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Operations Management (OM): Activities that add value to the creation of goods and
services by transforming inputs to outputs.
3. Finance / accounting tracks how well the organization is doing, pays the bills, and
collects money.
1. To see how the OM activity functions, and how people organize themselves for
productive enterprise.
2. To know how goods and services are produced.
3. To understand what operations managers, do.
4. To find a way an organization can improve its profitability and its service to society,
since OM is a costly part of an organization.
-Eli Whitney (1800), who made interchangeable parts popular through standardization
and quality control.
-Frederik W. Taylor (1801), who wanted to find the best way to produce and be
resourceful, and who believed managers should be responsible for:
Service Sector: segment of the economy that includes trade, financial, lodging,
education, legal, medical, and other professional occupations. Currently the biggest sector
in the economy.
Productivity: the ratio of outputs (goods and services) divided by one or more inputs
(such as labor, capital, or management).
Outputs are goods and services, while inputs are capital, labor, physical resources and
management. A country can improve the standard of living my measuring the productivity
and improving it.
Single-factor productivity: the ratio of one resource (input) to the goods and services
produced (outputs). A common measure of productivity is when input is measured in labor-
hours.
Multifactor Productivity: the ratio of many or all resources (inputs) to the goods and
services produced (outputs). Also known as total factor productivity.
Measurement Problems
Quality may change while the quantity of inputs and outputs remains constant.
External elements may cause an increase or decrease in productivity.
Precise units of measure may be lacking.
Especially in the service sector productivity measurement is difficult because the product is
not easy definable.
Productivity variables
If the labor force is better educated and healthier, they have a better contribution to
productivity. Three key variables for improved labor productivity are:
There is always a trade-off between Capital and labor. When the interest rate is higher,
there is less investment in capital because the return on investment has been reduced.
Management ensures that labor and capital are effectively used to increase productivity.
In order to improve productivity, effective use of knowledge and capital is needed, and the
manager’s job is to select the best new capital investments and improve the productivity of
the existing ones.
Knowledge society: a society in which much of the labor force has migrated from manual
work to work based on knowledge.
While there are many good theories on how to improve goods-production based activities,
the productivity in the service sector is more difficult to improve, since work in the service
sector is often:
labor-intensive
focused on unique individual attributes or desires
an intellectual task performed by professionals
difficult to mechanize and automate
difficult to evaluate for quality
The changes in the environment, laws and values represent the challenges that come from
conflicting perspectives of stakeholders.
Managers must meet the demand of the marketplace while doing everything in a socially
responsible and ethical way. Therefore, managers should have a moral awareness and
focus on increasing productivity, as well as developing safe quality products, maintaining a
clean environment and a safe workplace.
Chapter 2: Operations Strategy in a Global
Environment
New standards of global competitiveness as quality, variety, customization, convenience,
timeliness and costs contribute to efficiency and add value to goods. They also increase
complexity, risk and competition.
The advantages of shifting low-skilled jobs to other, low cost countries are:
NAFTA: a free trade agreement between Canada, Mexico and the U.S.
The European Union is also a trading group that has reduced the trade barriers among
the participating countries through standardization and a common currency.
The supply chain can be improved when moving facilities to countries that have
unique resources such as expertise, labor, or raw materials.
Products and services can be easier customized to meet unique cultural needs in
the foreign markets.
The response time to meet customers’ requirements can be reduced.
Firms can learn about opportunities for new products and services.
The life cycle of a product can be expanded.
By offering more employment opportunities global organizations can attract better
employees.
Once a mission has been decided, each functional area within the firm determines its
supporting mission. Functional areas are the major disciplines required by the firm such as
marketing, finance and production.
There are different ways a company can compete with other companies:
Competing on differentiation
Differentiation: to distinguish the offerings of the organization in any way that the
customer perceives as added value.
Experience Differentiation: engages the customer with the product through imaginative
use
Competing on Cost
Competing on Response
Response: set of values related to rapid, flexible, and reliable performance. There are
three aspects of response:
The three concepts are implemented through the six specific strategies:
Strategic decisions are implemented by deciding what the key tasks and the needed
staffing are in order to achieve them. These decisions are:
Critical success factors: activities or factors that are key to achieving competitive
advantage.
Activity map: a graphical link of competitive advantage, CSFs, and supporting activities.
International strategy: global markets are penetrated using exports and licenses. This
strategy has the least advantages and local responsiveness considerations.
Multi domestic strategy: decisions made are adapted to each country in order to increase
local responsiveness, and there is a degree of autonomy in each branch. These are often
subsidiaries, franchises, or joint ventures with certain independence. This strategy has low
cost advantage but has quick responsiveness to its location.
standardization and learning between facilities, also known as economies of scale. This
strategy is good for cost reduction, but it has low local responsiveness.
Transnational strategy: combines the efficiency of a global scale and the benefits of local
responsiveness. This strategy recognizes that a core competence can exist across
countries.
Chapter 3: Managing projects
Managing projects involves 3 steps:
1. Planning: such as goal setting, defining the project, and organizing teams.
2. Scheduling: relating resources (people, money, supplies) to specific activities, or
relating activities to each other.
3. Controlling: monitoring resources and budgets, and revising plans, as well as
shifting resources to fit time a cost demand.
Work Breakdown Structure (WBS): divides work into more detailed parts in order to
define the project more clearly.
Gantt Charts: planning charts used to schedule resources and to allocate time. Gantt
charts can be used for:
1. Showing the relation of each activity to other activities as well as the whole project.
2. Identifying the activities that have priorities.
3. Encouraging the setting of realistic time and cost estimates for each activity.
4. Helping to make better use of resources by identifying the bottlenecks in the project.
Computer programs can be used to provide detailed cost breakdowns, labor curves, cost
distribution tables, cost and hour summaries, raw material and expenditure forecasts.
Variance reports, time analysis reports, and work status reports.
Critical Path Method (CPM): a project management technique that uses only one
estimate per activity.
Critical Path: the longest time path through a network. The activities on a critical path will
delay the entire project if they are not completed on time.
Dummy activity: an activity that doesn’t take any time but is inserted into a network to
maintain the logic. A dummy ending activity can be for example added to the end of an
AON diagram for a project that has multiple ending activities.
Critical path analysis: a process that helps to determine a project schedule. In order to
find the critical path, a starting and ending time is calculated for each activity. There are
four possibilities:
1. Earliest Start (ES): earliest time at which an activity can start (considering that all
previous activities have been completed).
2. Earliest Finish (EF): Earliest time at which an activity can be finished.
3. Latest Start (LS): latest time at which an activity can start, without delaying the
completion time of the entire project.
4. Latest Finish (LF): Latest time by which an activity must finish to not delay the
completion time of the entire project.
Forward pass: a process that identifies the early start and early finish times of all
activities.
EF = ES + activity time
ES = EF of all immediate previous activities.
Backward pass: a process that identifies the late start and late finish times of all activities.
LS = LF - activity time
LF = LS of all immediately following activities.
Slack time: free time for an activity. The activities without any slack time are critical
activities and are almost always on the critical path.
Slack time = LS – ES (or LF – EF)
The critical path is a path through the network that starts at the first activity of the project,
ends at the last activity. It is continuous and contains only critical activities.
Optimistic time: the best completion time of an activity that could be gained in a PERT
network.
Pessimistic time: the worst completion time of an activity that could result in a PERT
network.
Most likely time: the most probable time that an activity could take in a PERT network.
Crashing: to shorten the time of an activity in a network in order to reduce time on the
critical path, so that total completion time is reduced.
Crash cost per period = (crash cost – normal cost) / (normal time – crash time)
Some limitations:
Chapter 4: Forecasting
Forecasting: predicting future events, making good estimates. The forecast is the only
estimate of demand until the actual demand is known. A forecast is classified by the three
categories:
1. Short-range forecast: Maximum period of 1 year, used for planning purchasing, job
scheduling, workforce levels, job assignments and production levels.
2. Medium-range forecast: For a period from 3 months to 3 years, used for sales and
production planning and budgeting.
3. Long-range forecast: lifespan > 3 years, used for planning new products, capital
expenditures and other long-range forecasts.
The last two categories deal with more wide-ranging issues and support management.
They are less accurate and use less quantitative methodologies than short-term
forecasting.
The four stages of the product life cycle (important to forecasting) are: Introduction,
Growth, Maturity and Decline.
Quantitative analysis and qualitative approach are both approaches to general forecasting:
Quantitative Forecast: forecasts that employ one or more mathematical models that rely
on
historical data and/or causal variables to forecast demand. There are two categories:
2. Time-series models. these models use a series of past data points to make
a forecast:
If you want to place more emphasis on recent values, weights can be used when there is a
clear pattern.
These averages are not very sensitive to real changes in the data, they are behind on the
actual values and refer more to the past and require records of past data.
New forecast= Last period’s forecast + α (Last forecast period’s actual demand-Last
period’s forecast)
The forecast error tells us how well the model performed against itself using past data.
Forecast error= Actual Demand - Forecast value
Mean Absolute Deviation (MAD): a measure of the overall forecast error for a model.
Mean absolute percent error (MAPE): the error as a percentage of the actual values.
Seasonal Variations in data are regular up-and-down movements in a time series that
relate to recurring events. When seasonal factors are multiplied by an estimate of average
demand to produce a seasonal forecast, it’s called a multiplicative seasonal model.
Tracking Signal: a measurement of how well the forecast is predicting actual values. The
forecast values are compared to the new available data. When the tracking signal is
positive, the demand is greater than forecast and vice versa.
Tracking signal = [Running sum of the forecast errors (RSFE)] / [Mean Absolute
Deviation (MAD)]
Bias: a forecast that is consistently higher or consistently lower than actual values of a
time series.
Focus Forecasting: forecasting that tries a variety of computer models and selects the
best ones for a particular application. It is based on two principles:
1. Sophisticated forecasting models are not always better than simple ones.
2. There is not a single technique that should be used for all products or services
Chapter 5: Design of Goods and Services
Product decision: the selection, definition and design of products.
An effective product strategy links products decision with investment, market share, and
product life cycle.
There are three options for product strategies: differentiation, low cost, and rapid response.
Product life cycles determine the strategies needed for a product. There are four
phases:
Decline: the product does not grow anymore and might generate losses; in
which case it might have to be terminated unless it makes a special
contribution.
To develop a new product, the operations manager must be aware of the following steps:
4. Technological change
5. Political/legal change
Quality Function Deployment (QFD): translating them into the attributes that each
functional area can understand and act on.
House of quality: a part of the quality function deployment process that uses a
planning matrix to show how the customer needs are implemented by the firm in
order to meet these needs:
Product development teams: Teams charged with moving from market requirements for
a product to achieving product success.
Robust design: a design that can be produced to requirements even with unfavorable
conditions in the production process.
Modular design: when parts or components of a product are subdivided into modules that
are easily interchanged or replaced.
Design for Manufacture and Assembly (DFMA): software that allows designers to look
at the effect of design on manufacturing of the product.
Standard for the Exchange of Product Data (STEP): provides a format allowing the
electronic transmittal of three-dimensioned data.
Product quality
Shorter design time
Product cost reductions
Database availability
New range of capabilities
Virtual reality: a form of communication in which images substitute for reality and typically
allow the user to respond interactively.
Value analysis: a review of successful products that takes place during the production
process.
Joint venture: firms establish joint ownership to pursue new products or markets. In this
method of purchasing technology, both organizations learn, and risks are shared.
Alliances: cooperative agreements that allow firms to remain independent, but that they
pursue strategies consistent with their individual mission.
A company can also buy a firm in order to gain technology, in which case the main concern
is whether the speed and development of the acquired firm fits with the buyer.
Defining the product
The Bill of Material (BOM) lists the components, their description, and the quantity of
each required to make one unit of a product.
The Make or buy decision distinguishes between what the firms wants to produce and
what it wants to purchase.
Group technology is a component coding system that specifies the type of processing
and the parameters of the processing; it allows similar products to be grouped. When this
is well implemented, the following advantages appear:
-Improved design
-Reduced raw material and purchases
-Simplified production planning and control
-Reduced tooling setup time, and work-in process and production time
Assembly chart: a graphic means of identifying how components flow into subassemblies
and ultimately into a final product.
Route sheet: a listing of the operations necessary to produce the components with the
material specified in the bill of material.
Work order: an instruction to make a given quantity of a particular item, usually to a given
schedule.
Product Life cycle product Management (PLM): a bundle of software programs that ties
together many phases of design and manufacture.
Service design
Services have unique characteristics, and that’s why designing them is not easy. There are
several ways in which costs can be reduced, and the product can be enhanced:
Designing the product in such a way that customization is as late in the process as
possible.
Modularizing the product so that customization takes the form of changing modules.
This way modules can be designed as standard entities.
The service can be divided into small parts and identify those parts that can be used
for automation or reduced customer interaction. This way a ‘win-win; situation can arise,
where both the manufacturer and the consumer satisfaction grows.
Focus design on the Moment of truth: the moment between the service provider
and customer that exemplifies, enhances, or detracts from the customer’s expectations.
The documentation for a service will often take the form of explicit job instructions
that specify what must happen now of truth.
The objective of decision trees is to determine the expected value of each course of action.
Chapter 6: Managing Quality
Quality: The ability of a product or service to meet customer needs.
It is important that the operations managers know what the customer expects, since
improving quality improves profitability.
Implications of Quality
Cost of quality: the cost of doing things wrong, that is, the price of nonconformance.
There are four categories of costs associated with quality:
ISO 14000: Improved layout rooting and machine loading an environmental management
standard established by the International Standards Organization (ISO)
Core elements of quality standard are the management of environmental issues, auditing,
performance evaluation, labeling, and life-cycle assessment.
-Involves all operations and work center including suppliers and customers
Six Sigma (also known al DMAIC): a program to save time, improve quality, and lower
costs. Six sigma is focuses on customer satisfaction, and it is a set of seven tools.
Quality Circle: a group of employees meeting regularly with a facilitator to solve work
related problems in their area.
Just-in-time (JIT)
Taguchi Concepts
Quality robust: products that are consistently built to meet customer needs despite
adverse conditions in the production process.
Quality Loss Function: a mathematical function that identifies all costs connected with
poor quality and (QLF) shows how these costs increase as product quality moves from
what the customer wants.
L= D^2C
L=Loss to society
Scatter diagrams: A graph of the value of one variable vs. another variable.
Cause and effect diagrams: A tool that identifies process elements (causes) that
might affect an outcome, also known as Ishikawa diagram or a fish-bone
chart. The technique discovers possible locations of quality problems.
Tools to Organize
Flow charts (Process Diagrams): a chart that describes the steps in a process.
Statistical process control chart: A chart with time on the horizontal axis to plot
values of a statistic
Inspection: a way of making sure that an operation is producing at the quality that
is expected of it. The type of process and the value added at each stage affect the
decision about when and where to inspect.
R-chart: a control chart that tracks the “range” within a sample; indicates that a gain or
loss
Natural variations: variability that affect every production process to some degree and
are to be expected; also known as common causes.
Samples: to measure the process, we take samples and analyze the sample statistics
following these steps
Types of Data
Variables Attributes
Central Limit Theorem: the theoretical foundation for x-charts. It states that the
distribution of x’s will tend to follow a normal curve as the number of samples increases,
irrespective of the distribution of the population of all parts.
1. The mean of the sampling distribution (x) will be the same as the population
mean μ
2. The standard deviation of the sampling distribution (σx) will equal the population
standard deviation (σ) divided by the square root of the sample size.
Process control
- For variables that have continuous dimensions (Weight, speed, length, strength, etc.).
Where:
x = mean of the sample means or a target value set for the process
n = sample size
Where:
R = average range of the samples
R-chart
Control Limits for P-Charts: population will be a binomial distribution but applying the
Central Limit Theorem allows us to assume a normal distribution for the sample statistics.
Where:
p = mean fraction defective in the sample
n = sample size
Control limits for C-charts: population will be a Poisson distribution, but applying the
Central Limit Theorem allows us to assume a normal distribution for the sample statistics
Using a c-Chart:
Observations are attributes whose defects per unit of output can be counted.
The number counted is often a small part of the possible occurrences.
Defects such as number of blemishes on a desk, number of typos in a page of text,
flaws in a bolt of cloth.
Run test: a way to examine the points in a control chart to see if non-random variation is
present.
high-variety production.
Advantages:
Disadvantages:
A crossover chart is a chart of costs for more than one process at possible volumes.
Each step of the process must add value, in order to receive competitive advantage with
good services and goods.
Flow diagram: a drawing used to analyze movement of people or material, which
can give a quick view of the big picture.
Time function (or Process) mapping: a flow diagram but with time added on the
horizontal axis.
Flexibility: the ability to respond with little penalty in time, cost, or customer value.
Production Technology
Computer numerical Control (CNC): machinery with its own computer and
memory.
Capacity Planning
Capacity: the “throughput” or number of units a facility can hold, receive, store or produce
in a period.
Design capacity: the maximum output of a system in each period under ideal conditions.
capacity that can be expected given the product mix, methods of scheduling, maintenance
and standards of quality.
Effective capacity: capacity that can be expected given the product mix, methods of
scheduling, maintenance and standards of quality.
In order to forecast demand accurately flexibility must be designed into the systems, the
product life cycle must be considered, and capacity changes must be approached with a
bigger picture in mind.
Variable costs are the costs that vary with the volume of units produced. The difference
between selling price and variable cost is contribution.
When investments are made on capacity, they should be selected as part of a coordinated
plan, and they should give a competitive advantage. Product life cycles should be
considered, and operating factors in the financial return analysis should be included as
well.
Analyzing capacity should include capital investment, variable cost, cash flows, and net
present value.
Net present Value: a means of determining the discounted value of a series of future cash
receipts.
Investments with the same NPV can have different projected lives
We do not always know the future interest rates
Chapter 8: Location decisions
Location has a large effect on the risk and profit of the company, since transportation costs
as well as other location costs take of a large part of the expenses. Location decision are
made because of:
Industrial location strategies focus on minimizing costs, while retail and professional
services location strategies focus on maximizing revenue. Warehouse strategy is usually a
combination of cost and speed of delivery.
The objective of location strategy is to maximize the benefit of the location to the firm.
When innovation is the focus of the strategy, competitiveness and innovation are affected
by:
1. The presence of high quality and specialized inputs such as scientific and technical
talent.
2. An environment that encourages investment and intense local rivalry
3. Pressure and insight gained from a sophisticated local market, and local presence
of related and supporting industries.
Market economics
Better international communication
More reliable, rapid travel and shipping
More easy capital flow between countries
Large labor cost differences
Labor Content = labor cost per day / production (in units per day)
Firms can also take advantage of a favorable exchange rate by moving to another country.
Tangible costs: costs that can be identified readily measured with some precision.
Intangible costs: location costs that can’t easily be quantified, such as quality of life, or
government.
The primary location factor for service companies is proximity to the market. They often
locate near raw materials and suppliers because of perishability, transportation costs or
bulk.
Factor-rating method: a method that introduces objectivity into the process of identifying
hard-to-evaluate costs. The factor-rating method has six steps:
Centre-of-gravity method: a mathematical technique that is used for finding the best
location for a single distribution point that services several areas or stores. This method
chooses the ideal location that minimizes the weighted distance between itself and the
location it serves, where the distance is weighted by the number of containers shipped (Qi)
The eight most important factors which determinate volume and revenue in service firms
are:
1. Purchasing power of the customer drawing area.
2. Service and image compatibility with demographics of the customer-drawing area.
3. Competition in the area.
4. Quality of the competition.
5. Uniqueness of the firm’s and competitors’ locations
6. Physical qualities of facilities and neighboring businesses
7. Operating policies of the firm
8. Quality of management
Geographic information system (GIS): a system that’s stores and displays information
that can be linked to a geographic location, for example census data, maps of streets and
urban areas, as well as utilities.
Chapter 9: Layout Strategy
The objective of layout strategy is to develop an economic layout that will meet the firm’s
competitive advantage.
- Flexibility
Office Layout: The grouping of workers, their equipment, and spaces/offices to provide for
comfort, safety, and movement of information. The layout is flexible and often changes due
to technological changes. The flow of information is of main importance in the layout, and
the relationship chart is a useful tool for deciding the office layout. An approach that
addresses flow, allocates space, and responds to customer behavior.
Retail Layout: layouts that are based on the idea that sales and profitability depend on
customer exposure to products. The main objective is to maximize profitability per square
foot of floor space.
3. Distribute power items to both sides of an aisle and disperse them to increase
viewing of other items
Slotting fees: fees manufacturers pay to get shelf space for their products.
Service surroundings: the physical surroundings in which a service takes place, and how
they affect customers and employees.
- Spatial layout and functionality - which involve customer circulation path planning,
aisle characteristics, and product grouping.
- Signs, symbols, and artefacts - characteristics of building design that carry social
significance.
Warehouse layout: A design that attempts to minimize total cost by addressing trade-offs
between space and material handling. Material handling costs are all costs related to the
transaction. The relationship between receiving/unloading area and the shipping/loading
area is an important component of the layout.
Advantages are that the product remains in one place, and the workers and the equipment
come to the site. However, the complicated factors are that the space at the site is limited,
that different materials are required at different stages of the project and that the volume of
the materials needed is dynamic.
Process-oriented (or functional) Layout: a layout that deals with low-volume, high-
variety production; like machines and equipment are grouped together. Characteristics:
Layout principle:
Work Cells: an arrangement of machines and personnel that focuses on making a single
product or family of related products.
Takt time is the frequency of production units necessary to meet customer orders.
A Focused work center can be organized when a firm has identified a family of similar
products that have a large and stable demand. This center moves production from a
general-purpose, process-oriented facility to a large work cell that remains part of the
present plant. When the focused work center is in a separate facility, it’s called a focused
factory.
- Supplies of raw materials and components are adequate and of uniform quality
Advantages: Disadvantages:
- Low material handling costs - Work stoppage at any point halts whole operation
- Builds components
- Uses series of machines
- Repetitive process
- Machine paced
Assembly line: an approach that puts fabricated parts together at a series of workstations;
used in repetitive processes.
- Uses workstation
- Repetitive process
- Paced by tasks
Labor planning: a means of determining staffing policies with employment stability and
work schedules.
With a stable workforce the firm can be able to pay lower wages, and these savings can
provide competitive advantage. Employment policies must be determined, partly by the
manager’s view of labor costs.
Standard work schedule: For example, 9-5 in Europe, or five 8-hour days in the US.
Flextime: a system that allows employees within limits, to determine their own work
schedules. This fringe benefit may contribute to job satisfaction.
Flexible workweek: a work schedule that is different form the standard schedule. A
compressed workweek is when there are longer shifts but less days in a week.
Part-time status: when an employee works less than a normal week; less than 32 hours
per week often classifies an employee as “part time”.
When a firm is more flexible in staffing and establishing work schedules, the more efficient
and responsive it can be.
Job design: an approach that specifies the tasks that constitute a job for an individual or a
group.
Labor (or job) Specialization: the division of labor into unique (“special”) tasks. This can
be done in different ways:
Job enlargement: the grouping of a variety of tasks about the same skill level; horizontal
enlargement.
Job rotation: a system in which an employee is moved from one specialized job to
another.
Job enrichment: a method of giving an employee more responsibility that includes some
of the planning and control necessary for job accomplishment.
According to Hackman and Oldham, jobs should have skill variety, job identity, job
significance, autonomy, and feedback.
Profit-sharing: a system providing some portion of any profit for distribution to employees
Methods Analysis: developing work procedures that are safe and produce quality
products efficiently. Important factors herein are:
1. Movement of individuals or material (Flow diagrams)
2. Activities of human and machine and crew activity (Activity charts)
3. Body movement (Micro-motion charts)
Activity charts are used to study and improve the utilization of an operator and a machine
or some combination of these.
Operations charts analyses body movement, by pointing out wasted motion and idle time.
Such visual systems can help clarify the process and the links between work and
organization performance to employees as well as present performance details. They can
also help with housekeeping, for example by telling when maintenance need to be done or
where certain parts/materials are stored.
Ethics
Fairness, equity, and ethics are important constraints of job design. Important issues may
relate to equal opportunity, equal pay for equal work, and safe working conditions. It is
helpful to work with government agencies, trade unions, insurers, and employees.
Labor standards: the amount of time required to perform a job, or part of a job. Effective
manpower planning is dependent on the knowledge of the labor required. Labor standards
are the amount of time required to perform a job or part of a job. Accurate labor standards
help determine labor requirements, costs, and fair work.
Chapter 12: Inventory Management
The functions of inventory are:
Types of inventories
Raw material: materials that are usually purchased but have yet to enter the
manufacturing process.
Work-in-progress inventory (WIP): products or components that are no longer
raw material but have yet to become finished products.
MRO: Maintenance, Repair and Operating materials.
Finished goods: an end item ready to be sold, but still an asset on the company’s
books.
- To provide a stock of goods that will provide a - Item cost (if purchased).
“selection” for customers.
- To buffer against variations in lead times (safety - Risk of demand shifts (obsolescence).
stock).
- To hedge against risks (inflation, upward price - Loss of products (theft, damage, etc.).
changes, strikes, wars).
Customer order decoupling point (CODP): The CODP indicates the point in the
production process after which production occurs only based upon customer demand. The
place of the CODP is important since there will be unnecessary inventory if it is too close to
the customer, but lead times will be longer if you put it too far away from the customer.
ABC analysis: A method for dividing on-hand inventory into three classifications (A class,
B class, C class) based on annual dollar volume. To determine the annual dollar volume,
we measure the annual demand of each inventory item times the cost per unit.
Shrinkage: retail inventory that is unaccounted for between receipts and sale. It occurs
from damage, theft and bad paperwork. Inventory theft is known as pilferage.
- Lead time (time between placement & receipt of order) is known & constant
- Stock-outs can be completely avoided if orders are placed at the right time
Q = Number of pieces per order
Annual setup cost= (annual demand/numbers of units in each order) * (setup or order
cost per order)
Annual holding cost= (order quantity/2) * (holding cost per unit per year)
Optimal order quantity: When annual setup cost = annual holding costs
Robust: a model that gives satisfactory answers even with substantial variation in its
parameters.
In order to find the best order size, the Q must be found when TC is minimized.
Lead Time: time between placing an order and receiving it (or: time needed for producing
the requested products).
Reorder point: inventory level at which a new order must be placed to ensure timely
delivery. ROP = d*L
Demand per day= The annual demand / Number of working days in a year.
Production Ordering: an economic order quantity technique applied to production orders.
-There are time periods with production and time periods without production
-Goal is to determine the number of products to produce per production run such that total
costs are minimized.
Max Inventory Level (during production run) = Total produced - Total used
Steps to take:
Probabilistic Model: A statistical modal applicable when product demand or any other
variable is not known but can be specified by means of a probability distribution.
A higher service level indicates more safety stock, which means a higher ROP.
Reorder points
Simple inventory models assume that everything is 100% predictable. There may be
uncertainty. Reorder point if all EOQ assumptions hold: ROP = d*L
Fixed quantity (Q) System: an EOW ordering system, with the same order amount each
time.
Perpetual inventory System: a system that keeps track of each withdrawal to inventory
continuously, so records are always current.
Fixed period (P) System: a system in which inventory orders are made at regular time
intervals. The assumptions of this system that are the same as the basic EOQ fixed-
quantity system are:
The only relevant costs are the ordering and holding costs
Lead times are known as constant
Items are independent of one another
Chapter 13: Aggregate planning
Aggregate Planning is an approach to determine the quantity and timing of production for
the intermediate future.
Steps in Planning
- Assigning responsibility
Capacity Options:
- subcontracting
Demand Options:
Mixing Options:
Chase Strategy: sets production equal to forecasted demand.
Mixed strategy: a planning strategy that uses two or more controllable variables to set a
feasible production plan. Mixed plans usually yield a better strategy, even though they are
more complex.
Graphical and charting techniques; Aggregate planning techniques that work with a few
variables at a time to allow planners to compare projected demand with existing capacity.
Airlines, hotels, care rental agencies, cruise lines and electrical utilities all have perishable
inventory. They have the following characteristics that make yield management of interest:
Demand fluctuates
Capacity is relatively fixed
Demand can be segmented
Variable costs are low and fixed costs are high
1. Multiple pricing structures must be feasible and appear logical to the customer.
2. Forecasts of the use and duration of the use must be made.
3. Dealing with changes in demand.
Chapter 14: Material requirements planning (MRP) and
ERP
MRP: a dependent demand technique that uses bill-of-material, inventory, expected
receipts, and a master production schedule to determine material requirements.
Master Production Schedule (MPS): a timetable that specifies what is to be made and
when.
Bill of Material (BOM): A listing of the components, and the quantity of each required to
make one unit of a product.
Planning bills: a material grouping created in order to assign an artificial parent to the bill
of material.
Phantom bills of Material: bills of material for components, usually assembles, that exist
only temporarily; they are never inventoried.
Low-level coding: a number that identifies items at the lowest level at which they occur. It
ensures that an item is always at the lowest level of usage.
MRP management
When there are frequent changes in the MRP system, it is called System nervousness.
Two tools are helpful when trying to reduce this system nervousness:
-Time fences: a way of allowing a segment of the master schedule to be labeled as ‘’not
to be rescheduled’’.
-Pegging: tracing upward in the bill of material (BOM) from the component to the parent
item.
Finite capacity planning: MRP software puts work into infinite size Buckets, that are time
units in a MRP system. Usually the time units are in weeks.
Small bucket approach, in facilities where lead times are relatively stable and poor
balance between work centers is expected. This process schedules management in in-
process facilities.
Bucketless system: time-phased data are referenced using dated records rather than
defined time periods, or buckets.
Back flush: A system to reduce inventory balances by deducting everything in the bill of
material on completion of the unit.
Balanced flow approach: planning and scheduling for repetitive operations. Execution is
achieved by maintaining a carefully balance flow of material to assembly areas with small
lot sizes.
Closed loop MRP system: a system that provides feedback to the capacity plan, master
production schedule, and production plan so planning can be kept valid at all times.
Load Report: a report for showing the resource requirements in a work center for all work
currently assigned there as well as all planned and expected orders.
Tactics for smoothing the load and minimizing the impact of changed lead time
include:
2.Operations splitting: sends the lot to two different machines for the same
operation.
3.Lot splitting: breaking up the order and running part of it ahead of the schedule.
Material requirements Planning II (MRP II): a system that allows, with MRP in place,
inventory data to be augmented by other resource variables. In this case, MRP becomes
material resource planning.
1. Gross requirements, which are the same as expected demand or sales forecasts.
2. Minimum levels of inventory to meet customer-service levels.
3. Accurate lead time.
4. Definition of the distribution structure.
Enterprise Resource Planning (ERP): an information system for identifying and planning
the enterprise-wide resources needed to take, make, ship, and account for customer
orders.
Backward scheduling: Scheduling that begins with the due date and schedules the final
operation first and the other job steps in reverse order.
Scheduling criteria
Work Cells are focused facilities that process families of similar components. The
scheduling focus is on generating a forward-looking schedule.
- work-center file: which contains information about the work center, such as capacity and
efficiency.
Control files: files that track each work order’s actual progress against the plan.
1. Subtract costs from entries such that only opportunity costs remain: the penalty of
not making an optimal assignment.
2. Subtract the smallest number in each row from every number in that row; then
subtract the smallest number in every column from every number in that column.
3. Draw the minimum number of vertical and horizontal straight lines necessary to
cover all zeroes in the table. If the number of lines equals either the number of rows or the
number of columns, then you can make an optimal assignment. OR:
- Subtract the smallest number not covered by a line from every other uncovered number.
Add the same number to any number(s) lying at the intersection of any two lines. Return to
Step 2
Sequencing: determining the order in which jobs should be done at each work center.
First come, first served (FCFS): the first job to arrive at a work center is processed first.
Earliest due date (EDD): the job with the earliest due date is processed first.
Shortest processing time (SPT): the job with the shortest processing time is processed
first.
Longest processing Time (LPT): the job with the longest processing time is processed
first.
Critical ratio (CR): the ratio of time remaining to required work time remaining is
calculated, and jobs are scheduled in order of increasing ratio. Helps determine the status
of specific jobs
Theory of constraints (FOC): that body of knowledge that deals with anything that limits
an organization’s ability to achieve its goals.
Control principle:
The drum is the beat of the system and provides the schedule or pace of
production
The buffer is the inventory necessary to keep constraints operating at capacity
The rope provides the synchronization necessary to pull units through the system
Level material use: the use of frequent, high-quality, small lot sizes that contribute to just-
in-time production.
Chapter 16: JIT and lean operations
Just-in-time (JIT): a philosophy of continuous and forced problem solving that drives out
waste.
Lean production: a way to eliminate waste through a focus on exactly what the customer
wants.
Variability: any deviation from the optimum process that delivers perfect product on time,
every time. Variability occurs because:
Employees, machines and suppliers produce units that do not conform to standards,
are late, or are not in the proper quantity.
Engineering drawings or specifications are inaccurate.
Production personnel try to produce before drawings or specifications are complete.
Customer demands are unknown.
Pull system: a JIT concept that results in material being produced only when requested
and moved to where it is needed just as it is needed.
Push system: a system that pushes materials into downstream workstations regardless of
their timeliness or availability of resources to perform the work.
Manufacturing Cycle time: the time between the arrival of raw materials and the shipping
of finished products.
JIT partnerships: partnerships of suppliers and purchasers that remove waste and drive
down costs for mutual benefits.
Relation between
- a planning and scheduling technique with fixed lead times (push control)
- a way to move material expeditiously (pull control)
Results of JIT
- Queue and delay reduction, speeds throughput, frees assets, and wins orders
- Quality improvement, reduces waste and wins orders
- Cost reductions, increases margin or reduces selling price
- Variability reductions in the workplace, reduces waste and wins orders
- Rework reduction, reduces waste and wins orders
Level schedules: scheduling products so that each day’s production meets the demand
for that day.
Kanban is the Japanese word for ‘card’ that has come to mean ‘‘signal”. A Kanban system
moves parts through production via a ‘‘pull’’ from a signal. It authorizes production from
downstream operations, and it is often used with fixed-size containers.
1. Sort/Segregate: keep what is needed and remove the rest from the work area.
2. Simplify/straighten arrange and use methods analysis tools to improve workflow
and reduce wasted motion.
3. Shine/sweep: clean daily
4. Standardize: remove variations from the process by developing standard operating
procedures and checklists
5. Sustain/self-discipline: review periodically to recognize efforts and to motivate to
sustain progress.
U.S managers often add two Ss that contribute to establishing and maintain a clean
workplace:
2. Queues: idle time, storage and waiting add no value, so they are a waste.
3. Transportation: moving materials more than once is waste.
4. Inventory: unnecessary raw material, WIP, finished goods add no value.
5. Motion: movement of equipment or people that ads no value is waste.
6. Over processing: work performed on the product that adds no value is waste.
7. Defective product: returns, warranty claims, rework, and scrap are a waste.
Inter arrival time: can be defined as the time between two subsequent arrivals of products
at the entrance of the process.
Arrival rate: indicates the number of products that arrive per time unit (e.g. number of
products that arrive per hour).
Time-function mapping: flow diagram but with time added on the horizontal axes.
Service blueprinting: a process analysis technique that lends itself to a focus on the
customer and the provider’s interaction with the customer.
Throughput time: time that passes between the moment at which the product is taken
into production and the moment at which the product is ready.
Deterministic throughput time is smaller than (or equal to) the actual average throughput
time.
Throughput time with multiple paths: at the start of the system, it might be uncertain
which pass will be followed by the product or customer through the various processes in
the system. To calculate throughput time with multiple paths, follow the next steps:
Effective capacity: Capacity that can be expected given the product mix, methods of
scheduling, maintenance and standards of quality.
Bottleneck: the slowest process in the system. Or in other words: that what determines
the speed of the entire process.
1. Calculate the design capacity for each 1. Calculate the design capacity of each
process. process.
2. Calculate the expected number of products 2. Calculate the arriving products in the
arriving in the system. system for each process.
- If the design capacity of all processes is - If the design capacity of all processes
sufficient, it can be concluded that the is sufficient, it can be concluded that the
bottleneck is the arrival process. bottleneck is the arrival process.
Departure Rate: the departure rate (i.e. throughput) of a system indicates the number of
products / customers that leave the system per time unit. It is determined by the output of
the bottleneck in the system.
Utilization rate: the available time in which a machine is used for production (including
operating times).
Work in Progress: the number of products that have been taken into production but have
not yet been finished. In general, the WIP cannot be computed exactly.
MTBF = Mean Time between Failures, the average time the machine is working between
two failures.
MTTR = Mean Time to Repair, the average time that is needed to repair the machine.
Efficiency can be obtained from utilization by excluding failures, repair times and breaks
from the available time.