Business Admin

3
Operations and
Productivity 1
PowerPoint presentation to accompany
Heizer and Render
Operations Management, Global Edition, Eleventh Edition
Principles of Operations Management, Global Edition, Ninth Edition
PowerPoint slides by Jeff Heyl
© 2014
© 2014
Pearson
Pearson
Education
Education 1-1
Outline
▶ Definition of Operations
Management (OM)
▶ Organizational Functions
▶ Why Study OM?
▶ Significant Events in OM
▶ Goods Versus Services
▶ Measuring productivity
© 2014 Pearson Education © 2011 Pearson Education, Inc. publishing as 1-2

Prentice Hall
What Is Operations
Management?
Production is the creation of
goods and services
Operations management (OM) is
the set of activities that create
value in the form of goods and
services by transforming inputs
into outputs
© 2014 Pearson Education 1-3

Organizing to Produce
Goods and Services
▶ Essential functions:
1. Marketing – generates demand
2. Production/operations – creates the
product
3. Finance/accounting – tracks how well the
organization is doing, pays bills, collects the
money
4. Human Resources – provides labor,
employs, assigns and gives training.

The Supply Chain
▶ A global network of organizations and
activities that supply a firm with goods and
services
▶ Members of the supply chain collaborate to
achieve high levels of customer satisfaction,
efficiency and competitive advantage.
Figure 1.2
Farmer Syrup Bottler Distributor Retailer

producer

Why Study OM?
1. OM is one of four major functions of any
organization, we want to study how people
organize themselves for productive
enterprise
2. We want (and need) to know how goods
and services are produced
3. We want to understand what operations
managers do
4. OM is such a costly part of an
organization
Options for Increasing
Contribution
TABLE 1.1
FINANCE
MARKETING /ACCOUNTING
OPTION OPTION OM OPTION
INCREASE REDUCE REDUCE
SALES FINANCE PRODUCTION
CURRENT REVENUE 50% COSTS 50% COSTS 20%
Sales $100,000 $150,000 $100,000 $100,000
Cost of goods –80,000 –120,000 –80,000 –64,000
Gross margin 20,000 30,000 20,000 36,000
Finance costs –6,000 –6,000 –3,000 –6,000
Subtotal 14,000 24,000 17,000 30,000
Taxes at 25% –3,500 –6,000 –4,200 –7,500
Contribution $ 10,500 $ 18,000 $ 12,750 $ 22,500

What Operations
Managers Do
Basic Management Functions
▶ Planning
▶ Organizing
▶ Staffing
▶ Leading
▶ Controlling

Ten Strategic Decisions
TABLE 1.2
DECISION CHAPTER(S)
1. Design of goods and services 5, Supplement 5
2. Managing quality 6, Supplement 6
3. Process and capacity design 7, Supplement 7
4. Location strategy 8
5. Layout strategy 9
6. Human resources and job design 10
7. Supply-chain management 11, Supplement 11
8. Inventory management 12, 14, 16
9. Scheduling 13, 15
10. Maintenance 17

The Strategic Decisions
1. Design of goods and services
▶ Defines what is required of operations
▶ Product design determines quality,
sustainability and human resources
2. Managing quality
▶ Determine the customer’s quality
expectations
▶ Establish policies and procedures to
identify and achieve that quality
Table 1.2 (cont.)
© 2014 Pearson Education 1 - 10

3. Process and capacity design
▶ How is a good or service produced?
▶ Commits management to specific
technology, quality, resources, and
investment.
4. Location strategy
▶ Nearness to customers, suppliers, and
talent.
▶ Considering costs, infrastructure, logistics,
and government. Table 1.2 (cont.)

5. Layout strategy
▶ Integrate capacity needs, personnel levels,
technology, and inventory
▶ Determine the efficient flow of materials,
people, and information.
6. Human resources and job design
▶ Recruit, motivate, and retain personnel with
the required talent and skills.
▶ Integral and expensive part of the total
system design.
Table 1.2 (cont.)

7. Supply-chain management
▶ Integrate supply chain into the firm’s strategy.
▶ Determine what is to be purchased, from
whom, and under what conditions.
8. Inventory management
▶ Inventory ordering and holding decisions.
▶ Optimize considering customer satisfaction,
supplier capability, and production schedules.
Table 1.2 (cont.)

9. Scheduling
▶ Determine and implement intermediate-
and short-term schedules.
▶ Utilize personnel and facilities while
meeting customer demands.
10. Maintenance
▶ Consider facility capacity, production
demands, and personnel.
▶ Maintain a reliable and stable process.
Table 1.2 (cont.)

Significant Events in OM
Figure 1.4
The Heritage of OM
▶ Division of labor (Adam Smith 1776;
Charles Babbage 1852)
▶ Standardized parts (Whitney 1800)
▶ Scientific Management (Taylor 1881)
▶ Coordinated assembly line (Ford/
Sorenson 1913)
▶ Gantt charts (Gantt 1916)
▶ Motion study (Frank and Lillian Gilbreth
1922)
▶ Quality control (Shewhart 1924; Deming
1950)
The Heritage of OM
▶ Computer (Atanasoff 1938)
▶ CPM/PERT (DuPont 1957, Navy 1958)
▶ Material requirements planning (Orlicky
1960)
▶ Computer aided design (CAD 1970)
▶ Flexible manufacturing system (FMS 1975)
▶ Baldrige Quality Awards (1980)
▶ Computer integrated manufacturing (1990)
▶ Globalization (1992)
▶ Internet (1995)
Eli Whitney
▶ Born 1765; died 1825
▶ In 1798, received government
contract to make 10,000 muskets
▶ Showed that machine tools could
make standardized parts to exact
specifications
▶ Musket parts could be used in any
musket

Frederick W. Taylor
▶ Born 1856; died 1915
▶ Known as ‘father of scientific
management’
▶ In 1881, as chief engineer for
Midvale Steel, studied how tasks
were done
▶ Began first motion and time studies
▶ Created efficiency principles
Taylor’s Principles
Management Should Take More
Responsibility for:
► Matching employees to right job
► Providing the proper training
► Providing proper work methods and
tools
► Establishing legitimate incentives for
work to be accomplished

Frank & Lillian Gilbreth
▶ Frank (1868-1924); Lillian (1878-1972)
▶ Husband-and-wife engineering team
▶ Further developed work measurement
methods
▶ Applied efficiency methods to their
home and 12 children!
▶ Book & Movie: “Cheaper by the Dozen,”
“Bells on Their Toes”

Henry Ford
▶ Born 1863; died 1947
▶ In 1903, created Ford Motor Company
▶ In 1913, first used moving assembly
line to make Model T
▶ Unfinished product moved by conveyor
past work station
▶ Paid workers very well for 1911
($5/day!)

W. Edwards Deming
▶ Born 1900; died 1993
▶ Engineer and physicist
▶ Credited with teaching Japan quality
control methods in post-WW2
▶ Used statistics to analyze process
▶ His methods involve workers in
decisions

Operations for
Goods and Services
▶ Manufacturers produce tangible product,
services often intangible
▶ Operations activities often very similar
▶ Distinction not always clear
▶ Few pure services

Differences Between Goods and
Services
TABLE 1.3
CHARACTERISTICS OF SERVICES CHARACTERISTICS OF GOODS
Intangible: Ride in an airline seat Tangible: The seat itself
Produced and consumed simultaneously: Beauty salon Product can usually be kept in inventory (beauty care
produces a haircut that is consumed as it is produced products)
Unique: Your investments and medical care are unique Similar products produced (iPods)
High customer interaction: Often what the customer is Limited customer involvement in production
paying for (consulting, education)
Inconsistent product definition: Auto Insurance Product standardized (iPhone)
changes with age and type of car
Often knowledge based: Legal, education, and medical Standard tangible product tends to make automation
services are hard to automate feasible
Services dispersed: Service may occur at retail store, Product typically produced at a fixed facility
local office, house call, or via internet.
Quality may be hard to evaluate: Consulting, Many aspects of quality for tangible products are easy
education, and medical services to evaluate (strength of a bolt)
Reselling is unusual: Musical concert or medical care Product often has some residual value

Productivity Challenge
Productivity is the ratio of outputs (goods and
services) divided by the inputs (resources
such as labor and capital)
The objective is to improve productivity!
Important Note!
Production is a measure of output only
and not a measure of efficiency

The Economic System
Inputs Transformation Outputs
Labor, Examples of Goods

capital, Transsformation are: and
management Storage services
Transportation
Machining
Feedback loop
Figure 1.6

Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Stop requiring signatures Saved 8 seconds
on credit card purchases per transaction
under $25
Change the size of the ice Saved 14 seconds
scoop per drink
New espresso machines Saved 12 seconds
© 2014 Pearson Education
per shot 1 - 28
Improving Productivity at
Starbucks
A team of 10 analysts
continually look for ways
to shave time. Some
improvements:
Operations improvements have
helped StarbucksSaved
Stop requiring signatures increase yearly
8 seconds
revenue per outlet
on credit card purchases bytransaction
per $250,000 to
under $25 $1,000,000 in seven years.
Change the size Productivity
of the ice has improved
Saved 14 by 27%, or
seconds
scoop about 4.5% per year.
per drink
New espresso machines Saved 12 seconds
© 2014 Pearson Education
per shot 1 - 29
Productivity
Units produced
Productivity =
Input used
▶ Measure of process improvement

▶ Represents output relative to input
▶ Only through productivity increases
can our standard of living improve

Productivity Calculations
Labor Productivity
Units produced
Productivity =
Labor-hours used
1,000
= = 4 units/labor-hour
250
One resource input  single-factor productivity

Multi-Factor Productivity
Output
Productivity =
Labor + Material + Energy +
Capital + Miscellaneous
► Also known as total factor productivity
► Output and inputs are often expressed in
dollars
Multiple resource inputs  multi-factor productivity

Collins Title Productivity
Old System:
Staff of 4 works 8 hrs/day 8 titles/day
Payroll cost = $640/day Overhead = $400/day
Old labor 8 titles/day

=
productivity 32 labor-hrs

Old System:

= = .25 titles/labor-hr

Old System:
New System:
14 titles/day Overhead = $800/day

New labor 14 titles/day

=

Old System:
New System:

New labor 14 titles/day


Old System:
New System:
Old multifactor 8 titles/day

=
productivity $640 + 400

Old System:
New System:

= = .0077 titles/dollar

Old System:
New System:

New multifactor 14 titles/day

=

Old System:
New System:

New multifactor 14 titles/day


Productivity Variables
1. Labor - contributes
about 10% of the
annual increase
2. Capital - contributes
about 38% of the
annual increase
3. Management -
contributes about 52%
of the annual increase
Productivity and the
Service Sector
1. Typically labor intensive
2. Frequently focused on unique individual
attributes or desires
3. Often an intellectual task performed by
professionals
4. Often difficult to mechanize and automate
5. Often difficult to evaluate for quality

Ethics, Social Responsibility,
and Sustainability
Challenges facing
operations managers:
▶ Develop and produce safe, high-quality
green products
▶ Train, retrain, and motivate employees
in a safe workplace
▶ Honor stakeholder commitments

Managing Inventory
12
Heizer and Render
© 2014
© 2014
Pearson
Pearson
Education
Education 1 - 44
Outline
1. Types of Inventory
2. Functions of Inventory
3. ABC Analysis
4. Record Accuracy
5. Cycle Counting
6. Independent vs. Dependent
Demand Inventory Control
Systems
© 2014 Pearson Education © 2011 Pearson 1 - 45
Outline – Continued
7. Deterministic Inventory Models
 Economic Order Quantity (EOQ)
Model.
 Production Order Quantity (POQ)
Model.
 Quantity Discount Model.
8. Probabilistic Models and Safety Stock
9. Single-Period Inventory Model
10. Fixed-Period (P) Systems

Amazon.com
 Amazon.com started as a “virtual”
retailer – no inventory, no
warehouses, no overhead; just
computers taking orders to be filled
by others
 Growth has forced Amazon.com to
become a world leader in
warehousing and inventory
management
Inventory Management
The objective of inventory

management is to strike a
balance between inventory
investment and customer service

Inventory Classifications
Inventory
Process Number Demand

Other
stage & Value Type
Raw Material A Items

Independent Maintenance
WIP B Items
Dependent Repair
Finished Goods C Items
Operating

Functions of Inventory
1. To decouple various parts of the
production process by covering
delays
2. To protect the company against
fluctuations in demand
3. To provide a selection for
customers
4. To take advantage of quantity
discounts
5. To hedge©against
2011 Pearson inflation
Problems Caused by
Inventory
▶ Inventory ties up working capital
▶ Inventory takes up space
▶ Inventory is prone to:
▶ Damage, Pilferage and
Obsolescence
▶ Inventory hides problems

The Material Flow Cycle
Cycle time
95% 5%
Input Wait for Wait to Move Wait in queue Setup Run Output
inspection be moved time for operator time time
Figure 12.1

Important Issues in
Inventory Management
1. Classifying inventory
items
2. Keeping accurate
inventory records

ABC Classification System
Classifying inventory according to some

measure of importance and allocating
control efforts accordingly.
A - very important
B - mod. important High
A
C - least important Annual
$ value B
of items
Low C
Low High
© 2014 Pearson Education Percentage of Items
1 - 54
12-54
ABC Worked Example
▶ Item Usage and Value

ABC Worked Example
▶ Annual Usage Values

ABC Worked Example
▶ Ascending Usage Values

ABC Worked Example
▶ ABC Chart Showing Classifications

ABC Classification System
 Policies employed may include

More emphasis on supplier
development for A items
Tighter physical inventory
control for A items
More care in forecasting A
items
Inventory Record Accuracy
&Cycle Counting
 Items are counted and records are
updated on a periodic basis
 Often used with ABC analysis
to determine the cycle
(frequency of counting)
 Eliminates shutdowns and
interruptions
 Maintains accurate inventory
records
Cycle Counting Example 2,
page 516, Ch.12
5,000 items in inventory, 500 A items, 1,750 B items, 2,750 C items
Policy is to count A items every month (20 working days), B items
every quarter (60 days), and C items every six months (120 days)
Item Number of Items

Class Quantity Cycle Counting Policy Counted per Day
A 500 Each month 500/20 = 25/day
B 1,750 Each quarter 1,750/60 = 29/day
C 2,750 Every 6 months 2,750/120 = 23/day
77/day

Record Accuracy and Inventory
Counting Systems
▶ Periodic Inventory Counting System
Physical count of items is made at periodic
intervals
▶ Perpetual (continual) Inventory
Counting System
Computer System that keeps track
of removals from inventory
continuously, thus
monitoring current levels of
each item

Independent and Dependent
Demand Inventory Management
Systems
 Independent demand - the
demand for the item is
independent of the demand for
any other item in inventory
 Dependent demand - the
demand for the item is
dependent upon the demand for
some other item in the
inventory
Examples for Independent Versus
Dependent Demand
▶ Independent demand – finished goods, items
that are ready to be sold such as computers,
cars.
▶ Forecasts are used to develop production and
purchase schedules for finished goods.
▶ Dependent demand – components of finished
products such as chips, tires and engine that
make up these finished goods
▶ Dependent demand inventory control techniques
utilize material requirements planning (MRP) logic to
develop production and purchase schedules
64
Inventory Independent Demand
A Dependent Demand
B(4) C(2)
D(2) E(1) D(3) F(2)
Independent demand is uncertain. That is why it is forecasted.

Dependent demand is certain and it is calculated.
65
Regardless of the nature of demand
(independent, dependent) two
fundamental issues underlie all
inventory planning:
How Much to Order?

When to order?
© 2014 Pearson Education 66 1 - 66

Independent Demand Inventory Models
to Answer These Questions
1) Single-Period Inventory Model:One time ordering
decision such as selling t-shirts at a football game,
newspapers, fresh bakery products. Objective is to
balance the impact of running out of stock with the
impact of being left with stock that does not sell.
2) Multi-Period Inventory Models
▶ Fixed-Order Quantity Models: Each time a fixed
amount of order is placed.
▶ Economic Order Quantity (EOQ) Model
▶ Production Order Quantity (POQ) Model
▶ Quantity Discount Models
▶ Fixed-Time Period Models :Orders are placed at
specific
© 2014 Pearson times intervals.
Education 1 - 67
Key Inventory Terms
▶ Lead time: time interval between ordering and receiving the
order
▶ Holding (carrying) costs: cost to carry an item in inventory for
a length of time, usually a year (heat, light, rent, security,
deterioration, spoilage, breakage, depreciation, opportunity
cost,…, etc.,)
▶ Ordering costs: costs of ordering and receiving inventory
(shipping cost, preparing invoices, cost of inspecting goods
upon arrival for quality and quantity, moving the goods to
temporary storage)
▶ Set-up Cost: cost to prepare a machine or process for
manufacturing an order
▶ Shortage costs: costs when demand exceeds supply, the
opportunity cost of not making a sale
Basic EOQ Model
Important assumptions
1. Demand is known, constant, and
independent
2. Lead time is known and constant
3. Receipt of inventory is instantaneous and
complete
4. Quantity discounts are not possible
5. Only variable costs are ordering and
holding
6. Stockouts can be completely avoided
Inventory Usage Over Time
Usage rate Average

Order inventory
Inventory level
quantity = Q on hand
(maximum
Q
inventory
level) 2
Minimum
inventory
0
Time
Figure 12.3
Minimizing Costs
Objective is to minimize total costs
Total cost of
holding and
setup (order)
Minimum
total cost
Annual cost
Holding cost
Setup (or order)

cost
Optimal order Order quantity
quantity (Q*)
Table 12.4(c)
The EOQ Model
Annual setup cost =
D
Q
S
Q = Number of pieces per order

Q* = Optimal number of pieces per order (EOQ)
D = Annual demand in units for the inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year
Annual setup cost = (Number of orders placed per year)

x (Setup or order cost per order)
Annual demand Setup or order

=
Number of units in each order cost per order
= D (S)
Q

The EOQ Model
Annual setup cost =
D
Q
S
Q
Q = Number of pieces per order Annual holding cost = H
2
Annual holding cost = (Average inventory level)

x (Holding cost per unit per year)
Order quantity
= (Holding cost per unit per year)
2
= Q (H)
2

The EOQ Model
Annual setup cost =
D
Q
S
Q
Q = Number of pieces per order Annual holding cost = H
2
Optimal order quantity is found when
annual setup cost equals annual
holding cost
D Q
S = H
Q 2
Solving for Q* 2DS = Q2H
Q2 = 2DS/H
Q* = 2DS/H

An EOQ Example
Determine optimal number of needles to order (Q)
D = 1,000 units per year
S = $10 per order
H = $.50 per unit per year
2DS
Q* =
H
2(1,000)(10)
Q* = = 40,000 = 200 units
0.50

An EOQ Example
Determine expected number orders per year (N)
D = 1,000 units Q* = 200 units
S = $10 per order
Expected Demand D
number of =N= =
orders Order quantity Q*
1,000
N= 200= 5 orders per year

An EOQ Example
Determine expected time between orders (T)
S = $10 per order N = 5 orders per year
Number of working
Expected time days per year
between orders = T = N
250
T= 5 = 50 days between orders

An EOQ Example
Determine total annual cost:
H = $.50 per unit per year T = 50 days
Total annual cost = Setup cost + Holding cost
D Q
TC = S
Q+ H 2
1,000 200
TC = ($10) +
200 ($.50)
2
TC = (5)($10) + (100)($.50) = $50 + $50 = $100

Robust Model
 The EOQ model is robust

 It works even if all parameters
and assumptions are not met
Because the total cost
curve is relatively flat in
the area of the EOQ
Minimizing Costs
Objective is to minimize total costs
Total cost of
holding and
setup (order)
Minimum
total cost
Annual cost
Holding cost
Setup (or order)

cost
Optimal order Order quantity
quantity (Q*)
Table 12.4(c)
An EOQ Example
Suppose Management underestimates demand by 50%
D = 1,000 units 1,500 units Q* = 200 units
D Q
TC = S
Q+ H 2
1,500 200
TC = ($10) +
200 ($.50)
2 = $75 + $50 = $125

An EOQ Example
Actual EOQ for new demand is 244.9 units
D = 1,000 units 1,500 units Q* = 244.9 units
D Q
TC = S
Q+ H 2
Only 2% less than
1,500 244.9 the total cost of
TC = ($10) +
244.9 ($.50) $125 when the
2
order quantity was
200
TC = $61.24 + $61.24 = $122.48

Production Order Quantity
(POQ) Model
 Used when the third assumption of
EOQ model is relaxed: Receipt of
inventory is not instantaneous and
complete
 Used when units are produced and
used/or sold simultaneously
 Hence, inventory builds up over a
period of time after an order is
placed
Model
Part of inventory cycle during
which production (and usage)
is taking place
Inventory level
Demand part of cycle

with no production
Maximum
inventory
t Time
Figure 12.6
Model
Q = Number of pieces per order p = Daily production rate
H = Holding cost per unit per year d = Daily demand/usage rate
t = Length of the production run in days
Annual inventory Holding cost

= (Average inventory level) x
holding cost per unit per year
Annual inventory
= (Maximum inventory level)/2
level
Maximum Total produced during Total used during

= –
inventory level the production run the production run
= pt – dt

Model
t = Length of the production run in days
Maximum Total produced during Total used during

= –
inventory level the production run the production run
= pt – dt
However, Q = total produced = pt ; thus t = Q/p
Maximum Q Q d
inventory level = p –d =Q 1–
p p p
Maximum inventory level Q d

Holding cost = (H) = 1– H
2 2 p
Model
D = Annual demand
Setup cost = (D/Q)S
Holding cost = 1HQ[1 - (d/p)]
2
(D/Q)S = 1 - (d/p)]
HQ[1
2
2DS
Q2 = H[1 - (d/p)]
2DS
Q* = H[1 - (d/p)]
p
Example
D = 1,000 units p = 8 units per day
S = $10 d = 4 units per day
H = $0.50 per unit per year
2DS
Q* = H[1 - (d/p)]
2(1,000)(10)
Q* = = 80,000
0.50[1 - (4/8)]
= 282.8 or 283 hubcaps

Model
Note:
D 1,000
d=4= =
Number of days the plant is in operation 250
When annual data are used the equation becomes
2DS
Q* =
annual demand rate
H 1– annual production rate

Quantity Discount Models
 These models are used where the price of
the item ordered varies with the order size.
 Reduced prices are often available when
larger quantities are ordered.
 Trade-off is between reduced purchasing
and ordering cost and increased holding
cost
Total cost = Setup (order) cost + Holding cost +

Product (purchase) cost
D Q
TC = S
Q+ H +2 PD

Total Costs with Purchasing Cost
Cost
Adding Purchasing cost TC with PD

doesn’t change EOQ
TC without PD
PD
0 EOQ Quantity
▶ There are two general cases of quantity
discount models:
1.Carrying costs are constant (for example:
$2 per unit).
2.Carrying costs are stated as a
percentage of purchase price (for
example: 20% of unit price)

Total Cost with Constant Carrying
Costs (Compute common EOQ)
TCa
Total Cost
TCb
Decreasing
TCc
Price
CC a,b,c
OC
EOQ Quantity
Quantity Discount Model
with Constant Carrying Cost
QUANTITY PRICE
S = $2,500
1 - 49 $1,400 H = $190 per computer
50 - 89 1,100 D = 200
90+ 900
2SD 2(2500)(200)
Qopt = = = 72.5 PCs
H 190
For Q = 72.5 SD H Qopt

TC = + 2 + PD = $233,784
Qopt
For Q = 90 SD HQ
TC = + 2 + PD = $194,105
Q
(When carrying costs are specified as a
percentage of unit price)
Steps in analyzing a quantity discount
1. For each discount range, calculate Q*
2. If Q* for a discount range doesn’t
qualify, adjust it upward (set it to the
smallest possible order size of next
discount range)
3. Compute the total cost for each Q* or
adjusted value from Step 2
4. Select the Q* that gives the lowest total
cost
A typical quantity discount schedule, Inventory
Carrying cost is 20% of unit price
Discount Discount
Number Discount Quantity Discount (%) Price (P)
1 0 to 999 no discount $5.00
2 1,000 to 1,999 4 $4.80
3 2,000 and over 5 $4.75
Table 12.2

When carrying costs are specified as a percentage of
unit price, the total cost curve is broken into different
total cost curves for each discount range
Total cost curve for discount 2

Total cost
curve for
discount 1
Total cost $
Total cost curve for discount 3

b
a Q* for discount 2 is below the allowable range at point a
and must be adjusted upward to 1,000 units at point b
1st price 2nd price

break break
0 1,000 2,000
Figure 12.7
Order quantity
Quantity Discount Example
Calculate Q* for every discount 2DS
Q* =
IP
2(5,000)(49)
Q1* = = 700 cars/order
(.2)(5.00)
2(5,000)(49)
(.2)(4.80)
2(5,000)(49)
(.2)(4.75)
Calculate Q* for every discount 2DS
Q* =
IP
2(5,000)(49)
(.2)(5.00)
2(5,000)(49)
(.2)(4.80) 1,000 — adjusted
2(5,000)(49)
(.2)(4.75) 2,000 — adjusted
Annual Annual Annual
Discount Unit Order Product Ordering Holding
Number Price Quantity Cost Cost Cost Total
1 $5.00 700 $25,000 $350 $350 $25,700
2 $4.80 1,000 $24,000 $245 $480 $24,725
3 $4.75 2,000 $23.750 $122.50 $950 $24,822.50
Table 12.3
Choose the price and quantity that gives the lowest
total cost
Buy 1,000 units at $4.80 per unit

When to Reorder with EOQ Ordering
▶ The EOQ models answer the equation of how much
to order, but not the question of when to order. The
reorder point occurs when the quantity on hand
drops to predetermined amount.
▶ That amount generally includes expected demand
during lead time.
▶ In order to know when the reorder point has been
reached, a perpetual inventory is required.
▶ The goal of ordering is to place an order when the
amount of inventory on hand is sufficient to satisfy
demand during the time it takes to receive that
order (i.e., lead time)
When to Order: Reorder Points (Make sure
demand and lead time are expressed in the
same time units)
 If the demand and lead time are both
constant, the reorder point (ROP) is
simply:
Demand Lead time for a

ROP = per day new order in days
=dxL
D
d= Number of working days in a year

Reorder Point Curve
Q*
Inventory level (units)
Resupply takes place as order arrives
Slope = units/day = d
ROP
(units)
Time (days)
Figure 12.5
Lead time = L
Reorder Point Example
Demand = 8,000 iPods per year
250 working day year
Lead time for orders is 3 working days
D
d= Number of working days in a year
= 8,000/250 = 32 units
ROP = d x L
= 32 units per day x 3 days = 96 units

When to reorder
▶ When variability is present in demand or lead
time, it creates the possibility that actual
demand will exceed expected demand.
▶ Consequently, it becomes necessary to carry
additional inventory, called “safety stock”, to
reduce the risk of running out of stock during
lead time. The reorder point then increases by
the amount of the safety stock:
ROP = expected demand during lead time + safety
stock (SS)

Safety Stock
Quantity
Maximum probable demand

during lead time
Expected demand
during lead time
ROP
Safety stock
LT Time
Safety stock reduces risk of
stockout
© 2014 during lead time
Pearson Education 1 - 106
Safety stock
▶ Because it cost money to hold safety stock, a
manager must carefully weigh the cost of
carrying safety stock against the reduction in
stockout risk it provides.
▶ The customer service level increases as the
risk of stockout decreases.
▶ The order cycle “service level” can be
defined as the probability that demand will not
exceed supply during lead time. A service
level of 95% implies a probability of 95% that
demand will not exceed supply during lead
time.
Safety Stock
▶ The “risk of stockout” is the complement of
“service level”
Service level = 1 - Probability of stockout
▶ Higher service level means more safety
stock
▶ More safety stock means higher ROP

Reorder Point with a Safety Stock
Inventory level
Q
Reorder
point, R
Safety Stock
0
LT LT
Time
Probabilistic Models to Determine ROP
and Safety Stock (Stockout Cost/Unit is
known)
▶ Use safety stock to achieve a desired
service level and avoid stockouts
ROP = d x L + ss
Annual stockout costs = the sum of the units short for each
demand level * the probability of that demand level * the stockout cost/unit
* the number of orders per year

Safety Stock Example
(Stochastic demand and constant lead time)
ROP = 50 units Stockout cost = $40 per frame
Opt. # of Orders per year (N) = 6
Carrying cost = $5 per frame per year (SS ???)
NUMBER OF UNITS PROBABILITY
30 .2
40 .2
ROP  50 .3
60 .2
70 .1
1.0

Safety Stock Example
ROP = 50 units Stockout cost = $40 per frame
Orders per year = 6 Carrying cost = $5 per frame per year
SAFETY ADDITIONAL TOTAL

STOCK HOLDING COST STOCKOUT COST COST
20 (20)($5) = $100 $0 $100
10 (10)($5) = $ 50 (10)(.1)($40)(6) = $240 $290
0 $ 0 (10)(.2)($40)(6) + (20)(.1)($40)(6) = $960 $960
A safety stock of 20 frames gives the lowest total cost

ROP = 50 + 20 = 70 frames

Probabilistic Models to Determine
ROP and Safety Stock when the
cost of stockouts cannot be
determined
 Desired service levels are used to
set safety stock
ROP = demand during lead time + ZsdLT
where Z = Number of standard deviations

sdLT = Standard deviation of demand during lead
time

Probabilistic Demand
Probability of Risk of a stockout

no stockout (5% of area of
95% of the time normal curve)
Mean ROP = ? kits Quantity

demand
350
Safety
stock
0 z
Number of
standard deviations
Probabilistic Example
m = Average demand during lead time = 350 resuscitation kits
sdLT = Standard deviation of
demand during lead time = 10 kits
Z = 5% stockout policy (service level = 95%)
Using Appendix I, for an area under the curve of 95%, the Z =

1.65
Safety stock = ZsdLT = 1.65(10) = 16.5 kits
Reorder point = Expected demand during lead time + Safety stock

= 350 kits + 16.5 kits of safety stock
= 366.5 or 367 kits

Probabilistic Demand
Minimum demand during lead time

Inventory level
Maximum demand during lead time
Mean demand during lead time

ROP = 350 + safety stock of 16.5 = 366.5
ROP 
Normal distribution probability of
demand during lead time
Expected demand during lead time (350 kits)
Safety stock 16.5 units
0 Lead
time Time
Figure 12.8 Place Receive
order order
Get the probability from
standard normal table
▶ z denotes a standard normal
random variable
▶ Standard normal curve is
symmetric about the origin 0
▶ Draw a graph

Get the probability from standard
normal table
▶ z denotes a standard normal random
variable
▶ Standard normal curve is symmetric
about the origin 0
▶ Draw a graph

From non-standard normal to
standard normal
▶ X is a normal random variable with mean
μ, and standard deviation σ
▶ Set Z=(X–μ)/σ
Z=standard unit or z-score of X
Then Z has a standard normal distribution and

Table Appendix I: P(0<Z<z)
z .00 .01 .02 .03 .04 .05 .06

0.0 .0000 .0040 .0080 .0120 .0160 .0199 .0239
0.1 .0398 .0438 .0478 .0517 .0557 .0596 .0636
0.2 .0793 .0832 .0871 .0910 .0948 .0987 .1026
0.3 .1179 .1217 .1255 .1293 .1331 .1368 .1404
0.4 .1554 .1591 .1628 .1664 .1700 .1736 .1772
0.5 .1915 .1950 .1985 .2019 .2054 .2088 .2123
… … … … … … … …
1.0 .3413 .3438 .3461 .3485 .3508 .3531 .3554
1.1 .3643 .3665 .3686 .3708 .3729 .3749 .3770
Other Probabilistic Models to
determine SS and ROP
▶ When data on demand during lead time is
not available, there are other models
available
1. When demand per day is variable and lead
time (in days) is constant
2. When lead time is variable and demand per
day is constant
3. When both demand per day and lead time
(in days) are variable

Demand per day is variable and
lead time (in days) is constant
ROP =(Average daily demand

* Lead time in days) + ZsdLT
wheresdLT = sd Lead time

sd= standard deviation of demand per day

Example
Average daily demand (normally distributed) = 15
Lead time in days (constant) = 2
Standard deviation of daily demand = 5
Service level = 90%
Z for 90% = 1.28

From Appendix I
ROP = (15 units x 2 days) + ZsdLT

= 30 + 1.28(5)( 2)
= 30 + 9.02 = 39.02 ≈ 39
Safety stock is about 9 computers

Lead time (in days) is variable and
demand per day is constant
ROP = (Daily demand * Average lead time in

days) +Z * (Daily demand) * sLT
wheresLT = Standard deviation of lead time in days

Example
Daily demand (constant) = 10
Average lead time = 6 days
Standard deviation of lead time = sLT = 1
Service level = 98%, so Z (from Appendix I) = 2.055
ROP = (10 units x 6 days) + 2.055(10 units)(1)

= 60 + 20.55 = 80.55
Reorder point is about 81 cameras

Both demand per day and lead time
(in days) are variable
ROP = (Average daily demand

x Average lead time) + ZsdLT
where sd = Standard deviation of demand per day

sLT = Standard deviation of lead time in days
sdLT = (Average lead time x sd2)
+ (Average daily demand)2s2LT

Example
Average daily demand (normally distributed) = 150
Standard deviation = sd = 16
Average lead time 5 days (normally distributed)
Standard deviation = sLT = 1 day
Service level = 95%, so Z = 1.65 (from Appendix I)
ROP = (150 packs ´ 5 days) +1.65s dLT

s dLT = ( ) (
5 days ´162 + 1502 ´12 =) (5 ´ 256) + (22,500 ´1)
= (1,280) + (22,500) = 23,780 @ 154
ROP = (150 ´ 5) +1.65(154) @ 750 + 254 = 1,004 packs

Single-Period Inventory Model
Used to handle ordering of
perishables (fresh fruits,
flowers) and other items with
limited useful lives
(newspapers, spare parts for
specialized equipment).

Single-Period Inventory Model
▶ In a single-period model, items are received in
the beginning of a period and sold during the
same period. The unsold items are not carried
over to the next period.
▶ The unsold items may be a total waste, or sold
at a reduced price, or returned to the producer at
some price less than the original purchase price.
▶ The revenue generated by the unsold items is
called the salvage value.

Single Period Model
▶ Only one order is placed for a product
▶ Units have little or no value at the end of the
sales period
Cs = Cost of shortage = Sales price/unit – Cost/unit

Co = Cost of overage = Cost/unit – Salvage value
Cs
Service level = Cs + Co

Single Period Example
Average demand = m = 120 papers/day
Standard deviation = s = 15 papers
Cs = cost of shortage = $1.25 - $.70 = $.55
Co = cost of overage = $.70 - $.30 = $.40
Cs
Service level = Cs + Co
.55 Service
= level
.55 + .40 57.8%
= .55 = .578
.95 m = 120
Optimal stocking level

Single Period Example
From Appendix I, for the area .578, Z  .20

The optimal stocking level
= 120 copies + (.20)(s)

= 120 + (.20)(15) = 120 + 3 = 123 papers
The stockout risk = 1 – service level
= 1 – .578 = .422 = 42.2%

Fixed-Period (P) Systems
▶ Orders placed at the end of a fixed
period
▶ Inventory counted only at the end of
period
▶ Order brings inventory up to target level
▶ Only relevant costs are ordering and
holding
▶ Lead times are known and constant
▶ Items are independent of one another
Fixed-Period (P) Systems, also
called Periodic Review System
Target quantity (T)
Q4
Q2
On-hand inventory
Q1 P
Q3
Time Figure 12.9

Fixed-Period Systems
▶ Inventory is only counted at each
review period
▶ May be scheduled at convenient times
▶ Appropriate in routine situations
▶ May result in stockouts between
periods
▶ May require increased safety stock

The Global
Environment and
Operations Strategy 2
Heizer and Render
© 2014
© 2014
Pearson
Pearson
Education
Education 1 - 136
OUTLINE
▶ A Global View to Operations
▶ Reasons to Globalize
▶ Developing Missions and
Strategies
▶ Strategies for Competitive
Advantage
▶ SWOT Analysis and Strategy
Development
Growth of World Trade
60 –
55 –
50 –
45 –
40 –
Percent
35 –
30 –
25 –
20 –
15 –
10 –| | | | | | | | |
1970 1975 1980 1985 1990 1995 2000 2005 2010

Year Figure 2.1
Reasons to Globalize
1. Improve the supply chain

2. Reduce costs (labor, taxes, tariffs, etc.)
3. Improve operations
4. Understand markets
5. Improve products
6. Attract and retain global talent

Improve the Supply Chain
▶ Locating facilities closer to unique
resources
▶ Auto design to California
▶ Athletic shoe production to China
▶ Perfume manufacturing in France

Reduce Costs
▶ Foreign locations with lower wage rates
can lower direct and indirect costs
▶ Trade agreements can lower tariffs
▶ Maquiladoras
▶ World Trade Organization (WTO)
▶ North American Free Trade Agreement
(NAFTA)
▶ APEC, SEATO, MERCOSUR, CAFTA
▶ European Union (EU)

Improve Operations
▶ Understand differences between
how business is handled in other
countries
▶ Japanese – inventory management
▶ Scandinavians – ergonomics
▶ International operations can
improve response time and
customer service

Understand Markets
▶ Interacting with foreign customers,
suppliers, competition can lead to
new opportunities
▶ Cell phone
design moved
from Europe
to Japan
▶ Extend the
product life
cycle

Improve Products
▶ Remain open to free flow of ideas
▶ Toyota and BMW manage joint
research and development
▶ Reduced risk, state-of-the-art design,
lower costs
▶ Samsung and Bosch jointly produce
batteries

Attract and Retain Global
Talent
▶ Offer better employment
opportunities
▶ Better growth opportunities and
insulation against unemployment
▶ Relocate unneeded personnel to
more prosperous locations

Cultural and Ethical Issues
▶ Cultures can be quite different
▶ Attitudes can be quite different
towards
► Punctuality ► Thievery
► Lunch breaks ► Bribery
► Environment ► Child labor
► Intellectual
property

Key Issues of Globalization
▶ National literacy rate ► Work ethic
▶ Rate of innovation ► Tax rates
▶ Rate of technology ► Inflation
change ► Availability of raw
▶ Number of skilled materials
workers ► Interest rates
▶ Political stability
► Population
▶ Product liability laws ► Number of miles of
▶ Export restrictions highway
▶ Variations in language ► Phone system

Ranking Corruption
Rank Country 2012 CPI Score (out of 100)
1 Demark, Finland, New Zealand 90 Least
4 Sweden 88 Corrupt
5 Singapore 87
6 Switzerland 86
7 Australia, Norway 85
9 Canada, Netherlands 84
13 Germany 79
14 Hong Kong 77
17 Japan, UK 74
19 USA 73
37 Taiwan 61
39 Israel 60
45 South Korea 56 Most
80 China 39 Corrupt
123 Vietnam 31
133 Russia 28
Match Product & Parent
► Braun Household
Appliances 1. Volkswagen
► Firestone Tires 2. Bridgestone
► Godiva Chocolate 3. Campbell Soup
► Haagen-Dazs Ice 4. Tata Motors Limited
Cream
5. Proctor and Gamble
► Jaguar Autos
6. Nestlé
► MGM Movies
7. Pillsbury
► Lamborghini Autos
8. Sony
► Alpo Petfoods

Match Product & Parent
► Braun Household
Appliances 1. Volkswagen
► Firestone Tires 2. Bridgestone
► Godiva Chocolate 3. Campbell Soup
► Haagen-Dazs Ice 4. Tata Motors Limited
Cream
5. Proctor and Gamble
► Jaguar Autos
6. Nestlé
► MGM Movies
7. Pillsbury
8. Sony
► Alpo Petfoods

Match Product & Country
► Braun Household
Appliances
► Firestone Tires 1. Great Britain
► Godiva Chocolate 2. Germany
► Haagen-Dazs Ice 3. Japan
Cream
4. United States
► Jaguar Autos
5. Switzerland
► MGM Movies
6. India
► Alpo Petfoods

Match Product & Country
► Braun Household
Appliances
► Firestone Tires 1. Great Britain
► Godiva Chocolate 2. Germany
► Haagen-Dazs Ice 3. Japan
Cream
4. United States
► Jaguar Autos
5. Switzerland
► MGM Movies
6. India
► Alpo Petfoods

Developing Missions and
Strategies
Mission statements tell an

organization where it is going
The Strategy tells the organization

how to get there

Mission
► Mission - where is the organization
going?
► Organization’s purpose for being
► Answers ‘What do we contribute to
society?’
► Provides boundaries and focus

Strategic Process
Organization’s
Mission
Functional Area
Missions
Finance/
Marketing Operations Accounting

Sample Missions
Sample Company Mission

To manufacture and service an innovative, growing, and
profitable worldwide microwave communications business
that exceeds our customers’ expectations.
Sample Operations Management Mission
To produce products consistent with the company’s mission

as the worldwide low-cost manufacturer.
Figure 2.3
Strategy
► Action plan to achieve
mission
► Functional areas have
strategies
► Strategies exploit
opportunities and
strengths, neutralize
threats, and avoid
weaknesses

Strategies for Competitive
Advantage
1. Differentiation – better, or at least

different
2. Cost leadership – cheaper
3. Response – more responsive

Competing on Differentiation
Uniqueness can go beyond both the
physical characteristics and service
attributes to encompass everything that
impacts customer’s perception of value
► Walt Disney Magic Kingdom –
experience differentiation
► Hard Rock Cafe – dining experience

Competing on Cost
Provide the maximum value as
perceived by customer. Does not
imply low quality.
► Southwest Airlines – secondary airports,
no frills service, efficient utilization of
equipment
► Walmart – small overhead, shrinkage,
and distribution costs
► Franz Colruyt – no bags, no bright lights,
no music, and doors on freezers
Competing on Response
▶ Flexibility is matching market changes in
design innovation and volumes
▶ A way of life at Hewlett-Packard
▶ Reliability is meeting schedules
▶ German machine industry
▶ Timeliness is quickness
in design, production,
and delivery
▶ Johnson Electric,
Pizza Hut, Motorola

Strategy Development Process
Analyze the Environment
Identify the strengths, weaknesses, opportunities, and threats.
Understand the environment, customers, industry, and competitors.
Determine the Corporate Mission

State the reason for the firm’s existence and identify the
value it wishes to create.
Form a Strategy
Build a competitive advantage, such as low price, design, or
volume flexibility, quality, quick delivery, dependability, after-
sale service, broad product lines.
Figure 2.6
© 2014 Pearson Education © 2011 Pearson Education, Inc. publishing as 1 - 162
Prentice Hall
SWOT Analysis
Mission
Internal External
Strengths Opportunities
Analysis
Internal External
Weaknesses Threats
Strategy

Nike SWOT Analysis
▶ Strengths
- strong at research and development.
- Nike is a global brand.
▶ Opportunities
- to develop new products such as sunglasses and
jewellery.
▶ Weaknesses
- The retail sector is very price sensitive.
▶ Threats
- The market for sports shoes and garments is very
competitive. Consumers are shopping around for a
better deal.
SWOT Analysis
▶ SWOT Analysis, which is a key

tool in the strategic planning
process can also be applied to
personal career planning.

Strategy Development and
Implementation
▶ Identify key success factors
▶ Build and staff the organization
▶ Integrate OM with other activities
The operations manager’s job is to implement

an OM strategy, provide competitive
advantage, and increase productivity
© 2014 Pearson Education © 2011 Pearson Education, Inc. publishing as 1 - 166

Prentice Hall
Strategy Development and
Implementation
▶ Only by identifying Key Success
Factors(KSFs) and Core
Competencies can an organization
achieve sustainable competitive
advantage.
▶ One of the KSFs for McDonalds is
layout.
▶ Core Competency for Honda is its
gas-powered engines.
Capacity and
SUPPLEMENT
Constraint
Management 7
Heizer and Render
Operations Management, Eleventh Edition
Principles of Operations Management, Ninth Edition
© 2014
© 2014
Pearson
Pearson
Education
Education, Inc. 1 - 168
Outline
► Capacity
► Bottleneck Analysis and the Theory
of Constraints
► Break-Even Analysis
► Reducing Risk with Incremental
Changes

Outline - Continued
► Applying Expected Monetary Value
(EMV) to Capacity Decisions
► Applying Investment Analysis to
Strategy-Driven Investments

Learning Objectives
When you complete this supplement
you should be able to :
1. Define capacity
2. Determine design capacity, effective
capacity, and utilization
3. Perform bottleneck analysis
4. Compute break-even

Learning Objectives
When you complete this supplement
you should be able to :
5. Determine the expected monetary
value of a capacity decision
6. Compute net present value

Capacity
► The throughput, or the number of units
a facility can hold, receive, store, or
produce in a period of time
► Determines
fixed costs
► Determines if
demand will
be satisfied
► Three time horizons
Planning Over a Time Horizon
Figure S7.1
Time Horizon
Options for Adjusting Capacity
Long-range Add facilities

planning
Intermediate-
Add long lead time equipment *
range Subcontract Add personnel
planning Add equipment Build or use inventory
(aggregate Add shifts
planning)
Schedule jobs
Short-range Schedule personnel
planning
(scheduling)
* Allocate machinery
Modify capacity Use capacity

* Difficult to adjust capacity as limited options exist
Design and Effective Capacity
► Design capacity is the maximum
theoretical output of a system
► Normally expressed as a rate
► Effective capacity is the capacity a firm
expects to achieve given current
operating constraints
► Often lower than design capacity

Utilization and Efficiency
Utilization is the percent of design
capacity actually achieved
Utilization = Actual output/Design capacity
Efficiency is the percent of effective

capacity actually achieved
Efficiency = Actual output/Effective capacity

Bakery Example
Actual production last week = 148,000 rolls
Effective capacity = 175,000 rolls
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 - 8 hour shifts
Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls
© 2014 Pearson Education, Inc. S7 - 177

Bakery Example

Bakery Example
Utilization = 148,000/201,600 = 73.4%

Bakery Example
Utilization = 148,000/201,600 = 73.4%
Efficiency = 148,000/175,000 = 84.6%

Bakery Example
Utilization = 148,000/201,600 = 73.4%
Efficiency = 148,000/175,000 = 84.6%

Bakery Example
Efficiency = 84.6%
Efficiency of new line = 75%
Expected Output = (Effective Capacity)(Efficiency)
= (175,000)(.75) = 131,250 rolls

Bakery Example
Efficiency = 84.6%
Efficiency of new line = 75%
Expected Output = (Effective Capacity)(Efficiency)
= (175,000)(.75) = 131,250 rolls

Capacity and Strategy
► Capacity decisions impact all 10

decisions of operations management
as well as other functional areas of
the organization
► Capacity decisions must be integrated
into the organization’s mission and
strategy

Capacity Considerations
1. Forecast demand accurately

2. Match technology increments and
sales volume
3. Find the optimum operating size
(volume)
4. Build for change

Economies and Diseconomies
of Scale Figure S7.2
(sales per square foot)
Average unit cost
1,300 sq ft 8,000 sq ft
store 2,600 sq ft store
store
Economies Diseconomies
of scale of scale
1,300 2,600 8,000
Number of square feet in store
© 2014
© 2014
Pearson
Pearson
Education
Managing Demand
► Demand exceeds capacity
► Curtail demand by raising prices, scheduling
longer lead time
► Long term solution is to increase capacity
► Capacity exceeds demand
► Stimulate market
► Product changes
► Adjusting to seasonal demands
► Produce products with complementary
demand patterns
Complementary Demand
Figure S7.3
Patterns
Combining the
two demand
patterns reduces
the variation
4,000 –
Sales in units
Snowmobile
3,000 – motor sales
2,000 –
1,000 – Jet ski

engine
sales
JFMAMJJASONDJFMAMJJASONDJ
Time (months)

Tactics for Matching Capacity
to Demand
1. Making staffing changes
2. Adjusting equipment
► Purchasing additional machinery
► Selling or leasing out existing equipment
3. Improving processes to increase throughput
4. Redesigning products to facilitate more throughput
5. Adding process flexibility to meet changing product
preferences
6. Closing facilities

Service-Sector Demand
and Capacity Management
► Demand management
► Appointment, reservations, FCFS rule
► Capacity
management
► Full time,
temporary,
part-time
staff

Bottleneck Analysis and the
Theory of Constraints
► Each work area can have its own unique
capacity
► Capacity analysis determines the
throughput capacity of workstations in a
system
► A bottleneck is a limiting factor or constraint
► A bottleneck has the lowest effective capacity
in a system

Bottleneck Analysis and the
► The bottleneck time is the time of the
slowest workstation (the one that takes
the longest) in a production system
► The throughput time is the time it takes
a unit to go through production from start
to end Figure S7.4
A B C
2 min/unit 4 min/unit 3 min/unit

Capacity Analysis
► Two identical sandwich lines
► Lines have two workers and three operations
► All completed sandwiches are wrapped
Bread Fill
15 sec/sandwich 20 sec/sandwich
Wrap/
Order Toaster
Deliver
Bread Fill 37.5 sec/sandwich

Capacity Bread
15 sec
Fill
20 sec Wrap/
Order Toaster
Analysis 30 sec
Bread
15 sec
Fill
20 sec
20 sec
Deliver
37.5 sec
► The two lines each deliver a sandwich

every 20 seconds
► At 37.5 seconds, wrapping and delivery has
the longest processing time and is the
bottleneck
► Capacity per hour is 3,600 seconds/37.5
seconds/sandwich = 96 sandwiches per
hour
► Throughput time is 30 + 15 + 20 + 20 + 37.5
= 122.5 seconds
Capacity Analysis
► Standard process for cleaning teeth
► Cleaning and examining X-rays can happen
simultaneously
Cleaning
Takes Develops 24 min/unit Check

Check in Dentist
X-ray X-ray out
2 min/unit 2 min/unit 4 min/unit X-ray 8 min/unit 6 min/unit

exam
5 min/unit

Capacity Check
in
Takes
X-ray
Develops
X-ray
Cleaning
24 min/unit Dentist
Check
out
Analysis 2 min/unit 2 min/unit 4 min/unit X-ray

exam
5 min/unit
8 min/unit 6 min/unit
► All possible paths must be compared

► Bottleneck is the hygienist at 24 minutes
► Hourly capacity is 60/24 = 2.5 patients
► X-ray exam path is 2 + 2 + 4 + 5 + 8 + 6 = 27
minutes
► Cleaning path is 2 + 2 + 4 + 24 + 8 + 6 = 46
minutes
► Longest path involves the hygienist cleaning
the teeth, patient should complete in 46
minutes
► Five-step process for recognizing and
managing limitations
Step 1: Identify the constraints
Step 2: Develop a plan for overcoming the constraints
Step 3: Focus resources on accomplishing Step 2
Step 4: Reduce the effects of constraints by offloading
work or expanding capability
Step 5: Once overcome, go back to Step 1 and find
new constraints

Bottleneck Management
1. Release work orders to the system at the
pace of set by the bottleneck
► Drum, Buffer, Rope
2. Lost time at the bottleneck represents lost
time for the whole system
3. Increasing the capacity of a non-bottleneck
station is a mirage
4. Increasing the capacity of a bottleneck
increases the capacity of the whole system

Break-Even Analysis
► Technique for evaluating process and

equipment alternatives
► Objective is to find the point in dollars
and units at which cost equals
revenue
► Requires estimation of fixed costs,
variable costs, and revenue

Break-Even Analysis
► Fixed costs are costs that continue even
if no units are produced
► Depreciation, taxes, debt, mortgage
payments
► Variable costs are costs that vary with
the volume of units produced
► Labor, materials, portion of utilities
► Contribution is the difference between
selling price and variable cost

Break-Even Analysis
► Revenue function begins at the origin
and proceeds upward to the right,
increasing by the selling price of each
unit
► Where the revenue function crosses
the total cost line is the break-even
point

Break-Even Analysis
–
Total revenue line
900 –
800 –
Break-even point Total cost line
700 – Total cost = Total revenue
Cost in dollars
600 –
500 –
400 – Variable cost
300 –
200 –
100 – Fixed cost

–
| | | | | | | | | | | |
0 100 200 300 400 500 600 700 800 900 1000 1100
Figure S7.5
Volume (units per period)
Break-Even Analysis
Assumptions
► Costs and revenue are linear
functions
► Generally not the case in the real
world
► We actually know these costs
► Very difficult to verify
► Time value of money is often
ignored
Break-Even Analysis
BEPx = break-even point x = number of units
in units produced
BEP$ = break-even point TR = total revenue = Px
in dollars F = fixed costs
P = price per unit V = variable cost per unit
(after all TC = total costs = F + Vx
discounts)
Break-even point occurs when
TR = TC F
or BEPx =
P–V
Px = F + Vx

Break-Even Analysis
BEPx = break-even point x = number of units
in units produced
BEP$ = break-even point TR = total revenue = Px
in dollars F = fixed costs
P = price per unit V = variable cost per unit
(after all TC = total costs = F + Vx
discounts)
F Profit = TR - TC
BEP$ = BEPx P = P
P–V = Px – (F + Vx)
F = Px – F – Vx
= (P – V)/P
= (P - V)x – F
F
=
1 – V/P
Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit
F $10,000
BEP$ = =
1 – (V/P) 1 – [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375

Break-Even Example
Fixed costs = $10,000 Material = $.75/unit
Direct labor = $1.50/unit Selling price = $4.00 per unit
F $10,000
BEP$ = =
1 – (V/P) 1 – [(1.50 + .75)/(4.00)]
$10,000
= = $22,857.14
.4375
F $10,000
BEPx = = = 5,714
P–V 4.00 – (1.50 + .75)

Break-Even Example
50,000 –
Revenue
40,000 –
Break-even
point Total
30,000 –
Dollars
costs
20,000 –
Fixed costs
10,000 –
–
| | | | | |
0 2,000 4,000 6,000 8,000 10,000
Units

Break-Even Example
Multiproduct Case
Break-even F
point in dollars =
éæ V ö ù
(BEP$) åêêç1- Pi ÷ ´ Wi úú ( )
ëè i ø û
where V = variable cost per unit

P = price per unit
F = fixed costs
W = percent each product is of total dollar sales
expressed as a decimal
i = each product
Multiproduct Example
Fixed costs = $3,000 per month
ITEM PRICE COST ANNUAL FORECASTED SALES UNITS
Sandwich $5.00 $3.00 9,000
Drink 1.50 .50 9,000
Baked potato 2.00 1.00 7,000
1 2 3 4 5 6 7 8
ANNUAL WEIGHTED
SELLING VARIABLE FORECASTED CONTRIBUTION
ITEM (i) PRICE (P) COST (V) (V/P) 1 - (V/P) SALES $ % OF SALES (COL 5 X COL 7)
Sandwich $5.00 $3.00 .60 .40 $45,000 .621 .248
Drinks 1.50 0.50 .33 .67 13,500 .186 .125

Baked
potato 2.00 1.00 .50 .50 14,000 .193 .097
$72,500 1.000 .470

MultiproductBEP
Example F
=
éæ ö $
Vi ù
Fixed costs = $3,000 per month åêêç1- P ÷ ´ Wi úú( )
ëè i ø û
ITEM PRICE COST ANNUAL FORECASTED SALES UNITS
$3,000 x 12
Sandwich $5.00 $3.00 = 9,000 = $76,596
.47
Drink 1.50 .50 9,000
Baked potato 2.00 1.00 Daily $76,596
7,000
sales 312 days = $245.50
=
1 2 3 4 5 6 7 8
.621 x $245.50
ANNUAL WEIGHTED
SELLING VARIABLE FORECASTED = 30.5 CONTRIBUTION
31
ITEM (i) PRICE (P) COST (V) (V/P) 1 - (V/P) $5.00
SALES $ % OF SALES (COL 5 X COL 7)
Sandwiches
Sandwich $5.00 $3.00 .60 .40 $45,000 .621 each day.248
Drinks 1.50 0.50 .33 .67 13,500 .186 .125
Baked
potato 2.00 1.00 .50 .50 14,000 .193 .097
$72,500 1.000 .470

Reducing Risk with
Figure S7.6 Incremental Changes
(a) Leading demand with (b) Leading demand with a
incremental expansion one-step expansion
New
New capacity
capacity
Demand
Demand
Expected Expected
demand demand
(c) Lagging demand with (d) Attempts to have an average

incremental expansion capacity with incremental
New expansion
capacity New
Demand
Expected Demand capacity Expected

demand demand

Reducing Risk with
Incremental Changes
(a) Leading demand with incremental
expansion
Figure S7.6
New
capacity
Demand
Expected
demand
1 2 3
Time (years)
Reducing Risk with
Incremental Changes
(b) Leading demand with a one-step
expansion
Figure S7.6
New
capacity
Demand
Expected
demand
1 2 3
Time (years)
Reducing Risk with
Incremental Changes
(c) Lagging demand with incremental
expansion
Figure S7.6
New
capacity
Expected
Demand
demand
1 2 3
Time (years)
Reducing Risk with
Incremental Changes
(d) Attempts to have an average capacity with
incremental expansion
Figure S7.6
New
capacity
Expected
Demand
demand
1 2 3
Time (years)
Applying Expected Monetary
Value (EMV) and Capacity
Decisions
► Determine states of nature
► Future demand
► Market favorability
► Assign probability values to states
of nature to determine expected
value

EMV Applied to Capacity
Decision
▶ Southern Hospital Supplies capacity
expansion
EMV (large plant) = (.4)($100,000) + (.6)(–$90,000)
= –$14,000
EMV (medium plant) = (.4)($60,000) + (.6)(–$10,000)
= +$18,000
EMV (small plant) = (.4)($40,000) + (.6)(–$5,000)
= +$13,000
EMV (do nothing) = $0

Strategy-Driven Investment
► Operations managers may have to

decide among various financial
options
► Analyzing capacity alternatives
should include capital investment,
variable cost, cash flows, and net
present value

Net Present Value (NPV)
In general:
F = P(1 + i)N
where F = future value
P = present value
i = interest rate
N = number of years
Solving for P:
F
P=
(1 + i)N
Net Present Value (NPV)
In general:
F = P(1 + i)N
where F = future value
P While
= present value this works fine, it
i is cumbersome for
= interest rate
N = number oflarger
years values of N
Solving for P:
F
P=
(1 + i)N
NPV Using Factors
F
P= N = FX
(1 + i)
where X = a factor from Table S7.1 defined
as = 1/(1 + i)N and F = future
value
TABLE S7.1 Present Value of $1

YEAR 6% 8% 10% 12% 14%
1 .943 .926 .909 .893 .877
2 .890 .857 .826 .797 .769
3 .840 .794 .751 .712 .675
4 .792 .735 .683 .636 .592
Portion of
5 .747 .681 .621 .567 .519 Table S7.1

Present Value of an Annuity
An annuity is an investment which
generates uniform equal payments
S = RX
where X = factor from Table S7.2
S = present value of a series of uniform
annual receipts
R = receipts that are received every year
of the life of the investment

TABLE S7.2 Present Value of and Annuity of $1

YEAR 6% 8% 10% 12% 14%
1 .943 .926 .909 .893 .877
2 1.833 1.783 1.736 1.690 1.647
3 2.676 2.577 2.487 2.402 2.322
4 3.465 3.312 3.170 3.037 2.914
5 4.212 3.993 3.791 3.605 3.433
Portion of
Table S7.2

▶ River Road Medical Clinic equipment investment
$7,000 in receipts per for 5 years

Interest rate = 6%
From Table S7.2
X = 4.212
S = RX
S = $7,000(4.212) = $29,484

Limitations
1. Investments with the same NPV may have
different projected lives and salvage
values
2. Investments with the same NPV may have
different cash flows
3. Assumes we know future interest rates
4. Payments are not always made at the end
of a period

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otherwise, without the prior written permission of the publisher.
Printed in the United States of America.

Location Strategies
8
Heizer and Render
© 2014
© 2014
Pearson
Pearson
Education
Outline
► Global Company Profile:
FedEx
► The Strategic Importance of Location
► Factors That Affect Location
Decisions
► Methods of Evaluating Location
Alternatives
► Service Location Strategy
► Geographic Information Systems
Learning Objectives
When you complete this chapter you
should be able to:
1. Identify and explain seven major factors
that effect location decisions
2. Compute labor productivity
3. Apply the factor-rating method
4. Complete a locational break-even analysis
graphically and mathematically

Learning Objectives
should be able to:
5. Use the center-of-gravity method
6. Understand the differences between
service- and industrial-sector location
analysis

Location Provides Competitive
Advantage for FedEx
▶ Central hub concept

▶ Enables service to more locations with
fewer aircraft
▶ Enables matching of aircraft flights with
package loads
▶ Reduces mishandling and delay in transit
because there is total control of packages
from pickup to delivery
© 2014
© 2014
Pearson
Pearson
Education
The Strategic Importance of
Location
► One of the most important decisions
a firm makes
► Increasingly global in nature
► Significant impact on fixed and
variable costs
► Decisions made relatively
infrequently

Location
► Long-term decisions
► Once committed to a location, many
resource and cost issues are difficult
to change

Location
The objective of location strategy is
to maximize the benefit of location
to the firm
Options include
1. Expanding existing facilities
2. Maintain existing and add sites
3. Closing existing and relocating

Location and Costs
► Location decisions based on low cost
require careful consideration
► Once in place, location-related costs
are fixed in place and difficult to
reduce
► Determining optimal facility location is
a good investment

Factors That Affect Location
Decisions
▶ Globalization adds to complexity
▶ Market economics
▶ Communication
▶ Rapid, reliable transportation
▶ Ease of capital flow
▶ Differing labor costs
▶ Identify key success factors (KSFs)

Location Decisions
Country Decision Key Success Factors
1. Political risks, government
rules, attitudes, incentives
2. Cultural and economic issues
3. Location of markets
4. Labor talent, attitudes,
productivity, costs
5. Availability of supplies,
communications, energy
6. Exchange rates and currency
Figure 8.1 risks
Location Decisions
Region/ Key Success Factors
Community
Decision 1. Corporate desires
2. Attractiveness of region
MN
3. Labor availability and costs
WI 4. Costs and availability of utilities
MI 5. Environmental regulations
IL IN
OH 6. Government incentives and fiscal
policies
7. Proximity to raw materials and
customers
Figure 8.1
8. Land/construction costs
Location Decisions
Site Decision Key Success Factors
1. Site size and cost
2. Air, rail, highway, and
waterway systems
3. Zoning restrictions
4. Proximity of services/
supplies needed
5. Environmental impact
issues
Figure 8.1

TABLE 8.1
Competitiveness of 142 Selected
Global Countries
2011-2012
Competitiveness COUNTRY
Switzerland
RANKING
1
Singapore 2
Index of Sweden 3
Finland 4
Countries USA
Japan
5
9
UK 10
Canada 12
Israel 22
China 26
Mexico 58
Vietnam 65
Russia 66
Haiti 141
Chad 142

Factors That Affect
Location Decisions
► Labor productivity
► Wage rates are not the only cost
► Lower productivity may increase total cost
Labor cost per day

= Cost per unit
Productivity (units per day)
South Carolina Mexico
$70 $25
= $1.17 per unit = $1.25 per unit
60 units 20 units

Factors That Affect
Location Decisions
► Exchange rates and currency risks
► Can have a significant impact on costs
► Rates change over time
► Costs
► Tangible - easily measured costs such as
utilities, labor, materials, taxes
► Intangible - less easy to quantify and include
education, public transportation, community,
quality-of-life

Factors That Affect
Location Decisions
► Exchange rates and currency risks
► Can have a significant impact on costs
► Rates change over time
Location decisions
► Costs
based on costs alone
► Tangible - easily measured costs such as
can create
utilities, labor, materials, taxes
difficult
ethical situations
► Intangible - less easy to quantify and include
education, public transportation, community,
quality-of-life

Factors That Affect
Location Decisions
► Political risk, values, and culture
► National, state, local governments attitudes
toward private and intellectual property,
zoning, pollution, employment stability may
be in flux
► Worker attitudes towards turnover, unions,
absenteeism
► Globally cultures have different attitudes
towards punctuality, legal, and ethical issues

Ranking Corruption
Rank Country 2012 CPI Score (out of 100)
1 Demark, Finland, New Zealand 90 Least
4 Sweden 88 Corrupt
5 Singapore 87
6 Switzerland 86
7 Australia, Norway 85
9 Canada, Netherlands 84
13 Germany 79
14 Hong Kong 77
17 Japan, UK 74
19 USA 73
37 Taiwan 61
39 Israel 60
45 South Korea 56 Most
80 China 39 Corrupt
123 Vietnam 31
133 Russia 28
Factors That Affect
Location Decisions
► Proximity to markets
► Very important to services
► JIT systems or high transportation costs may
make it important to manufacturers
► Proximity to suppliers
► Perishable goods, high transportation costs,
bulky products

Factors That Affect
Location Decisions
► Proximity to competitors (clustering)
► Often driven by resources such as natural,
information, capital, talent
► Found in both manufacturing and service
industries

Clustering of Companies
TABLE 8.3 Clustering of Companies
INDUSTRY LOCATIONS REASON FOR CLUSTERING
Wine making Napa Valley (US) Natural resources of land and
Bordeaux region climate
(France)
Software firms Silicon Valley, Boston, Talent resources of bright
Bangalore (India) graduates in
scientific/technical areas,
venture capitalists nearby
Clean energy Colorado Critical mass of talent and
information, with 1,000
companies

Theme parks Orlando, Florida A hot spot for
(Disney World, entertainment, warm
Universal Studios, weather, tourists, and
and Sea World) inexpensive labor
Electronics firms Northern Mexico NAFTA, duty free export to
U.S.
Computer hardware Singapore, Taiwan High technological
manufacturers penetration rate and per
capita GDP,
skilled/educated workforce
with large pool of engineers

Fast food chains Sites within 1 mile of Stimulate food sales, high
(Wendy’s, each other traffic flows
McDonald’s, Burger
King, and Pizza
Hut)
General aviation Wichita, Kansas Mass of aviation skills
aircraft (Cessna,
Learjet, Boeing,
Raytheon)
Athletic footwear, Portland, Oregon 300 companies, many owned
outdoor wear by Nike, deep talent pool and
outdoor culture

Factor-Rating Method
► Popular because a wide variety of factors
can be included in the analysis
► Six steps in the method
1. Develop a list of relevant factors called key
success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for
each location
6. Make a recommendation based on the highest
point score
Factor-Rating Example
TABLE 8.4 Weights, Scores, and Solution
SCORES
(OUT OF 100) WEIGHTED SCORES
KSF WEIGHT FRANCE DENMARK FRANCE DENMARK
Labor availability
.25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0
and attitude
People-to-car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0
Per capita income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0
Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3
Education and
.21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7
health
Totals 1.00 70.4 68.0

Locational
Cost-Volume Analysis
► An economic comparison of location
alternatives
► Three steps in the method
1. Determine fixed and variable costs for each
location
2. Plot the cost for each location
3. Select location with lowest total cost for
expected production volume

Locational Cost-Volume
Analysis Example
Three locations:
Selling price = $120
Expected volume = 2,000 units
Fixed Variable Total
City Cost Cost Cost
Athens $30,000 $75 $180,000
Brussels $60,000 $45 $150,000
Lisbon $110,000 $25 $160,000
Total Cost = Fixed Cost + (Variable Cost x Volume)

Analysis Example
Crossover point – Athens/Brussels
30,000 + 75(x) = 60,000 + 45(x)
30(x) = 30,000
(x) = 1,000
Crossover point – Brussels/Lisbon
60,000 + 45(x) = 110,000 + 25(x)

20(x) = 50,000
(x) = 2,500

Analysis Example
Figure 8.2
–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
Annual cost
–
$110,000 –
–
–
$80,000 –
–
$60,000 –
–
–
$30,000 – Athens Lisbon
Brussels
lowest lowest
– cost
lowest cost
cost
$10,000 –
|
– | | | | | |
0 500 1,000 1,500 2,000 2,500 3,000
Volume
Center-of-Gravity Method
► Finds location of distribution center
that minimizes distribution costs
► Considers
► Location of markets
► Volume of goods shipped to those
markets
► Shipping cost (or distance)

► Place existing locations on a
coordinate grid
► Grid origin and scale is arbitrary
► Maintain relative distances
► Calculate x and y coordinates for
‘center of gravity’
► Assumes cost is directly proportional
to distance and volume shipped

åd Q ix i
x-coordinate of the = i
center of gravity åQ i
i
åd Q iy i
y-coordinate of the = i
center of gravity åQ i
i
where dix = x-coordinate of location i

diy = y-coordinate of location i
Qi = Quantity of goods moved to or from
location i

TABLE 8.5 Demand for Quain’s Discount Department Stores

NUMBER OF CONTAINERS
STORE LOCATION SHIPPED PER MONTH
Chicago 2,000
Pittsburgh 1,000
New York 1,000
Atlanta 2,000

North-South Figure 8.3
New York (130, 130)

Chicago (30, 120)
120 –
Pittsburgh (90, 110)
90 –
60 –
d1x = 30
d1y = 120
30 –
Q1 = 2,000
Atlanta (60, 40)
–
| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

x-coordinate =
2000 + 1000 + 1000 + 2000
= 66.7
(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

y-coordinate =
2000 + 1000 + 1000 + 2000
= 93.3

North-South Figure 8.3
New York (130, 130)

Chicago (30, 120)
120 –
Pittsburgh (90, 110)
90 – + Center of gravity (66.7, 93.3)
60 –
30 –
Atlanta (60, 40)
–
| | | | | |
East-West
30 60 90 120 150
Arbitrary
origin
Transportation Model
► Finds amount to be shipped from

several points of supply to several
points of demand
► Solution will minimize total production
and shipping costs
► A special class of linear programming
problems

Worldwide Distribution of
Volkswagens and Parts
Figure 8.4

Service Location Strategy
1. Purchasing power of 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
Location Strategies
TABLE 8.6 Location Strategies – Service vs. Goods-Producing Organizations
SERVICE/RETAIL/PROFESSIONAL GOODS-PRODUCING
REVENUE FOCUS COST FOCUS
Volume/revenue Tangible costs
Drawing area; purchasing power Transportation cost of raw material
Competition; advertising/pricing Shipment cost of finished goods
Energy and utility cost; labor; raw
Physical quality material; taxes, and so on
Parking/access; security/lighting;
appearance/ image Intangible and future costs
Attitude toward union
Cost determinants Quality of life
Rent Education expenditures by state
Management caliber Quality of state and local government
Operation policies (hours, wage rates)

Location Strategies
TABLE 8.6 Location Strategies – Service vs. Goods-Producing Organizations
SERVICE/RETAIL/PROFESSIONAL GOODS-PRODUCING
TECHNIQUES TECHNIQUES
Regression models to determine importance Transportation method
of various factors Factor-rating method
Factor-rating method Locational cost–volume analysis
Traffic counts Crossover charts
Demographic analysis of drawing area
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems
ASSUMPTIONS ASSUMPTIONS
Location is a major determinant of revenue Location is a major determinant of cost
High customer-contact issues are critical Most major costs can be identified explicitly
Costs are relatively constant for a given area; for each site
therefore, the revenue function is Low customer contact allows focus on the
critical identifiable costs
Intangible costs can be evaluated

How Hotel Chains Select Sites
► Location is a strategically important decision
in the hospitality industry
► La Quinta started with 35 independent
variables and worked to refine a regression
model to predict profitability
r2 = .51
► The final model had only four variables
51% of the
► Price of the inn profitability is
► Median income levels predicted by
just these
► State population per inn four variables!
► Location of nearby colleges
Geographic Information
Systems (GIS)
► Important tool to help in location analysis
► Enables more complex demographic analysis
► Available data bases include
► Detailed census data
► Detailed maps
► Utilities
► Geographic features
► Locations of major services

Geographic Information
Systems (GIS)


Layout Strategies
9
Heizer and Render
© 2014
© 2014
Pearson
Pearson
Education
Outline
► Global Company Profile:
McDonald’s
► The Strategic Importance of Layout
Decisions
► Types of Layout
► Office Layout
► Retail Layout
► Warehousing and Storage Layouts

Outline - Continued
► Fixed-Position Layout
► Process-Oriented Layout
► Work Cells
► Repetitive and Product-
Oriented Layout

Learning Objectives
should be able to:
1. Discuss important issues in office layout
2. Define the objectives of retail layout
3. Discuss modern warehouse management
and terms such as ASRS, cross-docking,
and random stocking
4. Identify when fixed-position layouts are
appropriate

Learning Objectives
should be able to:
5. Explain how to achieve a good process-
oriented facility layout
6. Define work cell and the requirements of a
work cell
7. Define product-oriented layout
8. Explain how to balance production flow in a
repetitive or product-oriented facility

Innovations at McDonald’s
► Indoor seating (1950s)

► Drive-through window (1970s)
► Adding breakfast to the menu (1980s)
► Adding play areas (late 1980s)
► Redesign of the kitchens (1990s)
► Self-service kiosk (2004)
► Now three separate dining sections
© 2014
© 2014
Pearson
Pearson
Education
Innovations at McDonald’s
► Indoor seating (1950s)

► Drive-through windowSix(1970s)
out of the
► Adding breakfast to the seven are
menu (1980s)
layout
► Adding play areas (late decisions!
1980s)
► Redesign of the kitchens (1990s)
► Self-service kiosk (2004)
► Now three separate dining sections
© 2014
© 2014
Pearson
Pearson
Education
McDonald’s New Layout
▶ Seventh major innovation
▶ Redesigning all 30,000 outlets around the
world
▶ Three separate dining areas
▶ Linger zone with comfortable chairs and Wi-Fi
connections
▶ Grab and go zone with tall counters
▶ Flexible zone for kids and families
▶ Facility layout is a source of competitive
advantage
© 2014
© 2014
Pearson
Pearson
Education
Strategic Importance of Layout
Decisions
The objective of layout strategy

is to develop an effective and
efficient layout that will meet the
firm’s competitive requirements

Layout Design Considerations
► Higher utilization of space, equipment, and
people
► Improved flow of information, materials, or
people
► Improved employee morale and safer
working conditions
► Improved customer/client interaction
► Flexibility

Types of Layout
1. Office layout
2. Retail layout
3. Warehouse layout
4. Fixed-position layout
5. Process-oriented layout
6. Work-cell layout
7. Product-oriented layout

Types of Layout
1. Office layout: Positions workers, their
equipment, and spaces/offices to
provide for movement of information
2. Retail layout: Allocates shelf space
and responds to customer behavior
3. Warehouse layout: Addresses trade-
offs between space and material
handling

Types of Layout
4. Fixed-position layout: Addresses the

layout requirements of large, bulky
projects such as ships and buildings
5. Process-oriented layout: Deals with
low-volume, high-variety production
(also called job shop or intermittent
production)

Types of Layout
6. Work cell layout: Arranges machinery

and equipment to focus on production
of a single product or group of related
products
7. Product-oriented layout: Seeks the
best personnel and machine
utilizations in repetitive or continuous
production

Layout Strategies
TABLE 9.1 Layout Strategies
OBJECTIVES EXAMPLES
Office Locate workers requiring frequent Allstate Insurance

contact close to one another Microsoft Corp.
Retail Expose customer to high-margin Kroger’s Supermarket

items Walgreen’s
Bloomingdale’s
Warehouse Balance low-cost storage with low- Federal-Mogul’s warehouse

(storage) cost material handling The Gap’s distribution center
Project (fixed Move material to the limited Ingall Ship Building Corp.
position) storage areas around the site Trump Plaza
Pittsburgh Airport

Layout Strategies
TABLE 9.1 Layout Strategies
OBJECTIVES EXAMPLES
Job Shop Manage varied material flow for Arnold Palmer Hospital
(process each product Hard Rock Cafe
oriented) Olive Garden
Work Cell Identify a product family, build Hallmark Cards

(product teams, cross train team Wheeled Coach Ambulances
families) members
Repetitive/ Equalize the task time at each Sony’s TV assembly line

Continuous workstation Toyota Scion
(product
oriented)

Good Layouts Consider
► Material handling equipment
► Capacity and space requirements
► Environment and aesthetics
► Flows of information
► Cost of moving between various work
areas

Office Layout
► Grouping of workers, their equipment,
and spaces to provide comfort, safety,
and movement of information
► Movement of information is main
distinction
► Typically in state of flux due to
frequent technological changes

Relationship Chart
Figure 9.1
Office Layout
► Three physical and social aspects
► Proximity
► Privacy
► Permission
► Two major trends
► Information technology
► Dynamic needs for space and services

Supermarket Retail Layout
▶ Objective is to maximize profitability

per square foot of floor space
▶ Sales and profitability vary directly
with customer exposure

Five Helpful Ideas for
Supermarket Layout
1. Locate high-draw items around the periphery of
the store
2. Use prominent locations for high-impulse and
high-margin items
3. Distribute power items to both sides of an aisle
and disperse them to increase viewing of other
items
4. Use end-aisle locations
5. Convey mission of store through careful
positioning of lead-off department
Store Layout
Figure 9.2
Retail Slotting
▶ Manufacturers pay fees to retailers to
get the retailers to display (slot) their
product
▶ Contributing factors
▶ Limited shelf space
▶ An increasing number of new products
▶ Better information about sales through
POS data collection
▶ Closer control of inventory

Servicescapes
1. Ambient conditions - background
characteristics such as lighting, sound,
smell, and temperature
2. Spatial layout and functionality - which
involve customer
circulation path planning,
aisle characteristics, and
product grouping
3. Signs, symbols, and
artifacts - characteristics
of building design that
carry social significance
Warehousing and Storage
Layouts
▶ Objective is to optimize trade-offs
between handling costs and costs
associated with warehouse space
▶ Maximize the total “cube” of the
warehouse – utilize its full volume
while maintaining low material
handling costs

Layouts
Material Handling Costs
► All costs associated with the transaction
► Incoming transport
► Storage
► Finding and moving material
► Outgoing transport
► Equipment, people, material, supervision,
insurance, depreciation
► Minimize damage and spoilage
Layouts
▶ Warehouse density tends to vary inversely
with the number of different items stored
▶ Automated Storage and Retrieval Systems
(ASRSs) can significantly improve
warehouse
productivity by
an estimated 500%
▶ Dock location is a
key design element
Cross-Docking
▶ Materials are moved directly from receiving to
shipping and are not placed in storage in the
warehouse
▶ Requires tight
scheduling and
accurate shipments,
bar code or RFID
identification used for
advanced shipment
notification as
materials are unloaded

Random Stocking
► Typically requires automatic identification
systems (AISs) and effective information
systems
► Allows more efficient use of space
► Key tasks
1. Maintain list of open locations
2. Maintain accurate records
3. Sequence items to minimize travel, pick time
4. Combine picking orders
5. Assign classes of items to particular areas
Customizing
▶ Value-added activities performed at the
warehouse
▶ Enable low cost and rapid response
strategies
▶ Assembly of components
▶ Loading software
▶ Repairs
▶ Customized labeling and packaging

Fixed-Position Layout
▶ Product remains in one place
▶ Workers and equipment come to site
▶ Complicating factors
▶ Limited space at site
▶ Different materials
required at different
stages of the project
▶ Volume of materials
needed is dynamic
Alternative Strategy
▶ As much of the project as possible is
completed off-site in a product-oriented
facility
▶ This can
significantly
improve
efficiency but
is only possible
when multiple
similar units need to be created
Process-Oriented Layout
▶ Like machines and equipment are
grouped together
▶ Flexible and capable of handling a
wide variety of products or services
▶ Scheduling can be difficult and setup,
material handling, and labor costs can
be high

Surgery ER triage room Emergency room admissions
Patient A - broken leg
Patient B - erratic heart

pacemaker
Laboratories
Radiology ER Beds Pharmacy Billing/exit
Figure 9.3

▶ Arrange work centers so as to minimize
the costs of material handling
▶ Basic cost elements are
▶ Number of loads (or people) moving
between centers
▶ Distance loads (or people) move between
centers

n n
Minimize cost = åå X ijCij
i=1 j=1
where n = total number of work centers or departments

i, j = individual departments
Xij = number of loads moved from
department i to department j
Cij = cost to move a load between
department i and department j

Process Layout Example
Arrange six departments in a factory to
minimize the material handling costs. Each
department is 20 x 20 feet and the building
is 60 feet long and 40 feet wide.
1. Construct a “from-to matrix”
2. Determine the space requirements
3. Develop an initial schematic diagram
4. Determine the cost of this layout
5. Try to improve the layout
6. Prepare a detailed plan
Figure 9.4
Number of loads per week

Department Assembly Painting Machine Receiving Shipping Testing
(1) (2) Shop (3) (4) (5) (6)
Assembly (1) 50 100 0 0 20
Painting (2) 30 50 10 0
Machine Shop (3) 20 0 100
Receiving (4) 50 0
Shipping (5) 0
Testing (6)

Figure 9.5 Area A Area B Area C
Assembly Painting Machine Shop

Department Department Department
(1) (2) (3)
40’
Receiving Shipping Testing

(4) (5) (6)
Area D Area E Area F

60’
Figure 9.6
Interdepartmental Flow Graph
100
Assembly 50 Painting 30 Machine

(1) (2) Shop (3)
10
100

(4) (5) (6)
50

n n
Cost = åå X ijCij
i=1 j=1
Cost = $50 + $200 + $40

(1 and 2) (1 and 3) (1 and 6)
+ $30 + $50 + $10
(2 and 3) (2 and 4) (2 and 5)
+ $40 + $100 + $50
(3 and 4) (3 and 6) (4 and 5)
= $570

Revised Interdepartmental Flow Graph
Figure 9.7
30
Painting 50 Assembly 100 Machine

(2) (1) Shop (3)
50 100

(4) (5) (6)
50

n n
Cost = åå X ijCij
i=1 j=1
Cost = $50 + $100 + $20

(1 and 2) (1 and 3) (1 and 6)
+ $60 + $50 + $10
(2 and 3) (2 and 4) (2 and 5)
+ $40 + $100 + $50
(3 and 4) (3 and 6) (4 and 5)
= $480

Figure 9.8 Area A Area B Area C
Painting Assembly Machine Shop

(2) (1) (3)
40’

(4) (5) (6)
Area D Area E Area F

60’
Computer Software
▶ Graphical approach only works for small
problems
▶ Computer programs are available to solve
bigger problems
► CRAFT ► Factory Flow
► ALDEP ► Proplanner
► CORELAP

Computer Software
▶ Proplanner analysis
▶ Distance traveled reduced by 38%
After
Before

Computer Software
▶ Three dimensional visualization software
allows managers to view possible layouts
and assess process, material
handling, efficiency, and safety issues

Work Cells
▶ Reorganizes people and machines
into groups to focus on single
products or product groups
▶ Group technology identifies products
that have similar characteristics for
particular cells
▶ Volume must justify cells
▶ Cells can be reconfigured as designs
or volume changes
Advantages of Work Cells
1. Reduced work-in-process inventory
2. Less floor space required
3. Reduced raw material and finished goods
inventories
4. Reduced direct labor cost
5. Heightened sense of employee
participation
6. Increased equipment and machinery
utilization
7. Reduced investment in machinery and
equipment
Requirements of Work Cells
▶ Identification of families of products
▶ A high level of training, flexibility and
empowerment of employees
▶ Being self-contained, with its own
equipment and resources
▶ Test (poka-yoke) at each station in
the cell

Improving Layouts Using
Work Cells
Figure 9.9 (a)
Material
Current layout - workers in

small closed areas.
Improved layout - cross-trained

workers can assist each other. May
be able to add a third worker as
additional output is needed.

Improving Layouts Using
Figure 9.9 (b)
Work Cells
Current layout - straight lines

make it hard to balance tasks Improved layout - in U shape,
because work may not be workers have better access.
divided evenly Four cross-trained workers
were reduced.
U-shaped line may reduce employee movement

and space requirements while enhancing
communication, reducing the number of workers,
and facilitating inspection

Staffing and Balancing Work
Cells
Determine the takt time
Total work time available
Takt time =
Units required
Determine the number

of operators required
Total operation time required

Workers required =
Takt time

Staffing Work Cells Example
600 Mirrors per day required
Mirror production scheduled for 8 hours per day
From a work balance 60
chart total operation

50
time = 140 seconds
Standard time required

40
30
20
10
Figure 9.10
0
Assemble Paint Test Label Pack for
shipment
© 2014 Pearson Education Operations 1 - 328
Staffing Work Cells Example
600 Mirrors per day required
Mirror production scheduled for 8 hours per day
From a work balance
chart total operation
time = 140 seconds
Takt time = (8 hrs x 60 mins) / 600 units

= .8 min = 48 seconds
Total operation time required
Workers required = Takt time
= 140 / 48 = 2.92
Work Balance Charts
▶ Used for evaluating operation times in
work cells
▶ Can help identify bottleneck
operations
▶ Flexible, cross-trained employees can
help address labor bottlenecks
▶ Machine bottlenecks may require
other approaches

Focused Work Center and
Focused Factory
▶ Focused Work Center
▶ Identify a large family of similar products
that have a large and stable demand
▶ Moves production from a general-purpose,
process-oriented facility to a large work cell
▶ Focused Factory
▶ A focused work cell in a separate facility
▶ May be focused by product line, layout,
quality, new product introduction, flexibility,
or other requirements

Repetitive and Product-
Oriented Layout
Organized around products or families of
similar high-volume, low-variety products
1. Volume is adequate for high equipment utilization
2. Product demand is stable enough to justify high
investment in specialized equipment
3. Product is standardized or approaching a phase of
life cycle that justifies investment
4. Supplies of raw materials and components are
adequate and of uniform quality

Product-Oriented Layouts
► Fabrication line
► Builds components on a series of machines
► Machine-paced
► Require mechanical or engineering changes to
balance
► Assembly line Both types of lines
► Puts fabricated parts together must be balanced
at a series of so
workstations that the time to
perform the work at
► Paced by work tasks each station is the
► Balanced by moving tasks same

Product-Oriented Layouts
Advantages
1. Low variable cost per unit
2. Low material handling costs
3. Reduced work-in-process inventories
4. Easier training and supervision
5. Rapid throughput
Disadvantages
1. High volume is required
2. Work stoppage at any point ties up the whole
operation
3. Lack of flexibility in product or production rates

McDonald’s Assembly Line
Figure 9.11

Assembly-Line Balancing
▶ Objective is to minimize the imbalance
between machines or personnel while
meeting required output
▶ Starts with the precedence relationships
▶ Determine cycle time
▶ Calculate theoretical
minimum number of
workstations
▶ Balance the line by
assigning specific
tasks to workstations
Wing Component Example
TABLE 9.2 Precedence Data for Wing Component
ASSEMBLY TIME TASK MUST FOLLOW TASK
TASK (MINUTES) LISTED BELOW
A 10 – This means that
B 11 A tasks B and E
cannot be done
C 5 B until task A has
D 4 B been completed
E 11 A
F 3 C, D
G 7 F
H 11 E
I 3 G, H
Total time 65

TABLE 9.2 Precedence Data for Wing Component 480 available mins
ASSEMBLY TIME TASK MUST FOLLOW per day
TASK (MINUTES) TASK LISTED BELOW 40 units required
A 10 –
B 11 A Production time available
C 5 B per day
D 4 CycleB time = Units required per day
E 11 A Figure 9.12
= 480 / 40
F 3 C, D 5
= 12 minutes per unit
G 7 F C
10 n
11 3 7
åB Time for task
H 11 E
I 3 G, H A F i G
Minimum number i=1 4
Total time 65 of workstations = 3
11
Cycle
D time
11 I
= 65E/ 12 H
=5.42, or 6 stations
Layout Heuristics That May Be Used to Assign Tasks to
TABLE 9.3
Workstations in Assembly-Line Balancing
1. Longest task time From the available tasks, choose the task
with the largest (longest) task time
2. Most following tasks From the available tasks, choose the task
with the largest number of following tasks
3. Ranked positional From the available tasks, choose the task for
weight which the sum of following task times is the
longest
4. Shortest task time From the available tasks, choose the task
with the shortest task time
5. Least number of From the available tasks, choose the task
following tasks with the least number of subsequent tasks

480 available mins
Figure 9.13 per day
40 units required
Cycle time = 12 mins
Minimum
Station 5 workstations = 5.42 or 6
2
C
10 11 3 7
A B F G
4 3
D Station 3
Station 4 I
11 11
Station 6
Station Station 6
1 E H
Station Station
3 5
TABLE 9.2 Precedence Data for Wing Component 480 available mins
per day
ASSEMBLY TIME TASK MUST FOLLOW
TASK (MINUTES) TASK LISTED BELOW 40 units required
A 10 – Cycle time = 12 mins
B 11 A
Minimum
C 5 B workstations = 5.42 or 6
D 4 B
E 11 A Figure 9.12
F 3 C, D 5
G 7 F ∑ Task times C
Efficiency = 10 11 3 7
H 11 E
(Actual number of workstations)
A B x (Largest cycle
F
time)
G
I 3 G, H
4
=time
65 minutes / ((6 stations) x (12 minutes)) 3
Total 65
D I
11 11
= 90.3%
E H


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PowerPoint slides by Jeff Heyl

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Farmer Syrup Bottler Distributor Retailer

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Table 1.2 (cont.)

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The objective is to improve productivity!

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Labor, Examples of Goods

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▶ Measure of process improvement

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One resource input  single-factor productivity

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Multiple resource inputs  multi-factor productivity

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Old labor 8 titles/day

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Old labor 8 titles/day

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Old labor 8 titles/day

New labor 14 titles/day

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Old labor 8 titles/day

New labor 14 titles/day

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Old multifactor 8 titles/day

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Old multifactor 8 titles/day

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Old multifactor 8 titles/day

New multifactor 14 titles/day

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Old multifactor 8 titles/day

New multifactor 14 titles/day

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PowerPoint slides by Jeff Heyl

© 2014 Pearson Education © 2011 Pearson 1 - 46

The objective of inventory

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Process Number Demand

Raw Material A Items

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© 2014 Pearson Education 1 - 51