion
0.57 Standard deviations
Probability
(T ≤ 16 weeks)
is 71.57%
15 16 Time
Weeks
Figure 3.13 Weeks

Determining Project
Completion Time
Probability
of 0.99
Probability
of 0.01
2.33 Standard Z
From Appendix I deviations
0 2.33
Figure 3.14

Variability of Completion Time
for Noncritical Paths
► Variability of times for activities on
noncritical paths must be considered
when finding the probability of
finishing in a specified time
► Variation in noncritical activity may
cause change in critical path

What Project Management Has
Provided So Far
1. The project’s expected completion time is
15 weeks
2. There is a 71.57% chance the equipment
will be in place by the 16 week deadline
3. Five activities (A, C, E, G, and H) are on
the critical path
4. Three activities (B, D, F) are not on the
critical path and have slack time
5. A detailed schedule is available
Cost–Time Trade-Offs and Project
Crashing
It is not uncommon to face the
following situations:
► The project is behind schedule
► The completion time has been
moved forward
Shortening the duration of the

project is called project crashing
Factors to Consider When
Crashing a Project
► The amount by which an activity is
crashed is, in fact, permissible
► Taken together, the shortened activity
durations will enable us to finish the
project by the due date
► The total cost of crashing is as small as
possible

Crashing The Project
TABLE 3.5 Normal and Crash Data for Milwaukee Paper Manufacturing
TIME (WEEKS) COST ($)

CRASH COST CRITICAL
ACTIVITY NORMAL CRASH NORMAL CRASH PER WEEK ($) PATH ?
A 2 1 22,000 22,750 750 Yes
B 3 1 30,000 34,000 2,000 No
C 2 1 26,000 27,000 1,000 Yes
D 4 3 48,000 49,000 1,000 No
E 4 2 56,000 58,000 1,000 Yes
F 3 2 30,000 30,500 500 No
G 5 2 80,000 84,500 1,500 Yes
H 2 1 16,000 19,000 3,000 Yes

Crash and Normal Times
and Costs for Activity B
Activity
Cost
Crash
$34,000 —
Crash Cost – Normal Cost
Crash Cost/Wk =
$33,000 — Normal Time – Crash Time
Crash $34,000 – $30,000
Cost $32,000 — =
3–1
$4,000
$31,000 — = = $2,000/Week
2 Wks
$30,000 —
—
Normal
Normal
Cost
| | |
1 2 3 Time (Weeks)
Figure 3.15
Crash Time Normal Time
Crashing The Project
TABLE 3.5 Normal and Crash Data for Milwaukee Paper Manufacturing
TIME (WEEKS) COST ($)

CRASH COST CRITICAL
ACTIVITY NORMAL CRASH NORMAL CRASH PER WEEK ($) PATH ?
A 2 1 22,000 22,750 750 Yes
B 3 1 30,000 34,000 2,000 No
C 2 1 26,000 27,000 1,000 Yes
D 4 3 48,000 49,000 1,000 No
E 4 2 56,000 58,000 1,000 Yes
F 3 2 30,000 30,500 500 No
G 5 2 80,000 84,500 1,500 Yes
H 2 1 16,000 19,000 3,000 Yes

Critical Path and Slack Times for
Milwaukee Paper
Figure 3.16
A C F
0 2 2 4 4 7
0 2 2 4 10 13
2 2 3
Start Slack = 0 Slack = 0 E Slack = 6 H
0 0 4 8 13 15
0 0 4 8 13 15
0 4 2
B D Slack = 0 G Slack = 0
0 3 3 7 8 13
1 4 4 8 8 13
3 4 5
Slack = 1 Slack = 1 Slack = 0
Advantages of PERT/CPM
1. Especially useful when scheduling and
controlling large projects
2. Straightforward concept and not
mathematically complex
3. Graphical networks help highlight
relationships among project activities
4. Critical path and slack time analyses help
pinpoint activities that need to be closely
watched

Advantages of PERT/CPM
5. Project documentation and graphics point
out who is responsible for various activities
6. Applicable to a wide variety of projects
7. Useful in monitoring not only schedules but
costs as well

Limitations of PERT/CPM
1. Project activities have to be clearly defined,
independent, and stable in their relationships
2. Precedence relationships must be specified
and networked together
3. Time estimates tend to be subjective and
are subject to fudging by managers
4. There is an inherent danger of too much
emphasis being placed on the longest, or
critical, path

Supply and Value
Chain Management
1
Anjar Priyono, PhD.
1

Supply-Chain Management
The objective of supply chain

management is to structure the
supply chain to maximize its
competitive advantage and
benefits to the ultimate consumer

Companies compete are
competing using supply chain
Alfamart sell Cheese supply chain of Alfamart is longer; it cost higher.
100K IDR Chese Manufacturer (Kraft) whole seller regional distributor local
distributor retailer customers 110K IDR
Indomart sell Cheese supply chain of Indomart is shorter; it cost less.
100K IDR Chese Manufacturer (Kraft) whole seller distributor retailer customers
105K IDR

A Supply Chain for Beer
Figure 11.1

The Supply Chain’s
Strategic Importance
▶ The coordination of all supply chain activities, starting with
raw materials and ending with a satisfied customer
▶ Supply chain is about collaboration; in terms of CPFR.
▶ CPFR is the acronym for collaborative planning, forecasting
and replenishment replenishment: is the refilling process of
inventory.
▶ Includes suppliers, manufacturers and/or service providers,
distributors, wholesalers, retailers, and final customers.
▶ In what way you are collaborating with customers? you can
collaborate with customers to develop forecast together so that
the excessive stock can be avoided, and cost of inventory can
be minimized.

The Supply Chain’s
Strategic Importance
▶ Large portion of sales dollars spent on
purchases
▶ Supplier relationships increasingly
integrated and long term
▶ Improve innovation, speed design,
reduce costs
▶ Managing supplier relationships has
added emphasis
Supply Chain Management
TABLE 11.2 How Corporate Strategy Impacts Supply Chain Decisions
LOW COST RESPONSE DIFFERENTIATION
STRATEGY STRATEGY STRATEGY
Primary supplier • Cost • Capacity • Product development skills
selection criteria • Speed • Willing to share information
• Flexibility • Jointly and rapidly develop
products
Supply chain • Minimize • Use buffer stocks • Minimize inventory to avoid

inventory inventory to hold to ensure speedy product obsolescence
down costs supply
Distribution • Inexpensive • Fast transportation • Gather and communicate
network transportation • Provide premium market research data
• Sell through customer service • Knowledgeable sales staff
discount
distributors/
retailers
Product design • Maximize • Low setup time • Modular design to aid product
characteristics performance • Rapid production differentiation
• Minimize cost ramp-up

Sourcing Issues
▶ Make-or-buy decisions
▶ Choosing between obtaining products and
services externally as opposed to producing
them internally
▶ Outsourcing
▶ Transfer traditional internal activities and
resources to outside vendors
▶ Efficiency in specialization
▶ Focus on core competencies

Six Sourcing Strategies
▶ Many suppliers
▶ Few suppliers
▶ Vertical integration
▶ Joint ventures
▶ Keiretsu networks
▶ Virtual companies

1. Many Suppliers
▶ Commonly used for commodity products
▶ Commodity products: generic products, such as agricultural
products – ie. Sugar, rice, wood. There’s nothing in the products; all
suppliers can supply almost identical level of quality.
▶ Purchasing is typically based on price

▶ The selection process is typically using
bidding and auction.
▶ The relationship between firm and its supplier
is on short term basis.
▶ Suppliers compete with one another
▶ Supplier is responsible for technology,
expertise, forecasting, cost, quality, and
delivery.
2. Few Suppliers
▶ Buyer forms longer term relationships with
fewer suppliers
▶ Create value through economies of scale
and learning curve improvements
▶ Suppliers more willing to participate in JIT
programs and contribute design and
technological expertise
▶ Cost of changing suppliers is huge
▶ Trade secrets and other alliances may be
at risk
Differences between lean (thin) and
agile (flexible) supply chain
Competitive advantage low cost innovation
Bosch produce tools for carpenter,

Tools for cars and motorbikes
3. Vertical Integration
Vertical Integration Examples of Vertical Integration
Raw material
(suppliers) Tree Harvesting
Backward integration Chipmakers Pulpmaking
Current International
transformation Pepsi Apple
Paper
End-User Paper
Forward integration Bottling Retail stores
Conversion
Finished goods
(customers)
Figure 11.2

Vertical Integration
▶ Developing the ability to produce goods or
services previously purchased
▶ Integration may be forward, towards the
customer, or backward, towards suppliers
▶ Can improve cost, quality, delivery, and
inventory but requires capital, managerial
skills, and demand
▶ Risky in industries with rapid technological
change

4. Joint Ventures
▶ The purpose of joint venture is to
create synergies
▶ Formal collaboration
▶ Enhance skills
▶ Secure supply – eg. Supply of materials
▶ Reduce costs- eg. Because of achieving
economies scale of production
▶ The challenge is to cooperation without
diluting brand or conceding competitive
advantage
5. Keiretsu Networks
▶ A middle ground between few suppliers and
vertical integration
▶ Supplier becomes part of the company coalition
▶ Often provide financial support for suppliers
through ownership or loans
▶ Members expect long-term relationships and
provide technical expertise and stable deliveries
▶ May extend through several levels of the supply
chain

6. Virtual Companies
▶ Rely on a variety of supplier relationships
to provide services on demand
▶ Fluid organizational boundaries that allow
the creation of unique enterprises to meet
changing market demands
▶ Relationships may be short- or long-term
▶ Exceptionally lean performance, low
capital investment, flexibility, and speed

Risk and Mitigation Tactics
TABLE 11.3 Supply Chain Risks and Tactics
RISK RISK REDUCTION TACTICS EXAMPLE
Supplier Use multiple suppliers; McDonald's planned its supply
failure to effective contracts with chain 6 years before its opening
deliver penalties; subcontractors on in Russia. Every plant—bakery,
retainer; pre-planning meat, chicken, fish, and
lettuce—is closely monitored to
ensure strong links.
Supplier Careful supplier selection, Darden Restaurants has
quality training, certification, and placed extensive controls,
failures monitoring including third-party audits, on
supplier processes and logistics
to ensure constant monitoring
and reduction of risk.

RISK REDUCTION
RISK TACTICS EXAMPLE
Outsourcing Take over production; Tyson took over chicken farm
provide or perform the production in China to mitigate
service yourself product quality and safety
concerns related to using
independent farmers
Logistics Multiple/redundant Walmart, with its own trucking
delays or transportation modes fleet and numerous distribution
damage and warehouses; secure centers located throughout the
packaging; effective contracts U.S., finds alternative origins
with penalties and delivery routes bypassing
problem areas.

RISK REDUCTION
RISK TACTICS EXAMPLE
Distribution Careful selection, monitoring, Toyota trains its dealers around
and effective contracts with the world, invoking principles of
penalties the Toyota Production System to
help dealers improve customer
service, used-car logistics, and
body and paint operations.
Information Redundant databases; Boeing utilizes a state-of-the-art
loss or secure IT systems; training of international communication
distortion supply chain partners on the system that transmits
proper interpretations and engineering, scheduling, and
uses of information logistics data to Boeing facilities
and suppliers worldwide.

Political Political risk insurance; Hard Rock Café reduces
cross-country diversification; political risk by franchising and
franchising and licensing licensing, rather than owning,
when the political and cultural
barriers seem significant.
Economic Hedging to combat exchange Honda and Nissan are

rate risk; purchasing contracts moving more manufacturing
that address price fluctuations out of Japan as the exchange
rate for the yen makes
Japanese-made autos more
expensive.

Natural Insurance; alternate sourcing; Toyota, after its experience
catastrophes cross-country diversification with fires, earthquakes, and
tsunamis, now attempts to
have at least two suppliers,
each in a different
geographical region, for each
component.
Theft, Insurance; patent protection; Domestic Port Radiation
vandalism, security measures including Initiative: The U.S.
and terrorism RFID and GPS; diversification government has set up
radiation portal monitors that
scan nearly all imported
containers for radiation.

Managing the Integrated
Supply Chain
▶ Issues
▶ Local optimization can magnify
fluctuations
▶ Incentives push merchandise into the
supply chain for sales that have not
occurred
▶ Large lots reduce shipping and production
costs but increase inventory holding and do
not reflect actual sales

Bullwhip effect

Bullwhip effect t occurs
h i p e f fec
Bullw r s are
r d e
when o rough the
l a y e d th
r e i n with
c h a
supply s i n cr e a sing
t u a t io n
fluc ep
a c h s t
at e

Supply Chain
▶ Opportunities
▶ Accurate “pull” data, shared information
▶ Lot size reduction, shipping, discounts,
reduced ordering costs
▶ Vendor managed inventory (VMI)

Supply Chain
▶ Opportunities
▶ Collaborative planning, forecasting, and
replenishment (CPFR) throughout the
supply chain
▶ Blanket orders against which actual
orders are released
▶ Standardization

Supply Chain
▶ Opportunities
▶ Postponement withholds modification as
long as possible
▶ Electronic ordering and funds transfer
speed transactions and reduce paperwork
▶ Drop shipping and special packaging
bypasses the seller and reduces costs

Third-Party Logistics (3PL)
▶ Outsourcing logistics can reduce
inventory, costs, and improve delivery
reliability and speed
▶ Coordinate supplier inventory with delivery
services
▶ May provide
warehousing,
assembly, testing,
shipping, customs

Establishing Sustainability in
Supply Chains
▶ Return or reverse logistics
▶ Sending returned products back up the supply
chain for resale, repair, reuse, remanufacture,
recycling, or disposal
▶ Closed-loop supply chain
▶ Proactive design of a supply chain that tries to
optimize all forward and reverse flows
▶ Prepares for returns prior to product
introduction

Establishing Sustainability in
Supply Chains
TABLE 11.4 Management Challenges of Reverse Logistics
ISSUE FORWARD LOGISTICS REVERSE LOGISTICS
Forecasting Relatively straightforward More uncertain
Product quality Uniform Not uniform
Product packaging Uniform Often damaged
Pricing Relatively uniform Dependent on many factors
Speed Often very important Often not a priority
Distribution costs Easily visible Less directly visible
Inventory management Consistent Not consistent
- End of use return – coca cola, aqua, LPG bottle,

- End of life return – broken hp
- Company recall – Hyundai airbag system
- Warranty period – new hp just bought.
Material Requirements
Planning (MRP)
and ERP 1
PowerPoint presentation to accompany
Heizer, Render, Munson
4
Operations Management, Twelfth Edition, Global Edition
Principles of Operations Management, Tenth Edition, Global Edition
PowerPoint slides by Jeff Heyl

Outline
► Product structure
► Time-phased structure
► Bill of Material (BOM)
► Material Requirement planning

Dependent Demand
For any product for which a schedule

can be established, dependent
demand techniques should be used
MRP is dependent inventory

management system.

Dependent Demand MRP
► Benefits of MRP
1) Better response to customer orders made to
order: firms manufacture products whenever
there is demand from market.
Made to order is the opposite of made to stock.
2) Faster response to market changes
3) Improved utilization of facilities and labor
4) Reduced inventory levels

Dependent Demand
▶ The demand for one item is related to the
demand for another item
▶ Given a quantity for the end item, the
demand for all parts and components can
be calculated
▶ In general, used whenever a schedule can
be established for an item
▶ MRP is the common technique
▶ Independent demand make to
stock EOQ (economic order quantity)
Dependent Inventory Model
Requirements
► Effective use of dependent demand
inventory models requires the following
1. Master production schedule

2. Specifications or bill of material
3. Inventory availability
4. Purchase orders outstanding
5. Lead times

Master Production Schedule
(MPS)
▶ Specifies what is to be made and when
▶ Must be in accordance with the aggregate
production plan
▶ Inputs from financial plans, customer demand,
engineering, labor availability, inventory
fluctuations, supplier performance
▶ As the process moves from planning to
execution, each step must be tested for
feasibility

(MPS)
▶ MPS is established in terms of specific products,
it disaggregates the aggregate plan
▶ Schedule must be followed for a reasonable
length of time
▶ The MPS is quite often fixed or frozen in the
near-term part of the plan
▶ The MPS is a rolling schedule
▶ The MPS is a statement of what is to be
produced, not a forecast of demand
The Planning Process
Figure 14.1
Aggregate
Production Plan Figure 14.2
Months January February

Aggregate Plan 1,500 1,200
(Shows the total
quantity of amplifiers)
Weeks 1 2 3 4 5 6 7 8
(Shows the specific type and
quantity of amplifier to be
produced)
240-watt amplifier 100 100 100 100
150-watt amplifier 500 500 450 450
75-watt amplifier 300 100

(MPS)
Can be expressed in any of the following
terms: (1) batch, (2) units
1. A customer order in a job shop

(make-to-order) company
2. Modules in a repetitive
(assemble-to-order or forecast) company
3. An end item in a continuous
(stock-to-forecast) company

MPS Example
Master Production Schedule for Chef John's Buffalo Chicken

TABLE 14.1
Mac & Cheese
GROSS REQUIREMENTS FOR CHEF JOHN'S BUFFALO MAC & CHEESE
Day 6 7 8 9 10 11 12 13 14 And so on
Quantity 450 200 350 525 235 375

Bills of Material
▶ List of components, ingredients, and
materials needed to make product
▶ Provides product structure
▶ Items above given level are called parents
▶ Items below given level are called
components or children

BOM (Bill of material)
Example
A is parent for B and C.
B is parent for D and E.
C is parent for E and F. etc.
Level Product structure for “Awesome” (A)

Part
0 B: 2 x number of As = (2)(50) A = 100
Part C: 3 x number of As = (3)(50) = 150
Part D: 2 x number of Bs
1 + 2B x(2)number of Fs = (2)(100) + (2)(300) = C(3) 800
Part E: 2 x number of Bs
+ 2 x number of Cs = (2)(100) + (2)(150) = 500
2 F: 2 x number In MRP we adopt
E(2) of Cs = (2)(150) = 300 E(2) F(2)
Part
low level coding if
Part G: 1 x number of Fs = (1)(300) = 300
there are two
3 different level of G(1) D(2)
D(2) codes, we will adopt
the lowest one.
BOM Example
For an order of 50 Awesome speaker kits

0 A =50 units
1 B(2) = 50 x 2= 100 C(3) = 50 x 3 =150.
2 E(2)= 100 x 2 = 200 E(2)=150x2=300 F(2)= 150x2=300
3 D(2) = 100x2=200 G(1) =300x1=300 D(2) =300x2=6

Bills of Material
▶ Phantom Bills
▶ Describe subassemblies that exist only
temporarily
▶ Are part of another assembly and never go
into inventory
▶ Low-Level Coding
▶ Item is coded at the lowest level at which it
occurs
▶ BOMs are processed one level at a time

Lead Times for Components
▶ The time required to purchase,
produce, or assemble an item
▶ For production – the sum TABLE 14.2
of the move, setup, and Lead Times for Awesome

Speaker Kits (As)
assembly or run times COMPONENT LEAD TIME
▶ For purchased items – A 1 week
the time between the B 2 weeks

C 1 week
recognition of a need
D 1 week
and when it's available E 2 weeks
for production F 3 weeks
G 2 weeks
TABLE
Time-Phased Product
14.2
Lead Times for Awesome
Structure Figu
Speaker Kits (As) Must have D and E
Start production of D completed here so
COMPONEN LEAD production can begin
T TIME on B
A 1 week 1 week
2 weeks to
D produce
B 2 weeks
B
C 1 week 2 weeks
D 1 week E
A
E 2 weeks
2 weeks 1 week
F 3 weeks
E
G 2 weeks 2 weeks 1 week
G C
3 weeks
F
1 week
D
| | | | | | | |
1 2 3 4 5 6 7 8
Time in weeks
L
L
L
L

MRP Structure Figure 14.4
Data Files Output Reports
MRP by period
BOM Master report
production schedule
MRP by
date report
Lead times
(Item master file) Planned order
report
Inventory data
Purchase advice
Material
requirement
planning
programs
(computer and Exception reports
Purchasing data software)
Order early or late
or not needed
Order quantity too
small or too large
Let’s say, we need 100 components, and we
have 20 in inventory. Then, the net
Determining Gross
Requirements
▶ Starts with a production schedule for the end
item – 50 units of Item A in week 8
▶ Using the lead time for the item, determine the
week in which the order should be released –
a 1-week lead time means the order for 50
units should be released in week 7
▶ This step is often called "lead time offset" or
"time phasing"

Determining Gross
Requirements
▶ From the BOM, every Item A requires 2 Item
Bs – 100 Item Bs are required in week 7 to
satisfy the order release for Item A
▶ The lead time for the Item B is 2 weeks –
release an order for 100 units of Item B in
week 5
▶ The timing and quantity for component
requirements are determined by the order
release of the parent(s)

Determining Gross
Requirements
▶ The process continues through the entire
BOM one level at a time – often called
"explosion"
▶ By processing the BOM by level, items with
multiple parents are only processed once,
saving time and resources and reducing
confusion
▶ Low-level coding ensures that each item
appears at only one level in the BOM

BOM Example

0 A
1 B(2) C(3)
2 E(2) E(2) F(2)
3 D(2) G(1) D(2)

TABLE
Time-Phased Product
14.2
Lead Times for Awesome
Structure Figu
Speaker Kits (As) Must have D and E
Start production of D completed here so
COMPONEN LEAD production can begin
T TIME on B
A 1 week 1 week
2 weeks to
D produce
B 2 weeks
B
C 1 week 2 weeks
D 1 week E
A
E 2 weeks
2 weeks 1 week
F 3 weeks
E
G 2 weeks 2 weeks 1 week
G C
3 weeks
F
1 week
D
| | | | | | | |
1 2 3 4 5 6 7 8
Time in weeks
Gross Requirements Plan
Gross Material Requirements Plan for 50 Awesome Speaker Kits (As)
TABLE 14.3
with Order Release Dates Also Shown
WEEK
LEAD
1 2 3 4 5 6 7 8 TIME
A. Required date 50
Order release date 50 1 week
B. Required date 100
Order release date 100 2 weeks
C. Required date 150
Order release date 150 1 week
E. Required date 200 300
Order release date 200 300 2 weeks
F. Required date 300
D. Required date 600 200
Order release date 600 200 1 week
G. Required date 300

ITEM ON HAND ITEM ON HAND
Net Requirements Plan A

B
10
15
E
F
10
5
C 20 G 0
D 10
2 × number of As = 80
3 × number of As = 120

Net Requirements Plan
2 × number of Bs = 130
2 × number of Cs = 200
2 × number of Cs = 200
2 × number of Bs = 130
2 × number of Fs = 390
1 × number of Fs = 195

Determining Net Requirements
▶ Starts with a production schedule for the end

item – 50 units of Item A in week 8
▶ Because there are 10 Item As on hand, only
40 are actually required – (net requirement) =
(gross requirement – on-hand inventory)
▶ The planned order receipt for Item A in week
8 is 40 units – 40 = 50 – 10

▶ Following the lead time offset procedure, the
planned order release for Item A is now 40 units
in week 7
▶ The gross requirement for Item B is now 80 units
in week 7
▶ There are 15 units of Item B on hand, so the net
requirement is 65 units in week 7
▶ A planned order receipt of 65 units in week 7
generates a planned order release of 65 units in
week 5

▶ The on-hand inventory record for Item B is
updated to reflect the use of the 15 items in
inventory and shows no on-hand inventory in
week 8
▶ This is referred to as the Gross-to-Net
calculation and is the third basic function of the
MRP process

Gross Requirements Schedule
Figure 14.5
A S
B C B C
Master schedule
Lead time = 4 for A Lead time = 6 for S for B
Master schedule for A Master schedule for S sold directly
Periods 5 6 7 8 9 10 11 8 9 10 11 12 13 1 2 3
40 50 15 40 20 30 10 10
Periods 1 2 3 4 5 6 7 8
Therefore, these are
40+10 15+30
Gross requirements: B 10 40 50 20 the gross
=50 =45
requirements for B
Net Requirements Plan
The logic of net requirements
Gross + Allocations
requirements
Total requirements
On hand + Scheduled Net

– = requirements
receipts
Available inventory

MRP Planning Sheet
Figure 14.6

Safety Stock
▶ BOMs, inventory records, purchase and
production quantities may not be perfect
▶ Consideration of safety stock may be prudent
▶ Should be minimized and ultimately
eliminated
▶ Typically built into projected on-hand
inventory

MRP Management
▶ MRP dynamics
▶ Facilitates replanning when changes occur
▶ System nervousness can result from too
many changes
▶ Time fences put limits on replanning
▶ Pegging links each item to its parent
allowing effective analysis of changes

MRP Management
▶ MRP limitations
▶ MRP does not do detailed scheduling–it
plans
▶ Works best in product-focused, repetitive
environments
▶ Requires fixed lead time and infinite size
time buckets

Lot-Sizing Techniques
▶ Lot-for-lot technique orders just what is
required for production based on net
requirements
▶ May not always be feasible
▶ If setup costs are high, lot-for-lot can be
expensive
▶ Economic order quantity (EOQ)
▶ EOQ expects a known constant demand and
MRP systems often deal with unknown and
variable demand

Lot-for-Lot Example
WEEK 1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 35 0 0 0 0 0 0 0 0 0
hand
Net
0 30 40 0 10 40 30 0 30 55
requirements
Planned order
30 40 10 40 30 30 55
receipts
Planned order
30 40 10 40 30 30 55
releases
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

Lot-for-Lot Example
No on-hand inventory is carried through the system
TotalWEEK
holding cost
1 = $0
2 3 4 5 6 7 8 9 10
There are
Gross seven35setups
30 for this
40 0 item
10 in this
40 30 plan
0 30 55
requirements
Total ordering cost = 7 x $100 = $700
Scheduled
receipts
Projected on
35 35 0 0 0 0 0 0 0 0 0
hand
Net
0 30 40 0 10 40 30 0 30 55
requirements
Planned order
30 40 10 40 30 30 55
receipts
Planned order
30 40 10 40 30 30 55
releases

EOQ Lot Size Example
WEEK 1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 35 0 43 3 3 66 26 69 69 39
hand
Net
0 30 0 0 7 0 4 0 0 16
requirements
Planned order
73 73 73 73
receipts
Planned order
73 73 73 73
releases

Average weekly gross requirements = 27; EOQ = 73 units
EOQ Lot Size Example
Annual demand D = 1,404
Holding cost = 3751 units
WEEK 2
x3$1 (including
4 5 6
577units
8
on9 10
hand at end of week 10)
Gross
Ordering 35 30 40 0 10 40 30 0 30 55
requirements cost = 4 x $100 = $400
Total cost = $375 + $400 = $775
Scheduled
receipts
Projected on
35 35 0 43 3 3 66 26 69 69 39
hand
Net
0 30 0 0 7 0 4 0 0 16
requirements
Planned order
73 73 73 73
receipts
Planned order
73 73 73 73
releases

Average weekly gross requirements = 27; EOQ = 73 units
POQ Lot Size Example
WEEK 1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 35 0 40 0 0 70 30 0 0 55
hand
Net
0 30 0 0 10 0 0 0 55 0
requirements
Planned order
70 80 0 85 0
receipts
Planned order
70 80 85
releases
EOQ = 73 units; Average weekly gross requirements = 27;

POQ interval = 73/27 ≅ 3 weeks
POQ Lot Size Example
Setups = 3 x $100 = $300
WEEK 1 2 3 4 5 6 7 8 9 10
Holding cost = (40 + 70 + 30 + 55) units x $1 = $195
Gross
Total cost = $30035+ $195
requirements
30 = $495
40 0 10 40 30 0 30 55
Scheduled
receipts
Projected on
35 35 0 40 0 0 70 30 0 0 55
hand
Net
0 30 0 0 10 0 0 55 0
requirements
Planned order
70 80 0 85 0
receipts
Planned order
70 80 85
releases
EOQ = 73 units; Average weekly gross requirements = 27;

POQ interval = 73/27 ≅ 3 weeks
Lot-Sizing Summary
▶ In theory, lot sizes should be recomputed
whenever there is a lot size or order
quantity change
▶ In practice, this results in system
nervousness and
instability
▶ Lot-for-lot should
be used when
low-cost setups can
be achieved
Lot-Sizing Summary
▶ Lot sizes can be modified to allow for scrap,
process constraints, and purchase lots
▶ Use lot-sizing with care as it can cause
considerable distortion of requirements at lower
levels of the BOM
▶ When setup costs are significant and demand is
reasonably smooth, POQ or EOQ should give
reasonable results

MRP in Services
(a) PRODUCT STRUCTURE TREE Figure 14.9
Buffalo Chicken Mac & Cheese
Garnish with Buffalo Chicken mix, Baked Buffalo Chicken Mac &
Blue Cheese, Scallions Cheese
Unbaked Buffalo Chicken Mac

& Cheese
Buffalo Chicken Mix
Smoked Blue Cooked Grated Mac &

Buffalo Chopped
Pulled Cheese Elbow Pepper Jack Cheese Milk
Sauce Scallions
Chicken Crumbles Macaroni Cheese Base

MRP in Services
(b) BILL OF MATERIALS
Production Specifications Buffalo Chicken Mac & Cheese (6 portions)

Unit Total Labor
Ingredients Quantity Measure Cost Cost Hrs.
Elbow Macaroni (large, uncooked) 20. oz. $ $
00 0.09 1.80
Cheese-Pepper Jack (grated) 10. oz. 0.1 1.7
00 7 0
Mac and Cheese Base (from 32. oz. 0.8 25.
refrigerator) 00 0 60
Milk 4.0 oz. 0.0 0.1
0 3 2
Smoked Pulled Chicken 2.0 lb. 2.9 5.8
0 0 0
Buffalo Sauce 8.0 oz. 0.0 0.7
0 9 2
Blue Cheese Crumbles
Copyright © 2017 Pearson Education, Ltd.
4.0 oz. 0.1 0.7 14 - 50
0 9 6
Enterprise Resource Planning
(ERP)
▶ An extension of the MRP system to tie in
customers and suppliers
1. Allows automation and integration of many
business processes
2. Shares common data bases and business
practices
3. Produces information in real time
▶ Coordinates business from supplier
evaluation to customer invoicing
Enterprise Resource Planning
(ERP)
▶ ERP systems have the potential to
▶ Reduce transaction costs
▶ Increase the speed and accuracy of
information
▶ Facilitates a strategic emphasis on JIT
systems and supply chain integration
▶ Can be expensive and time-consuming
to install

ERP in the Service Sector
▶ ERP systems have been developed for
health care, government, retail stores,
hotels, and financial services
▶ Also called efficient consumer response
(ECR) systems in the grocery industry
▶ Objective is to tie sales to buying,
inventory, logistics, and production

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Process Strategy

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The objective is to create a process

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Tailor made: one product for one

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Within these basic strategies there are

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Figure 7.2(a) Many different outputs

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Figure 7.2(b) Modules combined for many

Fuel tank work cell Handlebars

Wheel work cell Fender work cell

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Output variations in size, shape,

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Figure 7.2(b) Many output versions

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▶ Decisions can be complex as alternate

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► Flexibility is the ability to respond

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► Value-Stream Mapping (VSM)

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Service Factory Law clinics Service Shop

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Mass Service and Professional Service

► Selection and training highly Low

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Service Factory and Service Shop

Tight control required to High General-

maintain standards Service Factory

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► The Importance of Project

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© 2014 Pearson Education, Inc. 3-5

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1) All necessary activities

2) The project comes from a variety

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Software Cost Management System

Develop GUIs Design Cost Module

Ensure Compatibility Develop Defect

Compatible with Figure 3.3

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1. Shows the relationship of each activity to

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© 2014 Pearson Education, Inc. 3 - 18

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