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Chapter 1:

Introduction to Operations

1-2

Chapter 1 Learning Objectives

•LO 1.1 Define operations and supply chain management.

•LO 1.2 Review the role of operations in the firm and the economy.

•LO 1.3 Describe the five main decisions made by operations and supply chain managers.

•LO 1.4 Explain the nature of cross-functional decision making with operations.

•LO 1.5 Describe typical inputs and outputs of an operations transformation system.

•LO 1.6 Analyze trends in operations and supply chain management.

1-3

Definition of Operations Management

Operations management focuses on decisions for the

internal production of the firm’s products or services.

1-4

A Typical Supply Chain (Figure 1.1)

1-5

Operations and Supply Chain Management

Deals with the sourcing, production, and distribution of the

product or service along with managing the relationships with

supply chain partners.

1-6

Importance of Operations and Supply Chain

Providing the products and

services that we use and enjoy

Constantly improving both productivity and

innovation

Sustaining our way of life while

working to protect the planet

Creating revenue from products & services to drive firm profitability

1-7

Role of Operations in the Economy

Gross Domestic Product (GDP) - monetary value of all goods and services produced in a country.

Productivity - value of goods/services output, relative to input.

Productivity = output capital + labor

1-8

Productivity Example

A retail (quick) clinic has the following output (revenue) and labor expenses. Did productivity improve from Year 1 to Year 2? (assume equivalent capital costs)

Annual Year 1 Year 2 Inflation

Output (revenue) $thousands $842 $883 2% Labor $thousands $280 $292 4%

1-9

Productivity Example - Solution

A retail (quick) clinic has the following output (revenue) and labor expenses. Did productivity improve from Year 1 to Year 2? (assume equivalent capital costs)

Productivity year 1 = Output year 1 = 842 = 3.01 Labor year 1 280

Productivity year 2 = Output year 2 = 883(.98) = 3.09 Labor year 2 292(.96)

Change in productivity = 3.09 = 1.027 which is a 2.7% increase 3.01

1-10

Why Study Operations Management?

Challenging and interesting career opportunities – domestic, international

Cross-functional nature of decisions – what every major needs to know

Principles of process thinking can be applied across the organization

ammentorp/123RF

1-11

Careers in Operations and Supply Chain Management

Supply Chain Analyst

Supply Chain Analytics

Plant Lead on Sustainability

Sourcing Specialist

Global Sourcing Analyst

Transportation Planner

Risk Consultant

Customs Specialist NetPics/Alamy Stock Photo

1-12

3 Aspects of Operations and Supply Chain Management

Decisions:

The operations manager must decide: • Process, quality, capacity, inventory, and supply chain

Function:

Major functional areas in organizations: • Operations, marketing, finance

Process:

Planning and controlling the transformation process and its interfaces (internal/external)

1-13

Let’s Manage Operations at Pizza USA!

Managing operations is about making decisions.

Steve Mason/Getty Images

1-14

Major Decisions at Pizza USA

Process ◦ How should we produce pizzas?

Quality ◦ How do we meet quality standards and ensure a good customer experience?

Capacity ◦ How much output do we need at various times?

Inventory ◦ Which ingredients, when & how much?

Supply Chain ◦ How to source inputs and manage logistics?

1-15

Framework for Operations Decisions (Figure 1.2)

1-16

Cross-Functional Decision Making

Operations is critical in every firm.

Marketing = create demand

Operations = produce and distribute goods and services

Finance = acquire and allocate capital

Supporting functions: human resources, information systems, accounting

Cross-functional decision making - see Table 1.2

1-17

Operations as a Process

Transformation (Conversion)

Process

Inputs Outputs

1-18

Operations as a Process (Figure 1.3)

Transformation (Conversion)

Process

Energy Materials

Labor Capital

Information

Goods or Services

Feedback information for control of process inputs and process technology

1-19

Transformation Process Examples (Table 1.3)

1-20

Trends in Operations and Supply Chain Management

▪ Sustainability – triple bottom line

▪ Services

▪ Digital Technologies

▪ Integration of Decisions Internally and Externally

▪ Globalization of Operations and the Supply Chain

StreetVJ/Shutterstock

1-21

Chapter 1 Summary

•LO 1.1 Define operations and supply chain management.

•LO 1.2 Review the role of operations in the firm and the economy.

•LO 1.3 Describe the five main decisions made by operations and supply chain managers.

•LO 1.4 Explain the nature of cross-functional decision making with operations.

•LO 1.5 Describe typical inputs and outputs of an operations transformation system.

•LO 1.6 Analyze trends in operations and supply chain management.

1-22

Questions for Discussion

•What do you hope to learn in this course?

•Review the operations and supply chain trends on slide 1-20. Which of these is most interesting to you and why?

•What production systems have you seen in person? How do they produce the intended product or service?

•Describe a transformation process that you recently experienced. Think about a medical or dental clinic visit, or a restaurant visit.

•Why are global factors important in operations and supply chain?

•How is operations and supply chain related to environmental responsibility?

Chapter 2:

Operations and Supply Chain Strategy

McGraw-Hill Education

2-24

Chapter 2 Learning Objectives

LO 2.1 Define operations strategy.

LO 2.2 Describe the elements of operations strategy and alignment with business and other functional strategies.

LO 2.3 Differentiate the ways to compete with operations objectives.

LO 2.4 Compare product imitator and innovator strategies.

LO 2.5 Explain the nature of global operations and supply chains.

LO 2.6 Analyze two types of supply chain strategies.

LO 2.7 Illustrate how operations and supply chain can become more sustainable.

2-25

Operations Strategy

“A consistent pattern of business decisions for operations and the associated supply chain …

… that are linked to the business strategy and other functional strategies, leading to a competitive advantage for the firm.”

The operations strategy at Southwest Airlines includes using only one type of airplane.

This lowers staff training and maintenance costs, and reduces on hand spare parts.

These decisions support the business strategy of being a low cost carrier.

Markus Mainka/123RF

2-26

Operations Strategy Process (Figure 2.1)

Mission

Objectives: (cost, quality, delivery, flexibility, sustainability)

Strategic Decisions: (process, quality, capacity, inventory, supply chain)

Distinctive Competence

Operations Strategy Functional strategies in

marketing, finance,

engineering, human resources,

and information systems

Corporate strategy

2-27

Operations Strategic Objectives

Cost – resources used

Quality – conformance to customer expectations

Delivery – quickly and on time

Flexibility – ability to rapidly change operations

Sustainability – environmental, social, economic

What trade- offs exist among the objectives?

How do firms use these

objectives to gain

competitive advantage?

2-28

Examples of Important Strategic Decisions in Operations (Table 2.2)

2-29

Distinctive Competence

This operations capability is something an organization does better than any competing organization that adds value for the customer.

Examples:

• patents, proprietary technology, operations innovations

2-30

Linking Operations to Business Strategy

Business strategy alternatives ◦ Product Imitator

◦ Operations must focus on keeping costs low.

◦ Product Innovator ◦ Operations must maintain flexibility in processes, labor, and suppliers.

Customer perspective ◦ Order Qualifier

◦ Objective that must be delivered at an acceptable level for customer to consider product/service. Can be an order loser if not met.

◦ Order Winner ◦ Objective that causes customer to choose a particular product/service.

2-31

Linking Operations to Business Strategy

◦ Product Imitator ◦ Order Winner = price (low cost)

◦ Order Qualifiers = flexibility, quality, delivery

◦ Product Innovator ◦ Order Winner = flexibility (rapid introduction of new products)

◦ Order Qualifiers = cost, delivery, quality

2-32

Example: McDonald’s Operations Strategy

Mission fast product/service, consistent quality, low cost, clean/friendly environment

Operations Objectives cost, quality, service

Strategic Decisions process, quality, capacity, inventory, supply chain

Distinctive Competence today: continuous improvement of the transformation system, and brand (originally: unique service/supply chain)

2-33

Characteristics of “Global Corporations”

 Facilities located worldwide, not country by country.

 Products & services can be shifted among countries.

 Sourcing on a global basis.

 Supply chain is global in nature.

 Product design & process technology are global.

 Products/service fit global tastes.

 Demand is considered on worldwide basis.

 Logistics & inventory control is on worldwide basis.

2-34

Supply Chain Strategy

To achieve competitive advantage for entire supply chain, rather than individual entities.

Two supply chain strategies: ◦ Imitative Products (e.g. commodities)

◦ Predictable demand ◦ Efficient, low-cost supply chain

◦ Innovative Products (e.g. new technologies) ◦ Unpredictable demand ◦ Flexible, fast supply chain

Firms design supply chain for each product/service or group of products/services ◦ Avoid “one size fits all” strategy

2-35

Supply Chain Strategy (Table 2.4)

2-36

Sustainability is in Operations

Operations Sustainability:

* minimizing or eliminating environmental impact of operations

* social and financial viability of the firm for future generations

Operations ‘greening’ may include: ◦ Curtailing air, water, landfill pollution

◦ Reducing energy consumption

◦ Minimizing transportation and total carbon footprint

◦ Working with suppliers to use recyclable and biodegradable packaging

◦ Incorporating product reuse, end-of-life return, recycling

British retailer Marks & Spencer has met goals to send zero waste to landfills and is the first major retailer to be carbon neutral.

Supply chain partners have been an important source of support for this effort.

TEA/123RF

2-38

Chapter 2 Summary

LO 2.1 Define operations strategy.

LO 2.2 Describe the elements of operations strategy and alignment with business and other functional strategies.

LO 2.3 Differentiate the ways to compete with operations objectives.

LO 2.4 Compare product imitator and innovator strategies.

LO 2.5 Explain the nature of global operations and supply chains.

LO 2.6 Analyze two types of supply chain strategies.

LO 2.7 Illustrate how operations and supply chain can become more sustainable.

2-39

Questions for Discussion

•Describe operations strategy in your own words.

•What is the relationship between a firm’s business strategy and its operations strategy?

•Think of examples of manufacturing and service firms that pursue the operations objectives of cost, quality, delivery, flexibility, sustainability.

•How do Apple’s operations and supply chain characteristics support their product innovator strategy?

•What are some operations or supply chain challenges facing global corporations?

•Describe recent examples you have seen in person or in the media that illustrate how operations is closely tied to environmental, social, and financial sustainability.

Chapter 3:

Product Design

McGraw-Hill/Irwin

Chapter 3 Learning Objectives

LO 3.1 Compare the three strategies for new product introduction.

LO 3.2 Describe the three phases of new product development.

LO 3.3 Evaluate how concurrent engineering deals with misalignment.

LO 3.4 Describe the criteria for selecting suppliers for collaboration.

LO 3.5 Evaluate an example of Quality Function Deployment.

LO 3.6 Explain the benefits of modular design.

McGraw-Hill/Irwin

Product Design: Why Does Operations Care?

In the past: Throw product design “over the wall”

Today: ◦ Must be able to produce the product (design the process)

◦ technology

◦ availability of resources

◦ Must have the right type and amount of capacity

◦ Must deliver a quality product or service

◦ Must have right inventory at right time

The LEGO Group is investing over $100 million and hiring 100 workers to redesign its product.

The goal is to make the product entirely from plant or recycled materials by 2030.

Milosh Kojadinovich/12RF

McGraw-Hill/Irwin

Strategies for New Product Introduction

Market Pull: “Make what we can sell” ◦ Organize resources to fulfill customer demand ◦ Food industry

Technology Push: “Sell what we can make” ◦ Develop superior technologies and products ◦ Electronics

Interfunctional View: most difficult ◦ Cross-functional design team – marketing, engineering, operations, finance ◦ Challenge to gain cooperation of all functions ◦ Consider existing and new markets

McGraw-Hill/Irwin

New Product Development Process

Concept Development ◦ Idea generation and evaluation of alternative ideas

Product Design ◦ Design of the physical product

◦ Design of the production process

Pilot Production/Testing ◦ Testing production prototypes (e.g., 3D printing)

◦ Finalizing production process

◦ Finalizing ‘information package’ specifying product and process design details

Shutterstock/Gorodenkoff

McGraw-Hill/Irwin

New Product Design Process (Figure 3.2)

Pilot production/testing Final process design

Preliminary process design

Concept development

Product design

McGraw-Hill/Irwin

Production Prototypes

3D Printing or Additive Manufacturing

- Creates physical prototype - Allows rapid production of prototype designs - Software and hardware continue to improve - Now possible to print metal and human cells - Speeds entire product design process

Robert Clark/Getty Images

McGraw-Hill/Irwin

Cross-Functional Product Design

Sequential approach ◦ Functions (marketing, engineering, operations) work independently

before passing work to next step. This is the ‘over the wall’ approach. ◦ Often results in misalignment of market needs, design, and production

process.

Concurrent approach ◦ Also called concurrent engineering. ◦ Functions cooperate, work together over the same time frame. ◦ Cross-functional teams are common. ◦ Not always “best” approach (e.g. high uncertainty of market or

technology).

McGraw-Hill/Irwin

Cross-Functional Product Design (Figure 3.3)

McGraw-Hill/Irwin

Supply Chain Collaboration

Relationships with Customers ◦ Ask right questions ◦ Align incentives to share knowledge ◦ Create collaborative technology platform ◦ Include as advisors to design team

McGraw-Hill/Irwin

Supply Chain Collaboration

Relationships with Suppliers ◦ Technical expertise

◦ Capabilities – cost, time, quality targets

◦ Capacity availability

◦ Low risk

McGraw-Hill/Irwin

Quality Function Deployment (QFD)

“House of Quality”

Tool for coordinating and communicating between functions

Helps identify tradeoffs

Engineering Characteristics

“Voice of the Engineer”

Customer Attributes

“Voice of the Customer”

McGraw-Hill/Irwin

House of Quality (QFD) (Figure 3.4)

McGraw-Hill/Irwin

HOUSE OF QUALITY (QFD)

House of Quality (QFD) (Figure 3.5)

McGraw-Hill/Irwin

HOUSE OF QUALITY (QFD)

QFD for Pizza USA Delivery (Figure 3.6)

McGraw-Hill/Irwin

Modular Design

Allows greater product variety through ‘mixing and matching’ modules

Design, develop, and manage basic components (modules) to (re)use in multiple products

Controls costs while enabling customer choice

Small number of components creates large number of combinations, e.g., Dell notebooks, IKEA cabinets

McGraw-Hill/Irwin

Modular Design

MINI Cooper’s basic model has many choices:

◦ 4 body colors

◦ 3 wheel designs

◦ 8 interior finishes

◦ 2 engines

◦ 11 styles

The theoretical number of different cars that can be produced:

4 × 3 × 8 × 2 × 11 = 2112

Most automobile manufacturers use modular design.

Robert Wilson/123RF

McGraw-Hill/Irwin

Chapter 3 Summary

LO 3.1 Compare the three strategies for new product introduction.

LO 3.2 Describe the three phases of new product development.

LO 3.3 Evaluate how concurrent engineering deals with misalignment.

LO 3.4 Describe the criteria for selecting suppliers for collaboration.

LO 3.5 Evaluate an example of Quality Function Deployment.

LO 3.6 Explain the benefits of modular design.

McGraw-Hill/Irwin

Questions for Discussion

•Can you think of examples of new products that did not function well for the customers who bought them? What went wrong?

•Describe what can happen if product design and process design are approached separately by different work teams.

•What are the key activities in pilot production?

•What do you know about 3D printing? 4D printing?!

•What do marketing, finance, and HR do when they are involved in a cross- function concurrent engineering team?

•How can suppliers be involved in new product development?

•Can you think of products you own that include modular design elements?

Chapter 4:

Process Selection

McGraw-Hill Education

Chapter 4 Learning Objectives

LO 4.1 Contrast and compare the five types of product-flow processes.

LO 4.2 Describe the differences among order fulfillment processes.

LO 4.3 Explain how companies should make process selection decisions.

LO 4.4 Correctly place examples of products on the product-process matrix.

LO 4.5 Describe the features of focused operations.

LO 4.6 Discuss the uses of mass customization and 3D printing.

LO 4.7 Contrast pollution prevention, pollution control and pollution practices.

Product-Flow Characteristics

Types of Product Flow ◦Continuous process

◦Assembly line ◦Batch flow ◦Job shop ◦Project

Product-Flow Characteristics: Continuous Process Highly standardized and automated

Flexibility limited

High volumes of production

Commodity products

Low cost is the ‘Order Winner’

Process industries (sugar, paper, oil, electricity, etc.)

Product-Flow Characteristics: Assembly Line

Linear sequence of operations (often paced)

Large capital investment, use of automation

Very efficient

High-volume, standardized products

Low flexibility to product and volume changes

Discrete products (autos, appliances, computers, etc.)

nikitabuida/Shutterstock

Assembly Line: Metal Bracket (Figure 4.1)

paintdrill bend

Task or work station

Product flow

cut

Product-Flow Characteristics: Batch Flow

Production of batches or lots

Batches flow as a unit (set) from one work center to another

Process layout of work centers (by tasks)

Flow is jumbled and intermittent

Flexible labor and equipment (general purpose)

Low to high volume, variety of products

Many types of products (furniture, dishes, boats)

Batch Flow: Metal Brackets (Figure 4.2)

Cut Paint

Task or work station Product flows

Bend

Drill

Batch A Batch B Batch C

Product-Flow Characteristics: Job Shop

Customized to customer order

Production of small batches or lots

Layout/flow similar to Batch Flow

Flexible labor and equipment (general purpose)

Many types of made-to-order products (plastic parts, machine components, sheet metal parts, custom signs, artificial limbs, etc.)

Product-Flow Characteristics: Project Production of customized single products

Labor and materials brought to site

Planning, scheduling challenges

Little automation, general purpose equipment

Highly skilled and flexible labor

Unique, one of a kind products (bridges, building construction, large aircraft, etc.)

Throughput Ratio: Process efficiency

TR = Total processing time for the job

Total time in operations X 100%

Typically:

90-100% in continuous process & assembly line

10-20% in batch flow & job shop

Order Fulfillment

Make-to-Stock (MTS)

Make-to-Order (MTO)

Assemble-to-Order (ATO)

Make-to-Stock (MTS) •Produce finished goods according to production schedule

•Customer buys from inventory

Disadvantage Inventory holding costs, slower to respond to changes in customer preferences

Advantage Faster fulfillment of customer demand, lower cost, smooth production rate

Make-to-Stock (Figure 4.3)

Customer

Production

Product Customer

order

Product

Finished goods inventory

Forecast orders

MTS Performance Measures Service level (orders filled when requested)

Inventory replenishment time

Inventory turnover (sales/avg. inventory)

Capacity utilization

Time to fill back order

Others, such as shrinkage rate

Make-to-Order (MTO) Start production after customer orders

No finished goods inventory

Disadvantage Intermittent production (i.e., lumpy demand pattern), slower response to customer demand

Advantage Higher flexibility to customize order; no finished goods inventory costs

Make-to-Order (Figure 4.3)

Customer

Production

Product

Customer order

MTO Performance Measures

Lead time

Orders completed on time (%)

Customer request date

Promise date

Assemble-to-Order (ATO)

Produce parts and subassemblies (modules); complete production when customer places order

Advantage Less finished goods inventory, faster fulfillment of customer order

Disadvantage Work-in-process inventory

Assemble-to-Order (Figure 4.3)

Customer

Production of subassemblies

Product Customer

order

Order assembly

Forecast orders

Holding inventory of subassemblies

MTS and MTO Comparison

Order Penetration Point (Figure 4.4)

DistributionAssemblyFabricationRaw materials

MTO MTO ATO MTS

∇----------∇ ∇ ∇

Process Selection Decisions

Factors affecting process choice ◦ Market conditions

◦ Capital requirements

◦ Availability and cost of labor

◦ Technology options

Produce when?Produce how? Continuous process

Assembly line Batch flow Job shop Project

MTS MTO ATO

Process Characteristics Matrix (Table 4.2)

Product-Process Strategy

Strategy must consider: ◦ Product characteristics

◦ Process capabilities

Product life cycle: ◦ Often begins in Job shop, then Batch flow, then Continuous/Assembly line.

Example: ◦ Bread was first produced by hand in individual units in traditional bakeries. It

is now produced in very large batches in modern automated bakeries.

Product-Process Matrix (Figure 4.5)

Low volume, low standardization

Printing

Heavy equipment

Auto assembly

Sugar refinery

Low volume, multiple products

Higher volume few major products

High volume, high standardization, commodity

Job Shop

Batch

Assembly Line

Continuous NONE

NONE

Unique, one of a kind product

Project Building

Focused Operations Focused factory: Meeting one set of goals.

Plant-within-a-plant (PWP): Separate products/services with differing

goals by production lines/areas within the same facility.

Lack of focus = attempting to meet too many goals at one plant or facility.

Signs of declining focus = product/service proliferation, different volumes,

different levels of standardization.

Example: Midwest Orthopedic Specialty Hospital (Milwaukee, WI) specializes in medical treatments on bones and joints.

Mass Customization

•Strategy to produce products in lot sizes = 1, high volume.

•Flexible manufacturing provides economies of scope.

•Traditional mass production provides economies of scale.

Produce custom products using a high volume process economies of scale = low unit cost economies of scope = high variety

Forms of Mass Customization

Modular production & assemble-to-order (ATO) ◦ e.g., assembling modules for Dell computers

Fast changeover ◦ e.g., zero set-up time at Motorola

Postponement of options ◦ e.g. power supply for Hewlett-Packard printers

3D Printing & Additive Manufacturing

Based on digital design model ◦ Stored in cloud, in not warehouse!

Layer plastic, metal, ceramic to build object ◦ Normal (real) size

◦ Complex shapes and spaces

Uses: medical implants, aerospace, spare parts, etc. ◦ Complements manufacturing for special needs, rather than

replacing production facilities

◦ Can shorten global supply chain; reduce inventory

cookelma/Getty Images; Maruna Skoropadska/123RF

Environmental Concerns

Technologies for pollution prevention.

Technologies for pollution control.

Infrastructure Systems for pollution practices.

Other concerns • Recycling outputs

• Recycled inputs

• Remanufacturing

Cross-Functional Decision Making

Marketing wants fast response to customer demand

Finance provides funds to configure the process

HR finds/creates the properly skilled workers

IT serves various data requirements

Accounting evolves in setting performance measures

Who has a stake in process choice?

Chapter 4 Summary

LO 4.1 Contrast and compare the five types of product-flow processes.

LO 4.2 Describe the differences among order fulfillment processes.

LO 4.3 Explain how companies should make process selection decisions.

LO 4.4 Correctly place examples of products on the product-process matrix.

LO 4.5 Describe the features of focused operations.

LO 4.6 Discuss the uses of mass customization and 3D printing.

LO 4.7 Contrast pollution prevention, pollution control and pollution practices.

Questions for Discussion

•In your own words, describe the advantages of each of the product flows: continuous, assembly line, batch, job shop, and project.

•Let’s say you are starting a new company that manufacturers customized jewelry. What types of process equipment will you search for? What types of workforce skills will you want?

•For your jewelry company, how will you decide between make-to-stock, make- to-order, and assemble-to-order?

•Can you think of examples where you have seen processes that are assemble- to-order?

•On the product-process matrix, why are there no firms in two of the corners?

•Have you purchased any mass customized products? Try to determine how you think they were made.

•What examples have you seen of organizations using pollution prevention, pollution control, or other pollution practices?

Chapter 5:

Service Process Design

McGraw-Hill Education

Chapter 5 Learning Objectives

LO 5.1 Differentiate the characteristics of a service organization from a manufacturing organization.

LO 5. 2 Explain the elements of a service-product bundle.

LO 5.3 Organize a variety of service offerings into the service delivery system matrix.

LO 5.4 Describe the effect on the service delivery system of customer contact.

LO 5.5 Explain service recovery and service guarantees.

LO 5.6 Evaluate the role of technology in service management.

LO 5.7 Appraise how globalization has affected services.

LO 5.7 Define the attributes of the service-profit chain.

The Service Economy

Source: Government Accountability Office, 2019

15 Largest U.S. employers

2010 3 manufacturers

12 services

1960 12 manufacturers

3 services X

The Service Economy

Source: Bureau of Labor Statistics, 2019

Defining Service

Intangibility of the offering

Simultaneous production and consumption

No finished goods inventory

Front office vs. back office

Cannot be stored/resold

Leonard Zhukovsky/123RF

Service-Product Bundle

Service - explicit service ◦ what the provider does for customer

Psychological benefits - implicit service ◦ how customer feels after service

Physical goods - facilitating goods ◦ used during service or received by customer

Pizza delivery

Pizza

Speed/ convenience

Delivery vehicle

Enjoyment

Goods and Services Packages (Figure 5.1)

100% 75% 50% 25% 0% 100%75%50%25%

Self-service groceries

Automobile

Installed carpeting

Fast-food restaurant

Gourmet restaurant

Auto maintenance

Haircut

Consulting services

Goods Services

Service Delivery System

Matrix (Figure 5.2)

Standard with options, using moderately repeatable

sequence.

Customer has some decision-making power.

Co-routed •Stock brokerage

Provider Routed •ATM

Standardized with highly repeatable process

sequence.

Customer has low decision-making power.

Highly customized with unique process sequence.

Customer has great decision-making power.

Customer Routed •Estate planning

Many process pathways.

Jumbled flows,

complex work with

many exceptions.

Moderate number of

process pathways.

Flexible flows with some

dominant paths, moderate work

complexity.Limited number of

process pathways.

Line flows, low

complexity work.

S er

vi ce

D el

iv er

y S

ys te

m D

es ig

Customer Wants and Needs in the Service Package

5-101

Customer Contact Extent of interaction between

service organization and customer.

Lower contact (buffered core)

…

“provider-routed” (standardized)

…

Example online shopping

Higher contact (reactive system)

…

“customer routed” (customized)

…

Example dentist appointment

Customer Contact (see Figure 5.3)

Low customer contact

◦ Higher production efficiency

◦ Lower sales opportunity

◦ Workers with technical skills

◦ Focus on routing methods

◦ Office automation

Balancing sales opportunity and production efficiency

High customer contact

◦ Lower production efficiency

◦ Higher sales opportunity

◦ Workers with diagnostic skills

◦ Focus on client mix

◦ Client/worker teams

Customer-Introduced Variability Arrival

◦ Uncertainty in when customers will arrive to consume a service

Request ◦ Uncertainty in what customers ask for in the service-product bundle

Capability ◦ Uncertainty in the ability of customers to participate in a service

Effort ◦ Uncertainty in the willingness of customers to perform appropriate actions

Subjective preference ◦ Uncertainty in the customer’s intangible preferences in how service is carried

out

Service Failure / Service Recovery

◦ Taking swift and appropriate action to compensate customer

for a failed service.

◦ Fly in customer’s soup  New bowl of soup plus free dessert!

UPS recovered from a service failure by not only delivering the package, but bringing flowers, chocolates, and doggy treats as well!

roberto galan/123RF

Service Guarantee

Benefits to the customer

◦ Promise of service to be delivered

◦ Payout to customer if promise not delivered

◦ FedEx package delivery  On time, or it is free!

Benefits to the organization

◦ Focuses on customer (service promise)

◦ Clearly defines payout

◦ Improves customer loyalty

Technology – Artificial Intelligence

◦ Routine – repetitive tasks Example: conversational phone bots provide customer service

◦ Analytical – problem solving and learning Example: sports data analytics for player recruiting decisions

◦ Intuitive – think creatively Example: helping doctors diagnose patients

◦ Empathetic – respond emotionally Example: bot Pepper welcomes and amuses

Japanese bank customers

Software and hardware programmed to exhibit human intelligence

VTT Studio/Shutterstock

Globalization: Outsourcing & Offshoring Services

Outsourcing: ◦ An outside firm performs service activities such as workforce recruiting,

payroll management, accounting services, and call center functions.

Offshoring: ◦ Export of these service activities to other countries.

Advantages: • Lower costs • Focus on core competencies

Disadvantages: • Coordination costs • Loss of direct control

Service Profit Chain (Figure 5.4)

Internal service quality drives…

Employee satisfaction drives…

Employee retention & productivity drives…

External service value (to customer) drives…

Customer satisfaction drives…

Customer loyalty drives…

Revenue growth & profitability ◦ Feed investment back into internal service quality

Chapter 5 Summary

LO 5.1 Differentiate the characteristics of a service organization from a manufacturing organization.

LO 5. 2 Explain the elements of a service-product bundle.

LO 5.3 Organize a variety of service offerings into the service delivery system matrix.

LO 5.4 Describe the effect on the service delivery system of customer contact.

LO 5.5 Explain service recovery and service guarantees.

LO 5.6 Evaluate the role of technology in service management.

LO 5.7 Appraise how globalization has affected services.

LO 5.7 Define the attributes of the service-profit chain.

Questions for Discussion

•Which service firms do you think are among the largest of all U.S. employers?

•What type of education and training are needed to fill the fastest growing occupations in the U.S.?

•Define the elements in the service-product bundle for your most recent service purchase.

•Can you think of examples of customer-routed, co-routed, and provider- routed services?

•How do firms decide if a service should be delivered in a high contact manner or a low contact manner?

•What was the outcome the last time you experienced a service failure?

•What ideas do you have for using artificial intelligence in the future?

Chapter 6:

Process-Flow Analysis

McGraw-Hill Education

Chapter 6 Learning Objectives LO 6.1 Describe process thinking and system boundaries.

LO 6.2 Explain how the process view of business is cross-functional.

LO 6.3 Construct a process flowchart for a given process.

LO 6.4 Analyze a process by asking a wide variety of questions informed by the process flowchart.

LO 6.5 Calculate process-flow capabilities using analytics.

LO 6.6 Explain the principles of process redesign.

Process Thinking  All work is a process.

 All business functions use processes.

 System: Collection of interrelated elements where…

Whole system > Sum of parts  Apply systems thinking to business.

 Define system boundaries

 Use cross-functional teams for systems analysis.  Include all affected functions

Process View of Business

Order fulfillment

Customer request

M a r k e t i n g O p e r a t i o n s F i n a n c e

C E O

Process Flowcharting Creating a visual diagram to describe (represent) a

transformation process

Also called (or similar to):

◦ Process mapping

◦ Flow-process charting

◦ Service blueprinting

◦ Systems flowchart

Process Flowcharting

Second, find ways to improve current process.

◦ Find repetitive operations

◦ Identify bottlenecks

◦ Describe directions and distances of flows (people, material and information)

◦ Reduce waste

First, visually describe current process.

Often required for certifications such as ISO9000.

Process Flowcharting

1. Select a transformation process to study.

2. Form a team to develop flowchart & for analysis (to improve

the system).

3. Specify the boundaries of transformation process.

4. Identify and sequence the operational steps.

5. Identify the performance metrics for the steps. - e.g., time to complete each step

6. Draw the flowchart, using consistent symbols.

Common Flowcharting Symbols

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Process: operation, activity, or task

Decision: evaluation or “IF-THEN”

Flow: materials, information, customer

Terminator: “START” and “END”

Example: Selecting a Supplier (Figure 6.2)

Service Blueprint

What is the process for selecting and altering a suit at a retail store?

What activities involved each of the following?

1. Customer 2. Sales associate

3. Tailor

Each needs a “swim lane”

Pressmaster/Shutterstock

Symbols for Flow-Process Chart

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Operation: task or work activity

Inspection: checking product quantity or quality

Transportation: movement of material from point to point

Storage: inventory of materials awaiting next operation

Delay: delay in sequence of operations

Example

Picking Operations at Grocery Store

Distribution Center (Figure 6.5)

Questions to Ask in Process-Flow Analysis

Flow: Is it balanced? Where is the bottleneck? Are all steps necessary?

How jumbled is the flow?

Time: How long to produce one unit? Can it be reduced? Is set-up time

excessive? Is waiting time excessive?

Quantity: Theoretical production amount? How easy to change? How

many units actually produced?

Quality: Historical defect rate? Which steps contribute to defects?

Where do errors occur?

Cost: How much to produce one unit? What are cost buckets for one unit?

Can some cost buckets be reduced or eliminated?

Measuring Process Flows

System Capacity = capacity of the most constraining resource

→ The single resource with the least capacity is called the bottleneck

Flow rate = minimum (Supply, Demand, Capacity)

Throughput time = from when processing begins until product or service is completed

Measuring Process Flows

Little’s Law I = T x R

I = average number of things in the system

T = average throughput time

R = average flow rate into the process

◦ Relates number of items in the system (I) to arrival rate (R) and throughput time (T).

◦ Assumes system is in a ‘steady state.’

Little’s Law Example ◦ People are in a line to get through security checks at a music festival.

An average of 10 people per minute are processed. People spend 24 minutes in line, on average.

◦ What is the average number of people in line?

◦ I = T x R

◦ I = 24 x 10 → I = 240 people in line, on average

◦ Same problem, but an average of 4 people per minute are processed, and the average number of people in line is 240.

◦ What is the average time spent in line?

◦ T = I / R

◦ T = 240 / 4 → T = 60 minutes in line, on average

Pizza U.S.A. example (section 6.6)

Activity Minutes Who/What

Take the order 1 Assistant

Make the crust 3 Chef

Prepare and add ingredients

2 Chef

Bake the pizza 24 Oven

Cut pizza and box the order

1 Assistant

Take payment 1 Assistant

Details: Assume all toppings added to every pizza. Two employees working at a time. Oven can bake up to 4 pizzas at a time.

Map the Process

Take order

Make crust

Prep/add ingredie

nts

Bake pizza

Take payme

Cut/bo x pizza

STAR T

END

1 min. 3 min. 2 min.

24 min.

1 min.1 min.

What is the Throughput Time?

Throughput time = time to complete one product or service

Pizza throughput time? 1 + 3 + 2 + 24 + 1 + 1 =

32 min.

What is Process Capacity?

Assistant: 1+1+1=3 min. per pizza, 20 pizzas per hr.

Chef: 3+2=5 min. per pizza, 12 pizzas per hr.

Oven: 24/4=6 min. per pizza, 10 pizzas per hr.Therefore… process capacity (flow rate) = 10 pizzas/hour

3 resource s

What is the Process Bottleneck?

At an average process time of 6 min. per pizza… the OVEN is the slowest activity….. and that determines process capacity…. and is, therefore, the bottleneck.

The process cannot produce more than the slowest activity. (flow rate = 10 pizzas/hr)

Process Redesign  Identify, analyze, improve critical processes. (may cross organizational boundaries)

 Extreme cases: Complete process reconfiguration. (eliminating many steps)

 Business Process Reengineering (BPR)

Check the text for a successful example from Credit Suisse.

Principles of Process Redesign

• Organize around outcomes, not tasks.

• Have the people who do the work process their own information.

Avoid handoffs, whenever possible.

• Put the decision point where work is performed, and build control into the process.

Make decisions at lowest possible level.

• Eliminate unnecessary steps in the process. Simplify, eliminate non-value-added activities.

Chapter 6 Summary

LO 6.1 Describe process thinking and system boundaries.

LO 6.2 Explain how the process view of business is cross-functional.

LO 6.3 Construct a process flowchart for a given process.

LO 6.4 Analyze a process by asking a wide variety of questions informed by the process flowchart.

LO 6.5 Calculate process-flow capabilities using analytics.

LO 6.6 Explain the principles of process redesign.

Questions for Discussion

•Based on your work experience, can you define a “system” in which you have worked?

•Draw a simple process map for a breakfast process such as making coffee or toast.

•What sorts of “decisions” are involved in your breakfast process?

•What is the bottleneck in your breakfast process?

•Have a classmate review your breakfast process map and provide suggestions for improvement!

•If you could redesign one of the processes on campus, which would you choose? What are some of your ideas?

Chapter 7:

Lean Thinking and Lean Systems

McGraw-Hill Education

Chapter 7 Learning Objectives

LO 7.1 Describe the origins and evolution of lean thinking.

LO 7.2 Describe the five tenets of lean thinking and the seven forms of waste in a lean system.

LO 7.3 Explain why a stabilized master schedule is required for smooth flow.

LO 7.4 Explain how setup time, lot size, layout, and maintenance are related to lean thinking.

LO 7.5 Differentiate how employees are unique in lean systems.

LO 7.6 Design a Kanban system to achieve customer pull.

LO 7.7 Compare lean suppliers to traditional manufacturing suppliers.

LO 7.8 Explain how to implement a lean system.

Evolution of Lean Toyota Production System (TPS)

◦ Developed in Japan following WWII (due to limited resources)

◦ Also known as Just-in-Time (JIT) manufacturing

◦ Came to U.S. in 1981 at Kawasaki motorcycle plant in Lincoln, Nebraska

1990s book, “The Machine That Changed the World”

by Womack, Jones & Roos

Popularized a new label:

Lean Production Walter Cicchetti/123RF

Lean Tenets Create product/service value from customer perspective

◦ Reduce waste - muda

Identify, study, improve the value stream ◦ Observe the process - gemba

Ensure simple, smooth, error-free flow ◦ Determine takt time

Produce only what is pulled by customer ◦ Use kanbans

Strive for perfection ◦ Hold kaizen events, 5S, 5 Whys

Create Value: Seven Forms of Waste

Overproduction: Producing more than the demand for customers, resulting in unnecessary inventory, handling, paperwork, and warehouse space.

Waiting time: Operators and machines waiting for parts or work to arrive from suppliers or other operations. Customers waiting in line.

Unnecessary transportation: Double or triple movement of materials due to poor layouts, lack of coordination, and poor workplace organization.

Excess processing: Poor design or inadequate maintenance or processes, requiring additional labor or machine time.

Too much inventory: Excess inventory due to large lot sizes, obsolete items, poor forecasts, or improper production planning.

Unnecessary motion: Wasted movements of people or extra walking to get materials.

Defects: Use of material, labor, and capacity for production of defects, sorting out bad parts, or warranty costs with customers.

Value Stream Mapping  Value stream is all processing steps to complete product/service

 Extension of process flowcharting

 Includes value-adding/non-value-adding activities

 Requires direct observation of process – gemba

 “Is this step or task necessary in creating value for the customer?”

 Change and improve process

Example: Value Stream Mapping

Ensure Flow: Inventory Hides Problems (Figure 7.2)

Poor quality

Unreliable supplier

Machine breakdownInefficient

layout

Bad design

Lengthy setups

W at

Le ve

Water level indicates level of inventory in the system

Lower Inventory Level Exposes Problems

Poor quality

Unreliable supplier

Machine breakdown

Inefficient layout

Bad design

Lengthy setups

W at

Le ve

Water level indicates level of inventory in the system

Water Flows Smoothly... Once Problems Resolved

W at

Le ve

Water level indicates level of inventory in the system

Problems addressed/solved

Customer Pull: Push versus Pull System (Figure 7.3)

 Downstream customer signals need for good or service.

 Signal is sent upstream that production is needed.

 No upstream process is authorized to produce until customer pulls, thus minimizing inventory in the system.

Strive for Perfection: Quality in a Lean System

Defects are waste.

No inventory to cover up mistakes.

System designed to expose errors; correct them at their source (so not repeated in the future).

Continuous improvement of the process.

Quality is essential input into lean system.

5 Whys Technique

Explores cause-and-effect relationships that underlie problems (root causes)

Enables root causes to be identified/resolved

Example: Truck won’t start. ◦ Why? Battery is dead. ◦ Why? Alternator is not functioning. ◦ Why? Alternator belt is broken. ◦ Why? Truck was not maintained as recommended. ◦ Why? Truck is old; no replacement parts available. ◦ Solution? Find source for parts, or purchase new truck.

5S Technique Organize workspace to improve employee morale, safety, efficiency.

Reduces time looking for “things.”

 Seiri to Sort (keep, toss)  Seiton to Straighten or set in order  Seiso to Shine, sweep, or clean  Seiketsu to Standardize  Shitsuke to Sustain (maintain)

Example: 5S Technique

Storage of chemicals in production area

Before • Quantities greater than needed • Difficult to see what is missing • Hard to find anything

After • Appropriately sized quantities • Quickly see what is missing • Easy to find anything

Source: The Lean & Chemicals Toolkit/U.S. Environmental Protection Agency

Creating Flow

 Stabilize master schedule

 Reduce setup times and lot sizes

 Change to cellular layout and preventative maintenance

 Cross-train and engage workers

Stabilize the Master Schedule

 Production horizon set according to demand.

 Production schedule repeated each day.

 Uniform load: level work load across workers/machines.

 Takt time: match supply (production rate) to demand rate .

 Produce planned quantity each day, and no more.

 These concepts are desirable, but not essential, to a lean system.

Reduce Setup Time and Lot Size Reducing setup time…

◦ increases available capacity ◦ increases flexibility to meet schedule changes ◦ reduces inventory

Setup types ◦ Single (single digit minutes) ◦ One-touch (less then 1 min; 2-step process)

◦ Internal (while machine stopped) ◦ External (while machine operating)

Lot size reduction ◦ Goal: single unit production

Cellular Layout (Figure 7.4)

• Inventory kept on shop floor close to where it is used.

• Eliminates wasted transportation moving materials.

• Work centers organized into group technology layout - cellular manufacturing.

• U-shape ensures flow without interruption.

Engaging Workers

Multifunction, cross-trained workers ◦ Flexibility to move to busy work centers

New pay system to reflect skills variety

Workers contribute individually and collaboratively ◦ Perform own maintenance and inspection

◦ Teamwork, problem solving

◦ Suggestion systems

Pull: Kanban System

Signals the need for more parts

Uses simple cards or signals to control production and inventory

Each work center receives production order (signal or card) from succeeding (downstream) work center

Prevents buildup of inventory

Reduces lead time

Same concept applies to receiving deliveries from suppliers (supplier must wait for signal)

Kanban System (Figure 7.5)

Kanban System

Kanban: “marker” (card, sign, empty container)

Visual control system of cards and containers, or other signal.

D = Demand rate (at work center) T = Time for container to complete circuit C = Container size (# units)

Number of containers:

DT n

Kanban Containers - Example

 Demand at work center B is 5 parts per minute and a standard container holds 50 parts.

 It takes 90 minutes for a container to make a complete circuit through work center A and work center B (and back to A), including all setup, run, move, and wait times.

The number of containers needed:

n = 5(90) / 50 = 9 containers

The maximum inventory in the production system, a useful measure of how lean the system is:

Maximum inventory = nC = DT = (9 × 50) = (5 × 90)

Supplier Relationships

 Viewed as the ‘external factory’

 Co-location, frequent deliveries

 Fewer suppliers

 No inspection—high quality is assumed (required)

 Integrated supplier programs  Early supplier selection

 Family-of-parts sourcing

 Long-term strategic relationship

 Reduce paperwork and inspection

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Implementation: Kaizen Event Establish a cross-functional team

Determine what customers value

Construct value stream map Eliminate waste (non-value-adding activities)

Create smooth and error-free flow

Use customer demand to pull work thru process

Implement team ideas

Chapter 7 Summary

LO 7.1 Describe the origins and evolution of lean thinking.

LO 7.2 Describe the five tenets of lean thinking and the seven forms of waste in a lean system.

LO 7.3 Explain why a stabilized master schedule is required for smooth flow.

LO 7.4 Explain how setup time, lot size, layout, and maintenance are related to lean thinking.

LO 7.5 Differentiate how employees are unique in lean systems.

LO 7.6 Design a Kanban system to achieve customer pull.

LO 7.7 Compare lean suppliers to traditional manufacturing suppliers.

LO 7.8 Explain how to implement a lean system.

Questions for Discussion

•Why did lean (Toyota Production System) work so well in Japan after World War II?

•Choose one of the Japanese words from the 5 lean tenets and explain it in your own words.

•Which of the 7 forms of waste can you observe at your favorite restaurants?

•What does it mean to say that “inventory hides problems” in a production system?

•Consider what “setup time” looks like in different industries: hospitals, quick oil change shops, restaurants, garment producing factories.

•Make a mental list of how you would “5S” your own refrigerator. Then, share your ideas with classmates and compare how they approached this task.

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Chapter 8:

Managing Quality

McGraw-Hill Education

Chapter 8 Learning Objectives

LO 8.1 Explain quality, from a customer perspective.

LO 8.2 Characterize product quality based on four dimensions.

LO 8.3 Distinguish service quality from product quality based on its distinct measurement.

LO 8.4 Apply the quality cycle to a product or service.

LO 8.5 Explain how mistake-proofing and the supply chain are integrated with quality management planning.

LO 8.6 Attribute how cost of quality is related to financial performance.

LO 8.7 Recall the two key quality pioneers and their main ideas.

LO 8.8 Compare and contrast ISO 9000 standards and the Baldrige Award criteria.

RESERVED. 8-166

What is Quality Management?

Quality is one of the four key objectives of operations: ◦ cost, quality, delivery, flexibility

Historical development of quality concepts ◦ Inspection (early 1900s)

◦ Statistics quality control (Shewhart - 1940s)

◦ Quality management (1960s)

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Quality is now viewed

as the responsibility of all functions

in the organization.

Comair Flight 5191, Lexington, KY

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“The Comair Flight 5191 crew began the day by powering up the wrong plane. They took off down the wrong runway. The air traffic controller, working alone in violation of FAA policy, had turned his back to do other duties. Investigators are uncovering a series of mistakes before the plane crashed, killing 49 people.”

Source: www.cnn.com, 2006

Quality involves the entire organization and the supply chain.

Definition of Quality

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Meaning: Only the customer can determine quality.

Meaning: The product or service is fit for customer use.

Meeting, or exceeding, customer requirements now and in the future.

Dimensions of Product Quality

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QUALITY

Quality of Design

Determined before the product is produced

Responsibility of cross-functional product design team

Translates customer “wishes” into specifications

Depends on market research, design concept, product specifications

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Quality of Conformance

 Producing a product (or service) that meets specifications

 Even ‘cheap’ products can have high conformance quality

- May not be durable, but conformance quality is achieved if product matches the design.

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The “Abilities”

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• Availability • Continuity of usefulness to customers (operational)

• Reliability • Useful product/service time until failure • Mean time before failure (MTBF)

• Maintainability • Restoration of product/service after failure • Mean time to repair (MTTR)

Uptime Availability

Uptime Downtime 



MTBF Availability

MTBF MTTR 



Availability Example

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• A piece of medical testing equipment is typically used for 3 hours and then requires 1 hour of maintenance. → Calculate the machine’s availability.

• MTBF = 3 hours • MTTR = 1 hour • Availability = 3 / (3 + 1) = .75 • The machine’s average availability is 75%.

Uptime Availability

Uptime Downtime 



MTBF Availability

MTBF MTTR 



Field Service

 Warranty and repair/replacement of the product after it has been sold

 Also called customer service, sales service, or just “service”

 Dimensions ◦ Promptness

◦ Competence

◦ Integrity

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Different Types of Quality (Figure 8.1)

Quality of market research

Quality of concept

Quality of specification

Technology

Employees

Management

Reliability

Maintainability

Logistical support

Promptness

Competence

Integrity

Quality of design

Quality of conformance

Availability

Field service

Customer satisfaction

Fitness for use

Service Quality

• Includes explicit and implicit service characteristics

• Measures are perceptual/subjective

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SERVQUAL is most popular measure • Tangibles → appearance • Dependability → promised service • Responsiveness → prompt, helpful • Assurance → knowledge, courtesy • Empathy → caring, individualized

The Quality Cycle (Figure 8.2)

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MARKETING Interprets customer needs Works with customer to design product

Interpretation of needs

CUSTOMER Quality needs

Needs

OPERATIONS Produces the product or services

QUALITY CONTROL Plans and monitors quality

Product

ENGINEERING Defines design concept Prepares specifications Defines quality characteristics

Specifications

Cross- functional

team

Quality Cycle in Mass Transit System (Figure 8.3)

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County planning Regional planning State transportation agency

Planner Scheduler

Routes Schedules Budgets

Method Facilities Equipment

Evaluation Inspection Audits Surveys Hearings

Public

Operations office

Riders’ needs

Quality Improvement Cycle

 Define quality attributes on the basis of customer needs.

 Decide how to measure each attribute.

 Set quality standards.

 Establish appropriate tests for each standard.

 Find and correct causes of poor quality.

 Continue to make improvements.

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Poka-Yoke (poh-kah yoh-kay)

Developed at Toyota, means ‘mistake proofing’

Design the product or process so that mistakes cannot occur or are immediately detectable

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Examples - In manufacturing, 2 parts are notched to

only fit together one way

- For consumers, snow blower requires that two hand levers be held during operation (so no hands can be in the dangerous moving parts!)

Suppliers Role in Quality

Involve in product design ◦ Prevent design defects; help select materials

Supplier certification ◦ Planning and control system for quality

Manage rolled yield (cumulative defect rate) ◦ 10 parts (1% defects in each)

◦ Rolled yield = (.99)10 = .90

◦ 90% quality yield for final product

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Boeing supplier rating system: Red (Unsatisfactory) Yellow (Improvement needed) Bronze (Satisfactory) Silver (Very Good) Gold (Exceptional)

Cost of Quality

◦ Prevention ◦ Training, data management, planning

◦ Appraisal ◦ Incoming materials inspection, final inspection

◦ Internal failure ◦ Scrap, rework, downtime

◦ External failure ◦ Warranty, returns, complaints

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Control costs

Failure costs

Cost of Quality Trade-offs (Figure 8.5)

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100% defective

100% good

Cost/unit

Prevention & appraisal

costs

Internal & external

failure costs

Quality Pioneer: W. Edwards Deming

14 Management Principles

Do not sacrifice quality for short-term profit

Emphasis on continuous improvement

PDCA Wheel ◦ Plan, Do, Check, Act

http://www.deming.org/

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Quality Pioneer: Joseph Juran

Quality “Trilogy”—planning, control and improvement

Solve “the vital few” quality problems

Stressed quality control methods

“Quality Handbook”

http://www.juran.com

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Juran lived to age 104, shown here with author Roger Schroeder

©Roger Schroeder

ISO 9000 Standards

 Guidelines for designing, manufacturing, selling, and servicing products.

 Selecting ISO 9000 certified suppliers provides some assurance that they follow accepted quality practices.

 Many manufacturers require supplier certification, particularly in Europe.

 www.iso.org

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ISO 14000 Standards Standards covering environmental management systems,

environmental auditing, evaluation of environmental performance, environmental labeling, and life-cycle assessment.

Helps organizations improve their environmental performance through documentation control, operational control, control of records, training, statistical techniques, and corrective and preventive actions.

ISO 26000 – social responsibility

ISO 31000 – risk management

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Baldrige Award  Highest U.S. quality award.

 Promotes quality management practices and improved quality results by U.S. industry.

 Award criteria are the standard for “best quality practices” in U.S.

 Many state and other country awards modeled on award criteria.

www.baldrige.gov

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Source: United States Department of Commerce

Baldrige Criteria Categories

1. Leadership

2. Strategy

3. Customers

4. Measurement, Analysis, and Knowledge Management

5. Workforce

6. Operations

7. Results

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Why Some Quality Improvement Efforts Fail

 Lack of middle and top management leadership attention

 Lack of funds for training and time for improvement activities

 “Blame the employee” rather than the system

 Belief in “trade-offs” (quality vs. cost)

 Management interference with teamwork

 Supplier quality problems

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Chapter 8 Summary

8-192

LO 8.1 Explain quality, from a customer perspective.

LO 8.2 Characterize product quality based on four dimensions.

LO 8.3 Distinguish service quality from product quality based on its distinct measurement.

LO 8.4 Apply the quality cycle to a product or service.

LO 8.5 Explain how mistake-proofing and the supply chain are integrated with quality management planning.

LO 8.6 Attribute how cost of quality is related to financial performance.

LO 8.7 Recall the two key quality pioneers and their main ideas.

LO 8.8 Compare and contrast ISO 9000 standards and the Baldrige Award criteria.

LO 8.9 Articulate some key barriers to successful quality improvement efforts.

Questions for Discussion

193

•Look at a product you are carrying with you today. What design characteristics contribute to its overall quality?

•Why does the customer need to define quality for a product or service?

•Consider your favorite restaurant or coffee shop. What “tangible” observations contribute to your assessment of quality?

•Availability of a system is never 100%! What do you think the availability of wifi on your campus is? Availability of your phone service?

•Can you think of examples of poka yokes? Have you designed some of your own?

•Why don’t companies spend more on prevention of quality problems?

•Look up some Baldrige Award winning organizations. Are you a customer of some of these?

9-1

Chapter 9:

Quality Control and Improvement

McGraw-Hill Education

Chapter 9 Learning Objectives

LO 9.1 Describe the steps in designing a quality control system.

LO 9.2 Design a process control system using control charts.

LO 9.3 Define and calculate process capability.

LO 9.4 Apply continuous improvement concepts using the seven quality tools.

LO 9.5 Explain Six Sigma and the DMAIC process.

LO 9.6 Differentiate lean and Six Sigma.

9-2

Design of Quality Control Systems

Break down production process into sub- processes and identify internal customers.

Identify critical control points where inspection or measurement should take place.

Use operator inspection when possible, placing responsibility for quality on workers.

9-3

Design of Quality Control Systems

 Identify critical points for inspection and testing • Incoming materials and services • During processes • Finished product or service

 Decide on the type of measurement • Variables: continuous scale • Attributes: discrete count, or good/bad

 Decide on amount of inspection to use

 Decide who should do inspection

9-4

Types of Measurement

Variables measurement Product/service characteristic that can be measured on a continuous scale:

Length, size, weight, height, time, velocity, temperature

Examples: dimensions of parts, viscosity of liquids, weight of packaged food, time to load webpage, temperature of coffee when served

9-5

Attributes measurement Product/service characteristic evaluated with a discrete choice:

Good/bad, pass/fail, count of defects

Examples: laptop is defective if it fails any functional tests, bank check is/is not deposited in correct account, inspection of fabric reveals the number of defects per 100 yards

Process Quality Control

Principles of Process Control: ◦ Every process has random variation.

◦ Production processes are not usually in a state of control.

“State of Statistical Control” - What does it mean? ◦ Unnecessary variation has been eliminated.

◦ Remaining variation is due to random causes.

9-6

Process Quality Control

Assignable (special) cause variation ◦ Can be identified and corrected.

◦ Could be due to machine, worker, materials, etc.

Common (random) cause variation ◦ Reasonable, acceptable variation.

◦ Within 3 standard deviations ( 3) of mean.

◦ Cannot be changed unless process is redesigned.

9-7

Quality Control Chart

Time →

9-9

Normal Distribution on Control Chart

UCL

Mean

LCL

Samples:

Assignable causes likely

1 2 3

Attribute Control (3)

9-10

Calculate center line = mean proportion defective across many samples

Calculate upper and lower control limits

9-10

p-chart

(1 ) 3

p p p

 

Variables Control (3)

9-11

Calculate center line = mean of sample means

Calculate upper and lower control limits

Calculate center line = mean of sample ranges

Calculate upper and lower control limits

9-11

x-chart

R-chart

RDLCL 3

RDUCL 4

RAx 2

Quality Control Chart Example (Figure 9.2)

Using Quality Control Charts

 If an observation (data point) is outside  3 and/or a pattern is detected, the process is NOT in control.

 Very likely something is wrong.

 An assignable cause of variation may exist.

 This is a signal to take action to eliminate the assignable cause: ◦ Find it, understand its cause, fix it so it does not occur again!

9-13

Using Quality Control Charts

How large should sample be? ◦ Large enough to detect defects

◦ Variables can use smaller sample sizes

How frequently to sample? ◦ Depends on cost, production rate

Process control vs. Process capability ◦ Is the process capable of producing to specification?

◦ Are the specifications appropriate?

9-14

Process Capability Index (Figure 9.3)

9-15

F re

qu en

Process measure

Computation of Cpk (Figure 9.4)

9-16

F re

qu en

Process measure Process measure

Continuous Improvement

 When process is not meeting customer specifications.

 Work on processes with strategic importance and low process capability first!

 Use the seven tools of quality control.

9-17

Seven Tools of Quality Control

9-18

Seven Tools of Quality Control

A battery manufacturer in NW Ohio, using only the seven tools of quality, decreased defectives from 7.2 per 100 to 2.6 per 100 in just 6 weeks!

9-19

Pareto Analysis (Table 9.4)

9-20

Note: 40% (2) of the sources cause 78.6% of the defects.

Pareto Diagram (Figure 9.6)

9-21

Cause-and-Effect (fishbone, Ishikawa) Diagram (Figure 9.7)

9-22

L o o s e c o n n e c t i o n s

W o r k e r s

M a t e r i a l c o n n e c t o r s

I n s p e c t i o n T o o l s

C o n t e n t N u t s

K n o w l e d g e F a t i g u e

T r a i n i n g

H o s e

S i z e

S u r f a c e d e f e c t

S i z eS m a l l

L a r g e

J u d g m e n t

M e a s u r e m e n t M e a s u r i n g

t o o l s E r r o r s

I n s p e c t o r

E x p e r i e n c e

T r a i n i n g

W e a r

A d j u s t m e n t

T o r q u e

A i r p r e s s u r e

Six Sigma Quality

 Philosophy of 3.4 defects per million.

 Uses project/team approach.

 Strategic process is selected for improvement.

 Cross-functional team is formed.

 ‘Black belt’ leader is chosen.

 Team uses DMAIC method (and quality tools) to find root causes and improve processes.

9-23

Six Sigma Process

Process Improvement steps (DMAIC):

1. Define - select process

2. Measure - measure relevant variables

3. Analyze - determine root causes and alternatives

4. Improve - change process

5. Control - ensure improvements not lost over time

9-24

Lean and Six Sigma Complementary approaches to improvement

◦ Lean seeks to eliminate waste (non-value-added) ◦ Six Sigma seeks to eliminate defects

◦ Lean uses part-time leaders and all employees ◦ Six Sigma uses full-time leaders and selected employees

◦ Lean requires limited training ◦ Six Sigma requires extensive training and experts

◦ Lean focuses on simpler projects ◦ Six Sigma takes on complex projects

◦ Lean projects may last a week or less ◦ Six Sigma projects may last for months

9-25

Chapter 9 Summary

9-26

LO 9.1 Describe the steps in designing a quality control system.

LO 9.2 Design a process control system using control charts.

LO 9.3 Define and calculate process capability.

LO 9.4 Apply continuous improvement concepts using the seven quality tools.

LO 9.5 Explain Six Sigma and the DMAIC process.

LO 9.6 Differentiate lean and Six Sigma.

Questions for Discussion

•In your own words, what is quality control?

•Why is quality control needed in manufacturing? In services?

•How do you decide which type of control chart may be useful for a particularly situation?

•Look at the seven quality tools. Brainstorm various situations in which each of the tools could be useful.

•Why is Six Sigma called “Six Sigma”?

•How are lean and Six Sigma the same, and how are they different?

10-28

Chapter 10:

Forecasting

McGraw-Hill Education

Chapter 10 Learning Objectives

LO 10.1 Describe why forecasting is important.

LO 10.2 Describe the four common methods of qualitative forecasting.

LO 10.3 Use forecast analytics to calculate a moving average and exponential smoothed average.

LO 10.4 Evaluate forecast accuracy using a variety of methods.

LO 10.5 Carry out forecast analytics for a causal model.

LO 10.6 Evaluate factors that impact forecasting method selection.

LO 10.7 Describe how big data analytics are used to forecast.

LO 10.8 Explain the benefits and costs of CPFR.

LO 10.9 Solve advanced forecasting problems (chapter supplement).

Forecasting for Decision Making

Forecasting demand for operations output ◦ Forecasting: what we think demand will be

◦ Planning: what we think demand should be

◦ Demand: may differ from sales

Forecasts are used in all functional areas: ◦ marketing, finance, human resources, etc.

Forecasts are necessary for operations decision areas: ◦ process design, capacity planning, inventory management, scheduling

Use of Forecasting: Marketing, Finance/Accounting, & HR

Use of Forecasting: Operations Decisions

Qualitative Forecasting Methods

Major methods: ◦ Delphi technique

◦ Market surveys

◦ Life-cycles analogy

◦ Informed judgment

Based on managerial judgment when there is a lack of data available.

Time-Series Analytics

Demand can be decomposed into:

◦ Level - average

◦ Trend - general direction (increasing/decreasing)

◦ Seasonality - short term recurring cycles

◦ Cycle - long term business cycle

◦ Error - random or irregular component

Time-Series Analytics

Components of demand data: ◦ Level

◦ Trend

◦ Seasonality

◦ Cycle

◦ Error

Snow boarding is an industry that exhibits several demand patterns. It is primarily a seasonal industry, and over many years the industry has experienced a growth trend. Random factors like snowfall cause abrupt variations in demand.

Adie Bush/Getty Images

Analytics: Moving Average

Assumes no trend, seasonality, or cycle

Simple moving average:

Weighted moving average:

DDD A Nttt

t 11 ......  



tt AF 1

11211 ......   NtNtttt DWDWDWAF

Moving Average - Example

Period Actual Demand Forecast

1 10

2 18

3 29

4 - 19

 Compute three period moving average for Period 4 (number of periods is forecaster’s decision)

F4 = A3 = (29 + 18 + 10) / 3 = 19

F5 = (actual demand for period 4 + 29 + 18) / 3

Time-Series Data (Figure 10.2)

Note: The forecast is smoother as the number of periods in the moving average increases.

Analytics: Exponential Smoothing

The new average is computed from the old average:

The value of the smoothing constant () is a choice. It determines the extent to which the new forecast weights recent demand (smooths random variation).

Αlpha (α) ranges between 0 and 1, and is usually 0.1 - 0.2.

  11  ttt ADA 

Simple Exponential Smoothing

Forecast:

F = forecast of demand

D = actual demand

t = time period

Assumes no trend, seasonality, or cycle

Note: we are adjusting Ft to get Ft+1

 tttt FDFF  1

Exponential Smoothing - Example

Sept. forecast was 15, but Sept. actual sales were 13.

Use alpha (α) of 0.2.

What is the October forecast?

October forecast = Sept. forecast + α(Sept. actual – Sept. forecast)

= 15 + 0.2(13 - 15)

= 15 - 0.4 = 14.6

Time-Series Data (Figure 10.3)

Note: The forecast is smoother as the value of alpha (α) is reduced.

Forecast Accuracy

Firms should estimate forecast accuracy:

 To monitor erratic demand observations or “outliers”

 To determine when the forecasting method is no longer tracking actual demand

 To determine the parameter values that provide the forecast with the least error

Forecast Accuracy Measures

Cumulative sum of forecast errors

Mean square error

Mean absolute deviation

Mean absolute percentage errors

Tracking signal

Advanced Time-Series Forecasting

Adaptive exponential smoothing ◦ Smoothing coefficient () is varied

Mathematical models ◦ Linear or nonlinear

Box-Jenkins method ◦ Requires about 60 periods of past data

Causal Forecasting Analytics

Examples: ◦ Use population and location

characteristics to forecast restaurant sales.

◦ Use supply chain data on inventory levels to forecast sales of new generation products such as cell phones.

◦ Use day of week and attendance of entertainment event at same venue to forecast expected guests at casino.

Cause-and-effect model, using a data set of other variables to predict demand (forecast).

Steve Allen/Brand X Pictures/Jupiterimages

Causal Forecasting Model

The general regression model:

Other forms of causal model: ◦ Econometric

◦ Input-output

◦ Simulation models

Causal Model - Example

Yt = a + b(It)

F7 = 38.23 + 2.397(37.6) = 128.34 = forecast for Period 7

Dt = actual sales in year t

Ft = forecasted sales

It = median family income (000’s)

Selecting a Forecasting Method

Use or decision characteristics ◦ Scheduling decision? Facility expansion? ◦ Short range? Long range?

Data availability ◦ Quantity and quality

Data pattern ◦ Level? Unstable?

Big Data Analytics

Resources needed:

Data • Either firm’s own or

acquire from elsewhere

• Quantitative (e.g. past demand) or qualitative (e.g. call center recordings)

Expertise • Data scientists • Statisticians • Analysists • Technical skills

needed but also understanding of industry and key challenges

Tools • Hardware • Software • Data storage • Tools for analysis

Big Data Analytics

Walmart collects data on more than one million customer transactions every hour.

Collaborative Planning, Forecasting, and Replenishment (CPFR)

 Aim is to achieve more accurate forecasts

 Share information across supply chain with customers and suppliers

 Compare forecasts  If discrepancy observed, look for reason

 Reach a consensus forecast

 Works best in B2B with few customers (e.g., a manufacturer supplying a small number of large retailers)

Chapter 10 Summary

LO 10.1 Describe why forecasting is important.

LO 10.2 Describe the four common methods of qualitative forecasting.

LO 10.3 Use forecast analytics to calculate a moving average and exponential smoothed average.

LO 10.4 Evaluate forecast accuracy using a variety of methods.

LO 10.5 Carry out forecast analytics for a causal model.

LO 10.6 Evaluate factors that impact forecasting method selection.

LO 10.7 Describe how big data analytics are used to forecast.

LO 10.8 Explain the benefits and costs of CPFR.

LO 10.9 Solve advanced forecasting problems (chapter supplement).

Questions for Discussion

•Think of examples of products and services for which demand may be fairly easy to forecast, and that may be quite difficult to forecast.

•Why are all firm functional areas – finance, accounting, HR, marketing, IT – involved in forecasting?

•How do qualitative forecasting methods translate “information” into quantities?

•When should a firm use a weighted moving average forecast, rather than the simple moving average?

•What opportunities do big data and analytics create for firms?

•Define “analysis paralysis” for forecasting. How does this happen? What can management do about it?

11-55

Chapter 11:

Capacity Planning

McGraw-Hill Education

Chapter 11 Learning Objectives

LO 11.1 Define capacity and utilization.

LO 11.2 Illustrate with an example a facilities strategy that considers: amount, size, timing, location and type.

LO 11.3 Explain how S&OP is done.

LO 11.4 Identify the demand and supply options that are available for S&OP.

LO 11.5 Contrast and compare the chase and level strategies.

LO 11.6 Define the various costs associated with aggregate planning.

LO 11.7 Create an alternative strategy for the Hefty Beer Company example.

11-56

Hierarchy of Capacity Decisions

11-57

Facilities decisions

Aggregate planning

Scheduling

0 6 12 18 24 Months

Planning Horizon

Scheduling

Facilities decisions

Aggregate planning

Definition of Capacity

11-58

Theoretical capacity • Labor availability and overtime

• Physical assets, delayed maintenance, etc.

• Can be used for short-term demand spikes

Effective capacity • Used for planning

• Subtracts maintenance downtime, shift breaks,

absenteeism, etc.

Maximum output that can be produced over a given period of time.

sattapapan tratong/123RF

Capacity Utilization

Actual output

Capacity

11-59

x 100%Utilization =

→ Utilization is seldom 100%. → Estimates capacity usage and ‘busyness.’

A production facility that builds 1000 cars during the time it can actually produce 1200 cars has utilization = 1000/1200 = 83%

A doctor who is busy working for 6 hours during an 8 hour shift has utilization = 6/8 = 75%

Facilities Decisions

• How much capacity is needed?

• How large should each facility be?

• When is the capacity needed?

• Where should the facilities be located?

• What type of facilities/capacity are needed?

11-60

Facilities Strategy

How much? Amount of capacity ◦ Size of capacity cushion

How large? Size of facilities ◦ Economies/diseconomies of scale

When? Timing of facility decisions ◦ Preemptive, wait-and-see

Where? Location of facilities ◦ Variety of factors to consider

What type? Types of facilities ◦ Product-focused, market-focused, process-focused, general-purpose

11-61

Factors Affecting Facilities Strategy

 Predicted demand

 Cost of facilities

 Likely behavior of competitors

 Business strategy

 Global considerations

11-62

How Much? Strategies for Capacity Cushion

Capacity cushion = 100% – utilization

Three strategies:

◦ Large cushion

◦ e.g., make-to-order

◦ Moderate cushion

◦ cost of running out balanced with cost of excess capacity

◦ Small cushion

◦ e.g., make-to-stock

11-63

How Large? Selecting Facility Size

Economies of scale ◦ Production costs are not linear

◦ Overhead costs spread over more units

Diseconomies of scale ◦ Increased transportation costs

◦ Cost of more bureaucracy

◦ Increased organizational complexity

11-64

When? Timing of Facility Additions

Preemptive Strategy ◦ Build capacity ahead of need

◦ Positive capacity cushion

Wait-and-see Strategy ◦ Small or negative capacity cushion

◦ Lower-risk strategy

11-65

Where? Facility Location

Quantitative Factors ◦ ROI, NPV

◦ Transportation, Taxes

◦ Lead times

Qualitative Factors ◦ Language, norms

◦ Worker and customer attitudes

◦ Proximity to customers, suppliers, competitors

11-66

This Bacardi Rum factory supplies the entire North American market from a single distillery in Puerto Rico.

Irina Moskalev/123RF

What Type? Types of Facilities

Product-focused (55%) ◦ One family of products/services (e.g., laptops, credit card processing)

Market-focused (30%) ◦ Located near sales (e.g., electricity, bakeries)

Process-focused (10%) ◦ Few technologies (e.g., computer chips, MRI center)

General purpose (5%) ◦ Several products/services (e.g., furniture, banking)

11-67

Sales & Operations Planning (S&OP)

 Matching supply & demand over a medium time range.

 Time horizon of about 12 months.

 Aggregated demand for one or few categories of product. Demand may fluctuate or be uncertain.

 Possible to change both supply and demand.

 Variety of management objectives.

 Facilities are fixed (cannot be expanded or reduced) during this planning timeframe.

11-68

Cross-Functional Nature of S&OP

Budgeting: closely tied to aggregate plan

HR: workforce availability

Operations: capacity/inventory planning

Accounting: cost analysis

Finance: capital investments

Marketing: sales plan

11-69

See Operations Leader box (in text) for how Hostess uses S&OP.

bhofack2/Getty Images

Cross-Functional Nature of S&OP (Figure 11.3)

Demand Management

Pricing

Advertising and promotion

Backlogs or reservations (shift demand)

Development of complementary offerings

◦ Seasonal products/service spread demand

◦ Lawn mower, snowblower

◦ Ski resort, mountain biking

11-71

Influence demand through:

Supply Management

Hiring and layoff of employees

Using overtime and undertime

Using part-time or temporary labor

Carrying inventory

Outsourcing/subcontracting

Cooperative arrangements

◦ Share capacity during demand peaks, e.g., airlines, hotels, utilities

11-72

Influence (control) supply through:

Aggregate Planning Strategies

Level Strategy ◦ Constant workforce size

◦ Inventory as buffer

Chase Strategy ◦ Vary workforce size

◦ Produce to meet demand

◦ Typical for services

11-73

Travelers (insurance) uses a level strategy but meets peak demand during disasters (see Operations Leader box in text).

FotoKina/Shutterstock

Aggregate Planning Costs Hiring and firing costs (Chase Strategy)

Overtime and undertime costs (Chase)

Subcontracting costs (Chase)

Part-time labor costs (Chase)

Inventory-carrying costs (Level Strategy)

Cost of stockout or back order (Level)

11-74

Aggregate Planning Costs: Level Workforce

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Total

Resources

Regular workers 45 45 45 45 45 45 45 45 45 45 45 45

Overtime (%) 0 0 0 0 0 0 0 0 0 0 0 0

Units Produced 450 450 450 450 450 450 450 450 450 450 450 450 5400

Sales Forecast 300 300 350 400 450 500 650 600 475 475 450 450 5400

Inventory (end of month) 200 350 450 500 500 450 250 100 75 50 50 50

Costs

Regular time $180 180 180 180 180 180 180 180 180 180 180 180 $2,160

Overtime 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Hire/Layoff 25 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 25

Inventory carrying 24 42 54 60 60 54 30 12 9 6 6 6 363

Total Cost $229 222 234 240 240 234 210 192 189 186 186 186 $2,548

Aggregate Planning - Level Strategy

Aggregate Planning - Chase StrategyAggregate Planning Costs

Chase Demand Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Total

Resources

Regular wrkers 30 30 35 40 45 50 65 60 48 47 45 45

Overtime (%) 0 0 0 0 0 0 0 0 0 0 0 0

Units produced 300 300 350 400 450 500 650 600 480 470 450 450 5400

Sales Forecast 300 300 350 400 450 500 650 600 475 475 450 450 5400

Inventory (end of month) 50 50 50 50 50 50 50 50 55 50 50 50

Costs

Regular time $120 120 140 160 180 200 260 240 192 188 180 180 $2,160

Overtime 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Hire/Layoff 40.0 0.0 25.0 25.0 25.0 25.0 75.0 20.0 48.0 4.0 8.0 0.0 295

Inventory carrying 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.6 6.0 6.0 6.0 72.60

Total Cost $166 126 171 191 211 231 341 266 246 198 194 186 $2,527.60

Chapter 11 Summary

11-77

LO 11.1 Define capacity and utilization.

LO 11.2 Illustrate with an example a facilities strategy that considers: amount, size, timing, location and type.

LO 11.3 Explain how S&OP is done.

LO 11.4 Identify the demand and supply options that are available for S&OP.

LO 11.5 Contrast and compare the chase and level strategies.

LO 11.6 Define the various costs associated with aggregate planning.

LO 11.7 Create an alternative strategy for the Hefty Beer Company example.

Questions for Discussion

•Think of examples of how capacity might be measured in a variety of industries.

•Consider how the hierarchy of capacity decisions may be made at your current school. What is likely included in long, medium, and short term decisions?

•Describe instances when you saw a very high utilization rate and a very low utilization rate. What is driving these?

•How is S&OP related to each business function?

•How would demand and supply management concepts be applied in service industries such as a dental clinic, movie theater, accounting firm?

•Read the Operations Leader box on Travelers (insurance). How do they use a level strategy when they face peak demand during a disaster?

12-79

Chapter 12:

Scheduling Operations

McGraw-Hill Education

Chapter 12 Learning Objectives

LO 12.1 Describe the concept of batch scheduling.

LO 12.2 Construct a Gantt chart.

LO 12.3 Create work schedules using forward and backward scheduling.

LO 12.4 Explain the implications of the theory of constraints for scheduling.

LO 12.5 Compare various dispatching rules.

LO 12.6 Describe the important factors to consider when designing a scheduling system.

12-80

Scheduling Operations

Most detailed and most constrained decisions in capacity planning hierarchy

Results in a time-phased plan (by hour, week)

Allocation of resources (workers, machines) to tasks

Trade-offs (conflicting objectives) ◦ High efficiency

◦ Low inventories

◦ Good customer service

12-81

Batch Scheduling

Network of queues, as job moves from work station to work station job = manufacturing parts, customer, paperwork

work station = machine, room, facility, worker

Customers or jobs spend most of their time at work stations waiting to be processed

Typical for actual work to be 5-20% of total throughput time

12-82

Batch Scheduling

12-83

WS 1 WS 2wait move

queue

move

move waitqueue

move

move move

WS = work station “move” = movement of work: parts, customers, paperwork, etc.

move  queue  process  wait  move…

Challenges of Batch/Job Shop Scheduling

 Variety of jobs processed

 Different routing and processing requirements of each job

 Number of different job orders in the facility at any one time

 Competition for common (constrained) resources

12-84

Gantt Charting Scheduling multiple jobs thru a set of work centers, minimizing completion time

Machine performance measures: ◦ Makespan = total time to complete a set of jobs

◦ Machine utilization = percent of makespan time machine (or person) is used.

Used to monitor progress of jobs

Optimal schedule can be computationally intensive for multiple jobs/multiple machines

12-85

Job Data for Scheduling - Example

12-86

12-87

Scheduling Example

Process A Process C Job 1 A

Process B

In what sequence should the jobs be done?

Job 4Job 2Job 5

Job 3

Gantt Chart for Example

12-88

Shop Performance Measures

•Machine Efficiency: Makespan or machine utilization

•Customer: Delivery times of the jobs (minimizing job waiting time is complementary measure)

Change the job sequence from 1, 4, 5, 2, 3 to improve efficiency and/or delivery times to the customer.

Machine(s) could be added to improve both efficiency and delivery times.

12-89

Conclusions about Batch Scheduling

 Performance is highly sequence dependent.

 Waiting time depends upon job interference in the schedule and available capacity.

 Finding optimal schedules is challenging, but good heuristics are available.

12-90

Finite Capacity Scheduling Scheduling jobs onto work stations, but not

exceeding the capacity of any given resource.

Used to identify bottlenecks.

Forward scheduling ◦ To determine completion date for all orders.

Backward scheduling ◦ Work backward from due date to determine start dates for orders.

12-91

Theory of Constraints (TOC) Proposed by Goldratt in book, The Goal (1983).

Goal is to make money from operations.

Production does not have value until it is sold!

Key elements:

Throughput = sales minus cost of raw materials

Inventory = raw materials value

Operating expenses = cost of labor and overhead

12-92

Theory of Constraints (TOC) Constraint is anything slowing down production … a bottleneck.

◦ Machine or workstation

◦ Market

◦ Procurement system

The bottleneck determines the capacity of the system.

Implication: Operations manager should focus on bottleneck to increase capacity and throughput (and make more money).

12-93

Theory of Constraints (TOC)

Principles observed in organizations:

∙ Companies, departments, and teams have unbalanced capacities. Annual budgets attempt to provide resources to balance capacities, but rarely succeed.

∙ There is always a constraint in the system somewhere in the plant, human resources, purchasing, or sales that prevents the company from making more money.

∙ One hour of capacity lost at the constraint (bottleneck) is an hour lost to the whole organization and can never be recovered.

∙ An hour gained at a nonconstraint does not add to the output or profit of the organization.

∙ Constraints must be managed differently than nonconstraints.

Theory of Constraints (TOC)

In summary, there are four steps to eliminate constraints:

1. Identify the system constraint that prevents the company from making more money.

2. Decide how to reduce the system’s constraint, so it is no longer a constraint.

3. Subordinate everything else (other tasks, work centers, sales, purchasing or other departments) to reducing the constraint.

4. Once the constraint is eliminated, find the next constraint and start over.

12-95

Priority Dispatching Rules Which job should be processed next?

◦ Rule for selecting the next job from the queue

Common in services: ◦ First come, first served ◦ Priority rule (first-class customers first) ◦ Preemptive rule (most severe patient treated next)

Common in manufacturing: ◦ Critical ratio = remaining time until due date

remaining processing time ◦ Shortest processing time (quickest job)

12-96

Planning and Control Systems

What delivery date should be promised?

Where is the bottleneck?

When should each activity or task be started?

How is on-time job completion ensured?

Sometimes referred to as: ◦ Advanced Planning & Scheduling (APS)

12-97

Chapter 12 Summary

12-98

LO 12.1 Describe the concept of batch scheduling.

LO 12.2 Construct a Gantt chart.

LO 12.3 Create work schedules using forward and backward scheduling.

LO 12.4 Explain the implications of the theory of constraints for scheduling.

LO 12.5 Compare various dispatching rules.

LO 12.6 Describe the important factors to consider when designing a scheduling system.

Questions for Discussion

•Read the Operations Leader box on setting the schedule for a soccer team. What other constraints, beyond those listed, do you think may be important for scheduling a soccer team?

•Make a Gantt Chart for the assignments, projects, and exams that you need to complete in this course.

•Challenge! Make a Gantt Chart for your personal workload in all of your current courses.

•Describe the Theory of Constraints in your own words.

•Consider why bottlenecks are such a problem in both manufacturing and service operations. What happens at the bottleneck?

13-100

Chapter 13:

Project Planning and Scheduling

McGraw-Hill Education

Chapter 13 Learning Objectives

LO 13.1 Explain the nature of tradeoffs among the three objectives of project management.

LO 13.2 Describe the four activities included in project management.

LO 13.3 Distinguish the advantages and disadvantages of a network over a Gantt chart for project scheduling.

LO 13.4 Calculate the ES, EF, LS, LF for an example network.

LO 13.5 Explain the significance of the critical path and slack.

LO 13.6 Calculate the cost of crashing a network by one or two days.

LO 13.7 Contrast and compare the use of constant-time and CPM networks.

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What is a Project? “A temporary endeavor undertaken to create a unique product/service/result.” - Project Mgmt Institute (PMI)

Unique item or event; often a single unit.

Begins and ends; not ongoing activity.

Work often done on-site.

Resources (materials, labor) are brought to the project.

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Examples of Projects •Building construction

•New product introduction

•Research & Development

•Computer system design

•Installation of equipment

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•Start-up or shutdown of a plant

•Manufacture of aircraft, ships, and large machines

•Auditing accounts

•Planning a military invasion

NASA mission

Fund-raising campaign

Movie making

Teaching a course

Designing an advertising campaign

Planning for a large fund-raising gala is managed as a project.

HIZIR KAYA/123RF

Objectives and Tradeoffs

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Meet performance

outcomes

Stay on schedule

Stay on budget

Project Management Activities & Decisions

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Planning

Scheduling

Closing

C ontrol

Planning Activities & Decisions

Identify the project customer

Establish the end product/service

Set project objectives

Estimate total resources and time required

Decide on the form of project organization

Make key personnel appointments

Define major tasks required

Establish a budget

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Scheduling Activities & Decisions

Develop a detailed work-breakdown structure

Estimated time required for each task

Sequence tasks in proper order

Develop a start/stop time for each task

Develop detailed budget for each task

Assign tasks to people, subcontractors, etc.

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Example: Work Breakdown Structure (Figure 13.1)

108

Control Activities and Decisions Monitor actual time, cost, and performance

Compare planned to actual figures

Determine whether corrective action is needed

Evaluate alternative corrective actions

Take appropriate corrective actions

13-109

Closing Activities and Decisions

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 Finish all work

 Close contracts

 Pay all accounts payable

 Turn the project over to the owners

 Reassign personnel and equipment

PMI - Body of Knowledge Integration Management

Scope Management

Schedule Management

Cost Management

Quality Management

Resource Management

Communications Management

Risk Management

Procurement Management

RESERVED. 13-111

Project Management Institute topics to understand for

certification as a Project Manager.

Scheduling Methods

Gantt Chart ◦ Bar charts

◦ Does not show interdependencies of activities

◦ Visual & easy to understand

Network Method ◦ Graphs or networks

◦ Shows precedence relations

◦ More complex, difficult to understand, and costly than Gantt charts

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Gantt Chart Project Example (Figure 13.2)

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Constant-Time Networks

Activity times assumed to be constant

Activities represented by nodes

Arrows show precedence relationships

Notation used to calculate start and finish times: ◦ ES(a) = early start of activity A (constrained by predecessors)

◦ EF(a) = early finish of activity A (constrained by early start time)

◦ LS(a) = late start of activity A (constrained by late finish time)

◦ LF(a) = late finish of activity A (without delaying successors)

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Example: Write a Business Report (Table 13.4)

Activity Description Immediate

Predecessors Duration in Days

A Decide topic & scope None 1

B Collect data A 2

C Search the Internet A 3

D Write the report B and C 5

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Network Diagram: Write a Business Plan (Figure 13.3)

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Forward Pass: Write a Business Plan (Figure 13.4)

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Calculating ES, EF, LS, LF, Completion Time

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ES (a) = 0 for the starting activities

EF (a) = ES(a) + t(a)*

ES (a) = Max [EF(all predecessors of a)]

Project completion time = Max [EF(all ending activities)]

* t(a) denotes the duration of activity a

LF (a) = Min [LS(all successors of a)]

LS (a) = LF(a) - t(a)*

Forward Pass:

Backward pass:

Forward and Backward Pass: Write a Business Plan (Figure 13.5)

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Critical Path

Critical Path = longest path in the network

◦ All activities for which ES=LS and EF=LF

◦ Duration of critical path is equal to the project completion time

◦ Any delay on critical path delays the project

(unless ‘corrective actions’ are taken)

◦ Critical path in example (on previous slide) is A-C-D

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Slack

•Slack time = time a path may be delayed without delaying the project

•Paths not on the critical path have slack.

•Slack = LS - ES = LF - EF

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Precedence and Times for Opening a New Office (Table 13.5)

Activity Description Immediate Predecessors

Activity Time

Computed Slack

1 Lease the site None 1 0

2 Hire the workers 1 5 0

3 Arrange for furnishings 1 1 1

4 Install furnishings 3 2 1

5 Arrange for phones 1 1 3

6 Install the phones 4, 5 1 1

7 Move into the office 2, 6, 4 2 0

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Network: Open a New Office (Figure 13.6)

1 1

2 5

4 2

3 1

ES EF

LS LF

7 26

1 5 1

1 6

0 1

1 2

4 5

1 2

2 3

6 8

3 5

4 5

5 6

2 4

Critical Path Method

Critical Path Method (CPM)

Developed to start-up/shutdown plants.

Activity times can be compressed by spending more $.

Requires single time estimate for each activity.

Looks at time/cost trade-offs: ◦ Normal activity time

◦ Normal cost

◦ Crash time

◦ Crash cost

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Time-Cost Relationship in CPM (Figure 13.8)

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Crash cost

C o

Normal cost

Crash time

Normal time

Time

Use of Project Management Concepts

Scheduling is only part of a complete approach to project management.

Trade-off between sophistication and cost of methods.

Choice between constant-time, CPM or more advanced techniques.

Choice of project management software packages.

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Example: Carlsbad Desalination Plant

127

This plant provides fresh water to the San Diego County Water Authority. The project cost $1 billion for the plant, pipelines, and upgrades to existing facilities.

A variety of project management tools were necessary to manage the long and detailed construction schedule – 2500 workers contributed 1.5 million hours.

For additional details on this project, see the Operations Leader box in the textbook.

Reed Kaestner/Getty Images

Chapter 13 Summary

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LO 13.1 Explain the nature of tradeoffs among the three objectives of project management.

LO 13.2 Describe the four activities included in project management.

LO 13.3 Distinguish the advantages and disadvantages of a network over a Gantt chart for project scheduling.

LO 13.4 Calculate the ES, EF, LS, LF for an example network.

LO 13.5 Explain the significance of the critical path and slack.

LO 13.6 Calculate the cost of crashing a network by one or two days.

LO 13.7 Contrast and compare the use of constant-time and CPM networks.

Questions for Discussion

129

•How is taking a class similar to managing a project?

•Review the example of work breakdown structure for a banquet. Define the categories for a project such as making a movie.

•What are the tradeoffs between the budget and schedule for a project?

•In the Project Mgmt Institute Body of Knowledge, the newest category is stakeholder management. Who are the stakeholders?

•In your own words, explain the difference between early and late start times. Same for early and late finish times.

•Why is the critical path important? Why is slack important?

14-130

Chapter 14:

Independent Demand Inventory

McGraw-Hill Education

Chapter 14 Learning Objectives

LO 14.1 Define inventory types and the purpose of inventory.

LO 14.2 Explain the costs incurred by inventory.

LO 14.3 Differentiate between independent and dependent demand.

LO 14.4 Calculate the economic order quantity and identify the underlying assumptions.

LO 14.5 Compute the parameters for a continuous review and periodic review inventory control system.

LO 14.6 Explain how continuous and periodic review systems are used in practice.

LO 14.7 Describe how inventory and service level are related.

LO 14.8 Define vendor managed inventory (VMI) and the ABC system.

14-131

Definitions

Types of inventory ◦ Raw materials, purchased parts (RM)

◦ Work in process (WIP)

◦ Finished goods (FG)

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Inventory A stock of materials used to facilitate production or satisfy customer demands.

Inventory Management Technologies

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 Bar coding  Point of sale (POS) data

 Radio-frequency identification (RFID)

Target is an Operations Leader in using technology and point-of-sale (POS) data for inventory management.

artzenter/Shutterstock

Materials-Flow Process (Figure 14.1)

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Water Tank Analogy for Inventory

Supply Rate Inventory Level

Demand Rate

Inventory Level

Purpose of Inventories

To protect against uncertainties - demand, supply, lead times, schedule changes ◦ Safety stock

To allow economic production and purchase ◦ Cycle inventory

To cover anticipated changes in demand/supply ◦ Anticipation inventory

To provide for transit ◦ Pipeline inventory

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Costs of Inventory (1 of 2)

Item cost ◦ Expressed as cost per unit or SKU

◦ Quantity discounts possible

Ordering (or setup) cost ◦ Paperwork, data entry, worker time for ordering

◦ Worker time for setup, downtime

◦ Transportation costs

◦ Typically a fixed cost per order (or setup)

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Costs of Inventory (2 of 2)

Carrying (or holding) cost ◦ Cost of capital (market rate or internal rate of return) ◦ Cost of storage (space, insurance, taxes) ◦ Cost of obsolescence, deterioration, and loss (shrinkage)

◦ Estimated U.S. average is 35% of SKU cost per year. ◦ Businesses often use cost of capital (under-estimate of true costs).

Stockout cost ◦ Back order costs (expressed as a fixed cost per backorder) ◦ Lost income ◦ Customer dissatisfaction; loss of future sales

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Types of Demand

Independent demand (this chapter) ◦ Finished goods, spare parts ◦ Demand comes from the market, independent of other items ◦ Requires forecasting

Dependent demand (Chapter 15) ◦ Components/parts of the finished (parent) products ◦ Demand is a known function of (parent) independent demand items ◦ Calculate, instead of forecast

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Demand Patterns (Figure 14.4)

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A pattern plus random influences

‘Lumpy’ due to production lots

Economic Order Quantity (EOQ)

Answers question: “How much should we order?”

 Used for independent demand items.

 Objective is to find order quantity (Q) that minimizes total cost (TC) of managing inventory.

 Must calculate for each SKU.

 Widely used and very robust (i.e., works well in a variety of situations, even when its assumptions do not perfectly hold).

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EOQ Assumptions 1. Demand rate is constant, recurring, and known.

2. Lead time is constant and known.

3. No stockouts allowed.

4. Items are ordered or produced in a lot or batch, and the lot is received all at once.

5. Costs are constant: Unit cost (no quantity discounts).

Carrying cost is constant per unit. Ordering (setup) cost per order.

6. Item is a single product or SKU; demand not influenced by other items.

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EOQ Lot Size Intuition

There is a trade-off between ordering frequency (i.e., order size) and the inventory level.

◦ Frequent orders (small lot sizes) lead to a lower average inventory level, i.e., higher total ordering costs and lower total holding costs.

◦ Less frequent orders (large lot sizes) lead to a higher average inventory level, i.e., lower total ordering costs and higher total holding costs.

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EOQ Inventory Levels (Figure 14.5)

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Notation in EOQ Calculation

14-145

D = Demand rate, units per year

S = Cost per order or setup cost, dollars per order

C = Unit cost, dollars per unit

i = Carrying rate, percent of dollar value per year

Q = Lot size, units

TC = Sum of ordering cost & carrying cost, dollars per year

Cost Equations in EOQ

Ordering cost per year = SD/Q

(cost per order) x (orders per year)

Carrying cost per year = iCQ/2

(annual carrying rate) x (unit cost) x (average inventory level)

Total annual cost (TC) = SD/Q + iCQ/2

(total ordering cost per year) + (total carrying cost per year)

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Total Cost of Inventory (Figure 14.6)

14-147

EOQ Formula

At the EOQ:

ordering costs = holding costs

S*(D/Q) = iC*(Q/2)

EOQ =

Note: Although we use annual costs, any time period can be used. Just be consistent throughout the equation! The same is true for currencies.

14-148 15-148

EOQ Example

Demand = 10 cases/week S = $12/order i = 30% per year C = $80/case

= 2*12*10*52) / (.3*80)

= 22.8 cases/order

EOQ = 2SD)/iC

EOQ Example

14-150

TC = ordering cost + holding cost

= SD/Q + iCQ/2 = 12*520/22.8 + .3*80*22.8/2

= 273.68 + 273.60 = $547.28/year

If ordering 22 cases/order, TC = $547.64 If ordering 23 cases/order, TC = $547.30

Demand = 10 cases/week S = $12/order i = 30% per year C = $80/case

EOQ Example

14-151

Total cost curve is quite flat near the optimal EOQ. Order size need not be exactly the EOQ to get cost advantages.

Total Inventory Cost

200

400

600

800

13 17 21 24 28 32 36 40

Order Size

D ol

la rs

Continuous Review (Q) System

 Relax assumption of constant demand. Demand is assumed to be random.

 Check inventory position each time there is demand (i.e., continuously).

 If inventory position drops below Reorder point, place an order for the EOQ.

 Also called fixed-order-quantity or Q system. (fixed order size is EOQ)

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Continuous Review (Q) System (Figure 14.7)

14-153

R = Reorder point Q = Order quantity L = Lead time

Continuous Review (Q) System

14-154

Amount to order = EOQ

Order when inventory position = Reorder point

Reorder point is independent of EOQ! EOQ tells how much to order. Reorder point tells when to order.

R = Reorder point m = mean demand during lead time s = safety stock

Service Level When demand is random, reorder point must account for

desired service level (fill rate).

Service level can be defined several ways: ◦ Probability all customer orders are filled while waiting for supply order to arrive. ◦ Percentage of demand filled from stock. ◦ Percentage of time item is on hand.

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s = safety stock z = safety factor  = standard deviation in demand during lead time

Probability Distribution of Demand over Lead Time (Figure 14.8)

14-156

m = mean demand

R = Reorder point

s = safety stock

Periodic Review (P) System

 Review inventory position at fixed interval (P).  For example, bread delivery truck visits grocery stores

on same days each week.

 Inventory brought up to a Target level.

 Order quantity varies according to demand.

 Also called fixed-order-interval system or P system.

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14-158

Periodic Review (P) System (Figure 14.9)

T = target level Q = order quantities L = lead time P = time between orders (period)

Periodic Review (P) System

14-159

P = time between orders

T = target inventory level

P System Service Level

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Safety stock must cover a longer interval: (P + L)

Service Level versus Inventory Level (Figure 14.10)

14-161

Using P and Q System in Practice

 Use P system when orders must be placed at specified intervals.

 Use P systems when multiple items ordered from the same supplier (joint-replenishment).

 Use Q system for expensive items; P for inexpensive.

 P requires more safety stock (and is more likely to stockout) since the system cannot respond quickly to increased demand.

 Either may be more costly: P in safety stock, Q in monitoring costs.

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P and Q Systems at Home

P system: You go to the grocery store on the same day every week.

“What will we need for the next week?” • P carries more inventory and is more likely to run out since it cannot respond

quickly to increases in demand.

•Q system: You go to the grocery store each time you need something.

“What do we need?” ◦ Q may require more unplanned trips to the store.

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Vendor Managed Inventory (VMI)

 Supply chain management initiative shifting responsibility for managing inventory stocks to vendors (suppliers).

 Vendor must have access to buyer’s demand forecast and inventory records.

 Managed through contractual arrangement.

 Supply chain partners share cost savings of collaboration.

14-164

See the Operations Leader box in the textbook for how P&G, maker of Tide, uses VMI to improve supply chain performance.

Roberto Machado Noa/Contributor/Getty Images

ABC Inventory Management Based on Pareto concept (80/20 rule) and total usage in dollars of each item.

Classification of A, B, and C items based on usage.

Purpose is to set effort priorities to manage different SKUs, i.e., to allocate scarce management resources.

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A B C

Proportion of items

Proportion of value

ABC Inventory Classification

A items: 20% of SKUs, 80% of dollars

B items: 30% of SKUs, 15% of dollars

C items: 50% of SKUs, 5% of dollars

Three classes is arbitrary; could be any number.

Percentages are approximate.

Danger: ◦ Dollar use may not reflect importance of a particular SKU! Some firms

classify critical but low value items as A.

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Annual Usage of Items by Dollar Value (Table 14.4)

14-167

ABC Chart for Table 14.4

14-168

A B C

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

3 6 9 2 4 1 10 8 5 7

Item No.

P e

rc e

n t

U sa

g e

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

C u

m u

la ti

ve %

U sa

g e

Percentage of Total Dollar Usage Cumulative Percentage

Chapter 14 Summary

14-169

LO 14.1 Define inventory types and the purpose of inventory.

LO 14.2 Explain the costs incurred by inventory.

LO 14.3 Differentiate between independent and dependent demand.

LO 14.4 Calculate the economic order quantity and identify the underlying assumptions.

LO 14.5 Compute the parameters for a continuous review and periodic review inventory control system.

LO 14.6 Explain how continuous and periodic review systems are used in practice.

LO 14.7 Describe how inventory and service level are related.

LO 14.8 Define vendor managed inventory (VMI) and the ABC system.

LO 14.9 Solve advanced inventory problems (chapter supplement).

Questions for Discussion

170

•Why do firms have inventory?

•Why are different methods used to manage independent and dependent demand inventory items?

•Ordering (or setup) and carrying (or holding) costs are generally seen as tradeoffs. Explain this in your own words.

•Review the assumptions of the EOQ model. Why is each of them important in this calculation?

•How would you decide between using a Q system or a P system?

•What inventory items have you observed being stocked by the supplier (vendor managed inventory)?

•Considering ABC inventory classification, what types of raw materials do you think would be A items? B items? C items?

15-171

Chapter 15:

Material Requirements Planning and ERP

McGraw-Hill Education

Chapter 15 Learning Objectives

LO 15.1 Define the elements, inputs, and outputs of an MRP system.

LO 15.2 Contrast and compare MRP vs. order-point systems.

LO 15.3 Construct a materials plan given the gross requirements.

LO 15.4 Describe in detail each element of an MRP system.

LO 15.5 Discuss DRP and different ways to deal with uncertain demand.

LO 15.6 Explain the five requirements for a successful MRP system.

LO 15.7 Describe what an ERP system does.

15-172

Materials Requirements Planning (MRP)

• Used to manage dependent demand items • Plans the timing of materials, parts • Plans the quantity of materials, parts

• Based on master schedule (which is driven by S&OP)

• Parts explosion breaks end (parent) items into requirements for materials, parts based on bill of materials (BOM)

• Schedule is offset based on lead times

• Push system based on meeting the master schedule

15-173

Firm orders from  Customers  Sister plants  Stock replenishment

Engineering design changes

Bill of materials

Forecast of demand

Purchase orders

Suppliers

MRP parts explosion

Capacity planning

Shop orders

Shop-floor control

Master schedule

S&OP

Operations Product Raw materials

Inventory records

Inv. transactions

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Closed Loop MRP System (Figure 15.1)

Comparison of MRP & Order-Point Systems

15-175

MRP Elements

Inputs 1. Master schedule

2. Bill of materials (BOM)

3. Inventory records

Outputs 1. Capacity planning

2. Purchasing

3. Shop-floor control

15-176

3M implemented two applications, JDA Factory Planner and JDA Supply Chain Planner, across all factories in Canada.

MRP Example

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Top

Leg

Long rail

Short rail

Bill of Materials (BOM)

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Short rails (2) 1 week

Table (end item) 1 week

Long rails (2) 1 week

Legs (4) 1 week

Top (1) 2 weeks

Leg assembly (1) 1 week

Indented BOM Level Code Component

0 Table (end-item)

1 Leg assembly (1)

2 Short rails (2)

2 Long rails (2)

2 Legs (4)

1 Top(1)

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Materials plan for BOM Levels 0 and 1

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Week

1 2 3 4 5 6

Tables

On hand = 50 Gross Requirement 200 150 100

LT = 1 wk Scheduled Receipts

Lot size: L4L Projected Ending Inventory 50

Saftey Stock = 0 Net Requirement

Planned order receipts

Planned order releases

Tops

On hand = 50 Gross Requirement

LT = 2 wk Scheduled Receipts 50

Lot size: L4L Projected Ending Inventory 50

Saftey Stock = 0 Net Requirement

Planned order receipts

Planned order releases

Leg Assembly

On hand = 100 Gross Requirement

LT = 1 wk Scheduled Receipts

Lot size: L4L Projected Ending Inventory 100

Saftey Stock = 0 Net Requirement

Planned order receipts

Planned order releases

Materials plan for BOM Levels 0 and 1

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Week

1 2 3 4 5 6

Tables

On hand = 50 Gross Requirement 200 150 100

LT = 1 wk Scheduled Receipts

Lot size: L4L Projected Ending Inventory 50 50 50

Saftey Stock = 0 Net Requirement 150 150 100

Planned order receipts 150 150 100

Planned order releases 150 150 100

Tops

On hand = 50 Gross Requirement 150 150 100

LT = 2 wk Scheduled Receipts 50

Lot size: L4L Projected Ending Inventory 50 100

Saftey Stock = 0 Net Requirement 50 150 100

Planned order receipts 50 150 100

Planned order releases 50 150 100

Leg Assembly

On hand = 100 Gross Requirement 150 150 100

LT = 1 wk Scheduled Receipts

Lot size: L4L Projected Ending Inventory 100 100

Saftey Stock = 0 Net Requirement 50 150 100

Planned order receipts 50 150 100

Planned order releases 50 150 100

Materials Plan (previous slide)

 Gross requirements in level 0 (Tables) come from the master schedule.

 Gross requirements in level 1 (Tops, Leg assemblies) come from the planned order releases in level 0.

 Planned order releases are offset by the lead times.

 Planned order releases are planned! Actual order releases must take available capacity into account.

 Net requirements are the gross requirements minus the projected ending inventory.

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MRP System Elements: Master Schedule

 Quantities are derived from the aggregate production plan (product families).

 Schedule should be frozen within production lead time (so all parts can be obtained).

 Quantities reflect “build” (produce) schedule rather than demand forecasts.

 Quantities represent what needs to be produced (infinite capacity assumed).

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MRP System Elements: Bill of Materials (BOM)

 Structured list of all parts and materials.

 Must be 100 percent accurate.

 Should be one BOM per product per company.

 Engineering-change-order (ECO) system used to update BOM as product redesigned.

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MRP System Elements: Inventory Records

Item master data segment ◦ Constant info (part number, cost, etc.)

Inventory status segment ◦ Materials plan for each item

Subsidiary data segment ◦ Info on outstanding orders, demand history, etc.

Records must be accurate ◦ Cycle counting: physical count of a few items each

day, so that all items are counted on a regular cycle

15-185

Alistair Berg/Digital Vision/Getty Images

MRP System Elements: Capacity Planning

Purpose is to aid management in checking validity of master schedule

◦ Is there enough capacity to produce as scheduled?

Two methods ◦ Shop loading: assign work to work centers

◦ Finite capacity scheduling: considers resource limitations

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MRP System Elements: Purchasing

o MRP system generates orders

o Past due orders mostly eliminated

o Order expediting mostly eliminated

o Can provide suppliers with reports of planned future orders

o Can use electronic data interchange (EDI) to communicate directly with suppliers

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MRP System Elements: Shop Floor Control

Purposes: ◦ Release orders to the shop floor

◦ Manage the orders for on-time completion ◦ Can use manufacturing execution system (MES)

Set job priorities (dispatching rules)

Manage lead times on basis of priority ◦ Expedite and de-expedite orders

Minimize inventory while meeting completion dates

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Operating an MRP System

Should MRP carry safety stock?

How much safety stock should be carried?

Safety lead time, safety capacity

Expand downstream in supply chain: ◦ Distribution Requirements Planning (DRP)

Use upstream to give suppliers visibility into schedule.

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Successful MRP System

1. Implementation planning

2. Appropriate and adequate IT support

3. Accurate data

4. Management support

5. User knowledge (all levels of firm)

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MRP in Services

191

MRP systems can be used for services too.

In renovating hotel rooms, Marriott develops a bill of materials and a bill of labor for each room type and then “explodes” the bill throughout the hotel facility to summarize its furniture and decorating needs.

Onoky/SuperStock

Enterprise Resource Planning (ERP) Systems

 Extension and integration of all functions through shared data systems.

 Forces standardized systems throughout firm: Accounting controls systems Marketing and sales transactions Human resource planning and payroll transactions

 Coordinate decisions along the supply chain.

 Major software vendors: SAP, Oracle

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ERP System Example

193

Global giant LG Electronics has 114 subsidiaries and more than 82,000 employees across 40 countries. Data management challenges made it difficult for LG to operate as a global company in the past.

Their ERP solution supports the following benefits: centrally managed systems, process transparency, sharing best practices, and real-time reporting for upper management for informed decision making.

Kobby Dagan/123RF

Chapter 15 Summary

15-194

LO 15.1 Define the elements, inputs, and outputs of an MRP system.

LO 15.2 Contrast and compare MRP vs. order-point systems.

LO 15.3 Construct a materials plan given the gross requirements.

LO 15.4 Describe in detail each element of an MRP system.

LO 15.5 Discuss DRP and different ways to deal with uncertain demand.

LO 15.6 Explain the five requirements for a successful MRP system.

LO 15.7 Describe what an ERP system does.

Questions for Discussion

195

•In your own words, what is the purpose of an MRP system?

•What information is provided by each of the “inputs” into an MRP system? (Figure 15.1 in the textbook shows these inputs.)

•Why is inventory management so different for dependent demand items?

•Consider a simple product that you have handy (pen, backpack, etc.). Draw a basic bill of materials for this item.

•Describe each of these: safety stock, safety lead time, and safety capacity.

•How are ERP systems different from MRP systems?

16-196

Chapter 16:

Supply Chain Management

McGraw-Hill Education

Chapter 16 Learning Objectives

LO 16.1 Define supply chain and supply chain management.

LO 16.2 Review key measures of supply chain performance.

LO 16.3 Explain the bullwhip effect and how it can be reduced.

LO 16.4 Contrast structural and systems improvements.

LO 16.5 Evaluate the effect of technology on the supply chain.

LO 16.6 Define supply chain risk, resilience, and how risk can be managed.

LO 16.7 Describe supply chain sustainability.

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A SUPPLY CHAIN is the set of entities and relationships that cumulatively define material and information flows both downstream toward the customer and upstream toward the very first supplier.

“Supply chain management is the design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer.”

--Institute for Supply Management

Typical Supply Chain (Figure 1.1)

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Supply Chain - Focal Firm Perspective

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Focal Firm 1st-tier

suppliers 2nd-tier

suppliers 3rd-tier

suppliers Distribution centers &

warehouses Retailers

Physical Supply Physical Distribution

Downstream or Forward Materials and Information Flow

Upstream or Backward Materials and Information Flow

Suppliers’ Supplier

Supplier

Plan

Customer Customer’s Customer

Make DeliverSource Make

DeliverMakeSourceDeliver SourceDeliver

Internal or External Internal or External

Your Company

Source

Return Return Return Return Return Return

Return Return

SCOR model = Supply Chain Operations Reference

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The Five SCOR functions

Plan Coordinate the other functions.

Source Bring inputs into the transformation process from other organizations.

Make The operations function responsible for making the product or service.

Deliver The logistics function responsible for the movement and storage of goods across organizations in a supply chain.

Return Return and recycle inputs or products in the supply chain.

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Supply Chain Performance Measures

Throughput time Also called cycle time. Sum of throughput time in each supply chain entity (org).

Cash-to-cash cycle time Time it takes to get paid, once product is sold. = Days in inventory + days in accounts receivable - days in accounts payable

Total delivered cost Unit cost = total manufacturing cost, including materials, labor, and overhead, divided by the number of units produced. Supply chain cost = sum of cost of materials and components from suppliers, cost to fabricate and assemble, cost to ship materials and work-in-progress between firms, and cost to ship finished-goods inventory to customer.

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Measure: Throughput Time Example

204

Supplier Factory Wholesale Retail

Inventory days 10 30 15 5

Accounts receivable days 25 25 30 10

Accounts payable days 30 40 20 15

Sourcing unit cost $25 $40 $70 $90

Added unit cost $5 $20 $5 $20

Sales unit price $40 $70 $90 $120

Q: Calculate the total supply chain throughput time.

A: 10 + 30 + 15 + 5 = 60 days

Measure: Cash-to-Cash Cycle Time Example

205

Supplier Factory Wholesale Retail

Inventory days 10 30 15 5

Accounts receivable days 25 25 30 10

Accounts payable days 30 40 20 15

Sourcing unit cost $25 $40 $70 $90

Added unit cost $5 $20 $5 $20

Sales unit price $40 $70 $90 $120

Q: Compute the cash-to-cash cycle time for each supply chain entity.

A: Supplier = 10 + 25 – 30 = 5 days Wholesale = 15 + 30 – 20 = 25 days Factory = 30 + 25 – 40 = 15 days Retail = 5 + 10 – 15 = 0 days

Measure: Total Delivered Cost Example

206

Supplier Factory Wholesale Retail

Inventory days 10 30 15 5

Accounts receivable days 25 25 30 10

Accounts payable days 30 40 20 15

Sourcing unit cost $25 $40 $70 $90

Added unit cost $5 $20 $5 $20

Sales unit price $40 $70 $90 $120

Q: Compute the total delivered cost in the supply chain.

A: $25 + 5 + 20 + 5 + 20 = $75 Note, we start with the sourcing cost (unit + added) and then just sum the added cost at each stage. This calculation takes out all the profit at each stage.

Dynamics: Bullwhip Effect

Supply chain is a highly interactive system. Decisions in each part of the chain affect the other entities.

Accelerator (bullwhip) effect: Increased variability in upstream orders, resulting in more inventory upstream.

Even with perfect information, replenishment lead times lead to accelerator effect.

Improve supply chain by reducing total replenishment time, share real demand information with all entities.

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208

Bullwhip Effect (Figure 16.2)

The farther away a supply chain entity is, the greater is the variability of orders it places.

The same pattern of upstream magnification of order variability also describes inventory levels and stockouts across the four entities in this supply chain.

Improving Supply Chain Performance

◦ Change structure

◦ Decisions that involve investments in bricks and mortar (facilities, new products, technology, etc.)

◦ Change systems

◦ Decisions that involve people, process flow and information systems

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Requires “coordination” within and across firms.

Structural Improvements

Forward and backward integration

Major process simplification

Supply base reduction

Outsourcing, offshoring

Major product redesign ◦ Postponement, modularity

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System Improvements

Cross-functional teams and partnerships with suppliers and customers to increase coordination.

Lean systems for producers, suppliers and distribution

Integrated information systems, downstream and upstream

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Technology and Supply Chain Management

Growth of e-commerce ◦ B2B (business-to-business)

◦ B2C (business-to-consumer)

Fundamental processes in supply chains: ◦ Order placement process

◦ Information before order (Is product available in stock?)

◦ Actual order entry

◦ Order fulfillment process ◦ Direct link to internal operations & suppliers

Use of analytics to improve supply chains

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Technology and Supply Chain Management

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E-commerce & Omni-channel

“Amazon” effect – pushing other retailers online.

Need seamless and error-free interactions across stores and online.

Need access via smartphones, tablets, desktop computers, and laptops.

Blockchain

Complete, shared, secure database of all transactions in the chain as a shipment moves from factory to destination.

BiTA (Blockchain in Transport Alliance) - over 200 companies using or considering blockchain.

Not yet widely used.

Supply Chain Risk and Resilience Resilience is the ability to quickly respond to unexpected disruptions in supply or demand, either natural or manmade.

◦ Examples of disruptions: strike, recession, sudden price change, natural disaster, manufacturing failure, unexpected demand.

Risk mitigation* ◦ Stage 1: Build resilience by creating a proactive plan

◦ Stage 2: Use agility to minimize damage during disruption

◦ Stage 3: Re-evaluate original plan during post-recovery

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* Each stage requires strategic and operational planning.

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Supply Chain Mitigation Framework

Analysis of Supply Chain Risk

• Supply chain risk: probability of supply chain disruption.

• Risk can be reduced at each node in the network. • Add inventory at the supplier node or within firm. • Use two geographically dispersed suppliers. • For a sole source, have backup second supplier.

• Do not solely focus on the highest spend suppliers. Even missing supplies from small suppliers can add risk.

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Analysis of Supply Chain Risk (Figure 16.4)

For a given damage scenario, calculate for each supplier:

◦ TR = time to recover and meet full demand

◦ TS = maximum time supplier can meet demand during a disruption,

using inventory or alternate supply sources.

◦ Insure that TS > TR

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Supply Chain Sustainability

Sustainability: meeting present needs without sacrificing the needs of future generations.

Triple bottom line: environmental, social, economic

3-phase approach:

1. Set environmental, social, and financial goals.

2. Develop long-range plans to meet goals with the suppliers.

3. Implement plans throughout the firm and its supply chain.

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Supply Chain Sustainability

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Unpackaged is not your typical

grocery store. This London organic grocery store tells its customers to bring their own containers when they shop.

Customers bring bottles, glass jars, paper bags, plastic bags, and old boxes to carry their goods home. Inside the store, grocery items are stored in barrels, buckets and bins, and black tubs.

Cate Gillon/Getty Images

Chapter 16 Summary

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LO 16.1 Define supply chain and supply chain management.

LO 16.2 Review key measures of supply chain performance.

LO 16.3 Explain the bullwhip effect and how it can be reduced.

LO 16.4 Contrast structural and systems improvements.

LO 16.5 Evaluate the effect of technology on the supply chain.

LO 16.6 Define supply chain risk, resilience, and how risk can be managed.

LO 16.7 Describe supply chain sustainability.

Questions for Discussion

221

•Explain why there are both downstream and upstream flows in supply chains. What are the differences?

•What are each of the activities included in the SCOR model?

•The chapter describes three ways to measure supply chain performance. What other ways could performance be measured?

•Describe the bullwhip effect in your own words.

•Look for examples of forward and backward integration. Why did these firms choose to extend their control of their supply chain?

•Have you personally experience supply chain disruptions? Where?

•Supply chains play an important role in sustainability. How can supply chains have more positive impact on the triple bottom line?

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Chapter 18:

Logistics

McGraw-Hill Education

Chapter 18 Learning Objectives

 LO 18.1 Define the scope and purpose of logistics.  LO 18.2 Explain transportation economics.  LO 18.3 Compare the advantages and disadvantages of the five

modes of transportation.  LO 18.4 Distinguish among the different functions of warehouses.  LO 18.5 Describe how to determine the number and location of

warehouses.  LO 18.6 Consider when a firm should use a third-party logistics

provider.  LO 18.7 Define logistics strategy and explain why it is needed.

Logistics Definition

Includes: ◦ Inbound to firm

◦ Outbound from firm

◦ Warehousing (storage)

◦ Network design

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Plans, implements, and controls the efficient, effective forward and reverse flows and storage of goods and related information between the point of origin and consumption in order to meet customer requirements.

Importance of Logistics

 Strategic decisions linking marketing and operations

 Operational decisions defining “place” and movement of goods

 Integration with other functions ◦ Marketing to fulfill customer demand

◦ Information systems to link firm to suppliers and customers

◦ Finance for large investments in inventory, warehousing

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Boundary spanning activities

Critical Logistics Decisions

 What modes of transportation to use?

 What types of warehousing to use?

 Where should factories and warehouses be located?

 Should logistics be outsourced to third-party provider (3PL)?

 What is the strategic role of logistics in creating and supporting competitive advantage?

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Transportation Economics Economies of scale

◦ Larger shipments cost

less per pound (than

smaller)

◦ Full truckloads cost

less per pound (than

partial)

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Economies of distance

◦ Longer distances cost

less per pound (than

shorter)

◦ Longer distances cost

less per mile (than

shorter)

Economies of speed

◦ Regular shipping costs

less per mile (than

expedited)

◦ Regular shipping costs

less per pound (than

expedited)

Transportation Economics Example

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A company has three shipments of 10,000 pounds each going from different nearby cities to one retail store. The carrier charges $10 per hundredweight (cwt).

If the shipments are consolidated into one truck, the carrier will take the 30,000 pounds for $7 per cwt, but charges $300 each for the two extra stops.

Should the company consolidate the three shipments?

Cost to ship separately in three trucks is: Cost = 10,000 ($10/100 pounds)*(3 shipments) = $1,000 * 3 = $3,000

Cost to consolidate the three shipments is: Cost = 30,000 ($7/100 pounds) + $300*(2) = $2,100 + $600 = $2,700

Consolidating the shipments costs less.

Transportation Modes

229

Multimodal

Intermodal Drones??

Trucks Rail Air

Water • Ocean • Inland

Pipeline

mipan/123RF

Mode Use in U.S. (Figure 18.1)

230

Transportation Decisions (Table 18.1)

Mode Advantages Disadvantages

Truck Can move freight quickly over long distances. Very flexible on locations. Easily linked with rail or air.

More expensive for heavy and bulky freight than other modes.

Rail Relatively inexpensive for long distances. Can be linked with truck or ocean freight.

Relatively slow.

Water (inland) Low cost for moving bulk commodities. Effective when linked to multimode.

Subject to proximity of waterway locations. Relatively slow.

Water (ocean) Cost-effective way to ship freight in containers over long distances.

Very slow.

Air Fast way to move freight. Flexible when linked to trucks.

Very expensive.

Pipeline Can move bulk commodities (oil, gas, and chemicals) for long distances.

Expensive to install.

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Distribution Centers and Warehousing

Consolidation

Distribution Centers and Warehousing

Break-bulk

Distribution Centers and Warehousing

Cross-docking

Other Purposes of Distribution Centers and Warehousing

 Managing seasonal demand

 Supporting manufacturing Incoming raw materials

Outgoing finished goods

 Providing value-added services

 Handling reverse logistics

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Logistics Networks - Location factors

• Labor availability

• Cost of labor

• Cost of construction and maintenance

• Cost of transportation

• Taxes

• Government incentives

• Government regulations

• Delivery time to customer

• Proximity to suppliers

• Highway and rail availability

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Logistics Network (Figure 18.3)

Center of Gravity Analytics

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 First approximation to locate warehouses based on transportation costs and distances.

 Model calculates the center-of-gravity based on the distances from warehouses to customers.

Center of Gravity - Example

Customer X coordinate Y Coordinate Demand (lbs)

A 10 10 5000

B 20 25 7500

C 25 35 6000

XCG = 10(5000) + 20(7500) + 25(6000) = 18.9 5000 + 7500 + 6000

YCG = 10(5000) + 25(7500) + 35(6000) = 24.2 5000 + 7500 + 6000

Center of Gravity - Example

240

The center of gravity is a logical location for a warehouse to serve Customers A, B, and C.

Number of Warehouses (Figure 18.4)

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Global Logistics

242

 Complex transportation, usually multimodal

 Complex information transfer: exporters, importers, freight forwarders, clearing agents, ocean shipping lines, freight companies, intermodal operators, banks, and insurance companies

ilfede/123RF

Global Logistics

243

Third-Party Logistics (3PL)

• Transportation services

• Warehousing services

• Inventory management services

• Reverse logistics services

• Access to logistics expertise

• Enhanced flexibility to changing markets/technology

• Lower cost than insourcing

• Humanitarian aid

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Ryder is a major player in 3PL to more than 50,000 business customers, using their 5900 technicians, 7700 drivers, and 800 facilities.

Ryder is a 3PL provider to Cisco, helping them keep their warranty promise on 1.5 million parts every year.

John Crowe/Alamy Stock Photo

Logistics Strategy

Determine objectives ◦ Cost, delivery, service quality, flexibility

Ownership vs. outsourcing logistics function

Transportation modes

Warehousing network ◦ Number and location of facilities

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Chapter 18 Summary

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 LO 18.1 Define the scope and purpose of logistics.  LO 18.2 Explain transportation economics.  LO 18.3 Compare the advantages and disadvantages of the five

modes of transportation.  LO 18.4 Distinguish among the different functions of warehouses.  LO 18.5 Describe how to determine the number and location of

warehouses.  LO 18.6 Consider when a firm should use a third-party logistics

provider.  LO 18.7 Define logistics strategy and explain why it is needed.

Questions for Discussion

247

•Describe different types of logistics that you have personally observed. Where did you see them? What were they doing?

•How does a firm choose its modes of transportation to move its goods?

•When would a firm use these various types of warehouses: consolidation, break-bulk, cross-docking?

•When is reverse logistics used? How does it work?

•In your own words, what is a logistics network?

•Beyond knowing the ‘center of gravity’ in a network, what other factors should be considered when choosing a warehouse location?

•What types of services are carried out by third-party logistics (3PL) providers?