Operations MGT - FULL NOTES

1 Operations and Productivity
PowerPoint presentation to accompany

Heizer and Render
Operations Management, 10e
Principles of Operations Management, 8e
PowerPoint slides by Jeff Heyl
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1-1

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
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

Why Study OM?
1. OM is one of three 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
What Operations
Managers Do
Basic Management Functions
 Planning
 Organizing
 Staffing
 Leading
 Controlling
Ten Critical Decisions
Ten Decision Areas Chapter(s)
1. Design of goods and services 5
2. Managing quality 6, Supplement 6
3. Process and capacity 7, Supplement 7
design
4. Location strategy 8
5. Layout strategy 9
6. Human resources and 10
job design
7. Supply-chain 11, Supplement 11
management
8. Inventory, MRP, JIT 12, 14, 16
9. Scheduling 13, 15
10. Maintenance 17 Table 1.2
Where are the OM Jobs?
 Technology/methods
 Facilities/space utilization
 Strategic issues
 Response time
 People/team development
 Customer service
 Quality
 Cost reduction
 Inventory reduction
 Productivity improvement
New Challenges in OM
From To
 Local or national focus  Global focus
 Batch shipments  Just-in-time
 Low bid purchasing  Supply-chain
partnering
 Lengthy product  Rapid product
development development,
alliances
 Standard products  Mass
customization
 Job specialization  Empowered
employees, teams
Goods and Services
Automobile
Computer
Installed carpeting
Fast-food meal
Restaurant meal/auto repair
Hospital care
Advertising agency/
investment management
Consulting service/
teaching
Counseling
100% 75 50 25 0 25 50 75 100%
| | | | | | | | |
Percent of Product that is a Good Percent of Product that is a Service

New Trends in OM
 Ethics
 Global focus
 Environmentally sensitive production
 Rapid product development
 Environmentally sensitive production
 Mass customization
 Empowered employees
 Supply-chain partnering
 Just-in-time performance
© 2011 Pearson Education, Inc. publishing as Prentice Hall 1 - 10
The Economic System
Inputs Transformation Outputs
Labor, The U.S. economic system Goods

capital, transforms inputs to outputs and
management at about an annual 2.5% services
increase in productivity per
year. The productivity
increase is the result of a
mix of capital (38% of 2.5%),
labor (10% of 2.5%), and
management (52% of 2.5%).
Feedback loop
Figure 1.6

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

Operations Strategy in a
2 Global Environment

Heizer and Render

Reasons to Globalize
Reasons to Globalize
Tangible 1. Reduce costs (labor, taxes, tariffs, etc.)
Reasons 2. Improve supply chain
3. Provide better goods and services
4. Understand markets
Intangible 5. Learn to improve operations
Reasons 6. Attract and retain global talent

Reduce Costs
 Foreign locations with lower wage
rates can lower direct and indirect
costs
 Maquiladoras
 World Trade Organization (WTO)
 North American Free Trade
Agreement (NAFTA)
 APEC, SEATO, MERCOSUR, CAFTA
 European Union (EU)
Improve the Supply Chain
 Locating facilities closer to
unique resources
 Auto design to California
 Athletic shoe production to China
 Perfume manufacturing in France

Provide Better Goods
and Services
 Objective and subjective
characteristics of goods and
services
 On-time deliveries
 Cultural variables
 Improved customer service

Understand Markets
 Interacting with foreign customers
and suppliers can lead to new
opportunities
 Cell phone
design from
Europe
 Cell phone
fads from
Japan
 Extend the product life cycle

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

Companies Want To Consider
 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

Factors Affecting Mission
Philosophy
and Values
Profitability
Environment
and Growth
Mission
Customers Public Image
Benefit to
Society

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

Strategy
 Action plan to
achieve mission
 Functional areas
have strategies
 Strategies exploit
opportunities and
strengths, neutralize
threats, and avoid
weaknesses

OM’s Contribution to Strategy
10 Operations Competitive
Decisions Approach Example Advantage
Product DIFFERENTIATION
Innovative design … Safeskin’s innovative gloves
Broad product line … Fidelity Security’s mutual
Quality funds
After-sales service … Caterpillar’s heavy equipment
service
Process Experience … Hard Rock Café’s dining
experience
Location
COST LEADERSHIP Differentiation
Low overhead … Franz-Colruyt’s warehouse-
Layout type stores (better)
Effective capacity
use … Southwest Airline’s
Human
resource aircraft utilization
Response
Inventory (faster)
management … Wal Mart’s sophisticated Cost
Supply chain
leadership
distribution system (cheaper)
Inventory
RESPONSE
Flexibility … Hewlett-Packard’s response to
Scheduling
volatile world market
Reliability … FedEx’s “absolutely,
Maintenance positively, on time” Figure 2.4
Quickness … Pizza Hut’s 5-minute guarantee
at lunchtime
10 Strategic OM Decisions
1. Goods and 6. Human resources

service design and job design
2. Quality 7. Supply-chain
3. Process and management
capacity design
8. Inventory
4. Location
selection 9. Scheduling
5. Layout design 10. Maintenance

Goods and Services and
the 10 OM Decisions
Operations
Decisions Goods Services
Goods and Product is usually Product is not
service tangible tangible
design
Quality Many objective Many subjective
standards standards
Process Customers not Customer may be
and involved directly involved
capacity Capacity must
design match demand
© 2011 Pearson Education, Inc. publishing as Prentice Hall

Table 2.1
1 - 26
Process Design
High Process-focused Mass Customization
JOB SHOPS Customization at high
(Print shop, emergency Volume
room, machine shop, (Dell Computer’s PC,
Variety of Products
fine-dining Repetitive (modular) cafeteria)

restaurant) focus
ASSEMBLY LINE
Moderate (Cars, appliances,
TVs, fast-food
restaurants) Product focused
CONTINUOUS
(Steel, beer, paper,
bread, institutional
kitchen)
Low
Low Moderate High

Volume
SWOT Analysis
Mission
Internal External
Strengths Opportunities
Analysis
Internal External
Weaknesses Threats
Strategy

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
Key Success Factors
Support a Core Competence and Implement Strategy by
Identifying and Executing the Key Success Factors in the Functional Areas
Marketing Finance/Accounting Production/Operations
Service Leverage
Distribution Cost of capital
Promotion Working capital
Channels of distribution Receivables
Product positioning Payables
(image, functions) Financial control
Lines of credit
Decisions Sample Options Chapter
Product Customized, or standardized 5

Quality Define customer expectations and how to achieve them 6, S6
Process Facility size, technology, capacity 7, S7
Location Near supplier or near customer 8
Layout Work cells or assembly line 9
Human resource Specialized or enriched jobs 10
Supply chain Single or multiple suppliers 11, S11
Inventory When to reorder, how much to keep on hand 12, 14, 16
Schedule Stable or fluctuating production rate 13, 15
Maintenance Repair as required or preventive maintenance 17
© 2011 Pearson Education, Inc. publishing as Prentice Hall Figure 2.7 1 - 30

3 Project Management

Heizer and Render

Strategic Importance of
Project Management
 Bechtel Project Management:
 Iraq war aftermath
 International workforce, construction
professionals, cooks, medical personnel,
security
 Millions of tons of supplies
 Hard Rock Cafe Rockfest Project:
 100,000 + fans
 planning began 9 months in advance

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

Examples of Projects
 Building Construction
 Research Project
Management of Projects
1. Planning - goal setting, defining the
project, team organization
2. Scheduling - relates people, money,
and supplies to specific activities
and activities to each other
3. Controlling - monitors resources,
costs, quality, and budgets; revises
plans and shifts resources to meet
time and cost demands

Project Management
Activities
 Planning
 Objectives  Scheduling
 Resources  Project activities
 Work break-down  Start & end times
structure  Network
 Organization
 Controlling
 Monitor, compare, revise, action
Project Planning
 Establishing objectives
 Defining project
 Creating work
breakdown structure
 Determining
resources
 Forming organization

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

Project Organization
Works Best When
1. Work can be defined with a specific
goal and deadline
2. The job is unique or somewhat
unfamiliar to the existing organization
3. The work contains complex
interrelated tasks requiring specialized
skills
4. The project is temporary but critical to
the organization
5. The project cuts across organizational
lines
A Sample Project
Organization
President
Human Quality
Resources Marketing Finance Design Production
Mgt
Project 1 Project
Manager
Mechanical Test
Technician
Engineer Engineer
Project 2 Project
Manager
Electrical Computer
Technician
Engineer Engineer
Figure 3.2

The Role of
the Project Manager
Highly visible
Responsible for making sure that:
1. All necessary activities are finished in order

and on time
2. The project comes in within budget
3. The project meets quality goals
4. The people assigned to the project receive
motivation, direction, and information

Work Breakdown Structure
Develop Windows 7
Level 1 1.0
Operating System
Software Project System

Level 2 1.1 1.2 1.3
Design Management Testing
Develop Module
Level 3 1.1.1 Planning 1.2.1 1.3.1
GUIs Testing
Ensure Compatibility Cost/Schedule Defect

with Earlier Versions 1.1.2 Management 1.2.2 Testing 1.3.2
Compatible with
Level 4 1.1.2.1
Windows ME
(Work packages)
Compatible with
1.1.2.2
Windows Vista
Compatible with Figure 3.3

Windows XP 1.1.2.3

Project Scheduling
 Identifying precedence
relationships
 Sequencing activities
 Determining activity
times & costs
 Estimating material &
worker requirements
 Determining critical
activities

Scheduling Techniques
1. Ensure that all activities are planned
for
2. Their order of performance is
accounted for
3. The activity time estimates are
recorded
4. The overall project time is developed

Project Management
Techniques
 Gantt chart
 Critical Path Method
(CPM)
 Program Evaluation
and Review
Technique (PERT)

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

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

AON Example
Milwaukee Paper Manufacturing's
Activities and Predecessors
Immediate
Activity Description Predecessors
A Build internal components —
B Modify roof and floor —
C Construct collection stack A
D Pour concrete and install frame A, B
E Build high-temperature burner C
F Install pollution control system C
G Install air pollution device D, E
H Inspect and test F, G
Table 3.1
Determining the Project
Schedule
Perform a Critical Path Analysis
 The critical path is the longest path
through the network
 The critical path is the shortest time in
which the project can be completed
 Any delay in critical path activities
delays the project
 Critical path activities have no slack
time
Schedule
Activity Description Time (weeks)
A Build internal components 2
B Modify roof and floor 3
C Construct collection stack 2
D Pour concrete and install frame 4
E Build high-temperature burner 4
F Install pollution control system 3
G Install air pollution device 5
H Inspect and test 2
Total Time (weeks) 25
Table 3.2
Schedule
Earliest start (ES) =earliest time at
Activity Description which an activity can start, Time (weeks)
assuming
A Build internal components
all predecessors 2
have been completed
B ModifyEarliest roof and floor(EF) =earliest time at
finish 3
C Construct which an activity
collection can be finished 2
stack
D Pour concrete
Latest startand(LS)
install frame
=latest 4
time at which
E an activity can start
Build high-temperature so as to not delay
burner 4
F Install the completion
pollution control time of the entire 3
system
project
G Install air pollution device 5
Latest finish (LF) =latest time by which
H Inspect anand test has to be finished so as
activity 2 to
Total Time (weeks)
not delay the completion time of 25 the
Table 3.2
entire project
Using Microsoft Project
Program 3.2
Using Microsoft Project
Program 3.3

4 Forecasting

Heizer and Render

What is Forecasting?
 Process of predicting
a future event
 Underlying basis
of all business
??
decisions
 Production
 Inventory
 Personnel
 Facilities

Forecasting Time Horizons
 Short-range forecast
 Up to 1 year, generally less than 3 months
 Purchasing, job scheduling, workforce
levels, job assignments, production levels
 Medium-range forecast
 3 months to 3 years
 Sales and production planning, budgeting
 Long-range forecast
 3+ years
 New product planning, facility location,
research and development
Distinguishing Differences
 Medium/long range forecasts deal with
more comprehensive issues and support
management decisions regarding
planning and products, plants and
processes
 Short-term forecasting usually employs
different methodologies than longer-term
forecasting
 Short-term forecasts tend to be more
accurate than longer-term forecasts

Influence of Product Life
Cycle
Introduction – Growth – Maturity – Decline
 Introduction and growth require longer

forecasts than maturity and decline
 As product passes through life cycle,
forecasts are useful in projecting
 Staffing levels
 Inventory levels
 Factory capacity

Product Life Cycle
Introduction Growth Maturity Decline
Best period to Practical to change Poor time to Cost control
increase market price or quality change image, critical
share image price, or quality
R&D engineering is Strengthen niche Competitive costs

Company Strategy/Issues
critical become critical

Defend market
position Drive-through
Internet search engines restaurants
CD-ROMs
iPods LCD &
Xbox 360 plasma TVs
Sales
Avatars
Boeing 787 Analog

TVs
Twitter
Figure 2.5
Product Life Cycle
Product design Forecasting Standardization Little product
and critical differentiation
Fewer product
development
Product and changes, more Cost
critical
process minor changes minimization
Frequent reliability Optimum Overcapacity
product and
Competitive capacity in the
process design
product industry
changes Increasing
OM Strategy/Issues
improvements
stability of Prune line to
Short production and options process eliminate
runs Increase capacity items not
Long production
High production returning
Shift toward runs
costs good margin
product focus Product
Limited models Enhance improvement and Reduce
capacity
Attention to distribution cost cutting
quality
Figure 2.5
Types of Forecasts
 Economic forecasts
 Address business cycle – inflation rate,
money supply, housing starts, etc.
 Technological forecasts
 Predict rate of technological progress
 Impacts development of new products
 Demand forecasts
 Predict sales of existing products and
services

Forecasting
 Human Resources – Hiring, training,
laying off workers
 Capacity – Capacity shortages can
result in undependable delivery, loss
of customers, loss of market share
 Supply Chain Management – Good
supplier relations and price
advantages

Seven Steps in Forecasting
1. Determine the use of the forecast
2. Select the items to be forecasted
3. Determine the time horizon of the
forecast
4. Select the forecasting model(s)
5. Gather the data
6. Make the forecast
7. Validate and implement results

Forecasting Approaches
Qualitative Methods
 Used when situation is vague
and little data exist
 New products
 New technology
 Involves intuition, experience
 e.g., forecasting sales on
Internet
Forecasting Approaches
Quantitative Methods
 Used when situation is ‘stable’ and
historical data exist
 Existing products
 Current technology
 Involves mathematical techniques
 e.g., forecasting sales of color
televisions
Overview of Quantitative
Approaches
1. Naive approach
2. Moving averages
time-series
3. Exponential models
smoothing
4. Trend projection
5. Linear regression associative
model

Time Series Forecasting
 Set of evenly spaced numerical

data
 Obtained by observing response
variable at regular time periods
 Forecast based only on past values,
no other variables important
 Assumes that factors influencing
past and present will continue
influence in future
Time Series Components
Trend Cyclical
Seasonal Random

Design of Goods
5 and Services

Heizer and Render

Product Decision
The objective of the product decision

is to develop and implement a
product strategy that meets the
demands of the marketplace with a
competitive advantage

Product Decision
 The good or service the organization
provides society
 Top organizations typically focus on
core products
 Customers buy satisfaction, not just
a physical good or particular service
 Fundamental to an organization's
strategy with implications throughout
the operations function
Product Strategy Options
 Differentiation
 Shouldice Hospital
 Low cost
 Taco Bell
 Rapid response
 Toyota

Product Life Cycles
 May be any length from a few

hours to decades
 The operations function must
be able to introduce new
products successfully

Product Life Cycles
Cost of development and production
Sales, cost, and cash flow
Sales revenue
Net revenue (profit)
Cash
flow
Negative
cash flow Loss
Figure 5.1

Product Life Cycle
Introductory Phase
 Fine tuning may warrant
unusual expenses for
1. Research
2. Product development
3. Process modification and
enhancement
4. Supplier development

Product Life Cycle
Growth Phase
 Product design begins to
stabilize
 Effective forecasting of
capacity becomes necessary
 Adding or enhancing capacity
may be necessary

Product Life Cycle
Maturity Phase
 Competitors now established
 High volume, innovative
production may be needed
 Improved cost control,
reduction in options, paring
down of product line

Product Life Cycle
Decline Phase
 Unless product makes a
special contribution to the
organization, must plan to
terminate offering

Product Life Cycle Costs
Costs committed
100 –
80 –
Percent of total cost
60 – Costs incurred
40 –
20 – Ease of change
0–
Concept Detailed Manufacturing Distribution,
design design service,
prototype and disposal
Importance of New Products
Percentage of Sales from New Products
50%
40%
30%
20%
10%
Industry Top Middle Bottom

leader third third third
Position of Firm in Its Industry Figure 5.2a
Product Development
Ideas
System
Ability Figure 5.3
Customer Requirements
Functional Specifications
Product Specifications Scope for

Scope of design and
product Design Review engineering
development teams
team Test Market
Introduction
Evaluation

Decision Tree Example
(.4)
Purchase CAD
High sales
(.6) Low sales
Hire and train engineers
(.4)
High sales
(.6)
Low sales
Do nothing
Figure 5.14
Decision Tree Example
$2,500,000 Revenue
(.4) - 1,000,000 Mfg cost ($40 x 25,000)
Purchase CAD - 500,000 CAD cost
$388,000 High sales
$1,000,000 Net
$800,000 Revenue
(.6) Low sales - 320,000 Mfg cost ($40 x 8,000)
- 500,000 CAD cost
Hire and train engineers - $20,000 Net loss
(.4)
High sales
EMV (purchase CAD system) = (.4)($1,000,000) + (.6)(- $20,000)
= $388,000
(.6)
Low sales
Do nothing
Figure 5.14
6 Managing Quality

Heizer and Render

Quality and Strategy
An operations manager’s objective

is to build a total quality
management system that identifies
and satisfies customer needs

Quality and Strategy
 Managing quality supports

differentiation, low cost, and
response strategies
 Quality helps firms increase
sales and reduce costs
 Building a quality organization is
a demanding task

The Flow of Activities
Organizational Practices
Leadership, Mission statement, Effective operating
procedures, Staff support, Training
Yields: What is important and what is to be
accomplished
Quality Principles
Customer focus, Continuous improvement, Benchmarking,
Just-in-time, Tools of TQM
Yields: How to do what is important and to be
accomplished
Employee Fulfillment
Empowerment, Organizational commitment
Yields: Employee attitudes that can
accomplish
what is important
Customer Satisfaction
Winning orders, Repeat customers
Yields: An effective
Figure 6.2 organization with
a competitive
© 2011 Pearson Education, Inc. publishing as Prentice Hall advantage 1 - 87
Defining Quality
The totality of features and

characteristics of a product or
service that bears on its ability to
satisfy stated or implied needs
American Society for Quality

Different Views
 User-based:
User-based better performance,
more features
 Manufacturing-based:
Manufacturing-based
conformance to standards,
making it right the first time
 Product-based:
Product-based specific and
measurable attributes of the
product

Implications of Quality
1. Company reputation
 Perception of new products
 Employment practices
 Supplier relations
2. Product liability
 Reduce risk
3. Global implications
 Improved ability to compete
Key Dimensions of Quality
 Performance  Durability
 Features  Serviceability
 Reliability  Aesthetics
 Conformance  Perceived quality
 Value

Leaders in Quality
Leader Philosophy/Contribution
W. Edwards Deming 14 Points for
Management
Joseph M. Juran Top management
commitment, fitness for
use
Armand Feigenbaum Total Quality Control
Philip B. Crosby Quality is Free, zero
defects
Table 6.1
International Quality
Standards
 ISO 9000 series (Europe/EC)
 Common quality standards for products
sold in Europe (even if made in U.S.)
 2008 update places greater emphasis on
leadership and customer requirements
and satisfaction
 ISO 14000 series (Europe/EC)

TQM
Encompasses entire organization,
from supplier to customer
Stresses a commitment by
management to have a continuing,
companywide drive toward
excellence in all aspects of products
and services that are important to
the customer

Seven Concepts of TQM
1. Continuous improvement
2. Six Sigma
3. Employee empowerment
4. Benchmarking
5. Just-in-time (JIT)
6. Taguchi concepts
7. Knowledge of TQM tools

Continuous Improvement
 Represents continual
improvement of all processes
 Involves all operations and work
centers including suppliers and
customers
 People, Equipment, Materials,
Procedures

Six Sigma
 Two meanings
 Statistical definition of a process that
is 99.9997% capable, 3.4 defects per
million opportunities (DPMO)
 A program designed to reduce
defects, lower costs, and improve
customer satisfaction

Six Sigma
Lower limits Upper limits
 Two meanings
2,700 defects/million
 Statistical definition of a process that

3.4 defects/million
is 99.9997% capable, 3.4 defects per
million opportunities (DPMO)
 A program designed to reduce
defects, lower costs, Mean
and improve
customer satisfaction
±3
±6
Figure 6.4

Benchmarking
Selecting best practices to use as a
standard for performance rna
l
i nte ing
1. Determine what to Use hmark ig
e n c re b
benchmark b o u ’
if y nough
e
2. Form a benchmark team
3. Identify benchmarking partners
4. Collect and analyze benchmarking
information
5. Take action to match or exceed the
benchmark
Just-in-Time (JIT)
Relationship to quality:
 JIT cuts the cost of quality
 JIT improves quality
 Better quality means less
inventory and better, easier-to-
employ JIT system

Just-In-Time (JIT) Example
Work in process
inventory level
(hides problems)
Unreliable Capacity
Vendors Scrap
Imbalances

Tools of TQM
 Tools for Generating Ideas
 Check sheets
 Scatter diagrams
 Cause-and-effect diagrams
 Tools to Organize the Data
 Pareto charts
 Flowcharts

Tools of TQM
 Tools for Identifying Problems
 Histogram
 Statistical process control chart

Cause-and-Effect Diagrams
Material Method
(ball) (shooting process)
Grain/Feel Aiming point
(grip)
Size of ball
Air pressure Bend knees
Hand position
Balance
Lopsidedness
Follow-through
Missed
Training
free-throws
Rim size
Conditioning Motivation Rim height
Consistency Rim alignment Backboard

stability
Concentration
Machine
Manpower
(hoop & Figure 6.7
(shooter)
backboard)
Pareto Charts
Data for October
– 100
70 – – 93
– 88
60 – 54
Frequency (number)
Cumulative percent
– 72
50 –
40 –
Number of
30 – occurrences
20 –
12
10 –
4 3 2
0 –
Room svc Check-in Pool hours Minibar Misc.
72% 16% 5% 4% 3%
Causes and percent of the total

Flow Charts
MRI Flowchart
1. Physician schedules MRI 7. If unsatisfactory, repeat
2. Patient taken to MRI 8. Patient taken back to room
3. Patient signs in 9. MRI read by radiologist
4. Patient is prepped 10. MRI report transferred to
5. Technician carries out MRI physician
6. Technician inspects film 11. Patient and physician discuss
8
80%
1 2 3 4 5 6 7 11
9 10
20%

When and Where to Inspect
1. At the supplier’s plant while the supplier is
producing
2. At your facility upon receipt of goods from
the supplier
3. Before costly or irreversible processes
4. During the step-by-step production
process
5. When production or service is complete
6. Before delivery to your customer
7. At the point of customer contact
Source Inspection
 Also known as source control

 The next step in the process is
your customer
 Ensure perfect product
to your customer
Poka-yoke is the concept of foolproof devices

or techniques designed to pass only
acceptable product

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

Service Quality
The Operations Manager must
recognize:
1. The tangible component of
services is important
2. The service process is important
3. The service is judged against the
customer’s expectations
4. Exceptions will occur

Determinants of Service
Quality
Reliability Consistency of performance and dependability
Responsiveness Willingness or readiness of employees
Competence Required skills and knowledge
Access Approachability and ease of contact
Courtesy Politeness, respect, consideration, friendliness
Communication Keeping customers informed
Credibility Trustworthiness, believability, honesty
Security Freedom from danger, risk, or doubt
Understanding/
Understand the customer’s needs
knowing the customer
Tangibles Physical evidence of the service
Table 6.5
Process Strategy
7 and Sustainability

Heizer and Render

Process Flow Diagram
Frame tube Frame-building Frame Hot-paint
bending work cells machining frame painting
THE ASSEMBLY LINE
TESTING Engines and
Incoming parts transmissions
28 tests
From Milwaukee
on a JIT arrival
Air cleaners Oil tank work cell schedule
Fluids and mufflers Shocks and forks
Fuel tank work cell Handlebars
Wheel work cell Fender work cell

Roller testing
Crating

Process Strategies
The objective of a process strategy is

to build a production process that
meets customer requirements and
product specifications within cost
and other managerial constraints

Process, Volume, and Variety
Figure 7.1 Volume
Low Repetitive High
Volume Process Volume
High Variety
one or few Process Focus Mass Customization
units per run, projects, job shops (difficult to achieve,
(allows (machine, print, but huge rewards)
customization) hospitals, restaurants) Dell Computer
Arnold Palmer
Hospital
Changes in
Modules
modest runs, Repetitive
standardized (autos, motorcycles,
modules home appliances)
Changes in Harley-Davidson
Attributes Product Focus
(such as grade, (commercial
quality, size, Poor Strategy
(Both fixed and baked goods,
thickness, etc.) steel, glass, beer)
long runs only variable costs
are high) Frito-Lay
Process Strategies
 How to produce a product or
provide a service that
 Meets or exceeds customer
requirements
 Meets cost and managerial goals
 Has long term effects on
 Efficiency and production flexibility
 Costs and quality

Process Strategies
Four basic strategies
1. Process focus
2. Repetitive focus
3. Product focus
4. Mass customization
Within these basic strategies there are
many ways they may be implemented

Process Focus
 Facilities are organized around specific
activities or processes
 General purpose equipment and skilled
personnel
 High degree of product flexibility
 Typically high costs and low equipment
utilization
 Product flows may vary considerably
making planning and scheduling a
challenge
Repetitive Focus
 Facilities often organized as
assembly lines
 Characterized by modules with parts
and assemblies made previously
 Modules may be combined for many
output options
 Less flexibility than process-focused
facilities but more efficient

Product Focus
 Facilities are organized by product
 High volume but low variety of
products
 Long, continuous production runs
enable efficient processes
 Typically high fixed cost but low
variable cost
 Generally less skilled labor

Product Focus Few Inputs
(corn, potatoes, water,
seasoning)
(low-volume, high variety,

continuous process)
Frito-Lay
Output variations in size,

Figure 7.2(c) shape, and packaging
(3-oz, 5-oz, 24-oz package
labeled for each material)
Product Focus
D A Scrap
Nucor Steel Plant steel
Continuous caster
B
C Electric
Ladle of molten steel furnace
Continuous cast steel

sheared into 24-ton slabs
Hot tunnel furnace - 300 ft
E F
Hot mill for finishing, cooling, and coiling
H G
I

Mass Customization
 The rapid, low-cost production of
goods and service to satisfy
increasingly unique customer
desires
 Combines the
flexibility of a
process focus
with the efficiency
of a product focus

Mass Customization
Number of Choices
Item 1970s 21st Century
Vehicle models 140 286
Vehicle types 18 1,212
Bicycle types 8 211,000
Software titles 0 400,000
Web sites 0 162,000,000
Movie releases per year 267 765
New book titles 40,530 300,000
Houston TV channels 5 185
Breakfast cereals 160 340
Items (SKUs) in 14,000 150,000
supermarkets
LCD TVs 0 102
Table 7.1
Mass Customization
Repetitive Focus
Figure 7.3 Flexible people
and equipment
Modular
techniques
Accommodating
Product and Responsive
Process Design Supply Chains
Mass Customization
Rapid
throughput
Effective techniques
scheduling
techniques
Process-Focused Product-Focused
High variety, low volume Low variety, high volume
Low utilization (5% to 25%) High utilization (70% to 90%)
General-purpose equipment Specialized equipment

Focused Processes
 Focus brings efficiency
 Focus on depth of product line
rather than breadth
 Focus can be
 Customers
 Products
 Service
 Technology
Changing Processes
 Difficult and expensive

 May mean starting over
 Process strategy determines
transformation strategy for an
extended period
 Important to get it right

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

Design
 Flow Charts - Shows the movement of
materials
 Time-Function Mapping - Shows flows and
time frame

Design
 Flow Charts - Shows the movement of
materials
 Time-Function Mapping - Shows flows and
time frame
 Value-Stream Mapping - Shows flows and
time and value added beyond the
immediate organization
 Process Charts - Uses symbols to show
key activities
 Service Blueprinting - focuses on
customer/provider interaction
Service Blueprinting
 Focuses on the customer and

provider interaction
 Defines three levels of interaction
 Each level has different
management issues
 Identifies potential failure points

Service Blueprint
Personal Greeting Service Diagnosis Perform Service Friendly Close
Level Customer arrives

for service. Customer departs
#1
(3 min)
F
Determine Notify Customer pays bill.
specifics. customer (4 min)
Warm greeting (5 min)
and obtain No and recommend
an alternative
F
service request.
(10 sec) provider.
Standard Can F
Level request. (7min)
service be
#2 (3 min) done and does Notify
Direct customer customer No customer the
to waiting room. approve? car is ready.
(5 min) (3 min)
F F F F
Yes Yes
Perform
Level required work. F Prepare invoice.
#3 (varies) (3 min)
Figure 7.8
Process Analysis Tools
 Flowcharts provide a view of the
big picture
 Time-function mapping adds rigor
and a time element
 Value-stream analysis extends to
customers and suppliers
 Process charts show detail
 Service blueprint focuses on
customer interaction
Improving Service
Processes
 Layout
 Product exposure, customer
education, product enhancement
 Human Resources
 Recruiting and training
 Impact of flexibility

Computer-Integrated
Manufacturing (CIM)
 Extension of flexible manufacturing
systems
 Backwards to engineering and inventory
control
 Forward into warehousing and shipping
 Can also include financial and customer
service areas
 Reducing the distinction between low-
volume/high-variety, and high-
volume/low-variety production
Process Redesign
 The fundamental rethinking of business
processes to bring about dramatic
improvements in performance
 Relies on reevaluating the purpose of the
process and questioning both the
purpose and the underlying assumptions
 Requires reexamination of the basic
process and its objectives
 Focuses on activities that cross
functional lines
 Any process is a candidate for redesign
Sustainability
 Sustainability in production
processes
1. Resources
2. Recycling
3. Regulations
4. Reputation

8 Location Strategies

Heizer and Render

Location Strategy
The objective of location strategy is

to maximize the benefit of location
to the firm

Location Strategy
 One of the most important decisions a
firm makes
 Increasingly global in nature
 Significant impact on fixed and
variable costs
 Decisions made relatively infrequently
 The objective is to maximize the
benefit of location to the firm
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

Location and Innovation
 Cost is not always the most important
aspect of a strategic decision
 Four key attributes when strategy is
based on innovation
 High-quality and specialized inputs
 An environment that encourages
investment and local rivalry
 A sophisticated local market
 Local presence of related and
supporting industries
Location Decisions
 Long-term decisions
 Decisions made infrequently
 Decision greatly affects both fixed
and variable costs
 Once committed to a location,
many resource and cost issues
are difficult to change

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
Figure 8.1 currency 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
Clustering of Companies
Industry Locations Reason for clustering
Wine making Napa Valley (US) Natural resources of
Bordeaux region land and climate
(France)
Software firms Silicon Valley, Talent resources of
Boston, Bangalore bright graduates in
(India) scientific/technical
areas, venture
capitalists nearby
Race car Huntington/North Critical mass of talent
builders Hampton region and information
(England)
© 2011 Pearson Education, Inc. publishing as Prentice Hall Table 8.3 1 - 146
Theme parks Orlando, Florida A hot spot for
(Disney World, entertainment, warm
Universal weather, tourists, and
Studios) inexpensive labor
Electronics Northern Mexico NAFTA, duty free
firms export to US
Computer Singapore, Taiwan High technological

hardware penetration rate and
manufacturers per capita GDP,
skilled/educated
workforce with large
pool of engineers
Fast food Sites within 1 mile Stimulate food sales,
chains of each other high traffic flows
(Wendy’s,
McDonald’s,
Burger King,
and Pizza Hut)
General Wichita, Kansas Mass of aviation skills
aviation aircraft
(Cessna,
Learjet, Boeing)
Orthopedic Warsaw, Indiana Ready supply of skilled
device workers, strong U.S.
manufacturing market
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. Recommend the location with the highest
point score
Locational
Break-Even Analysis
 Method of cost-volume analysis used for
industrial locations
 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

Worldwide Distribution of
Volkswagens and Parts
Figure 8.4
Location Strategies
Service/Retail/Professional Location Goods-Producing Location
Revenue Focus Cost Focus
Volume/revenue Tangible costs
Drawing area; purchasing power Transportation cost of raw
Competition; advertising/pricing material
Shipment cost of finished goods
Physical quality Energy and utility cost; labor; raw
material; taxes, and so on
Parking/access; security/lighting;
appearance/image
Intangible and future costs
Cost determinants Attitude toward union
Rent Quality of life
Management caliber Education expenditures by state
Operations policies (hours, wage Quality of state and local
rates) government
Table 8.6
Location Strategies

Techniques Techniques
Regression models to determine Transportation method
importance of various factors Factor-rating method
Factor-rating method Locational break-even analysis
Traffic counts Crossover charts
Demographic analysis of drawing area
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems
Table 8.6
Location Strategies

Assumptions Assumptions
Location is a major determinant of Location is a major determinant of
revenue cost
High customer-contact issues are Most major costs can be identified
critical explicitly for each site
Costs are relatively constant for a Low customer contact allows focus
given area; therefore, the revenue on the identifiable costs
function is critical Intangible costs can be evaluated
Table 8.6
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
9 Layout Strategies

Heizer and Render

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
Objectives Examples
Office Locate workers requiring Allstate Insurance
frequent contact close to one
Microsoft Corp.
another
Retail Expose customer to high- Kroger’s Supermarket
margin items
Walgreen’s
Bloomingdale’s
Warehouse Balance low cost storage with Federal-Mogul’s warehouse
(storage) low-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
Table 9.1

Layout Strategies
Objectives Examples
Job Shop Manage varied material flow Arnold Palmer Hospital
(process for each product
Hard Rock Cafe
oriented)
Olive Garden
Work Cell Identify a product family, Hallmark Cards
(product build teams, cross train team
Wheeled Coach
families) members
Standard Aero
Repetitive/ Equalize the task time at each Sony’s TV assembly line
Continuous workstation
Toyota Scion
(product
oriented)
Table 9.1

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

Supermarket Retail Layout
 Objective is to maximize
profitability per square foot of
floor space
 Sales and profitability vary
directly with customer exposure

Focused Work Center and
Focused Factory
Work Cell Focused Work Center Focused Factory
Description: Work cell is A focused work center is A focused factory is a

a temporary product- a permanent product- permanent facility to
oriented arrangement oriented arrangement produce a product or
of machines and of machines and component in a
personnel in what is personnel in what is product-oriented
ordinarily a process- ordinarily a process- facility. Many focused
oriented facility oriented facility factories currently
being built were
originally part of a
process-oriented
facility
Example: A job shop Example: Pipe bracket Example: A plant to

with machinery and manufacturing at a produce window
personnel rearranged shipyard mechanism for
to produce 300 unique automobiles
control panels
© 2011 Pearson Education, Inc. publishing as Prentice Hall Table 9.21 - 167
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
Human Resources, Job
10 Design, and Work
Measurement

Heizer and Render

Human Resource Strategy
The objective of a human resource

strategy is to manage labor and
design jobs so people are effectively
and efficiently utilized

Human Resource Strategy
1. People should be effectively utilized
within the constraints of other
operations management decisions
2. People should have a reasonable quality
of work life in an atmosphere of mutual
commitment and trust

Constraints on Human
Resource Strategy
Product strategy Process strategy
• Skills needed • Technology
• Talents needed
e
• Machinery and
ur
• Materials used W
ha
ed
equipment used
t
oc
• Safety • Safety
Pr
Schedules Individual differences
• Time of day When Who • Strength and
• Time of year HUMAN fatigue
(seasonal) RESOURCE • Information
• Stability of STRATEGY processing and
schedules response
Location strategy Layout strategy

• Climate • Fixed position
re
H
he
ow
• Temperature • Process
W
• Noise • Assembly line

• Light • Work cell
• Air quality • Product
© 2011 Pearson Education, Inc. publishing as Prentice Hall Figure 10.1 1 - 172
Labor Planning
Employment Stability Policies
1. Follow demand exactly
 Matches direct labor costs to
production
 Incurs costs in hiring and
termination, unemployment
insurance, and premium wages
 Labor is treated as a variable cost

Labor Planning
Employment Stability Policies
2. Hold employment constant
 Maintains trained workforce
 Minimizes hiring, termination, and
unemployment costs
 Employees may be underutilized
during slack periods
 Labor is treated as a fixed cost

Work Schedules
 Standard work schedule
 Five eight-hour days
 Flex-time
 Allows employees, within limits, to
determine their own schedules
 Flexible work week
 Fewer but longer days
 Part-time
 Fewer, possibly irregular, hours

Job Classification and
Work Rules
 Specify who can do what
 Specify when they can do it
 Specify under what conditions
they can do it
 Often result of union contracts
 Restricts flexibility in assignments
and consequently efficiency of
production
Job Design
 Specifying the tasks that
constitute a job for an individual
or a group
1. Job specialization
2. Job expansion
3. Psychological components
4. Self-directed teams
5. Motivation and incentive systems

Labor Specialization
 The division of labor into unique tasks
 First suggested by Adam Smith in 1776
1. Development of dexterity
2. Less loss of time
3. Development of specialized tools
 Later Charles Babbage (1832) added
another consideration
1. Wages exactly fit the required skill
required

Job Expansion
 Adding more variety to jobs
 Intended to reduce boredom
associated with labor specialization
 Job enlargement
 Job rotation
 Job enrichment
 Employee empowerment

Job Enlargement
Enriched job
Planning
(Participate in a cross-
function quality
improvement team)
Enlarged job
Task #3 Present job Task #2
(Lock printed circuit (Manually insert and (Adhere labels
board into fixture for solder six resistors) to printed
next operation) circuit board)
Control
(Test circuits after
assembly)
Figure 10.2
Psychological Components
of Job Design
Human resource strategy requires
consideration of the psychological
components
of job design

Core Job Characteristics
Jobs should include the following
characteristics
1. Skill variety
2. Job identity
3. Job significance
4. Autonomy
5. Feedback

Self-Directed Teams
 Group of empowered individuals
working together to reach a
common goal
 May be organized for long-term or
short-term objectives
 Effective because
 Provide employee empowerment
 Ensure core job characteristics
 Meet individual psychological needs
Limitations of Job
Expansion
1. Higher capital cost
2. Individuals may prefer simplenjobs
nual
Average A
3. Higher wages rates for ining Hou
Tragreater rs/
skills
Employee
4. Smaller labor pool 7
U.S.
5. Higher training costs den 170
Swe
Japan 200

Motivation and Incentive
Systems
 Bonuses - cash or stock options
 Profit-sharing - profits for distribution to
employees
 Gain sharing - rewards for
improvements
 Incentive plans - typically based on
production rates
 Knowledge-based systems - reward for
knowledge or skills
Ergonomics and the Work
Environment
 Ergonomics is the study of the
interface between man and
machine
 Often called
human factors
 Operator input
to machines

Ergonomics and Work
Methods
 Feedback to operators
 The work
environment
 Illumination
 Noise
 Temperature
 Humidity

Work Sampling
 Estimates percent of time a worker
spends on various tasks
 Requires random observations to
record worker activity
 Determines how employees allocate
their time
 Can be used to set staffing levels,
reassign duties, estimate costs, and
set delay allowances
Work Sampling
 Advantages of work sampling
 Less expensive than time study
 Observers need little training
 Studies can be delayed or interrupted
with little impact on results
 Worker has little
chance to affect
results
 Less intrusive

Supply-Chain
11 Management

Heizer and Render

Supply-Chain Management
The objective is to build a chain of

suppliers that focuses on
maximizing value to the ultimate
customer

The Supply Chain’s
Strategic Importance
Supply chain management is the
integration of the activities that
procure materials and services,
transform them into intermediate
goods and final products, and deliver
them through a distribution system
Competition is no longer between
companies; it is between supply chains
Supply Chain Management
Important activities include determining
1. Transportation vendors
2. Credit and cash transfers
3. Suppliers
4. Distributors
5. Accounts payable and receivable
6. Warehousing and inventory
7. Order fulfillment
8. Sharing customer, forecasting, and
production information
A Supply Chain for Beer
Figure 11.1
How Supply Chain
Decisions Impact Strategy
Low-Cost Response Differentiation
Strategy Strategy Strategy
Supplier’s Supply demand Respond quickly Share market
goal at lowest to changing research;
possible cost requirements jointly develop
(e.g., Emerson and demand to products and
Electric, Taco minimize options (e.g.,
Bell) stockouts (e.g., Benetton)
Dell Computers)
Primary Select primarily Select primarily Select primarily
selection for cost for capacity, for product
criteria speed, and development
flexibility skills
Table 11.1
How Supply Chain
Decisions Impact Strategy
Low-Cost Response Differentiation
Strategy Strategy Strategy
Process Maintain high Invest in excess Modular
charact- average capacity and processes that
eristics utilization flexible lend
processes themselves to
mass
customization
Inventory Minimize Develop Minimize
charact- inventory responsive inventory in the
eristics throughout the system with chain to avoid
chain to hold buffer stocks obsolescence
down cost positioned to
ensure supply
Table 11.1
Make-or-Buy Decisions
Choice between internal production
and external sources

Outsourcing
 Transfers traditional internal
activities and resources of a firm to
outside vendors
 Utilizes the efficiency that comes
with specialization
 Firms outsource information
technology, accounting, legal,
logistics, and production

Supply Chain Strategies
 Negotiating with many suppliers
 Long-term partnering with few
suppliers
 Vertical integration
 Joint ventures
 Keiretsu
 Virtual companies that use
suppliers on an as needed basis
Many Suppliers
 Commonly used for commodity
products
 Purchasing is typically based on
price
 Suppliers compete with one
another
 Supplier is responsible for
technology, expertise,
forecasting, cost, quality, and
delivery
Vertical Integration
Vertical Integration Examples of Vertical Integration
Raw material
Iron ore Silicon Farming
(suppliers)
Backward
Steel
integration
Current Integrated
Automobiles Flour milling
transformation circuits
Distribution
Forward integration Circuit boards
systems
Finished goods Computers

(customers) Dealers Watches Baked goods
Calculators
Figure 11.2
Joint Ventures
Formal collaboration
Enhance skills
Secure supply
Reduce costs
Cooperation without diluting brand
or conceding competitive advantage

Keiretsu Networks
 A middle ground between few suppliers
and vertical integration
 Supplier becomes part of the company
coalition
 Often provide financial support for
suppliers through ownership or loans
 Members expect long-term relationships
and provide technical expertise and
stable deliveries
 May extend through several levels of the
supply chain
Virtual Companies
 Rely on a variety of supplier

relationships to provide services on
demand
 Fluid organizational boundaries that
allow the creation of unique enterprises
to meet changing market demands
 Exceptionally lean performance, low
capital investment, flexibility, and speed

Managing the Supply Chain
There are significant management issues in
controlling a supply chain involving many
independent organizations
 Mutual agreement on goals

 Trust
 Compatible organizational cultures

Vendor Selection
 Vendor evaluation
 Critical decision
 Find potential vendors
 Determine the likelihood of them
becoming good suppliers
 Vendor Development
 Training
 Engineering and production help
 Establish policies and procedures
Vendor Evaluation
Scores Weight
Criteria Weights (1-5) x Score
Engineering/research/innovation skills .20 5 1.0
Production process capability .15 4 .6
(flexibility/technical assistance)
Distribution/delivery capability .05 4 .2
Quality systems and performance .10 2 .2
Facilities/location .05 2 .1
Financial and managerial strength .15 4 .6
(stability and cost structure)
Information systems capability (e- .10 2 .2
procurement, ERP)
Integrity (environmental compliance/ .20 5 1.0
ethics)
Total 1.00 3.9
Vendor Selection
 Negotiations
 Cost-Based Price Model - supplier
opens books to purchaser
 Market-Based Price Model - price
based on published, auction, or
indexed price
 Competitive Bidding - used for
infrequent purchases but may make
establishing long-term relationships
difficult
Distribution Systems
 Trucking
 Moves the vast majority of
manufactured goods
 Chief advantage is flexibility
 Railroads
 Capable of carrying large loads
 Little flexibility though
containers and piggybacking
have helped with this
Distribution Systems
 Airfreight
 Fast and flexible for light loads
 May be expensive

Third-Party Logistics
 Outsourcing logistics can reduce costs

and improve delivery reliability and
speed
 Coordinate supplier inventory with
delivery services
 May provide
warehousing,
assembly, testing,
shipping, customs

Inventory
12 Management

Heizer and Render

Inventory Management
The objective of inventory

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

Importance of Inventory
 One of the most expensive assets

of many companies representing as
much as 50% of total invested
capital
 Operations managers must balance
inventory investment and customer
service

Functions of Inventory
1. To decouple or separate various
parts of the production process
2. To decouple the firm from
fluctuations in demand and
provide a stock of goods that will
provide a selection for customers
3. To take advantage of quantity
discounts
4. To hedge against inflation
Types of Inventory
 Raw material
 Purchased but not processed
 Work-in-process
 Undergone some change but not completed
 A function of cycle time for a product
 Maintenance/repair/operating (MRO)
 Necessary to keep machinery and
processes productive
 Finished goods
 Completed product awaiting shipment
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

Managing Inventory
1. How inventory items can be

classified
2. How accurate inventory records
can be maintained

ABC Analysis
 Divides inventory into three classes
based on annual dollar volume
 Class A - high annual dollar volume
 Class B - medium annual dollar
volume
 Class C - low annual dollar volume
 Used to establish policies that
focus on the few critical parts and
not the many trivial ones
Record Accuracy
 Accurate records are a critical
ingredient in production and inventory
systems
 Allows organization to focus on what
is needed
 Necessary to make precise decisions
about ordering, scheduling, and
shipping
 Incoming and outgoing record
keeping must be accurate
 Stockrooms should be secure
Control of Service
Inventories
 Can be a critical component
of profitability
 Losses may come from
shrinkage or pilferage
 Applicable techniques include
1. Good personnel selection, training, and
discipline
2. Tight control on incoming shipments
3. Effective control on all goods leaving
facility
Independent Versus
Dependent Demand
 Independent demand - the
demand for item is independent
of the demand for any other
item in inventory
 Dependent demand - the
demand for item is dependent
upon the demand for some
other item in the inventory

Holding, Ordering, and
Setup Costs
 Holding costs - the costs of holding
or “carrying” inventory over time
 Ordering costs - the costs of
placing an order and receiving
goods
 Setup costs - cost to prepare a
machine or process for
manufacturing an order
Holding Costs
Cost (and range)
as a Percent of
Category Inventory Value
Housing costs (building rent or 6% (3 - 10%)
depreciation, operating costs, taxes,
insurance)
Material handling costs (equipment lease or 3% (1 - 3.5%)
depreciation, power, operating cost)
Labor cost 3% (3 - 5%)
Investment costs (borrowing costs, taxes, 11% (6 - 24%)
and insurance on inventory)
Pilferage, space, and obsolescence 3% (2 - 5%)
Overall carrying cost 26%
Table 12.1
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 setup and holding
6. Stockouts can be completely avoided
Inventory Usage Over Time
Usage rate Average

Order inventory
quantity = Q
Inventory level
on hand
(maximum
inventory Q
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
D = 1,000 units
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
D = 1,000 units Q* = 200 units
S = $10 per order
Expected Demand D
number of = N = =
orders Order quantity Q*
1,000
N= = 5 orders per year
200

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

An EOQ Example
H = $.50 per unit per year T = 50 days
Total annual cost = Setup cost + Holding cost

D Q
TC = S + H
Q 2
1,000 200
TC = ($10) + ($.50)
200 2
TC = (5)($10) + (100)($.50) = $50 + $50 = $100

An EOQ Example
Management underestimated demand by 50%
D = 1,000 units 1,500 units Q* = 200 units
D Q
TC = S + H
Q 2
1,500 200
TC = ($10) + ($.50) = $75 + $50 = $125
200 2
Total annual cost increases by only 25%

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 + H
Q 2 Only 2% less
1,500 244.9 than the total
TC = ($10) + ($.50) cost of $125
244.9 2
when the
TC = $61.24 + $61.24 = $122.48 order quantity
was 200
Reorder Points
 EOQ answers the “how much” question
 The reorder point (ROP) tells “when” to
order
Demand Lead time for a
ROP = per day new order in days
=dxL
D
d = Number of working days in a year

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

Production Order Quantity
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

13 Aggregate Planning

Heizer and Render

Aggregate Planning
The objective of aggregate planning

is to meet forecasted demand while
minimizing cost over the planning
period

The Planning Process
Determine the quantity and timing of
production for the intermediate future
 Objective is to minimize cost over the
planning period by adjusting
 Production rates
 Labor levels
 Inventory levels
 Overtime work
 Subcontracting rates
 Other controllable variables
Aggregate Planning
Required for aggregate planning
 A logical overall unit for measuring sales
and output
 A forecast of demand for an intermediate
planning period in these aggregate terms
 A method for determining costs
 A model that combines forecasts and
costs so that scheduling decisions can
be made for the planning period

Aggregate Planning
 Combines appropriate resources
into general terms
 Part of a larger production planning
system
 Disaggregation breaks the plan
down into greater detail
 Disaggregation results in a master
production schedule

Demand Options
 Influencing demand
 Use advertising or promotion
to increase demand in low
periods
 Attempt to shift
demand to slow
periods
 May not be
sufficient to
balance demand
and capacity
Aggregate Planning Options
Option Advantages Disadvantages Some Comments
Changing Changes in Inventory Applies mainly to
inventory human holding cost production, not
levels resources are may increase. service,
gradual or Shortages may operations.
none; no abrupt result in lost
production sales.
changes.
Varying Avoids the costs Hiring, layoff, Used where size

workforce of other and training of labor pool is
size by alternatives. costs may be large.
hiring or significant.
layoffs
Table 13.1
Yield Management
Allocating resources to customers at
prices that will maximize yield or
revenue
1. Service or product can be sold in
advance of consumption
2. Demand fluctuates
3. Capacity is relatively fixed
4. Demand can be segmented
5. Variable costs are low and fixed costs
are high
Making Yield Management
Work
1. Multiple pricing structures must
be feasible and appear logical to
the customer
2. Forecasts of the use and
duration of use
3. Changes in demand

Material Requirements
14 Planning (MRP) and ERP

Heizer and Render

Dependent Demand
For any product for which a schedule

can be established, dependent
demand techniques should be used

Dependent Demand
Benefits of MRP
1. Better response to customer
orders
2. Faster response to market
changes
3. Improved utilization of facilities
and labor
4. Reduced inventory levels
Master Production Schedule
(MPS)
 Specifies what is to be made and when
 Must be in accordance with the aggregate
production plan
 Inputs from financial plans, customer
demand, engineering, supplier performance
 As the process moves from planning to
execution, each step must be tested for
feasibility
 The MPS is the result of the production
planning process
Master Production Schedule
(MPS)
 MPS is established in terms of specific
products
 Schedule must be followed for a
reasonable length of time
 The MPS is quite often fixed or frozen in
the near term part of the plan
 The MPS is a rolling schedule
 The MPS is a statement of what is to be
produced, not a forecast of demand
The Planning Process
Production Marketing Finance
Capacity Customer Cash flow
Inventory demand
Procurement Human resources

Supplier Manpower
performance planning
Management Engineering
Return on Aggregate Design
investment production completion
Capital plan
Change
production
Master production plan?
schedule
Figure 14.1
Focus for Different
Process Strategies
Make to Order Assemble to Order Stock to Forecast
or Forecast
(Process Focus) (Repetitive) (Product Focus)
Number of
inputs
Schedule orders
Typical focus of the
master production Schedule modules
schedule
Number of
end items Schedule finished
product
Examples: Print shop Motorcycles Steel, Beer, Bread

Machine shop Autos, TVs Lightbulbs
Fine-dining restaurant Fast-food restaurant Paper
Figure 14.3
Bills of Material
 List of components, ingredients,
and materials needed to make
product
 Provides product structure
 Items above given level are called
parents
 Items below given level are called
children

BOM Example
Level Product structure for “Awesome” (A)
0 A
Std. 12” Speaker kit w/

1 B(2) Std. 12” Speaker kit C(3) amp-booster
2 E(2) E(2) F(2) Std. 12” Speaker

booster assembly
Packing box and

3 D(2) installation kit of wire, G(1) D(2)
bolts, and screws
Amp-booster
12” Speaker 12” Speaker

Bills of Material
 Modular Bills
 Modules are not final products but
components that can be assembled
into multiple end items
 Can significantly simplify planning
and scheduling

Accurate Records
 Accurate inventory records are
absolutely required for MRP (or
any dependent demand system) to
operate correctly
 Generally MRP systems require
more than 99% accuracy
 Outstanding purchase orders must
accurately reflect quantities and
scheduled receipts
Lead Times
 The time required to purchase,
produce, or assemble an item
 For production – the sum of the
order, wait, move, setup, store,
and run times
 For purchased items – the time
between the recognition of a need
and the availability of the item for
production

Time-Phased Product
Structure
Must have D and E
Start production of D completed here so
production can
begin on B
1 week
2 weeks to
D produce
B
2 weeks
E
A
2 weeks 1 week
E
2 weeks 1 week
G C
3 weeks
F
1 week
D
| | | | | | | |
1 2 3 4 5 6 7 8 Figure 14.4
Time in weeks
MRP Structure
Data Files Output Reports
MRP by
BOM Master period report
production schedule
MRP by
date report
Lead times
(Item master file) Planned order
report
Inventory data
Purchase advice
Material
requirement
planning
programs
(computer and Exception reports
Purchasing data software)
Order early or late
or not needed
Order quantity too

small or too large
Figure 14.5
Determining Gross
Requirements
 Starts with a production schedule for the
end item – 50 units of Item A in week 8
 Using the lead time for the item,
determine the week in which the order
should be released – a 1 week lead time
means the order for 50 units should be
released in week 7
 This step is often called “lead time
offset” or “time phasing”

MRP Planning Sheet
Figure 14.7

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

MRP Management
 MRP is a dynamic system
 Facilitates replanning when changes occur
 Regenerating
 Net change
 System nervousness can result from too
many changes
 Time fences put limits on replanning
 Pegging links each item to its parent
allowing effective analysis of changes

MRP and JIT
 MRP is a planning system that

does not do detailed scheduling
 MRP requires fixed lead times
which might actually vary with
batch size
 JIT excels at rapidly moving small
batches of material through the
system

EOQ Lot Size Example
1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 35 0 43 3 3 66 26 69 69 39
hand
Net
0 30 0 0 7 0 4 0 0 16
requirements
Planned order
73 73 73 73
receipts
Planned order
73 73 73 73
releases
Holding cost = $1/week; Setup cost = $100; Lead time = 1

week
Average
© 2011 Pearson Education, Inc.weekly
publishing as gross
Prentice Hallrequirements = 27; EOQ = 73 units 1 - 268
Material Requirements
Planning II
 Requirement data can be enriched by
other resources
 Generally called MRP II or Material
Resource Planning
 Outputs include
 Scrap
 Packaging waste
 Carbon emissions
 Data used by purchasing, production
scheduling, capacity planning, inventory
Material Resource Planning
Weeks
LT 5 6 7 8
Computer 1 100
Labor Hrs: .2 each 20
Machine Hrs: .2 each 20
Scrap: 1 ounce fiberglass each 6.25 lbs
Payables: $0 each $0
PC Board (1 each) 2 100
Scrap: .5 ounces copper each 3.125 lb
Payables: raw material at $5 each $500
Processor (5 each) 4 500
Scrap: .01 ounces of acid waste each 0.3125 lb
Payables: processors at $10 each $5,000 Table 14.4
Capacity Planning
Feedback from the MRP system
Load reports show resource
requirements for work centers
Work can be moved between work
centers to smooth the load or bring it
within capacity

MRP in Services
 Some services or service items are
directly linked to demand for other
services
 These can be treated as dependent
demand services or items
 Restaurants
 Hospitals
 Hotels

MRP in Services
(a) PRODUCT STRUCTURE TREE
Veal
picante
#10001 Chef;
Work
Center #1
Cooked Prepared veal

linguini Spinach and sauce
#20002 #20004 #20003
Helper one; Asst. Chef;
Work Work
Center #2 Center #3
Uncooked
Sauce Veal
linguini
#30006 #30005
#30004
Figure 14.10

Enterprise Resource
Planning (ERP)
 An extension of the MRP system to
tie in customers and suppliers
 Allows automation and integration of
many business processes
 Shares common data bases and
business practices
 Produces information in real time
 Coordinates business from supplier
evaluation to customer invoicing
ERP in the Service Sector
 ERP systems have been developed
for health care, government, retail
stores, hotels, and financial
services
 Also called efficient consumer
response (ECR) systems
 Objective is to tie sales to buying,
inventory, logistics, and production

JIT and Lean
16 Operations

Heizer and Render

Toyota Motor Corporation
 Largest vehicle manufacturer in the

world with annual sales of over 9
million vehicles
 Success due to two techniques, JIT
and TPS
 Continual problem solving is central
to JIT
 Eliminating excess inventory makes
problems immediately evident

Toyota Motor Corporation
 Central to TPS is employee learning
and a continuing effort to produce
products under ideal conditions
 Respect for people is fundamental
 Small building but high levels of
production
 Subassemblies are transferred to the
assembly line on a JIT basis
 High quality and low assembly time
per vehicle
JIT/Lean Operations
Good production systems require

that managers address three issues
that are pervasive and fundamental
to operations management:
eliminate waste, remove variability,
and improve throughput

Just-In-Time, TPS, and
Lean Operations
 JIT is a philosophy of continuous and
forced problem solving via a focus on
throughput and reduced inventory
 TPS emphasizes continuous
improvement, respect for people, and
standard work practices
 Lean production supplies the
customer with their exact wants when
the customer wants it without waste

Just-In-Time (JIT)
Powerful strategy for improving operations
Materials arrive where they
are needed when they are
needed
Identifying problems and
driving out waste reduces
costs and variability and
improves throughput
Requires a meaningful
buyer-supplier relationship

JIT and Competitive
Advantage
Figure 16.1
JIT and Competitive
Advantage
Figure 16.1
JIT Partnerships
Figure 16.2
Concerns of Suppliers
 Diversification – ties to only one customer
increases risk
 Scheduling – don’t believe customers can
create a smooth schedule
 Lead time – short lead times mean
engineering or specification changes can
create problems
 Quality – limited by capital budgets,
processes, or technology
 Lot sizes – small lot sizes may transfer
costs to suppliers
JIT Layout
Reduce waste due to movement
JIT Layout Tactics
Build work cells for families of products
Include a large number operations in a small area
Minimize distance
Design little space for inventory
Improve employee communication
Use poka-yoke devices
Build flexible or movable equipment
Cross-train workers to add flexibility
Table 16.1
Reduce Setup Times
Initial Setup Time 90 min —
Separate setup into preparation and actual

setup, doing as much as possible while the
Step 1 machine/process is operating
(save 30 minutes)
60 min —
Move material closer and
Step 2 improve material handling
(save 20 minutes)
45 min —
Standardize and
Step 3 improve tooling
(save 15 minutes)
25 min —
Step 4 Use one-touch system to eliminate
adjustments (save 10 minutes)
15 min —
Training operators and standardizing 13 min —
Step 5 work procedures (save 2 minutes)
Figure 16.6 Step 6 Repeat cycle until subminute —
setup is achieved
JIT Scheduling
 Schedules must be communicated
inside and outside the organization
 Level schedules
 Process frequent small batches
 Freezing the schedule helps stability
 Kanban
 Signals used in a pull system

Kanban
 Kanban is the Japanese word for card
 The card is an authorization for the next
container of material to be produced
 A sequence of kanbans
pulls material through
the process
 Many different sorts of
signals are used, but
the system is still called
a kanban

Kanban
1. User removes a
standard sized
container
2. Signal is seen by
the producing
department as
authorization to
replenish
Signal marker
on boxes
Part numbers
mark location
Figure 16.8
Kanban
Material/Parts Final Finished Customer

Supplier assembly goods order
Work
cell
Kanban
Kanban Kanban
Figure 16.9

JIT Quality
 Strong relationship
 JIT cuts the cost of obtaining good
quality because JIT exposes poor
quality
 Because lead times are shorter,
quality problems are exposed sooner
 Better quality means fewer buffers
and allows simpler JIT systems to be
used

JIT Quality Tactics
Use statistical process control
Empower employees
Build fail-safe methods (poka-
yoke, checklists, etc.)
Expose poor quality with small
lot JIT
Provide immediate feedback
Table 16.4
Lean Operations
 Different from JIT in that it is

externally focused on the customer
 Starts with understanding what the
customer wants
 Optimize the entire process from
the customer’s perspective

Building a Lean Organization
 Transitioning to a lean system can
be difficult
 Lean systems tend to have the
following attributes
 Use JIT techniques
 Build systems that help employees
produce perfect parts
 Reduce space requirements

Building a Lean Organization
 Develop partnerships with suppliers
 Educate suppliers
 Eliminate all but value-added
activities
 Develop employees
 Make jobs challenging
 Build worker flexibility

Lean Operations in Services
 The JIT techniques used in
manufacturing are used in services
 Suppliers
 Layouts
 Inventory
 Scheduling

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1 Operations and Productivity

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Percent of Product that is a Good Percent of Product that is a Service

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Labor, The U.S. economic system Goods

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 Measure of process improvement

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Customers Public Image

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1. Goods and 6. Human resources

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fine-dining Repetitive (modular) cafeteria)

Low Moderate High

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Determine the Corporate Mission

Marketing Finance/Accounting Production/Operations

Decisions Sample Options Chapter

Product Customized, or standardized 5

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1. All necessary activities are finished in order

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Software Project System

Ensure Compatibility Cost/Schedule Defect

Compatible with Figure 3.3

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 Introduction and growth require longer