operations notes

• Operations management (OM) is the science and art of ensuring that goods and services are created and delivered successfully to customers.

• The principles of OM help one to view a business enterprise as a total system, in which all activities are coordinated, not only vertically throughout the organization, butalso horizontally across multiple functions.

Translating market knowledge of customers to design and manage goods, services, and processes

Helping organizations do more with less Ensuring that resources (labor, equipment,

materials, and information) and operations are coordinated

Exploring technology to improve productivity Building quality into goods, services, and processes Determining resource capacity and schedules Creating a high-performance workplace Continually learning and adapting the organization

to global and environmental changes

Goods are tangible Goods = physical products that you can see, touch, or possibly

consume▪ Durable good = a product that typically lasts at least three years▪ Nondurable good = perishable and generally lasts for less than 3

years Services are intangible.

Demand for services is more difficult to predict than demand for goods. Services cannot be stored as physical inventory. Service facilities typically need to be in close proximity to the

customer. Patents do not protect services. Services especially in the “front office” (at points of contact with the

customer) require different skills than producing physical goods, and it is difficult for firms to do both well. Physical inventory can compensate for poor demand forecast accuracy while service capacity is a surrogate for inventory. Therefore, services must be better at forecasting and demand/capacity planning than goods-producing firms or they will miss a sale.

Quality measures the degree to which the output of a process meets customer requirements. Goods quality relates to the physical performance & characteristics

of a good Service quality is consistently meeting or exceeding customer

expectations (external focus) and service delivery system performance (internal focus) for all service encounters.▪ Five key dimensions of service quality:▪ Tangibles: physical facilities, uniforms, equipment, vehicles, and

appearance of employees (i.e., the physical evidence).▪ Reliability: ability to perform promised service

dependably/accurately.▪ Responsiveness: willingness to help customers and provide

prompt recovery to service upsets.▪ Assurance: knowledge and courtesy of the service-providers, and

their ability to inspire trust and confidence in customers.▪ Empathy: caring attitude & individualized attention provided to

customers.

• Time relates to 2 types of performance measures:

the speed of doing something (average) and

the variability of the process.

• Processing time = time it takes to perform a task.

• Queue time is a fancy word for wait time—the time spent waiting.

• Flexibility is the ability to adapt quickly and effectively to changing requirements.

• Goods and service design flexibility is the ability to develop a wide range of customized goods and services to meet different or changing customer needs.

• Volume flexibility is the ability to respond quickly to changes in the volume and type of demand.

Technology Globalization Changing consumer expectations A changing workforce Global manufacturing Sustainability: an organization’s ability to

strategically address current business needs and successfully develop a long-term strategy that embraces opportunities and manages risk for all products, systems, supply chains, and processes to preserve resources for future generations

A value chain is a network of facilities and processes that describe the flow of goods, services, information, and financial transactions from suppliers through the facilities and processes that create goods and services and deliver them to the customer.

The underlying purpose of every organization is to provide value to its customers and stakeholders.

Value is the perception of the benefits associated with a good, service, or bundle of goods and services (i.e., the customer benefit package) in relation to what buyers are willing to pay for them.

Value = Perceived benefits/Price (cost) to the customer If the value ratio is high, the good or service is

perceived favorably by customers, and the organization providing it is more likely to be successful. To increase value, an organization must: Increase perceived benefits while holding price or

cost constant Increase perceived benefits while reducing price or

cost Decrease price or cost while holding perceived

benefits constant A competitively dominant customer if often called a

value proposition.

Service is more than delivering a product on time. It’s also partnering customer by providing: Personalized service for fast, accurate

response; Customized engineering designs to meet

customer needs; Preventive maintenance systems to ensure

high machine uptime; Experienced, highly trained, long-term

employees; and Troubleshooting by a knowledgeable sales

staff.

Some view a supply chain as the portion of the value chain that focuses primarily on the physical movement of goods and materials, and supporting flows of information and financial transactions through the supply, production, and distribution processes. Note that many organizations use the terms “value

chain” and “supply chain” interchangeably; however, the two terms are differentiated in your text.

A value chain views an organization from the customer’s perspective — the integration of goods and services to create value — while a supply chain is more internally focused on the creation of physical goods.

The operational structure of a value chain is the configuration of resources such as suppliers, factories, warehouses, distributors, technical support centers, engineering design and sales offices, and communication links.

Vertical integration refers to the process of acquiring and consolidating elements of a value chain to achieve more control.

Backward integration refers to acquiring capabilities at the front-end of the supply chain (for instance, suppliers), while forward integration refers to acquiring capabilities toward the back-end of the supply chain (for instance, distribution or even customers).

Value chain integration is the process of managing information, physical goods, and services to ensure their availability at the right place, at the right time, at the right cost, at the right quantity, and with the highest attention to quality.

Outsourcing is the process of having suppliers provide goods and services that were previously provided internally. The U.S. has experienced three waves of outsourcing:▪ The 1st wave involved the exodus of goods-producing jobs from

the United States in many industries several decades ago.▪ The 2nd wave involved simple service work such as standard

credit card processing, billing, keying information into computers, and writing simple software programs.

▪ The 3rd, and current wave, involves skilled knowledge work such as engineering design, graphic artists, architectural plans, call center customer service representatives, and computer ship design.

The decision whether to outsource is usually based on economics, and break-even analysis can be used to provide insight into the best decision

Break-even is used to compare costs associated with different options at different quantity levels.

The break-even analysis occurs where costs of two options are equal. Define: (VC1 * Q) + FC = (VC2 * Q)

▪ VC1 = Variable cost/unit if produced

▪ VC2 = Variable cost/unit (i.e., purchase price/unit) if outsourced

▪ FC = Fixed costs associated with producing the part▪ Q = Quantity produced (volume)

Then

▪ Total cost of production = (VC1)Q + FC

▪ Total cost of outsourcing = (VC2)Q If we set these costs equal to each other we obtain:

▪ (VC2)Q = (VC1)Q + FC

▪ (VC2)Q – (VC1)Q = FC

▪ (VC2 – VC1)Q = FC

The breakeven quantity is found by solving for Q Q* = FC/VC2 – VC1

Whenever the anticipated volume is greater than Q*, the firm should produce the part in-house; otherwise it is best to outsource.

A firm is evaluating the alternative of manufacturing a part that is currently being outsourced from a supplier. The relevant information is provided below: For in-house manufacturing ▪ Annual fixed cost = $45,000 ▪ Variable cost per part = $140

For purchasing from supplier (outsourced) ▪ Purchase price per part = $160

Using this information, determine the break-even quantity for which the firm would be indifferent between manufacturing the part in-house or outsourcing it. Parameters: VC1 = Variable cost/unit if produced

VC2 = Variable cost/unit if outsourced FC = fixed costs associated with producing the part Q = quantity

Using break-even, we compute Q* = FC/VC2 – VC1 = 45,000/$160 - $140 = 2,250 parts

▪ If demand is greater than 2,250 produce in-house (make) ▪ If demand is less than or equal to 2,250 outsource

How many of a product must sell in order to break-even? (VC * Q) + FC = (P * Q) VC = Variable cost/unit FC = fixed costs associated w/ product/service

Q = break-even quantity P = price/unit

Offshoring = the building, acquiring, or moving of process capabilities from a domestic location to another country while maintaining ownership & control; based on 1 framework, foreign factories can be classified into 1 of 6 categories: Offshore factories established to gain access to low wages and

other ways to reduce costs such as avoiding trade tariffs. Outpost factories established primarily to gain access to local

employee skills and knowledge. Server factories established to supply specific national or regional

markets. Sources factories, like offshore factories, established to gain access

to low-cost production but also have the expertise to design and produce a component part for the company’s global value chain.

Contributor factories established to serve a local market and conduct activities like product design and customization.

Lead factories established to innovate and create new processes, products, and technologies.

A multinational enterprise is an organization that sources, markets, and produces its goods and services in several countries to minimize costs, and to maximize profit, customer satisfaction, and social welfare.

Complex global value chains are more difficult to manage than small domestic value chains. Some of the many issues include the following: Global supply chains face higher levels of risk and uncertainty, requiring more

inventory and day-to-day monitoring to prevent product shortages. Workforce disruptions, such as labor strikes and government turmoil in foreign countries, can create inventory shortages and disrupting surges in orders.

Transportation is more complex in global value chains. For example, tracing global shipments normally involves more than one mode of transportation and foreign company. The transportation infrastructure may vary considerably in foreign countries.

Global purchasing can be a difficult process to manage when sources of supply, regional economies, and governments change. Daily changes in international currencies necessitate careful planning and in the case of commodities, consideration of futures contracts.

International purchasing can lead to disputes and legal challenges relating to such things as price fixing and quality defects.

Privatizing companies and property is another form of major changes in global trade and regulatory issues.

Global supply chains face higher levels of risk and uncertainty, requiring more inventory and day-to-day monitoring to prevent product shortages.

Transportation is more complex in global value chains. The transportation infrastructure may vary considerably in foreign

countries. Global purchasing can be a difficult process to manage when sources of

supply, regional economies, and even governments change. International purchasing can lead to disputes and legal challenges

relating to such things as price fixing and quality defects. Privatizing companies and property is another form of major changes in

global trade and regulatory issues. Explain why it is important for operations managers to understand the

culture and practices of the countries in which a firm does business. What are some of the political consequences if they don’t? Why go global? What are different global customer and market segments? Which functions need to be present in the region? How will you enter a region? Who will do the globalization work in your company? Are core staff willing to relocate overseas?

Malcolm Baldridge National Quality Award Seven criteria areas: Leadership; Strategic

planning; Customer focus; Measurement, analysis and knowledge management; Workforce focus; Process management; Business Results process aspects

Pros: generates discussion Cons: could use many resources in applying Usually your financial performance will improve

5-10% as a result of the reward Balanced Scorecard

Four performance perspective areas: financial, customer, innovation and learning, and internal

VLC = P*CM*RF*BLC Where ▪ P = revenue per unit▪ CM = contribution margin to profit and

overhead expressed as a fraction▪ RF = repurchase frequency = # of

purchases per year▪ BLC = buyer’s life cycle, computed as

1/defective rate Total market value = VLC * number of

customers gained

A hamburger factory produces 40,000 hamburgers each week. The equipment used costs $5,000 and will remain productive for three years. The labor cost per year is $8,000. What is the productivity measure of “units of output per dollar of

input” averaged over the three-year period?▪ = total units produced divided by the total labor cost plus total

equipment cost▪ = 40,000(52)(3)/[8000(3) + 5000] = 215.2 hamburgers/dollar

We have the option of buying $10,000 of equipment, with an operating life of five years. It would reduce labor costs to $4,000 per year. Should we consider purchasing this equipment (using productivity arguments alone)?▪ For the expensive machine, productivity = 40,000(52)(5)/[4000(5)

+ 10,000] = 346.7 units of output/dollar input. Because the productivity of the expensive machine is higher, it would be a good investment.

A fast-food restaurant has a drive-through window and during peak lunch times can handle a maximum of 60 cars per hour with one person taking orders, assembling them, and acting as cashier. The average sale per order is $7.00. A proposal has been made to add two workers and divide the tasks among the three. One will take orders, the second will assemble them, and the third will act as cashier. With this system it is estimated that 100 cars per hour can be serviced. All workers earn the minimum wage. Use productivity arguments to recommend whether or not to change the current system. Productivity = revenue/labor dollar For system 1, productivity = 60(7.00)/x = 420/x For system 2,

productivity = 100(7.00)/3x = 233.3/x …where x is the prevailing minimum wage. With the additional

workers, productivity drops by almost 50 percent (i.e., too much labor for system 2). Thus, it is not advisable to change the current system (i.e., keep system1). System #2 simply uses too much labor.

• Competitive advantage denotes a firm’s ability to achieve market and financial superiority over its competitors.

• Competitive priorities represent the strategic emphasis that a firm places on certain performance measures and operational capabilities within a value chain.

Is it possible for a world-class organization to achieve superiority on all five major competitive priorities - price (cost), quality, time, flexibility, and innovation? Explain your reasoning. Provide examples pro or con. Generally not, as tradeoffs usually exist among these

priorities. For example, Dell competes on quality, time, and flexibility, and therefore mass customization. However, Dell is not particularly a technology innovator or even a low cost producer. Recently it has had problems with call center service quality. Some fast food restaurants focus more on cost and time at the expense of flexibility. However, many firms today, such as IBM, Southwest Airlines, Toyota, Procter & Gamble, Siemens, and Vanguard Mutual Funds are building capabilities in all of these areas in order to establish leadership superiority in their markets and meet the diversity of customer needs.

• Basic customer expectations—dissatisfiers and satisfiers—are generally considered the minimum performance level required to stay in business and are often called order qualifiers.

• Order winners are goods and service features and performance characteristics that differentiate one customer benefit package from another, and win the customer's business.

Provide examples of dissatisfiers, satisfiers, and exciters/delighters different from those in the book, and based on your own experience. Why are these classification important for companies to understand, particularly from a strategic point of view, and how should companies use this knowledge? Dissatisfiers: requirements that are expected in a good or service. Satisfiers: requirements that customers say they want. Exciters/delighters: new or innovative good or service features that

customers do not expect. As customers become familiar with new goods and service features

that delight them such as Apple’s ipod, these same features become part of the standard customer benefit package over time. Eventually, exciters/delighters become satisfiers. Because expectations continually evolve, companies must invest in trying to identify the exciters/delighters in order to remain competitive. Anti-lock and skid brakes at one point in time where exciters and now are satisfiers, and if absent today become dissatifiers.

• Strategy – use of resources long term

• Tactical – use of recources in the interim

• Operational – use of resources in the short term

• Driven to support the strategy

• Strategy is a pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole.

• Effective strategies develop around a few key competitive priorities, such as low cost or fast service time, which provide a focus for the entire organization and exploit an organization’s core competencies (the strengths unique to that organization).

• How far into the future a firm does strategic planning depends on the product/service life cycle

• Strategic planning is the process of determining long-term goals, policies, and plans for an organization.

• The businesses in which the firm will participate are often called strategic business units (SBUs), and are usually defined as families of goods or services having similar characteristics or methods of creation.

• Strategy is the result of a series of hierarchical decisions about goals, directions, and resources.

Most large organizations have three levels of strategy: 1. Corporate strategy is necessary to define the businesses in which the

corporation will participate and develop plans for the acquisition and allocation of resources among those businesses.

2. A business strategy defines the focus for SBUs. The major decisions involve which markets to pursue and how best to compete in those markets; that is, what competitive priorities the firm should pursue.

3. A functional strategy is the set of decisions that each functional area—marketing, finance, operations, research and development, engineering, and so on—develops to support its particular business strategy.

The operations strategy defines how an organization will execute its chosen business strategies; how an organization’s processes are designed & organized to produce the type of goods & services to support corporate & business strategies.

Managers recognize = the value chain can be leveraged to provide a competitive advantage & operations is a core competency for the organization.

Whoever has superior operational capability over the long term is the odds-on-favorite to win the industry shakeout.

Soft technology refers to the application of the Internet, computer software, and information systems to provide data, information, and analysis and to facilitate and accomplishment of creating and delivering goods and services.

Hard technology refers to equipment and devices that perform a variety of tasks in the creation and delivery of goods and services.

From an operations management standpoint, all organizations face common issues regarding technology:

The right technology must be selected for the goods that are produced.

Process resources, such as machines and employees, must be set up and configured in a logical fashion to support production efficiency.

Labor must be trained to operate the equipment. Process performance must be continually improved. Work must be scheduled to meet shipping commitments/customers

promise dates. Quality must be ensured.

• Virtually everything that is done in a business depends on some type of technology.

• Technology is evolving at an extremely rapid pace.

• Technological innovation in goods, services, manufacturing, and service delivery is a competitive necessity.

• Ex: RFID (Radio Frequency ID) tags are tiny computer chips that transmit radio signals and can be mounted on packages or shipping containers to help organizations identify product locations and movement.

• Integrate hard and soft technology across the organization, allowing managers to make better decisions and share information across the value chain / supply chain.

• Computer integrated manufacturing systems (CIMS), enterprise resource planning (ERP) systems, and customer relationship management (CRM) systems are IOSs.

Computer-integrated manufacturing systems (CIMS) represent the union of hardware, software, database management, & communications to automate & control production activities from planning & design to manufacturing & distribution. CAD/CAE enables engineers to design, analyze, test, simulate, and

“manufacture” products before they physically exist, thus ensuring that a product can be manufactured to specifications when it is released to the shop floors.

CAM involves computer control of the manufacturing process, such as determining tool movements and cutting speeds.

Flexible manufacturing systems (FMS) consists of two or more computer-controlled machines or robots linked by automated handling devices such as transfer machines, conveyors, & transport systems. Computers direct the overall sequence of operations & route the work to the appropriate machine, select & load the proper tools, & control the operations performed by the machine.

A robot is a programmable machine designed to handle materials or tools in the performance of a variety of tasks.

ERP systems integrate all aspects of a business – accounting, customer relationship management, supply chain management, manufacturing, sales, human resources – into a unified system and provide more timely analysis and reporting of sales, customer, inventory, manufacturing, human resource, and accounting data.

Customer relationship management (CRM) is a business strategy designed to learn more about customers’ wants, needs, and behaviors in order to build customer relationships and loyalty, and ultimately enhance revenues and profits.

CRM helps firms gain and maintain competitive advantage by Segmenting markets based on demographic and behavioral characteristics; Tracking sales trends and advertising effectiveness by customer and market

segment; Identifying which customers should be the focus of targeted marketing

initiatives with predicted high customer response rates; Forecasting customer retention (and defection) rates and providing

feedback as to why customers leave the company; Identifying which transactions are likely candidates to be fraudulent; Studying which goods and services are purchased together, and what might

be good ways to bundle them (that is, the customer benefit package); Studying and predicting that Web characteristics are most attractive to

customers and how the Web site might be improved; and Linking the information above to competitive priorities by market segment

and process and value chain performance.

Numerical control (NC) – machine tools, which enable the machinist’s skills to be duplicated by a programmable device (originally punched paper tape) that controls the movements of a tool used to make complex shapes

For computer numerical control (CNC) machines, the operations are driven by a computer.

E-service refers to using the Internet & technology to provide services that create & deliver time, place, information, entertainment, & exchange value to customers and/or support the sale of goods. Technology, especially the Internet and e-communications, is changing the operation,

speed, and efficiency of the value chain and presents many new challenges to operations managers

Electronic transaction capability allows all parts of the value chain to immediately know and react to changes in demand and supply.

Intermediary is any entity – real or virtual – that coordinates/shares info between buyers & sellers.

Return facilitators specialize in handling all aspects of customers returning a manufactured good or delivered service and requesting their money back, repairing and manufactured good and returning it to the customer, and/or invoking the service guarantee.

Four major types of business relationships: B2B: Business to Business B2C: Business to Customer C2C: Customer to Customer G2C: Government to Customer

Scalability is a measure of the contribution margin (revenue minus variable costs) required to deliver a good or service as the business grows and volumes increase.

High scalability is the capability to serve additional customers at zero or extremely low incremental costs. (e.g., Monster.com)

If an organization establishes a business where the incremental costs (or variable cost) to serve more customers is zero, then the firm is said to be infinitely scalable.

Low scalability implies that serving additional customers requires high incremental variable costs.

Technology development and adoption generally has three stages – birth, turbulence, and build-out: Stage I. Birth At the beginning of a major technological era, enabling

technologies emerge and are eagerly welcomed as revolutionary. Excitement builds as technological pioneers crowd into the field and innovations flourish. In some cases, early investors make extraordinary profits, fueling speculation, chaos and investment mania, even “irrational exuberance.”

Stage II. Turbulence. Overinvestment and overcapacity burst the bubble of the new technology’s progress. Sometimes linked to a slowing economy, stock prices drop and even crash. Some investors lose everything; some companies fold. Investment halts as financiers retrench. Observers may declare the technology dead. But the story is by no means over.

Stage III. Build-out. Confidence returns. Real value emerges. Missing components of the technology are put in place, leading to full implementation. The technology penetrates the economy as other industries organize around it and businesses adjust to take full advantage of it. Sustained investment yields robust returns. The technology becomes the driving engine of economy.

A manager of Paris Manufacturing that produces computer hard drives is planning to lease a new automated inspection system. The manager believes the new system will be more accurate than the current manual inspection process. The firm has had problems with hard drive defects in the past and the automated system should help catch these defects before they are shipped to the final assembly manufacturer. The relevant information is provided below. Current Manual Inspection System▪ Annual fixed cost = $50,000▪ Inspection variable cost per unit = $15 per unit

New Automated Inspection System ▪ Annual fixed cost = $200,000▪ Inspection variable cost per unit = $0.55 per unit

Suppose annual demand is 11,000 units. Should the firm lease the new inspection system? Total cost (TC) = fixed cost (FC) + variable cost (VC) TCcurrent = FC + VC = $50,000 + $15D

TCnew = $200,000 + $.55D Therefore,▪ $50,000 + $15D = $200,000 + $0.55D ▪ $14.45D = $150,000 ▪ D = 10,381 hard drives

From an economic perspective the breakeven volume is 10,381 hard drives. If D = 10,381 we are indifferent to the two inspection systems assuming quality is equivalent. If D is less than 10,381 then the current manual system is preferred. Since D = 11,000 and greater than the breakeven quantity of 10,381 we should lease the new inspection system.

Assume the cost factors given above have not changed. A marketing representative of NEW- SPEC, a firm that specializes in providing manual inspection processes for other firms, approached the Paris Manufacturing and offered to inspect parts for $17 each with no fixed cost. They assured Paris Manufacturing the accuracy and quality of their manual inspections would equal the automated inspection system. Demand for the upcoming year is forecast to be 11,000 units. Should the manufacturer accept the offer? If NEW-SPEC, a third party firm, does the inspections the total cost

is▪ $17D = $50,000 + $15D ▪ $2D = $50,000 ▪ D = 25,000 hard drives

Since D = 11,000 is less than 25,000, the manufacturer should accept the offer because the total cost is $187,000 (11,000*$17) with NEW-SPEC and $215,000 ($50,000 + $15*11,000) with their current manual inspection system. They will save $28,000.

Maling Manufacturing needs to purchase a new piece of machining equipment. The two choices are a conventional (labor-intensive) machine and an automated (computer-controlled) machine. Profitability will depend on demand volume. The table below presents an estimate of profits over the next three years. Conventional machine: low demand volume = $80,000; high demand volume =

$110,000 Automated machine: low demand volume = $50,000; high demand volume =

$145,000 Given the uncertainty associated with the demand volume, and no other

information to work with, how would you make a decision? Explain your reasoning. This is a difficult decision because of the uncertainty in the volume. The wrong

decision can lead to significant lost profit opportunity. For example, if the conventional machine is chosen and demand turns out to be high, only $110,000 will be realized as opposed to $145,000 with an automated machine. With absolutely no other information, it is a question of how much risk one is willing to take. Going with the automated machine has a risk of achieving only a $50,000 profit with low demand, while if the conventional machine is chosen, one is guaranteed at least $80,000 but may forego the potential for a big payoff. If there is reason to believe that the likelihood that demand will be either low or high is good, then the decision is obvious, although some risk still remains.

Step 1 – Strategic Mission and Vision Step 2 – Strategic and Market Analysis, and

Understanding Competitive Priorities Step 3 – Customer Benefit Package Design and

Configuration Step 4 – Detailed Goods, Services, and Process

Design 4a = Manufactured Good Design and Deployment 4b = Process Selection and Design 4c = Service and Delivery System Design 4d = Service Encounter Design

Step 5 – Market Introduction/Deployment Step 6 – Marketplace Evaluation

CBP design/configuration revolve around a solid understanding of customer needs and target markets, and the value customers place on attributes, such as: Time: reduce waiting time, be more responsive to

customer needs. Place: select location for customer convenience. Information: provide product support, user

manuals. Entertainment: enhance customer experience. Exchange: multiple channels used for purchases. Form: how well the physical characteristics of a

good address customer needs.

The process by which the service is created and delivered (that is, “produced”) is, in essence, the service itself!

Goods that are insensitive to external sources of variation are called robust.

The loss function is represented by L(x) = k(x – T)2…where:▪ L(x) is the monetary value of the loss associated

with the deviating from the target, T;▪ x is the actual value of the dimension; and▪ k is a constant that translates the deviation

into dollars.

Reliability is the probability that a manufactured good, piece of equipment, or system performs its intended function for a stated period of time under specified operating conditions; defined as a value between 0 and 1. A probability of .97 indicates that, on

average, 97 out of 100 times the item will perform its function for a given period of time under specific operating conditions.

A system is a related group of components that work together to accomplish a task.

The total reliability of a serial system is the product of the individual probabilities of each process in a system.

Reliability calculation:Rs = (p1)(p2)(p3)…(pn)Rs = (.98)(.91)(.99) = .883 or 88.3%

In parallel systems, functions are independent and the entire system will fail only if all components fail.

The reliability of the parallel system for subassembly B is: Rp = 1 – (1 – p1)(1 – p2)(1 – p3)…(1 – pn) Rp = 1 – (1 – .91)(1 – .91) = 1 - .0081 = .9919

Thus, the reliability of the equipment is: Rs = (.98)(.9919)(.99) = .962 o 96.2%

QFD is both a philosophy and a set of planning and communication tools that focus on customer requirements in coordinating the design, manufacturing, and marketing of goods or services.

QFD fosters improved communication & teamwork among all constituencies in the design process.

QFD translates customer wants and needs into technical requirements of a product or service buy building a “house of quality”

Customer requirements , as expressed in the customer’s own terms, are called the voice of the customer.

Determine customer requirements through the voice of the customer (VCO).

Define technical requirements of the product.

Determine interrelationships between the technical requirements.

The relationship matrix defines what technical requirements satisfy VOC needs.

Customer priorities and competitive evaluation help select which VOC requirements the product or service should focus on.

Prototype testing is the process by which a model (real or simulated) is constructed to test the good’s physical properties or use under actual operating conditions, as well as consumer reactions to the prototypes.

Quality engineering refers to a process of designing quality into a manufactured good based on a prediction of potential quality problems prior to production. Value engineering = cost avoidance/prevention before good or service is

created. Value analysis refers to cost reduction of the manufactured good or service

process. Failure-mode-and-effects analysis (FMEA) is a technique in which each

component of a product is listed along with the way it may fail, the cause of failure, the effect or consequence of failure, and how it can be corrected by improving the design.

Product & process simplification = process of trying to simplify designs to reduce complexity & costs; thus improve productivity, quality, flexibility, customer satisfaction

A focus on improving the environment by better good or service design is often called green manufacturing or green practices.

Design for Environment (DfE) is the explicit consideration of environmental concerns during the design of goods, services, and processes and includes such practices as designing for recycling and disassembly.

Service process design includes the following: Facility location and layout Process and job design Technology and information support systems Organizational structure The servicescape▪ The servicescape is all the physical evidence a

customer might use to form an impression; also provides behavioral setting where service encounters take place.▪ Some servicescape, termed lean servicescape environment, are very simple.▪ More complicated designs & service systems = elaborate servicescape environments

Service process design is the activity of developing an efficient sequence of activities to satisfy both internal and external requirements.

Ambient conditions – manifest by sight, sound, smell, touch, and temperature; five human senses; e.g., leather chairs in the lobby, cartoon characters in children’s hospital, music at a coffee shop.

Spatial layout and functionality – how furniture, equipment, and office spaces are arranged; also streets, parking lots, stadiums, etc.

Signs, symbols, and artifacts – explicit signals that communicate an image of the firm; e.g., diplomas hanging on the wall in a medical clinic, company logos and uniforms, artwork, mission statements.

Service encounter design focuses on the interaction, directly or indirectly, between the service provider and the customer.

The Principal dimensions include: Customer contact behavior and skills Service provider selection, development, and empowerment

Recognition and reward Service recovery and guarantees

Customer contact refers to the physical or virtual presence of the customer in the service delivery system during a service experience.

Customer contact is measured by the percentage of time the customer must be in the system relative to the total time it takes to provide the service.

Systems in which the percentage is high are called high-contact systems; those in which it is low are called low-contact systems.

Customer-contact requirements are measurable performance levels or expectations that define the quality of customer contact with representatives of an organization.

Apostle describes a customer so satisfied that they convert the uninitiated to a product or service.

Terrorists are so unhappy that they speak out against a poorly delivered service at every opportunity.

Employee loyalty drives profitability. Employee satisfaction drives loyalty. Internal quality drives employee satisfaction.

A service-profit chain audit helps companies determine what drives their profit and suggests actions that can lead to long-term profitability.

Relating all the links in the service-profit chain may seem to be a tall order. But profitability depends not only on placing hard values on soft measures but also on linking those individual measures together into a comprehensive service picture. Service organizations need to quantify their investments in people - both customers and employees. The service-profit chain provides the framework for this critical task.

• Firms generally produce either in response to customer orders and demand or in anticipation of them. This leads to 3 major types of good and service:

• Custom (made-to-order) goods and services: produced and delivered as one-of-a-kind or in small quantities, and are designed to meet specific customers’ specifications; because custom goods are produced on demand, the customer must wait for them, often for a long time because the good or service must be designed, created, and delivered.

• Option (assemble-to-order) goods and services: configurations of standard parts, subassemblies, or services that can be selected by customers from a limited set; although the customer chooses how the good or service is configured, any unique specifications or requirements cannot generally be accommodated

• Standard (made-to-stock) goods and services: made according to a fixed design, and the customer has no options from which to choose; standard goods are made in anticipation of customer demand and stocked in inventory and therefore are usually readily available

• Four principal types of processes are used to produce goods and services:

• Projects: large-scale, customized initiatives that consist of many smaller tasks and activities that must be coordinated and completed to finish on time and within budget

• Job shop processes: organized around particular types of general-purpose equipment that are flexible and capable of customizing work for individual customers

• Flow shop processes: organized around a fixed sequence of activities and process steps, such as an assembly line to produce a limited variety of similar goods or services

• Continuous flow process: organized around creating highly standardized good or services, usually around the clock in very high volumes

The product-process matrix does not transfer well to service businesses and processes.

In the product-process matrix, product volume, the number of products, and the degree of standardization/customization determine the manufacturing process that should be used. This relationship between volume and process is not found in many service businesses.

For example, to meet increased volume, service businesses such as retail outlets, banks, and hotels have historically added capacity in the form of new stores, branch banks, and hotels (i.e., bricks and mortar) to meet demand, but do not change their processes to meet.

So, new ways to think about services and their processes are needed, such as the Service Positioning Matrix.

Customer-routed services are those that offer customers broad freedom to select the pathways that are best suited for their immediate needs and wants from many possible pathways through the service delivery system. The customer decides what path to take

through the service delivery system with only minimal guidance from management.

Examples include searching the Internet, museums, health clubs, and amusement parks.

Provider-routed services constrain customers to follow a very small number of possible and predefined pathways through the service system.

A newspaper dispenser is an extreme example of a service system design with only one pathway, thus allowing a single service encounter activity sequence.

Logging on to your secure online bank account is provider-routed.

The position along the horizontal axis of the Service-Positioning Matrix is described by the sequence of service encounters. It depends on two things:

1. The degree of customer discretion, freedom, and decision-making power in selecting their service encounter activity sequence.

Customers may want the opportunity to design their own unique service encounter activity sequence, in any order they choose.

2. The degree of repeatability of the service encounter activity sequence.

Service encounter repeatability refers to the frequency that a specific service encounter activity sequence is used by customers.

The position along the vertical axis of the Service Positioning Matrix reflects the number of pathways built into the service system design by management. It depends on two things:

1. The number of unique pathways (routes) that customers can take as they move through the service system during delivery of the service.

2. Management’s degree of control designed into the service delivery system.

1. Define the purpose and objectives of the process.

2. Create a detailed process or value stream map that describes how the process is currently performed.

3. Evaluate alternative process designs. Identify and define appropriate performance measures for the process.

4. Select the appropriate equipment and technology.

5. Develop an implementation plan to introduce the new or revised process design.

A process map (flowchart) describes the sequence of all process activities and tasks necessary to create and deliver a desired output or outcome.

A process map can include the flow of goods, people, information, or other entities, as well as decisions that must be made and tasks that are performed.

Process maps document how work either is, or should be, accomplished, and how the transformation process creates value.

Process maps delineate the boundaries of a process. A process boundary is the beginning or end of a process.

A process flowchart is the basis for value stream mapping, service blueprinting, and service maps.

Service blueprints add a “line of customer visibility” that separates the back and front office (rooms) as shown on next slide.

Many names are used for the analysis and development of process flowcharts, however, the basics of process analysis don’t change.

Management strategies to improve process designs usually focus on one or more of the following:

• Increasing revenue by improving process efficiency in creating good and services and delivery of the customer benefit package

• Increasing agility by improving flexibility and response to changes in demand and customer expectations

• Increasing product and/or service quality by reducing defects, mistakes, failures, or service upsets.

• Decreasing costs through better technology or elimination of non-value-added activities.

• Decreasing process flow time by reducing waiting time or speeding up movement through the process and value chain.

Utilization is the fraction of time a workstation or individual is busy over the long run.

Understanding resource utilization is an important aspect of process design and improvement.

Utilization (U) = Resources Demanded Resource Availability

U = Demand Rate/[Service Rate×Number of Servers] = DR/[(SR)(NS)]

An automobile emissions testing center has six (6) inspectors and tests 50 autos per hour. Each inspector can inspect twelve (12) autos per hour. What would the service rate need to be in order to achieve a 90% utilization?

Utilization (U) = Demand Rate/[Service Rate x Number of Servers]

.90 = 50/[SR*6]

A telephone call center uses two customer service representatives (CSRs) during the 8:30 a.m. to 9:00 a.m. time period. The standard service rate is 3.0 minutes per telephone call per CSR. Assuming a target labor utilization rate of 80%, how many calls can these two CSRs handle during this half-hour period? Service rate = 3 mins/call or 10 calls/30

minutes/CSR Utilization (U) = Demand Rate/[Service

Rate*Number of Servers] 0.80 = DR/[(10 calls/30minutes/CSR)(2 CSRs) DR = 0.80*20 = 16 calls/30 minutes

The average number of entities completed per unit time—the output rate—from a process is called throughput.

Throughput might be measured as parts per day, transactions per minute, or customers per hour, depending on the context.

A bottleneck is the work activity that effectively limits throughput of the entire process.

Little’s Law is a simple formula that explains the relationship among flow time (T), throughput (R) and work-in-process (WIP).

WORK-IN-PROCESS = THROUGHPUT × FLOW TIME

or

WIP = R × T [7.3]

• Flow time, or cycle time, is the average time it takes to complete one cycle of a process.

• Little’s Law provides a simple way of evaluating average process performance.

An accounts payable manager processes 300 checks per day with an average processing time of 20 working days. What is the average number of accounts payable checks being processed in her office? What if through information technology she reduces the processing time from 20 to 5 days? What are the advantages and disadvantages of adopting this technology? Explain. WIP = R* T = (300 checks/day)(20 days) = 6,000

checks WIP = R* T = (300 checks/day)(5 days) = 1,500

checks The new information technology dramatically speeds

up the process and simultaneously lowers the average number of checks (WIP) in the office.

Capacity = capability of a manufacturing or service resource such as a facility, process, workstation, or piece of equipment to accomplish its purpose over a specified time period.

Capacity can be viewed in one of two ways:1. As the maximum rate of output per unit of time, or2. As units of resource availability.

An automobile transmission-assembly factory normally operates two shifts per day, five days per week. During each shift, 400 transmissions can be completed under ideal conditions. What is the capacity of this factory? Capacity = (2 shifts/day)(5 days/week)

(400 tranmissions/shift)(4 weeks/month)

Modify capacityModify capacity Use capacityUse capacity

IntermediaIntermediate-range te-range planningplanning

Subcontract Add personnelAdd equipment Build or use inventory Add shifts

Short-Short-range range planningplanning

Schedule jobsSchedule

personnel Allocate

machinery*

Long-Long-range range planningplanning

Add facilitiesAdd long lead time equipment *

* * LimiteLimited d options options existexist

Economies of scale are achieved when the average unit of cost of a good or service decreases as the capacity and/or volume of throughput increases. Operations managers must decide on the appropriate levels of

capacity to meet current (short-term) and future (long-term) demand. Diseconomies of scale = when the average unit cost of the good or

service begins to increase as the capacity and/or volume of throughput increase.

A focused factory is a way to achieve economies of scale without extensive investments in facilities and capacity by focusing on a narrow range of goods or services, target market segments, and/or dedicated processes to maximize efficiency and effectiveness. The focused factory argues to “divide and conquer” by adopting

smaller more focused facilities dedicated to (1) a few key products, (2) a specific technology, (3) a certain process design and capability, (4) a specific competitive priority objective such as next day delivery, and (5) particular market segments or customers and associated volumes.

Safety capacity (often called the capacity cushion) is an amount of capacity reserved for unanticipated events, such as demand surges, materials shortages, and equipment breakdowns. Average safety capacity (%) = 100% − Average

resource utilization %

Capacity required to meet a given production volume for one work order Capacity required (Ci) = Setup time (Si) +

[Processing Time (Pi) X Order size (Qi)] . . . Thus, C = Ci = [Si + (Pi X Qi)]

A bottleneck is the work activity that effectively limits throughput of the entire process.

Demand exceeds capacityDemand exceeds capacity Curtail demand by raising prices, scheduling longer lead timeCurtail demand by raising prices, scheduling longer lead time Long term solution is to increase capacityLong term solution is to increase capacity

Capacity exceeds demandCapacity exceeds demand Stimulate marketStimulate market Product changesProduct changes

Adjusting to seasonal demandsAdjusting to seasonal demands Produce products with complementary demand patternsProduce products with complementary demand patterns

Tactics for Matching Capacity to DemandTactics for Matching Capacity to Demand• Making staffing changesMaking staffing changes• Adjusting equipmentAdjusting equipment• Purchasing additional machineryPurchasing additional machinery• Selling or leasing out existing equipmentSelling or leasing out existing equipment• Improving processes to increase throughputImproving processes to increase throughput• Redesigning products to facilitate more throughputRedesigning products to facilitate more throughput• Adding process flexibility to meet changing product preferencesAdding process flexibility to meet changing product preferences• Closing facilitiesClosing facilities

Estimate Capacity Requirements

Item Client X Client Y

Annual demand forecast (copies) 2000.00 6000.00Standard processing time (hour/copy) 0.50 0.70Average lot size (copies per report) 20.00 30.00Standard setup time (hours) 0.25 0.40

[Dp + (D/Q)s]product 1 + ... + [Dp + (D/Q)s]product n

N[1 – (C/100)]M =




[2000(0.5) + (2000/20)(0.25)]client X + [6000(0.7) + (6000/30)(0.4)]client Y

(250 days/year)(1 shift/day)(8 hours/shift)(1.0 – 15/100)M =




M = = 3.12 4 machines5305

1700

• In developing a long-range capacity plan, a firm must make the basic economic trade-off between the cost of capacity and the opportunity cost of not having adequate capacity.

• Long-term capacity planning must be closely tied to the strategic direction of the organization—what products and services it offers.

Complementary goods and services – goods and services that can be produced or delivered using the same resources available to the firm, but whose seasonal demand patterns are out of phase with each other.

Capacity Expansion (1) Capacity is added in “chunks” or discrete increments; and

(2) demand is steadily increasing. 4 basic strategies for expanding capacity over some fixed time

horizon:▪ One large capacity increase▪ Small capacity increases that match average demand▪ Small capacity increases that lead demand▪ Small capacity increases that lag demand

• Add or share equipment: lease equipment as needed or set up a partnership arrangement with capacity sharing.

• Examples: mainframe computers, CAT scanner, farm equipment.

• Sell unused capacity: sell idle capacity to outside buyers and even competitors.

• Examples: computing capacity, perishable hotel rooms.• Change labor capacity and schedules: short term

changes in work force levels. • Examples: overtime, extra shifts, temporary

employees, outsourcing.• Change labor skill mix: hiring the right people.• Shift work to slack periods

• Some general approaches to influence customers to shift demand from periods without adequate capacity to periods with excess capacity or to fill times with excess capacity include:

• Vary the price of goods or services: price is the most powerful way to influence demand.

• Provide customers information: best times to call or visit.

• Advertising and promotion: a vital role on influencing demand; promotions are strategically distributed to increase demand during periods of low sales or excess capacity.

• Add peripheral goods and/or services: change demand during slack periods.

• Provide reservations: a promise to provide a good or service at some future time and place.

The Theory of Constraints (TOC) is a set of principles that focuses on increasing total process throughput by maximizing the utilization of all bottleneck work activities and workstations.

Throughput: money generated per time period through actual sales. Constraint: anything that limits an organization from moving toward or

achieving its goal.▪ A physical constraint is associated with the capacity of a resource

(e.g., machine, employee).▪ A bottleneck work activity effectively limits capacity of the entire

process.▪ A nonbottleneck work activity is one in which idle capacity exists.▪ A nonphysical constraint is environmental or organizational (e.g.,

low product demand or an inefficient management policy or procedure).

Inputs To customers

Operation 2 is a bottleneck

50/hr1 2 3

200/hr 200/hr

Forecasting is the process of projecting the values of one or more variables into the future.

Poor forecasting can result in poor inventory and staffing decisions, resulting in part shortages, inadequate customer service, and customer complaints.

Many firms integrate forecasting with value chain and capacity management systems to make better operational decisions.

The planning horizon is the length of time on which a forecast is based. Short-range forecast▪ Up to 1 year, generally less than 3 months▪ Usually employs different methodologies than long-term forecasting▪ Tend to be more accurate than longer-term forecasts▪ Purchasing, 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

The span of the planning horizon depends on how the forecast will be used: Longer horizons are needed for strategic planning such as those

involving addition of new facilities or shut-down of existing facilities. Medium/long range forecasts deal with more comprehensive issues and

support management decisions

• A time series is a set of observations measured at successive points in time or over successive periods of time.

• 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• A time series pattern may have one or more of the following

characteristics: Trend (underlying pattern of growth or decline in a time

series) Seasonal patterns Cyclical patterns Random variation (or noise) Irregular (one time) variation

Seasonal patterns are characterized by repeatable periods of ups and downs over short periods of time; if you have seasonal patterns, you should have complementary demand

Cyclical patterns are regular patterns in a data series that take place over long periods of time.

Random variation (sometimes called noise) is the unexplained deviation of a time series from a predictable pattern, such as a trend, seasonal, or cyclical pattern.

Because of these random variations, forecasts are never 100 percent accurate.

Irregular variation is a one-time variation that is explainable.

• Forecast error is the difference between the observed (actual) value of the time series and the forecast, or At – Ft. • Mean Square Error (MSE) only good

for tracking your performance over time• MSE = Σ (At – Ft )2 / T

• Mean Absolute Deviation Error (MAD)• MAD = Σ | (At – Ft ) | / T

• Mean Absolute Percentage Error (MAPE)• MAPE = ( Σ |(At – Ft )/At | X 100 ) / T

Based on the assumption that the future will be an extrapolation of the past A moving average (MA) forecast is an average of the most recent “k”

observations in a time series▪ Ft+1 = (most recent “k” observations)/k = (At + At-1 + At-2 + … + At-k+1)/k

Single exponential smoothing (SES) = forecasting technique that uses weighted average of past time-series value to forecast value of the time series in the next period.▪ Ft+1 = At + (1 - )Ft

▪ Ft + (At – Ft)▪ Where is called the smoothing constant (0 1).▪ = 2/(k + 1)

Regression analysis is a method for building a statistical model that defines a relationship between a single dependent variable and one or more independent variables, all of which are numerical.▪ Yt = a + bt▪ A linear regression model with more than one independent variable is

called a multiple linear regression model.▪ Multiple regression provides a technique for building forecasting models

that not only incorporate time but other potential causal variables.

• Judgmental forecasting relies upon opinions and expertise of people in developing forecasts.

• When no historical data is available, only judgmental forecasting is possible.

• The Delphi method = forecasting by expert opinion by gathering judgments & opinions of key personnel based on experience & knowledge of the situation.

• The major reasons for using judgmental methods are: Greater accuracy Ability to incorporate unusual or one-time events The difficultly of obtaining the data necessary for

quantitative techniques

• Managers use a variety of judgmental and quantitative forecasting techniques.

• Statistical methods alone cannot account for such factors as sales promotions, competitive strategies, unusual economic disturbances, new products, large one-time orders, natural disasters, or labor complications.

• The first step in developing a practical forecast is to understand the purpose, time horizon, and level of aggregation.

• Different forecasting methods require different levels of technical ability and understanding of mathematical principles and assumptions.

Define a Cone of Uncertainty

Look for the S Curve

Embrace the Things That Don’t Fit

Hold Strong Opinions Weakly

Look Back Twice as Far as You Look Forward

Know When NOT to Make a Forecast

Resource Management deals with the planning, execution, and control of all the resources that are used to produce goods or provide services in a value chain.

Typical objectives of resource management are to:

1. Maximize profits and customer satisfaction,

2. Minimize costs, or

3. Maximize benefits to stakeholders. Resources include materials, equipment, facilities,

information, technical knowledge and skills, and of course, people.

One framework for resource planning is divided into three levels:

Aggregate planning (Level 1),

Disaggregation (Level 2), and

Execution (Level 3).

• Resource management for service-producing organizations generally does not require as many intermediate levels of planning (Level 2) as it does for goods-producing firms.

• Aggregate planning is the development of a long-term output and resource plan in aggregate units of measure.

• These typically define output levels over a planning horizon of 1 to 2 years, focusing on product families or total capacity requirements.

• Aggregate planning later translates into monthly or quarterly production plans, taking into account capacity limitations such as supply availability, equipment, and labor.

• Level 2 planning, or disaggregation, is the process of translating aggregate plans into short-term operational plans that provide the basis for weekly and daily schedules and detailed resource requirements.

• Level 3 focuses on execution, moving work from one workstation to another, assigning people to tasks, setting priorities for jobs, scheduling equipment, and controlling processes.

• Aggregate planning is most challenging when demand fluctuates over time.

• Managers have a variety of options in developing aggregate plans in the face of fluctuating demand:

Demand management Production-rate changes Workforce changes Inventory smoothing Facilities, equipment, and transportation

• Demand Management:

Cooperation between marketing and manufacturing to create more feasible aggregate demands.

• Production-Rate Changes:

Utilizing overtime/undertime, subcontracting during peak months.

• Workforce Changes:

Hiring and firing employees—often not a feasible alternative – particularly if skilled workers are scarce.

• Inventory Changes:

Building inventories or carrying back orders.

• Facilities, Equipment, and Transportation:

Typically a long-term investment, although companies can rent equipment for peak seasons.

Aggregate Planning StrategiesAggregate Planning Strategies

Possible Alternatives Possible AlternativesStrategyduring Slack Season during Peak Season

1. Chase #1: vary workforce Layoffs Hiringlevel to match demand

2. Chase #2: vary output Layoffs, undertime, Hiring, overtime, rate to match demand vacations subcontracting

3. Level #1: constant No layoffs, building No hiring, depleting workforce level anticipation inventory, anticipation inventory,

undertime, vacations overtime, subcontracting, backorders, stockouts

4. Level #2: constant Layoffs, building antici- Hiring, depleting antici-output rate pation inventory, pation inventory, over-

undertime, vacations time, subcontracting, backorders, stockouts

The manager of a large distribution center must determine how many part-time stockpickers to maintain on the payroll. She wants to develop a staffing plan with a level workforce, implemented with overtime and undertime. Workforce requirements are shown as the number of part-time employees required for each time period at the maximum regular time of 20 hours per week (on next slide). Currently, 10 part time clerks are employed. Constraints and other information is as follows: The size of the training facilities limits the number of new

hires in any period to no more than 10. No backorders are permitted, demand must be met each

period. Overtime cannot exceed 20% of the regular time capacity in

any period. Regular time wage rate: $2000 per time period per week Overtime wage: 150% of regular time rate Hiring: $1000 per person Layoffs: $500 per person

Dock Aisle

TIME PERIOD

1 2 3 4 5 6 Total

Requirement* 6 12 18 15 13 14 78Current employment = 10 part-time clerks

1. No more than 10 new hires in any period2. No backorders are permitted3. Overtime can not exceed 20% of regular-time capacity4. The following costs can be assigned:

Regular-time wage $2,000/period at 20 hours/week

Overtime wages 150% of regular-timeHiring $1,000/personLayoffs $500/person

* Number of part-time employees

Dock Aisle

TIME PERIOD

1 2 3 4 5 6 Total





Peak Requirement

1.20w = 18 employees in peak period

Dock Aisle

TIME PERIOD

1 2 3 4 5 6 Total





Peak Requirement


w = = 15 employees18

1.20

Dock Aisle

TIME PERIOD

1 2 3 4 5 6 Total


1. No more than 10 new hires in any period2. No back orders are permitted3. Overtime can not exceed 20% of regular-time capacity4. The following costs can be assigned:



Peak Requirement


w = = 15 employees18

1.20

Dock Aisle

TIME PERIOD

1 2 3 4 5 6 Total


Aggregate Planning for Golden Beverages: Golden Beverages makes two major products—

Old Fashioned and Foamy Delite root beers. The company operates a continuous flow factory and has a fluctuating forecast, with seasonal peaks in the summer and winter holiday season.

Golden utilizes a level production strategy, planning for the same production rate in each time period.

An alterative to level production is a chase demand strategy, setting the production rate equal to the demand in each time period.

Level Production Plan

Chase Production Strategy

• Disaggregation (Level 2) provides the link between aggregate plans developed at Level 1 and detailed execution at Level 3 (see Exhibit 13.6).

• This provides the basis for detailed purchasing and production schedules for all of the components that comprise the finished good or support service delivery.

• There are three major components for disaggregating aggregate plans into Level 2 plans.

Master production scheduling (MPS) Materials requirements planning (MRP) Capacity requirements planning (CRP)

• A master production schedule (MPS) is a statement of how many finished items are to be produced and when they are to be produced.

• Typically developed for weekly time periods over a 6- to 12-month horizon.

• Materials Requirements Planning (MRP) is a forward-looking, demand-based approach for planning the production of manufactured goods and ordering materials and components to minimize unnecessary inventories and reduce costs.

• The output of an MRP system = a schedule for obtaining raw materials & purchased parts, a detailed schedule for manufacturing & controlling inventories, & financial information that drives cash flow, budget, & financial needs.

• The MRP system takes in a number of parameters as inputs and performs some level of analysis and generates recommendations that can either be accepted or rejected by the planner.

• MRP explosion is the process of using the logic of dependent demand to calculate the quantity and timing of orders for all subassemblies and components that go into and support the production of finished goods.

• An independent demand is a demand that is not based on the demand for another item while a dependent demand is based on the demand for another item.

• Independent:• Automobiles, televisions, cartons of ice cream• Demand often occurs at constant rate• Effects inventories that are managed separately from other items (e.g.:

finished goods made-to-stock)• For end items for your business • Demand is managed based on forecasts• Example: to an automobile dealer, a customer order for a new car is an

independent demand.• Dependent:

• Effects inventories that are managed to support production of finished goods

• Demand is managed based on plans (e.g.: MPS)• Most raw materials, component parts, and subassemblies• Demand often occurs in lumps• Example: an independent demand for a new car causes dependent

demands for all of the components which make up the car

1. Dependent demand is demand that is directly related to the demand of other SKUs and can be calculated without needing to be forecasted. Demand for materials needed to produce finished goods is dependent on the number of finished goods planned.

2. Time phasing: all dependent demand requirements do not need to be ordered at the same time, but rather are time-phased as necessary.

3. Lot sizing is the process of determining the appropriate amount and timing of ordering to reduce costs. There are three common lot sizing methods for MRP:Lot-for-lot (LFL)Fixed order quantity (FOQ)Periodic order quantity (POQ)

Computer and necessary software Integrity of data Accurate and up-to-date…

Master schedules Bills of materials Inventory records▪ Includes info on the status of each item by

time period▪Gross requirements▪Scheduled receipts▪Amount on hand▪ Lead times▪ Lot sizes

Independent Demand

A

B(4) C(2)

D(2) E(1) D(3) F(2)

Dependent Demand

Independent demand is uncertain. Dependent demand is certain.

MRP Inputs MRP Processing MRP Outputs

Masterschedule

Bill ofmaterials

Inventoryrecords

MRP computerprograms

ChangesOrder releases

Planned-orderschedules

Exception reports

Planning reports

Performance-controlreports

Inventorytransaction

Primaryreports

Secondaryreports

Master Production Schedule Master schedule: One of three primary inputs in MRP; states which end

items are to be produced, when these are needed, and in what quantities Cumulative lead time: The sum of the lead times that sequential phases

of a process require, from ordering of parts or raw materials to completion of final assembly.

Time-phased plan specifying timing & quantity of production for each end item.

Material Requirement Planning Process There must be a 95% accuracy

Product Structure

Tree

Lead Times

156

One of the three primary inputs of MRP A listing of all of the raw materials, parts,

subassemblies, and assemblies needed to produce one unit of a product.

Shows way a finished product or parent item is put together from individual components

Parent item shown at highest level or level zero Parts that go into parent item are called level 1

components and so on Production planners explode BOM for level zero

item to determine the number, due dates, and order dates of subcomponents

Visual depiction of the requirements in a bill of materials, where all components are listed by levels.

Production of a single product (A), which requires the components B, C, and D.

Gross requirements Total expected demand

Scheduled receipts Open orders scheduled to arrive

Planned on hand Expected inventory on hand at the beginning of each time

period Net requirements

Actual amount needed in each time period Planned-order receipts

Quantity expected to received at the beginning of the period

Offset by lead time Planned-order releases

Planned amount to order in each time period

Projected on-hand inventory in period t = on-hand inventory in period t - 1 + scheduled or planned receipts in period t - (gross requirements in period t . . . t safety stock) If projected on-hand inventory < 0 then need

planned receipt Net requirements for planning period =

gross requirements for planning period - planned on hand at planning period

Planned on hand at planning period = current on hand + scheduled receipts prior to planning period - scheduled requirements prior to planning period

Planned orders - schedule indicating the amount and timing of future orders.

Order releases - Authorization for the execution of planned orders.

Changes - revisions of due dates or order quantities, or cancellations of orders.

An ordering schedule that covers the gross requirements for each week is called lot-for-lot (LFL).

The fixed order quantity policy (FOQ) uses a fixed order size for every order or production run.

• The periodic order quantity (POQ) orders a quantity equal to the gross requirement quantity in one or more predetermined time periods minus the projected on-hand quantity of the previous time period.

• POQ = gross requirements for p time periods – scheduled receipts – on-hand inventory

Low levels of in-process inventories

Ability to track material requirements

Ability to evaluate capacity requirements

Means of allocating production time

Manufacturing Resource Planning (MRP II): Second generation MRP systems that connect to financial systems & help synchronize internal operations

Capacity Requirements Planning (CRP): Evaluates and matches demand with capacity

Enterprise Resource Planning (ERP): An information system designed to integrate internal & external processes of a supply chain via a centralized database

Capacity Requirements Planning (CRP) is the process of determining the amount of labor and machine resources required to accomplish the tasks of production on a more detailed level, taking into account all component parts and end items in the materials plan. Load reports: Department or work center reports

that compare known and expected future capacity requirements with projected capacity availability.

Time fences: Series of time intervals during which order changes are allowed or restricted.

• Basic MRP does not consider capacity limitations (assumes infinite capacity so no rescheduling, etc.), so CRP addresses this issue.

Develop a tentativemaster production

schedule

Develop a tentativemaster production

schedule

Use MRP tosimulate material

requirements

Use MRP tosimulate material

requirementsConvert materialrequirements to

resource requirements

Firm up a portionof the MPS

Is shopcapacity

adequate?

Cancapacity be

changed to meetrequirements

Revise tentativemaster production

schedule

Changecapacity

Yes

No

Yes

No

MRP II extends MRP systems to share information with other functional areas

Key component of MRP II is storing operational information centrally

ERP systems seek to integrate all business activities and processes throughout the organization

Goal is to provide real-time information to all employees that need it

Work problems: 13-3, 13-7, 13-9, 13-11

Working the In-Line Industries Case using Excel is also recommended

Read case and be prepared to discuss answers to assigned case questionsAssigned groups be prepared to present recommendations (6 minutes per group)

operations notes

Business

customer benefit

legal challenges

small capacity

enterprise

inspection

prevent product

automated

increase perceived