I. Company A is following a POQ model where the optimal order quantity is 600 units.

The unit holding

cost is H=$10/unit/year. The production rate is 100units/month and the demand rate is 50units/month.
What is the total ordering cost incurred by company A per year?

Answer:

At optimality: Ordering cost = Holding cost = H(1-d/p)*Q/2 = 10*(150/100)*600/2 = 10/2*300 =

$1500/year

II. A local airline, is managing its revenue. The operations manager recognized that the expected demand
for a specific flight is very sensitive to price. Specifically, the demand is given by d = 400 - 5*p, where p
is the listed price and d the corresponding demand. The airline sets sequentially two prices, p_1=$10 and
then p_2= $50. What is the maximum total revenue the airline can hope to generate? Assume the total
number of seats on this flight is 250.

Answer:

d_2 = 400 - 5*50 =150; Remaining seats is 250-150=100. d_1= 400-5*10 -150 = 200. But because of
capacity issues, d_1=min(100,200)=100.
So, maximum revenues: 150*50 + 100*10=$8500
A soft drink bottler samples the output on a daily basis and measures the contents of the beverage in
process. The following results were obtained from ten six-packs over a ten-day period in January 2011.
Sample Number Number of Grams Per Bottle Mean Grams Per Six- Range of Grams Per
(Rounded) Pack (Rounded) Six-Pack
1 11.4, 11.8, 12.0, 11.7, 11.5, 12.1 11.75 0.7
2 11.6, 11.7, 11.6, 11.4, 11.8, 11.7 11.63 0.4
3 11.7, 11.5, 11.6, 11.3, 11.9, 11.6 11.6 0.6
4 11.8, 11.7, 12.1, 11.9, 11.7, 11.8 11.83 0.4
5 11.8, 11.3, 11.7, 11.6, 11.9, 12.0 11.72 0.7
6 11.5, 11.7, 11.9, 11.8, 11.8, 11.4 11.68 0.5
7 11.4, 11.3, 11.9, 11.6, 11.9, 11.6 11.62 0.6
8 11.7, 11.5, 11.8, 12.1, 11.6, 11.9 11.77 0.6
9 11.8, 11.5, 11.9, 11.6, 11.8, 11.7 11.72 0.4
10 11.6, 11.8, 11.5, 11.7, 11.3, 11.6 11.58 0.5

116.9 5.4

1. Develop an X-bar control chart for this process and plot the sample means on the chart

2. Develop a range chart for this process and plot the sample ranges on the chart.

3. Evaluate the process. In other words, is the process in control, out of control? Explain.

Answer:
1. The grand mean is 11.69. The mean of the ranges is 0.54. The values for the equation below are from
Exhibit 3-9 and based on 6 items per sample. The upper limit is 11.69 + (0.483)(0.54) = 11.95. The lower
limit is 11.69 - (0.483)(0.54) = 11.429
2. The limits for the range are based on the following equations. The upper limit is (2.004)(0.54) =
1.08216. The lower limit is (0)(0.54) = 0
3. Yes the process appears to be in control since all ten means are within the limits, although some of the
individual observations are outside the limits.
Develop a solution for the following line balancing problem, allowing a cycle time of 5 minutes.

Work Task Task Time Task

(seconds) Predecessor(s)
A 70 -
B 60 A
C 120 B
D 60 -
E 240 C, D
F 100 A
G 190 E, F

1) Draw the precedence diagram for the set of tasks.

2) Calculate the theoretical minimum number of workstations.

3) Balance this line using the most following task heuristic. What tasks are assigned to which stations?
(You could use another heuristic if you wish, but highlight it clearly)

4) What is the efficiency of this line?

5) What is the lowest cycle time that the previous line can achieve? What is the corresponding minimum
number of workstations?
Answer:
1)

2) Total task time is 840sec=14min and thus min number of workstations 14/5= 2.8 = 3workstations.
3) ABDF in station 1 – C in station 2 – E in station 3 and G in station 4
4) The efficiency = 840/4*300=70%
5) CT = longest task time: 4minutes. In this case the minimum number of workstations is 14/4 = 3.5
which is again 4.
This graph shows three process distributions with their specification limits.
Process A has a Cp of 1. Processes B and C have Cp’s of 2.
Using your understanding of the relationship between the Cp and Cpk indexes, compare the Cpk of
processes A, B and C (i.e. which process has a smaller, greater Cpk).

Answer:
Cp and Cpk are parameters that tell us how capable our process is of producing parts that are in spec. Cp
simply compares the spec width and process width and Cpk accounts for any shifting that may have
occurred from the target value.
Process A has a Cp of 1. This means that the spec width and process width is the same for this process.
For process A, Cp = Cpk.
Processes B and C have Cp's of 2. The spec width is twice the process width. However, the mean of
process C is shifted from the target value. Cpk for B > 1 and Cpk for C < Cpk for B.
Consider a retailer selling basic mobile phones. The store sells on average around 1000 phones per month.
The retailer gets her supply from a major regional distributor who charges $200 per phone. In addition,
the distributor charges $5000 for every shipment he makes. The lead time between the distributor and the
retailer averages at 2weeks. The Lebanese customs charges the retailer 5% of the total value of the order.
Assume 1 year = 48weeks and 1 month = 4 weeks.
The retailer would like to grow her business and invest in a secondary business related to smart phones.
These phones have a return as high as 25%/year. However, she is short on cash and the only way she
could invest in this new business is by re-thinking carefully its inventory management strategy.
Her main objective remains to maximize the profit from its primary (basic) phone business. Currently, the
retailer is ordering three times a year and she is never out of stock.

1) a) What do you think the current quantity the retailer is ordering?

b) Do you agree with the quantity the retailer is ordering? And if so, explain why. If not, suggest a more
profitable ordering quantity, Q*.

c) How many times your suggested-policy requires the retailer to order per year?

2) By how much the policy you are suggesting is more profitable than the one currently in use?

3) In order to release more cash for its new business, the retailer is considering using another distributor.
This second one is further away; the lead time remains at 2 weeks while the shipment cost is more
expensive $6000. However, this second distributor offers a 10% discount on each of the $200 item
ordered if the quantity ordered is above 5000units. The customs charges remain the same.
What should the retailer do? Could she save more money with the second distributor? If yes, how much?

4) What is the retailer’s ROP whether she uses the first distributor or the second one?

5) Suppose demand is not deterministic, but is volatile with standard deviation of 250units/month. What
is the ROP if the retailer aims at achieving a 95% service level? (Z95%=1.64). What is the Safety stock
(SS) that the retailer should hold in this case?

6) In this question we are looking at quantifying the cost of uncertainty. We assume that the retailer
orders Q* when the inventory level reaches the ROP obtained in 5). The quantity Q*is the one obtained in
1).
What is the average holding cost in this case when we assume the demand to be equal to its average (i.e.
1000units/month) Compare it to the average holding cost obtained in 1) when demand was deterministic.
Conclude.
Hint: Plot the inventory level with respect to time

Answer:

1) a) The current quantity being ordered is 1000*12/3=4000units per order

b) This is not the optimal quantity. The optimal one is given by Q*=sqrt(2D*S/H) where
D=12*1000=12000units, S=5000 and H=0.25*(200+0.05*200)=$52.5/unit/year and Q*=1512units.

c) The number of times would be 12000/1512=7.93~~8times.

2) The previous policy incurs: H*Q/2+S*D/Q = where Q=4000. This cost is equal =105K+15K=$120K.
While under the optimal policy (i.e. with Q=Q*=1512) the inventory cost is 79372, with a delta of
$40627.

3) We start by checking the optimal quantity under the discount.

H=0.25*(0.05*180+180)=$47.25/unit/year. S=6000 and Q1*=1745. In order to take advantage of the
discount the retailer will have to order 5000units. The total cost is
(180+0.05*180)*12000+47.25*5000/2+6000*12000/5000=$2400525 as opposed to
12000*210+79372=2599372 and hence a delta of 198848.

4) d*L=12000/48*2=500units.

5) ROP=500 + Z*stdev_LT=500+1.64*s_d/sqrt(2)=790units
SS= 790-500=290units

6) The cost of uncertainty is basically the cost incurred from additional units being stocked. On average,
the inventory level will fluctuate between Q+SS and SS and so the holding cost H*Q/2+H*SS. We can
see that if we assume inventory being depleted at a constant rate. Hence the additional cost due to the
uncertainty is H*SS=12529.
As an Operations Manager, you need to make some decisions regarding the procurement of bolts. You
wish to choose the most capable supplier from among three different suppliers: Supplier A, Supplier B, an
d Supplier C. You require that the diameter at the end of the bolt has specifications of 1.500 ± 0.009 cm.
Each of the three suppliers have reported the sample mean and sample standard deviation of their bolt
diameters computed from random samples taken from their production runs. The suppliers’ statistics are
provided in the following table.

1.List the different reasons that make the process capability index a suitable criterion to express process
performance.
2. Based on the sample data provided, which supplier will you choose? Why?
3. What other management tools, besides process capability, would you advise using? Explain
Answer:
1.Because it gives a simple number to express whether a process fails/meets/exceeds specification, and it
accounts for both mean and variance i.e. whether process is centered on the target value
2.

Therefore, Supplier B is preferable.

3. TQM, is the supplier able to build a win--‐win relationship.
Or: JIT in time, so that the chain is responsive etc.
Or: X--‐bar and R charts
This question focuses on a factory that manufactures plastic dolls. Each doll is made up of a head, two
arms, two legs, and a torso. The factory would like to produce 95 dolls in each 8 hour working day. The
process for producing a doll can be summarized as follows:

1. Draw the precedence diagram for

the tasks at the doll manufacturer.

2. Determine the desired cycle time.

3. Determine the theoretical minimum

number of stations needed.

4.Assign tasks to stations in a forward manner using most following tasks priority rule. Write clearly in
which order tasks are selected by the priority rule and which tasks are assigned to which station.

5.Calculate the efficiency of the line obtained in part 4 assuming the cycle time obtained in part 2.
Explain what the efficiency score you obtained means for the production line. (If you weren’t successful
at completing part 4 or part 2, make and clearly state any reasonable assumption for these values.

6.For technology related reasons, Task 4 CANNOT currently be combined with any other task and has to
be a workstation by itself. How does this impact your efficiency?

Answer:

1.

2. Cycle Time =480min/95 dolls = 5.05 mins per doll It is ok if you round it to 5 or 5.1

3. #Workstations theoretical = 30minutes/5.05minutes = 5.9 =~6work stations

4.Workstation 1 = {1}, 5min; Workstation 2 = {3, 6}, 5min; Workstation 3 = {2, 8}, 5min; Workstation 4
= {4, 5}, 5min; Workstation 5 = {7}, 5min; Workstation 6 = {9}, 5min.

5.Efficiency = 30minutes / (6stations * 5.05minutes) = 99% . It means that each unit manufactured will in
cur 1% of idle time (around 0.3 minutes out of 30min) 6.
The number of workstations ought to increase by 1. Hence Efficiency=30/(7*5.05)=84.86%
Having setup and balanced the assembly line for manufacturing dolls, the manufacturer wants to focus on
quality. To this end, the director of operations at the doll factory has established the following process for
checking quality. Every day, one doll is randomly selected and the doll is examined for defects – for exam
ple, strength of the head, leg, and arm connections to the torso are tested, the quality of the painted face is
evaluated, the thickness and stitching of the hair is evaluated, etc. Each part that doesn’t meet the desired
specifications is logged as a defect. The following data, results for 10 working days (week 1 and Week 2)
at the factory, were carefully monitored by quality control, in order to build a control chart.

1. What kind of control chart would you use to monitor this process?
Why?

2. What are the 3-sigma control limits for this process?

3. Draw below the control chart that you specified in part 1 of this
question.

a.Plot the 10 data points for Week 1 and Week 2. Do you recognize any
special behavior? Give an explanation for that behavior

b. Control for the subsequent Week 3 by adding the following data to

your previous chart.

4. On which day of Week 3 did you recognize you are out--‐

of control? Could you suggest a more comprehensive (i.e. better) way to measure whether your system is
out of control? Hint: look for a way that could support early detection of control issues.

THE FOLLOWING QUESTION IS INDEPENDENT OF QUESTIONS 2 TO 4.

5.What other control chart can be used in measuring defect rate. What would you need to do to transform
the chart suggested in part 1 into the chart you are suggesting now?

Answer:

1. c--‐chart--‐ because a c--‐chart is designed to control the number of defects per unit of output.

2.Mean of c = 3.4; sqrt{bar{c}} =~approx 1.8; UCL = bar(c) + 3* bar(c) = 3.4 + 3*1.8 =~8.9 LCL = max
{ bar(c) --‐ 3* bar(c), 0} = max {3.4 – 3*1.8, 0} = 0.

3. a-b. There is a cyclical trend where it starts high on

Monday goes down on Tuesday and Wednesday picks
up on Thursday and reaches a maximum on Friday.

4.Friday is the first day when things went out of control.

We could use a control chart for every day of the week.
This way on Monday we could have noticed that
something is wrong. We expect the average and standard
deviation would be lower…

5.The manufacturer could track the number of dolls that

are defective out of a sample of dolls per day; this can be tracked via a p--‐chart.
Assume that a retailer is facing a constant demand D=12,500 units/year for a smart phone (1 year=50
weeks). The retailer is looking for a supplier in China. Two suppliers were able to meet the quality criteria
set by the retailer. The retailer has to pick one of the two. Both of them charge the same unit cost of
c1 = c2 = $100 per unit and charge the same transportation cost per order equal to $650/order. The
difference is the following.

CASE 1: Supplier 1 is selected. The retailer receives the order in one batch, one week after the order is pl
aced
CASE 2: Supplier 2 is selected. The retailer begins receiving the order two weeks after the order is place.
In this case, the order arrives in small batches of 350 units per week. Suppose the total holding cost (also
known as the carrying cost) is constant and equal to $100/unit/year. For accounting purposes, the retailer
wants to order a quantity of 1000 units every four weeks.
THE FOLLOWING QUESTIONS ARE INDEPENDENT FROM EACH OTHER

1. What is the ROP of the retailer? Consider both cases (CASE 1 and 2).

2. Which supplier do you recommend the retailer selects? Explain.

3.Suppose, the retailer can negotiate the cost, c1 of Supplier 1. Find the value of c1 that makes the
retailer indifferent between the two suppliers.

4.Suppose the retailer is not constrained by any accounting issues, and is considering a different
ordering policy (that is, a policy other than ordering 1000 units every four weeks)

a. Which quantity do you recommend the retailer order instead (consider both cases: CASE 1 and 2)?

b.What is the total cost in each case? Which supplier do you recommend that the retailer select and why?

5. Assume that demand per week is not constant but random with an average of 250 units per week and a
standard deviation of 90 units. What is the ROP in each case given a desired service level of 95% (Z95%
=1.64). Would this make you change your mind about which supplier to select? Explain why or why not.

Answer:

1. ROP1 = d*LT = (12500/50) * 1 = 250 ROP2 = (12500/50) * 2 = 500

2. All costs are the same except for holding which is lower for the POQ model HC = H*(1--‐
d/p) and hence you should pick Supplier 2 (POQ model) HC = 100*(1--‐0.714) = $28.6 = H2

3.Q=1000. To be indifferent both total costs need to be the same H1*Q/2 + S*D/Q + c1*D = H2*Q/2 + S
* D/Q + c2*D Hence c1 = (H2--‐H1)*Q/(2D) +c2= ……

4.a. S (is ordering or setup cost), when mentioned "charge the same transportation cost per order equal to
$650/order" --
‐ This means it's ordering cost, S = $650 per order The production rate (p) is given as "the order arrives in
small batches of 350 units per week" --
‐ So, p = 350 units/week You can use p as weekly production rate instead of daily, since you use with it
the weekly demand rate d = 12500/50 = 250 CASE1: Q*1=sqrt(2DS/H)= sqrt(162500) = 403.11 CASE2:
Q*2= sqrt [ (2DS) / H(1‐ d/p) ] = sqrt [ 16250000/28.57] = 754.17 Supplier 2 incurs less holding cost and
so retailer can afford a larger quantity all else equal
b. TC1=H1Q*1+D1c1 = $ … TC2=H2Q*2+D2c2 = $ … Pick the supplier that guaranties the lowest cost
(it is supplier 2 again)

5.ROP1=250+1.67*90=397.6 ROP2=500+1.67*sqrt(2)*90 = 708.7 Yes because in this case the SS stock

is too high, this will impact the holding cost on average 208*60=12480