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 Assignment(Case study type)--------30%
 Article review--------------------------20%
 Exam ------------------------------------50%

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February, 2015

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5
 OM is one of three major functions (marketing,
finance, and operations) of any organization

 We want (and need) to know how goods

and services are produced
 We want to understand what operations
managers do
 OM is such a costly part of an organization
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  Creates the product

 Generates
 Tracks how well demand
the organization is
doing, pays bills,
collects the money

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 Operations

 People Services

Transformation Products
 Capital Process Good
s
 Material

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Operations are the processes within organizations that
acquire inputs (people, capital, material, information
e.t.c) and transform these inputs into outputs (services
and goods) consumed by the public.

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The transformation process should add value such that the
output has financial value greater than the sum of the inputs
INPUT $ $$$
Material
OUTPUT
Machines
TRANSFORMATION Goods
Labor
PROCESS Services
Management

Capital

 Feedback
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11
 Production of goods – tangible output
 Delivery of services – an act
 Service job categories
 Government
 Wholesale/retail
 Financial services
 Healthcare
 Personal services
 Business services
 Education

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 Tangible product
 Consistent product
definition
 Production usually
separate from
consumption
 Can be inventoried
 Low customer
interaction 13
 Intangible product
 Produced and consumed at
same time
 Often unique
 High customer interaction
 Inconsistent product
definition
 Often knowledge-based
 Frequently dispersed

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15
 Attributes of Goods Attributes of Services
(Tangible Product) (Intangible Product)
Can be resold Reselling unusual

Can be inventoried Difficult to inventory

Some aspects of quality Quality difficult to measure

measurable
Selling is distinct from  Selling is part of service
production
Product is transportable  Provider, not product, is
often transportable
Site of facility important for cost Site of facility important for

customer contact
Often easy to automate Often difficult to automate

Revenue generated primarily Revenue generated primarily

from tangible product from the intangible

16 service
  100% 75 50 25 0 25 50 75 100%
 | | | | | | | | |
 Percent of Product that is a Good Percent of Product that is a Service

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 Integration of service and goods
 Service and
 Electric utility generates
manufacturing power for a facility
sectors of the
economy are highly  The facility makes lamps
interdependent

Lamps are delivered by truck to retail stores



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 All organizations make decisions and follow a
similar path
 First decisions very broad – Strategic decisions
 Strategic Decisions – set the direction for
the entire company; they are broad in scope
and long-term in nature

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 Following decisions focus on specifics - Tactical
decision
 Tactical decisions: focus on specific day-to-day issues
like resource needs, schedules, & quantities to produce
 are frequent
 Strategic decisions less frequent
 Tactical and Strategic decisions must align

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21
 Design of goods and services
 What good or service should we offer?
 How should we design these products and services?

 Managing quality
 How do we define quality?
 Who is responsible for quality?

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 Process and capacity design
 What process and what capacity will these products
require?
 What equipment and technology is necessary for these
processes?

 Location strategy
 Where should we put the facility?
 On what criteria should we base the location decision?

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 Layout strategy
 How should we arrange the facility?
 How large must the facility be to meet our plan?
 Human resources and job design
 How do we provide a reasonable work environment?
 How much can we expect our employees to produce?

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 Supply chain management
 Should we make or buy this component?
 Who are our suppliers and who can integrate into our e-
commerce program?
 Inventory, material requirements planning, and JIT
 How much inventory of each item should we have?
 When do we re-order?

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 Intermediate and short–term scheduling
 Are we better off keeping people on the payroll during
slowdowns?
 Which jobs do we perform next?

 Maintenance
 Who is responsible for maintenance?
 When do we do maintenance?

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 Customers demand better quality, greater
speed, and lower costs
 Companies implementing lean system concepts
– a total systems approach to efficient
operations
 Recognized need to better manage information
 Increased cross-functional decision making

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 Past Causes Future
Local or Reliable worldwide Global focus,
national communication and moving
focus transportation networks production
offshore
Batch Short product life cycles Just-in-time
(large) and cost of capital put performance
shipments pressure on reducing
inventory

Figure 1.6


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 Past Causes Future
Lengthy Shorter life cycles, Rapid product
product Internet, rapid development,
development international alliances,
communication, computer- collaborative
aided design, and designs
international collaboration
Standardized Affluence and worldwide Mass
products markets; increasingly customization
flexible production with added
processes emphasis on
quality
Job Changing socioculture Empowered
specialization milieu; increasingly a employees,
knowledge and teams, and lean
information society production
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  Past Causes Future
Low-cost Environmental issues, ISO Environmentally
focus 14000, increasing disposal sensitive
costs production, green
manufacturing,
recycled
materials,
remanufacturing
Ethics not Businesses operate more High ethical
at forefront openly; public and global standards and
review of ethics; opposition social
to child labour, bribery, responsibility
pollution expected

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1. What is operations management? and why it
is so important?
2. What is the need of learning OM for you?
3. Write 3 differences and similarities between
goods and services?

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Chapter 2 - Operations Strategy
and Competitiveness

Operations Management

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 Le
ar
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bj
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ti v
es

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 What is operations strategy?

What is Strategy ?:
 Long term Action plan to achieve
mission
 A plan for achieving organizational
goals.
 Functional areas have strategies
 Strategies exploit opportunities and
strengths, neutralize threats, and
avoid weaknesses
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 What is operations strategy?

Operations Strategy is a plan for the design and
management of operations functions.

 Operation Strategy is developed after the business strategy.

 Operations Strategy focuses on specific capabilities which

give it a competitive edge – competitive priorities.

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 Operations Strategy Model
Corporate and
business strategy

Operations Strategy
Internal Functional strategies in
analysis Mission marketing, finance,
Distinctive engineering, human
Competence resources, and
External information systems
Objectives
analysis (cost, quality, flexibility, delivery)
Policies
(process, quality systems, capacity,
and inventory)

Consistent pattern of decisions

Results
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Business/Functional
Strategy

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Three Inputs to a Business Strategy

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Operations Strategy – Designing the
Operations Function

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Competitive Priorities- The Edge
 Four Important Operations Questions: Will
you compete on –
Cost?
Quality?
Time?
Flexibility?

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 Competing on Cost?
 Competing based on cost means offering a
product at a low price relative to the prices
of competing products. in this
 Typically high volume products
 Low cost is a universally attractive objective
 Often limit product range & offer little customization
 May invest in automation to reduce unit costs
 Can use lower skill labor
 Probably use product focused layouts
 Low cost does not mean low quality 41
 Cost could mean. . .
Hospital Automobile plant

Bus company Supermarket

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 Competing on Quality?
 Quality is a major influence on customer satisfaction or dissatisfaction
 Quality is defined differently depending on who is defining it
 Quality is consistent conformance to customers’ expectations
 Two major quality dimensions include

High performance design:

Superior features, high durability, & excellent customer service

Product & service consistency:

Meets design specifications

Close tolerances

Error free delivery
 Quality needs to address

Product design quality – product/service meets requirements

Process quality – error free products

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 Quality could mean. . .
Hospital Automobile plant
•Patients receive the most appropriate
treatment
• Treatment is carried out in the correct
manner
•All parts are made to specification
• Patients are consulted and kept
informed • All assembly is to specification
• Staff are courteous, friendly and • The product is reliable
helpful • The product is attractive

Bus company Supermarket

•The buses are clean •Goods are in good condition
• The buses are quiet and fume-free •The store is clean and tidy
• The timetable is accurate and • Decor is appropriate and
user-friendly attractive
• Staff are courteous, friendly and • Staff are courteous, friendly and
helpful helpful 44
 Competing on Time?
 Time/speed means the elapsed time between customers requesting
products or services and their receipt of it
 First that can deliver often wins the race
 Speed increases value for some customers
 Time related issues involve
 Rapid delivery:

Focused on shorter time between order placement and delivery
 On-time delivery:

Deliver product exactly when needed every time
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 Speed/time could mean. . .
Hospital Automobile plant

•The time between requiring •The time between dealers

treatment and requesting a vehicle of a particular
receiving treatment kept to a specification and receiving it kept to
minimum a minimum
• The time for test results, X-rays, • The time to deliver spares to
etc. to be returned kept to a minimum service centers kept to a minimum

Bus company Supermarket

•The time taken for the total
transaction of going to the
•The time between a customer supermarket, making the purchases
setting out on the journey and and returning kept to a minimum
reaching his or her destination kept • The immediate availability of
to a minimum goods 46
 Competing on Flexibility?

A competitive priority focusing on offering a

wide variety of goods or services.
or being able to change the operation in some way to satisfy
custumer. Four types of requirement:

 Product/service flexibility – the operation’s ability to introduce

new or modified products and services;
 Mix flexibility – the operation’s ability to produce a wide range
or mix of products and services;
 Volume flexibility – the operation’s ability to change its level of
output or activity to produce different quantities or volumes of
products and services to much market demand;
 Delivery flexibility – the operation’s ability to change the timing
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 Flexibility could mean. . .
Hospital Automobile plant
•Product/service flexibility – the •Product/service flexibility – the
introduction of new types of treatment introduction of new models
• Mix flexibility – a wide range of • Mix flexibility – a wide range of
available treatments options available
• Volume flexibility – the ability to
• Volume flexibility – the ability to
adjust the number of vehicles
adjust the number of patients treated manufactured
• Delivery flexibility – the ability to • Delivery flexibility – the ability to
reschedule appointments reschedule manufacturing priorities

Bus company Supermarket

Product/service flexibility – the •Product/service flexibility – the
introduction of new routes or departures introduction of new goods or promotions
• Mix flexibility – a large number of • Mix flexibility – a wide range of goods
locations served stocked
• Volume flexibility – the ability to adjust • Volume flexibility – the ability to adjust
the frequency of services the number of customers served
• Delivery flexibility – the ability to • Delivery flexibility – the ability to obtain
reschedule trips out-of-stock items (very occasionally)48
 The Need for Trade-offs
 The need to focus more on one competitive
priority than on others.
 Decisions must emphasis priorities that support
business strategy
 Decisions often required trade offs
 Decisions must focus on order qualifiers and
order winners

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 Dealing with Trade-offs

For example, consider a company that competes on

using the highest quality component parts in its
products. Due to the high quality of parts the
company may not be able to offer the final product
at the lowest price. In this case, the company has to
make a tradeoff between quality and price.

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 Order Qualifiers and Winners: the
Marketing/Operations linkage
Order qualifiers
 are the basic criteria that permit the firm’s
products to be considered as candidates for
purchase by customers.
Are the minimum characteristics of a firm or its

products to be considered as a source of

purchase .

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Order winners

 A characteristics of a firm that distinguish

it from its competitors so that it is selected
as the source of purchase.
 are the criteria that differentiate the
products and services of one firm from
another.

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 For example
 A brand name of car can be an “order qualifier”

 Repair services can be “order winners”

Examples: Warranty, Roadside Assistance,

Leases, etc.
Productivity

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 Productivity and its measurs
 A common, seemingly simple but very complicated
measure
 How a country, region, industry, company, business unit,
department, ... uses its resources (relative to others).
 Broadly defined as the ratio of OUTPUTS to INPUTS
 Total, partial, or multifactor measures:

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Productivity Example

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 Measuring Productivity
 Productivity is a measure of how efficiently inputs are converted to
outputs
Productivity = output/input

 Total Productivity Measure

Total Productivity = $sales/inputs $

 Partial Productivity Measure

Partial Productivity = cars/employee

 Multifactor Productivity Measure

Multi-factor Productivity = sales/total $costs

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Productivity Example - An automobile manufacturer has presented
the following data for the past three years in its annual report. As a
potential investor, you are interested in calculating yearly productivity
and year to year productivity gains as one of several factors in your
investment analysis.
2003 2002 2001 2003 2002 2001
Partial Prod. Measure

Unit car 2,700,000 2,400,000 2,100,000

Unit Car Sales/Employee 24.1 21.2
sales 18.3

Year-to-year Improvement 13.7% 15.8%

Employees 112,000 113,000 115,000
Multifactor Prod. Measures

$ Sales $49,000 $41,000 $38,000 Total Cost Productivity 1.26 1.24

1.19
(billions$)
Year-to-year Improvement 1.6% 4.2%
Cost of $39,000 $33,000 $32,000
Sales Which is the best measurement?

(billions) 58
 Improving Productivity
 Develop productivity measures
 Determine critical (bottleneck) operations
 Develop methods for productivity
improvements
 Establish reasonable goals
 Get management support
 Measure and publicize improvements

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 Quiz 2

1. How do operations strategy supports

business strategy?
2. What is competitive priority and how
the firm select one of the four
strategies?

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 3
CHAPTER THREE

Product Design

Operations Management

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Differentiate service and goods design
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 Product Design
Major factors in design strategy
Cost
Quality
Time-to-market
Customer satisfaction
Competitive advantage

Product and service design – or redesign – should be

closely tied to an organization’s strategy

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Translate customer wants and needs into product and service requirements

Refine existing products

Develop new

Formulate quality goals

Formulate cost targets

Construct and test prototypes

Document specifications

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The main forces that initiate design or redesign
are market opportunities and treats

Economic
Social and demographic
Political, liability, or legal
Competitive
Cost or availability
Technological

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Main focus
Customer satisfaction

Secondary focus
Function of product/service
Cost/profit
Quality
Appearance
Ease of production/assembly
Ease of maintenance/service
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Produce designs that are consistent with
the goals of the company

Give customers the value they expect

Make health and safety a primary concern

Consider potential harm to the

environment
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Product/service life cycles
How much standardization
Product/service reliability
Range of operating conditions

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Sales, cost, and cash flow

Cost of development and production

Sales revenue
Net revenue (profit)

Cash
flow

Negative
cash flow Loss

Introduction Growth Maturity Decline

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Introduction
 Fine tuning may warrant unusual
expenses for
 Research
 Product development
 Process modification and
enhancement
 Supplier development
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Growth
 Product design begins to stabilize
 Effective forecasting of capacity
becomes necessary
 Adding or enhancing capacity
may be necessary

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Maturity
 Competitors now established
 High volume, innovative
production may be needed
 Improved cost control, reduction
in options, paring down of
product line

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Decline
 Unless product makes a special
contribution to the organization,
must plan to terminate offering

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1. Idea generation
2. Feasibility analysis
3. Product specifications
4. Process specifications
5. Prototype development
6. Design review
7. Market test
8. Product introduction
9. Follow-up evaluation
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Ideas

Ability

Customer Requirements

Functional Specifications

Product Specifications

Design Review

Test Market

Introduction

Evaluation
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 Supply chain based

Ideas Competitor based

Research based

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Standardization
Extent to which there is an absence of variety
in a product, service or process
Standardized products are immediately
available to customers

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Fewer parts to deal with in inventory &
manufacturing
Design costs are generally lower
Reduced training costs and time
More routine purchasing, handling, and
inspection procedures

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Orders fillable from inventory

Opportunities for long production runs

and automation

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Designs may be frozen with too many
imperfections remaining.
Decreased variety results in less
consumer appeal.

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• Mass customization:
A strategy of producing standardized goods
or services, but incorporating some degree
of customization
Delayed differentiation
Modular design

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• Delayed differentiation is a
postponement tactic
Producing but not quite completing a
product or service until customer
preferences or specifications are known

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Modular design is a form of standardization in
which component parts are subdivided into
modules that are easily replaced or
interchanged. It allows:
easier diagnosis and remedy of failures
easier repair and replacement
simplification of manufacturing and assembly

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 Robust Design

Robust Design: Design that results in products

or services that can function over a broad
range of conditions

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Manufacturability is the ease of
fabrication and/or assembly which is
important for:
Cost
Productivity
Quality

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Beyond the overall objective to achieve
customer satisfaction while making a
reasonable profit is:
Design for Manufacturing(DFM)
The designers’ consideration of the
organization’s manufacturing
capabilities when designing a product.
The more general term design for
operations encompasses services as well
as manufacturing
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Concurrent engineering
is the bringing together
of engineering design and
manufacturing personnel
early in the design phase.

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Computer-Aided Design (CAD) is product
design using computer graphics.
increases productivity of designers, 3 to 10
times
creates a database for manufacturing
information on product specifications
provides possibility of engineering and cost
analysis on proposed designs

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 Design for Manufacturing and Assembly
(DFMA)
 Solve manufacturing problems during the design
stage
 3-D Object Modeling
 Small prototype
development
 CAD through the
internet

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Ease of Production (Manufacturability)
Specifications - Precise information about the
characteristics of the product
Tolerances - Minimum & maximum limits on a
dimension that allows the item to function as
designed
Standardization - Reduce variety among a group of
products or parts
Simplification - Reduce or eliminate the
complexity of a part or product
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Three general dimensions of service design
are:
Degree of Standardization of the Service
Custom-fashioned for particular customers or
basically the same for all customers?
Degree of Customer Contact in Delivering
the Service
High level of contact (dress boutique) or low level
(fast-food restaurant)?
Mix of Physical Goods and Intangible
Services
Mix dominated by physical goods (tailor’s shop) or
by intangible services (university)?

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Differences Between New Service and New
Product Development
Unless services are dominated by physical
goods, their development usually does not
require engineering, testing, and prototype
building.
Because many service businesses involve
intangible services, market sensing tends to be
more by surveys rather than by market tests
and demonstrations.

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Service design involves
The physical resources needed
The goods that are purchased or consumed by
the customer
Explicit services
Implicit services

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 Differences Between Product
and Service Design

Tangible – intangible
Services created and delivered at the
same time
Services cannot be inventoried
Services highly visible to customers
Services have low barrier to entry
Location important to service

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Service blueprinting
A method used in service design to describe
and analyze a proposed service
A useful tool for conceptualizing a
service delivery system

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1. Establish boundaries
2. Identify steps involved
3. Prepare a flowchart
4. Identify potential failure points
5. Establish a time frame
6. Analyze profitability

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 Standard Brush Apply Collect
execution time Buff
shoes polish payment
2 minutes
30 30 45 15
secs secs secs secs
Total acceptable
execution time
Wrong
5 minutes
color wax
Clean Fail
shoes point Materials
Seen by
(e.g., polish, cloth)
customer 45
secs

Line of Not seen by

visibility customer but Select and
necessary to purchase
performance supplies
98
1. Consistent with the organization mission
2. User friendly
3. Robust
4. Easy to sustain
5. Cost effective
6. Value to customers
7. Effective linkages between back operations
8. Ensure reliability and high quality

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 Quality Function Deployment
Voice of the customer

QFD: An approach that integrates the “voice of the

customer” into the product and service development
process.

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Product/service design and redesign
matters companies level of
competencies. How? Why?
Explain basic difference between
product and service design.
Service design requires due care
compared to product design. Why?

101
 CHAPTER 4
FOUR

Process Planning

Operations Management

102
Process selection
Deciding on the way production of goods or
services will be organized
Major implications
Capacity planning
Layout of facilities
Equipment
Design of work systems

103
 Facilities and
Forecasting Capacity Equipment
Planning

Product and Layout

Service Design

Process
Technological Selection Work
Change Design

104
How to produce a product or provide a
service that
Meets or exceeds customer requirements
Meets cost and managerial goals
Has long term effects on
Efficiency and production flexibility
Costs and quality

105
Four basic strategies
Process focus
Repetitive focus
Product focus
Mass customization

Within these basic strategies there are many

ways they may be implemented
106
How much variety in products or services
will the system need to handle?

What degree of equipment flexibility will be

needed?

What is the expected volume of output?

107
• Key aspects of process selection strategy
Capital intensive – equipment/labor
Customer involvement
Process flexibility
Adjust to changes
– Design
– Volume
– technology

108
 Process strategies that follow a continuum
 Within a given facility, several strategies may be
used
 These strategies are often classified as:

Process- Repetitive- Product-Focused

Focused Focused

Continuum 7-109
 Facilities are organized by process
 Similar processes are together
 Example: All drill presses are together
 Low volume, high variety products

 Other names
 Intermittent process
 Job shop
 Batch process
110
 Facilities are organized around specific
activities or processes
 General purpose equipment and skilled
personnel
 High degree of product flexibility
 Typically high costs and low equipment
utilization
 Product flows may vary considerably making
planning and scheduling a challenge

111
 Job Shop

Many
Many variety
inputs of
outputs

112
 Bank

© 1995
Hospital Corel
Corp.

Machine Shop
© 1995 Corel Corp.

© 1995 Corel Corp.

113
Advantages
Greater product flexibility
More general purpose equipment
Lower initial capital investment
Disadvantages
More highly trained personnel
More difficult production planning & control
Low equipment utilization

114
Facilities often organized by assembly
lines
Characterized by modules
Parts & assemblies made previously
Modules combined for many output
options
Less flexibility than process-focused
facilities but more efficient
Other names
Assembly line
Production line 115
More structured than process-focused, less structured than
product focused

Enables quasi-customization

Using modules, it enjoys economic advantage of continuous

process, and custom advantage of low-volume, high-variety
model

116
Automobile Assembly Line

117
 Hot-paint
Frame-building Frame frame painting
Frame tube machining
bending work cells
THE ASSEMBLY LINE
TESTING
28 tests
Air cleaners Oil tank work cell
Fluids and mufflers Shocks and forks
Fuel tank work cell Handlebars
Wheel work cell Fender work cell
Roller testing

118
Clothes
Dryer Fast
Food

McDonald’s
McDonald’s
over 95 billion served
over 95 billion served

Truck

119
 A repetitive process. Robots join and weld Saturns on an
automated assembly line Mercedes Benz Factory - YouTube.flv 120
 Facilities are organized by product
 High volume, low variety products
 Where found
 Discrete unit manufacturing
 Continuous process manufacturing

 Other names Products A & B

 Line flow production 11 22 33
 Continuous production Operation

121
Long, continuous production runs enable
efficient processes
Typically high fixed cost but low variable
cost per unit
Generally less skilled labor

122
 Continuous Work Flow

Output
variations in
Few inputs
size, shape,
and
packaging

123
Advantages
Lower variable cost per unit
Easier production planning and control
Higher equipment utilization (70% to 90%)
Disadvantages
Lower product flexibility
Usually higher capital investment

124
 A Scrap
steel
D Nucor Steel Plant
Continuous caster

B
C Electric
Ladle of molten steel furnace

Continuous cast steel

sheared into 24-ton slabs
E Hot tunnel furnace - 300 ft
F

Hot mill for finishing, cooling, and coiling

H G
I

125
126
 Soft Drinks
(Continuous,
then Discrete)
Light Bulbs
(Discrete)

Paper
(Continuous)
127
 The rapid, low-cost production of goods and
service to satisfy increasingly unique customer
desires
 Combines the
flexibility of a
process focus
with the efficiency
of a product focus

128
 Mass
Process Focus Repetitive Product Focus
Customization
(Low volume, Focus (High-volume,
(High-volume,
high variety) (Modular) low-variety)
high-variety)

Long runs,
Small quantity, Large quantity, Large quantity,
standardized
large variety of small variety of large variety of
product made
products products products
from modules

Special Rapid
General
equipment aids Special purpose changeover on
purpose
in use of equipment flexible
equipment
assembly line equipment
129
 Process Repetitive Product Mass
Focus Focus Focus Customization
(Low volume, (Modular) (High-volume, (High-volume,
high variety) low-variety) high-variety)

Operators are Employees are Operators are Flexible

broadly modestly less broadly operators are
skilled trained skilled trained for the
necessary
customization

Many job Repetition Few work Custom orders

instructions reduces orders and job require many
as each job training and instructions job
changes changes in job because jobs instructions
instructions standardized
130
 Process Repetitive Product Mass
Focus Focus Focus Customizatio
n
(Low (Modular) (High-
volume, high volume, low- (High-
variety) variety) volume, high-
variety)

Raw material JIT Raw material Raw material

inventories procurement inventories inventories
high techniques are low are low
used

Work-in- JIT inventory Work-in- Work-in-

process is techniques process process
high used inventory is inventory
low driven down
by JIT, lean
production 131
 Process Repetitive Product Mass
Focus Focus Focus Customizatio
n
(Low (Modular) (High-
volume, high volume, low- (High-
variety) variety) volume, high-
variety)

Units move Movement is Swift Goods move

slowly measured in movement of swiftly
through the hours and unit through through the
plant days the facility is facility
typical

Finished Finished Finished Finished

goods made goods made goods made goods often
to order to frequent to forecast build-to-order
forecast and stored (BTO)
132
 Process Repetitive Product Mass
Focus Focus Focus Customizatio
n
(Low (Modular) (High-
volume, high volume, low- (High-
variety) variety) volume, high-
variety)

Scheduling Scheduling Relatively Sophisticated

is complex, based on simple scheduling
trade-offs building scheduling, required to
between various establishing accommodate
inventory, models from output rate to custom
availability, a variety of meet forecasts orders
customer modules to
service forecasts

133
 Process Repetitive Product Mass
Focus Focus Focus Customizatio
n
(Low (Modular) (High-
volume, high volume, low- (High-
variety) variety) volume, high-
variety)

Fixed costs Fixed costs Fixed costs Fixed costs

low, variable dependent on high, variable high, variable
costs high flexibility of costs low costs must be
the facility low

Costing Costs usually High fixed High fixed

estimated known due to costs mean costs and
before job, extensive costs dynamic
known only experience dependent on variable costs
after the job utilization of make costing134
capacity a challenge
 Mass Service
Service processes that have a high number of transactions,
often involving limited customization

Example mass transportation services, call centers, etc.

A mass service – a call centre can

handle a very high volume of customer
enquiries because it standardizes its
processes 135
 Professional Service
Service processes that are devoted to producing
knowledge-based or advice based services, usually
involving high customer contact and high customization,

Examples include management consultants, lawyers,

architects, etc.

136
 Mass Service and Professional Service

 Labor involvement is high

 Selection and training highly important
 Focus on human resources
 Personalized services

137
 Service Shop
Service processes that are positioned between professional services
and mass services, usually with medium levels of volume and
customization.
Eg. Banks, high street shops, holiday tour operators, car rental
companies, schools, most restaurants, hotels and travel agents

 Automation of standardized services

 Low labor intensity responds well to process technology
and scheduling
 Tight control required to maintain standards

138
 Low Volume High Low Volume High
High Variety Low High Variety Low
Divers/complex

Intermittent
Process
Professio
focused
nal
service
Repetitiv
e
Service shop
Process
Process

flow

Product
tasks

focused
Mass Mass
customiz service
ation
Continuous
Repeated

Manufacturing process types Service process types

139
Flow Diagrams
Process Charts
Service Blueprinting

140
Is the process designed to achieve
competitive advantage in terms of
differentiation, response, or low cost?
Does the process eliminate steps that do
not add value? How?
Does the process maximize customer
value as perceived by the customer? How?
Will the process win orders? How?

141
 CHAPTER6FIVE

Capacity planning

Operations Management

142
The maximum level of value-added activity that
an operation, or process, or facility is capable of
over a period of time.
Capacity refers to an upper limit or ceiling on the
load that an operating unit can handle.
The number of physical units produced
The number of services performed
The goal of strategic capacity planning is to
achieve a match between the long-term supply
capabilities of an organization and the predicted
level of long-term demand.
143
 Develop Quantitative
Forecast
Alternative Factors
Demand
Plans (e.g., Cost)

Compute Evaluate Qualitative

Rated Capacity Factors
Capacity Plans (e.g., Skills)

Compute Select Best

Implement
Needed Capacity
Best Plan
Capacity Plan

144
Long Range Add Facilities
Planning *

Intermediate Sub-Contract Add Personnel

Range Planning Add Equipment Build or Use Inventory
Add Shifts

Schedule Jobs
Short Range * Schedule Personnel
Planning Allocate Machinery

Modify Use Capacity

Capacity 145
Design The theoretical maximum “throughput,” or
Capacity: number of units a facility can hold, receive,
store, or produce in a period of time.
Effective Capacity a firm can expect to receive given its
Capacity: product mix, methods of scheduling,
maintenance, and standards of quality.

Utilization: Actual output as a percent of design capacity.

Efficiency: Actual output as a percent of effective capacity.

146
Measure of planned or actual capacity
usage of a facility, work center, or
machine
Actual Output
Utilization =
Design Capacity
= Planned hours to be used
Total hours available

147
Measure of how well a facility or machine is
performing when used
Actual output
Efficiency =
Effective Capacity
Actual output in units
=
Standard output in units
Average actual time
=
Standard time
148
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day

Actual output = 36 units/day

Efficiency = =
90%
Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day

=
72% Design capacity 50 units/day
149
Facilities
Design
Location Policy
Layout Operational
Environment Scheduling
Product/service
Design
Materials management
Product or service mix Quality assurance
Process Maintenance policies
Quantity capabilities Equipment breakdowns
Quality capabilities
Human factors
Supply chain
Job content External factors
Job design Product standards
Training and experience Safety regulations
Motivation
Compensation
Unions
Learning rates Pollution control standards
Absenteeism and labor turnover
150
Capacity strategy for long-term demand
Demand patterns
Growth rate and variability
Facilities
Cost of building and operating
Technological changes
Rate and direction of technology changes
Behavior of competitors
Availability of capital and other inputs
151
Forecast demand accurately
Understand the technology and capacity
increments
Find the optimal operating level
(volume)
Build for change

152
1. Make staffing changes (increasing or decreasing the number of employees)

2. Adjust equipment and processes – which might include purchasing

additional machinery or selling or leasing out existing equipment

3. Improve methods to increase throughput; and/or

4. Redesign the product to facilitate more throughput

153
Demand management
Vary prices
Change lead times
Encourage or discourage business
Offer complementary products
Capacity management
Adjust staffing
Adjust equipment and processes
Change methods to facilitate production
Redesign the product to facilitate production

154
155
What is the strategic importance of
capacity ?

What are the different factors affecting

capacity?
Capacity planning affects different strategic
operation decisions like facility location. How
does it affects facility location, lay out,
scheduling and other strategic decision areas?

156
 Chapter Six
Facility Location

Operations Management

157
 One of the most important decisions a firm
makes
 Increasingly global in nature
 Significant impact on fixed and variable
costs
 Decisions made relatively infrequently
 The objective is to maximize the benefit of
location to the firm
158
 Location decisions based on low cost
require careful consideration
 Once in place, location-related costs
are fixed in place and difficult to reduce
 Determining optimal facility location is
a good investment

159
 Long-term decisions
 Decisions made infrequently
 Decision greatly affects both fixed and
variable costs
 Once committed to a location, many
resource and cost issues are difficult to
change

160
Country Decision Critical Success Factors
1. Political risks, government
rules, attitudes, incentives
2. Cultural and economic issues
3. Location of markets
4. Labor talent, attitudes,
productivity, costs
5. Availability of supplies,
communications, energy
6. Exchange rates and currency
risks

161
 Region/ Critical Success Factors
Community 1. Corporate desires
Decision 2. Attractiveness of region
3. Labor availability, costs, attitudes towards
unions
MN 4. Costs and availability of utilities
WI 5. Environmental regulations
MI 6. Government incentives and fiscal policies
7. Proximity to raw materials and customers
IL OH 8. Land/construction costs
IN

Figure 8.1
162
 Site Decision Critical Success Factors
1. Site size and cost
2. Air, rail, highway, and waterway
systems
3. Zoning restrictions
4. Proximity of services/ supplies
needed
5. Environmental impact issues

Figure 8.1
163
Cost-Profit-Volume Analysis
Determine fixed and variable costs
Plot total costs
Determine lowest total costs

164
 Method of cost-volume analysis used for
industrial locations
 Three steps in the method
1. Determine fixed and variable costs for each
location
2. Plot the cost for each location
3. Select location with lowest total cost for
expected production volume

165
Three locations:
Selling price = $120
Expected volume = 2,000 units
Fixed Variable Total
City Cost Cost Cost
Akron $30,000 $75 $180,000
Bowling Green $60,000 $45 $150,000
Chicago $110,000 $25 $160,000

Total Cost = Fixed Cost + (Variable Cost x Volume)

166
 –
$180,000 –
–
$160,000 –
$150,000 –
–
st c urve
co
$130,000 –
h i c ago
C
Annual cost

–
$110,000 – n
– Gree
ng v e
– owli t cur
s
$80,000 – B co
– o st
c
$60,000 – o n e
r v
– Ak c u r
–
Akron Chicago
$30,000 – Bowling Green
lowest lowest cost
– lowest cost
cost
$10,000 –
| | | | | | |
–
0 500 1,000 1,500 2,000 2,500 3,000
Volume 167
 Popular because a wide variety of factors can be
included in the analysis
 Six steps in the method
1. Develop a list of relevant factors called critical success
factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for each
location
6. Recommend the location with the highest point score
168
 Critical Scores
Success (out of 100) Weighted Scores
Factor Weight France Denmark France Denmark
1. Labor
availability
and attitude .25 70 60 (.25)(70) = 17.5
(.25)(60) = 15.0
2. People-to-
car ratio .05 50 60 (.05)(50) = 2.5
(.05)(60) = 3.0
3. Per capita
income .10 85 80 (.10)(85) = 8.5
(.10)(80) = 8.0
4. Tax structure .39 75 70 (.39)(75) = 29.3
(.39)(70) = 27.3
5. Education
and health .21 60 70 (.21)(60) = 12.6 169
 Finds location of distribution center
that minimizes distribution costs
 Considers
 Location of markets
 Volume of goods shipped to those
markets
 Shipping cost (or distance)

170
 Place existing locations on a
coordinate grid
 Grid origin and scale is arbitrary
 Maintain relative distances
 Calculate X and Y coordinates for
‘center of gravity’
 Assumes cost is directly proportional to
distance and volume shipped
171
 ∑dixQi
i=1
x - coordinate =
∑Q
i∑Qi

∑diyQi
i=1
y - coordinate =
∑
i
Qi

where dix = x-coordinate of

location i
diy = y-coordinate of
location i
172
North-South
Debre Brehan(130, 130)
Bahardar (30, 120)
120 –
Addis Ababa (90, 110)
90 –

60 –

30 – Jinka (60, 40)

|
–
|

30
|

60
|

90
|

120
|

150
East-West
Arbitrary
origin
173
 Number of Containers
Store Location Shipped per Month

Bahrdar (30, 120) 2,000

Addis Ababa (90, 110) 1,000
D.brahan (130, 130) 1,000
Jinka (60, 40) 2,000

(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

x-coordinate =
2000 + 1000 + 1000 + 2000
= 66.7
(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
y-coordinate =
2000 + 1000 + 1000 + 2000
= 93.3
174
North-South
Debre Brehan(130, 130)
Bahardar (30, 120)
120 – Addis Ababa (90, 110)
+ Center of gravity 66.7, 93.3)
90 –

60 –
Jinka (60, 40)

30 –| | | | | |
East-West
30 60 90 120 150
Arbitrar
y origin
175
–
 Finds amount to be shipped from
several points of supply to several
points of demand
 Solution will minimize total production
and shipping costs
 A special class of linear programming
problems

176
1. Purchasing power of customer-drawing area
2. Service and image compatibility with demographics
of the customer-drawing area
3. Competition in the area
4. Quality of the competition
5. Uniqueness of the firm’s and competitors’ locations
6. Physical qualities of facilities and neighboring
businesses
7. Operating policies of the firm
8. Quality of management

177
Service/Retail/Professional Location Goods-Producing Location
Revenue Focus Cost Focus
Volume/revenue Tangible costs
Drawing area; purchasing power Transportation cost of raw material
Competition; advertising/pricing Shipment cost of finished goods
Energy and utility cost; labor; raw
Physical quality material; taxes, and so on
Parking/access; security/lighting;
appearance/image Intangible and future costs
Attitude toward union
Cost determinants Quality of life
Rent Education expenditures by state
Management caliber Quality of state and local
Operations policies (hours, wage government
rates) 178
Service/Retail/Professional Location Goods-Producing Location
Techniques Techniques
Regression models to determine Transportation method
importance of various factors Factor-rating method
Factor-rating method Location break-even
Traffic counts analysis
Demographic analysis of drawing area Crossover charts
Purchasing power analysis of area
Center-of-gravity method
Geographic information systems

179
Service/Retail/Professional Location Goods-Producing Location
Assumptions Assumptions
Location is a major Location is a major determinant
determinant of revenue of cost
Most major costs can be identified
High customer-contact explicitly for each site
issues are critical Low customer contact allows
Costs are relatively constant focus on the identifiable costs
for a given area; therefore, Intangible costs can be evaluated
the revenue function is
critical

180
Why location decision is difficult to
reverse?
What limitations and strengths do you
observe in Ethiopia with regard to
location decision?
What are the major differences between
service and manufacturing location
decisions?

181
Chapter seven

Facility Layout

Operations Management

182
Layout: the configuration of departments, work
centers, and equipment, with particular emphasis
on movement of work (customers or materials)
through the system

183
Inefficient operations
For Example: Changes in the design
High Cost of products or services
Bottlenecks

Accidents
The introduction of new
products or services

Safety hazards
Changes in
environmental Changes in volume of
or other legal output or mix of
requirements products

Morale problems
Changes in methods
and equipment
 Higher utilization of space, equipment, and
people
 Improved flow of information, materials, or
people
 Improved employee morale and safer
working conditions
 Improved customer/client interaction
 Flexibility

186
1. Fixed-position layout
2. Process-oriented layout
3. Work-cell layout cellular lay out
4. Product-oriented layout
5. Combination layout
Other Service Layouts
1. Office layout
2. Retail layout
3. Warehouse layout

187
1. Fixed-position layout: Addresses the
layout requirements of large, bulky
projects such as ships and buildings
2. Process-oriented layout: Deals with low-
volume, high-variety production (also
called job shop or intermittent
production)

188
3. Work cell layout: Arranges machinery
and equipment to focus on production of
a single product or group of related
products
4. Product-oriented layout: Seeks the best
personnel and machine utilizations in
repetitive or continuous production

189
1. Office layout: Positions workers, their
equipment, and spaces/offices to
provide for movement of information
2. Retail layout: Allocates shelf space and
responds to customer behavior
3. Warehouse layout: Addresses trade-offs
between space and material handling

190
Locating the position of a product or service such
that it remains largely stationary, while
transforming resources are moved to and from it. it
Product remains in one place
Workers and equipment come to site
Complicating factors
 Limited space at site
 Different materials
required at different
stages of the project
 Volume of materials
needed is dynamic 191
 Like machines and equipment are
grouped together
 Flexible and capable of handling a
wide variety of products or services
 Scheduling can be difficult and setup,
material handling, and labor costs can
be high

192
Example
Hospital – some processes (e.g. X-ray machines and
laboratories) are required by several types of
patient; some processes (e.g. general wards) can
achieve high staff and bed utilization.
Supermarket – some products, such as tinned goods,
are convenient to restock if grouped together

193
 Arrange work centers so as to
minimize the costs of material
handling
 Basic cost elements are
 Number of loads (or people) moving
between centers
 Distance loads (or people) move
between centers

194
Can handle a variety of processing requirements
Not particularly vulnerable to equipment failures
Equipment used is less costly
Possible to use individual incentive plans

In-process inventory costs can be high

Challenging routing and scheduling
Equipment utilization rates are low
Material handling slow and inefficient
Complexities often reduce span of supervision
Special attention for each product or customer
Accounting and purchasing are more involved
195
In-process inventory costs can be high
Challenging routing and scheduling
Equipment utilization rates are low
Material handling slow and inefficient
Complexities often reduce span of supervision
Special attention for each product or customer
Accounting and purchasing are more involved

196
 Reorganizes people and machines into
groups to focus on single products or
product groups
 Group technology identifies products
that have similar characteristics for
particular cells
 Volume must justify cells
 Cells can be reconfigured as designs or
volume changes
197
1. Reduced work-in-process inventory
2. Less floor space required
3. Reduced raw material and finished goods
inventory
4. Reduced direct labor
5. Heightened sense of employee participation
6. Increased use of equipment and machinery
7. Reduced investment in machinery and
equipment

198
Current layout - workers in
small closed areas. Cannot
increase output without a Improved layout - cross-
third worker and third set of trained workers can assist
equipment. each other. May be able to
add a third worker as
additional output is needed.
199
Current layout - straight lines Improved layout - in U shape,
make it hard to balance tasks workers have better access.
because work may not be Four cross-trained workers
divided evenly were reduced.

U-shaped line may reduce employee

movement and space requirements while
enhancing communication, reducing the
Figure 9.10 (b)
number of workers, and facilitating inspection
200
Determine the takt time
Total work time available
Takt time =
Units required

Determine the number of

operators required

Workers required = Total operation time required

Takt time

201
600 Mirrors per day required
Mirror production scheduled for 8 hours per day
From a work balance chart
60
total operation time
= 140 seconds

Standard time required

50

40

30

20

10

0 Assemble Paint Test Label Pack for

shipment
Operations 202
600 Mirrors per day required
Mirror production scheduled for 8 hours per day
From a work balance chart
total operation time
= 140 seconds

Takt time = (8 hrs x 60 mins) / 600 units

= .8 mins = 48 seconds

Total operation time required

Workers required =
Takt time
= 140 / 48 = 2.91
203
 Used for evaluating operation times
in work cells
 Can help identify bottleneck
operations
 Flexible, cross-trained employees
can help address labor bottlenecks
 Machine bottlenecks may require
other approaches

204
Organized around products or families of similar
high-volume, low-variety products

1. Volume is adequate for high equipment utilization

2. Product demand is stable enough to justify high
investment in specialized equipment
3. Product is standardized or approaching a phase of life
cycle that justifies investment
4. Supplies of raw materials and components are
adequate and of uniform quality

205
 Fabrication line
 Builds components on a series of machines
 Machine-paced
 Require mechanical or engineering changes to
balance
 Assembly line
 Puts fabricated parts together at a series of
workstations
 Paced by work tasks
 Balanced by moving tasks
Both types of lines must be balanced so that the time to
perform the work at each station is the same
206
High rate of output
Low unit cost
Labor specialization
Low material handling cost
High utilization of labor and equipment
Established routing and scheduling
Routing accounting and purchasing

207
Creates dull, repetitive jobs
Poorly skilled workers may not maintain
equipment or quality of output
Fairly inflexible to changes in volume
Highly susceptible to shutdowns
Needs preventive maintenance
Individual incentive plans are impractical
High volume is required
Work stoppage at any point ties up the whole
operation

208
209
 Grouping of workers, their equipment,
and spaces to provide comfort, safety, and
movement of information
 Movement of
information is main
distinction
 Typically in state of
flux due to frequent
technological
changes
210
 Objective is to maximize profitability
per square foot of floor space
 Sales and profitability vary directly
with customer exposure
Supermarket Psychology Supermarket
Layout - YouTube.flv

211
1. Locate high-draw items around the periphery
of the store
2. Use prominent locations for high-impulse and
high-margin items
3. Distribute power items to both sides of an
aisle and disperse them to increase viewing of
other items
4. Use end-aisle locations
5. Convey mission of store through careful
positioning of lead-off department
212
213
 Manufacturers pay fees to retailers to
get the retailers to display (slot) their
product
 Contributing factors
 Limited shelf space
 An increasing number of new products
 Better information about sales through
POS data collection
 Closer control of inventory
214
 Computerized tool 5 facings
for shelf-space

Shampoo

Shampoo

Shampoo

Shampoo

Shampoo
management
 Generated from
store’s scanner
data on sales

Conditioner
Shampoo

Shampoo

Shampoo

Shampoo
Conditioner

Conditioner
 Often supplied by
manufacturer

2 ft.

215
 Ambient conditions - background
characteristics such as lighting, sound, smell,
and temperature
 Spatial layout and functionality - which
involve customer
circulation path planning,
walkway characteristics, and
product grouping
 Signs, symbols, and
artifacts - characteristics
of building design that
carry social significance 216
 Objective is to optimize trade-offs
between handling costs and costs
associated with warehouse space
 Maximize the total “cube” of the
warehouse – utilize its full volume
while maintaining low material
handling costs

217
 Material Handling Costs
 All costs associated with the transaction
 Incoming transport
 Storage
 Finding and moving material
 Outgoing transport
 Equipment, people, material, supervision, insurance,
depreciation
 Minimize damage and spoilage
218
 Warehouse density tends to vary inversely
with the number of different items stored
 Automated Storage and
Retrieval Systems (ASRSs)
can significantly improve
warehouse productivity by
an estimated 500%
 Dock location is a key
design element

219
Traditional Layout
Storage racks
Customization

Conveyor
Staging
Office
Shipping and receiving docks 220
Why lay out and re-layout is as such
important?
How do you evaluate lay out of most
service organizations in Ethiopia. Show
your justification. What happened to
these organization due to their lay out?

221
 Chapter 8

Aggregate Planning

Operations Management

222
Determine the quantity and timing of
production for the immediate future
 Objective is to minimize cost over the
planning period by adjusting
 Production rates
 Labor levels
 Inventory levels
 Overtime work
 Subcontracting rates
 Other controllable variables
223
Required for aggregate planning
 A forecast of demand for an intermediate
planning period in these aggregate terms
 A method for determining costs

224
1. Use inventories to absorb changes in demand
2. Accommodate changes by varying workforce
size
3. Use part-timers, overtime, or idle time to
absorb changes
4. Use subcontractors and maintain a stable
workforce
5. Change prices or other factors to influence
demand
225
 Changing inventory levels
 Increase inventory in low demand
periods to meet high demand in the
future
 Increases costs associated with
storage, insurance, handling,
obsolescence, and capital investment
15% to 40%
 Shortages can mean lost sales due to
long lead times and poor customer
service 226
 Varying workforce size by hiring or
layoffs
 Match production rate to demand
 Training and separation costs for
hiring and laying off workers
 New workers may have lower
productivity
 Laying off workers may lower morale
and productivity
227
 Varying production rate through
overtime or idle time
 Allows constant workforce
 May be difficult to meet large increases
in demand
 Overtime can be costly and may drive
down productivity
 Absorbing idle time may be difficult

228
 Subcontracting
 Temporary measure during periods of
peak demand
 May be costly
 Assuring quality and timely delivery
may be difficult
 Exposes your customers to a possible
competitor

229
 Using part-time workers
 Useful for filling unskilled or low
skilled positions, especially in services

230
 Influencing demand
 Use advertising or promotion to
increase demand in low periods
 May not be
sufficient to
balance demand
and capacity

231
 Back ordering during high- demand
periods
 Requires customers to wait for an
order without loss of goodwill or the
order
 Most effective when there are few if
any substitutes for the product or
service
 Often results in lost sales

232
 Option Advantages Disadvantages Some Comments
Changing Changes in human Inventory holding Applies mainly to
inventory resources are cost may increase. production, not
levels gradual or none; Shortages may service, operations.
no sudden result in lost sales.
production
changes.

Varying Avoids the costs of Hiring, layoff, and Used where size of
workforce other alternatives. training costs may labor pool is large.
size by hiring be significant.
or layoffs

233
 Option Advantages Disadvantages Some Comments
Varying Matches Overtime Allows flexibility
production seasonal premiums; tired within the
rates fluctuations workers; may aggregate plan.
through without hiring/ not meet
overtime or training costs. demand.
idle time
Sub- Permits Loss of quality Applies mainly
contracting flexibility and control; in production
smoothing of reduced profits; settings.
the firm’s loss of future
output. business.

234
 Option Advantages Disadvantages Some Comments
Using part- Is less costly and High turnover/ Good for unskilled
time workers more flexible training costs; jobs in areas with
than full-time quality suffers; large temporary
workers. scheduling labor pools.
difficult.

Influencing Tries to use excess Uncertainty in Creates marketing

demand capacity. demand. Hard to ideas.
Discounts draw match demand to Overbooking
new customers. supply exactly. used in some
businesses.

235
 Some
Option Advantages Disadvantages
Comments
Back May avoid Customer must Many
ordering overtime. be willing to companies
during Keeps capacity wait, but back order.
high- constant. goodwill is lost.
demand
periods
Counter- Fully utilizes May require Risky finding
seasonal resources; skills or products or
product allows stable equipment services with
and service workforce. outside the opposite
mixing firm’s areas of demand
expertise. patterns.
236
 A mixed strategy may be the best way
to achieve minimum costs
 There are many possible mixed
strategies
 Finding the optimal plan is not always
possible

237
 Chase strategy
 Match output rates to demand forecast
for each period
 Vary workforce levels or vary production
rate
 Favored by many service organizations

238
 Level strategy
 Daily production is uniform
 Use inventory or idle time as buffer
 Stable production leads to better quality
and productivity
 Some combination of capacity options,
a mixed strategy, might be the best
solution
239
 Popular techniques
 Easy to understand and use
 Trial-and-error approaches that do
not guarantee an optimal solution
 Require only limited computations

240
1. Determine the demand for each period
2. Determine the capacity for regular time,
overtime, and subcontracting each period
3. Find labor costs, hiring and layoff costs, and
inventory holding costs
4. Consider company policy on workers and stock
levels
5. Develop alternative plans and examine their
total costs
241
 Production Demand Per Day
Month Expected Demand Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124
Average Total expected demand
requirement =
Number of production days
6,200
= = 50 units per day
124
242
 Forecast demand
Production rate per working day

70 – Level production using average

monthly forecast demand
60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
243
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate
(above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

or k f orce
on st a n tw
c
Plan 1 –
244
 Monthly
Cost Information
Production at Demand Inventory Ending
Month carry
Inventory 50 Units
cost per Day Forecast $ 5 Change Inventory
per unit per month
Jan
Subcontracting 1,100
cost per unit 900 +200unit
$10 per 200
Feb pay rate 900
Average 700 +200
$ 5 per 400
hour ($40 per day)
Mar 1,050 800 +250
$ 7 per hour 650
Overtime pay rate
Apr 1,050 1,200 (above
-150 8 hours per day)
500
Labor-hours to produce 1.6 hours per unit
May 1,100 a unit 1,500 -400 100
Cost of increasing1,000
June daily production1,100
rate $300-100
per unit 0
(hiring and training)
Cost of decreasing daily production rate $600 per unit
1,850
$600 per unit
(layoffs)
Total units of inventory carried over from one workforce
Table 13.3 month to the
– c o nstant= 1,850 units
next
Plan 1
Workforce required to produce 50 units per day = 10 workers
245
Costs Monthly
Calculations
Cost Information
Cost Information
Production at Demand Inventory Ending
Inventory carrying
Month carry
Inventory 50 cost per Day$9,250
Units (= $1,850
Forecast per units
5Change carried
unit per month x
Inventory
Jan
Subcontracting 1,100
cost per unit 900 $5$10per
perunit)
+200unit 200
Regular-time
Feb pay ratelabor
Average 900 49,600700 (= $105 per
workers
+200 x $40
hour ($40 per
400
per day)
Mar 1,050 800 day$ 7xper
124
+250 days) 650
hour
Overtime pay rate
Other
Apr costs (overtime,
1,050 1,200 1.6 x(above
50
-150=10
8 hours per day)
500
hiring,
Labor-hours
May layoffs,
to produce
1,100 a unit 1,500
1.6 hours per unit
8 -400 100
subcontracting)
Cost
Juneof increasing daily production
1,000 0rate $300-100
1,100 per unit 0
(hiring and training)
Total cost $58,850 1,850
Cost of decreasing daily production rate $600 per unit
Cost of decreasing daily production rate $600 per unit
(layoffs)
Total units of inventory carried over from one
Table 13.3 month to the next = 1,850 units
Workforce required to produce 50 units per day = 10 workers
246
 Demand Per
Expected Production Day
Month Demand Days (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124 rac ting
ubco n t
n 2 – s
P la

Minimum requirement = 38 units per day

247
 Forecast demand
Production rate per working day

70 –
Level production
60 – using lowest
monthly forecast
50 – demand

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
248
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
$ 5 per hour ($40 per
Average pay rate
day)
$ 7 per hour
Overtime pay rate (above 8 hours per
day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production $300 per unit
rate (hiring and training)
Cost of decreasing daily production $600 per unit
rate (layoffs)
249
Cost Information
Inventory carry cost $ 5 per unit per month
In-housecost
Subcontracting production
per unit = 38
$10units
per unitper day
Average pay rate x$124
5 per days
hour ($40 per day)

Overtime pay rate

= 4,712
$ 7 per units
hour
(above 8 hours per day)
Subcontract
Labor-hours units
to produce a unit = 6,200 - 4,712
1.6 hours per unit

=
Cost of increasing daily production rate
(hiring and training)
1,488 units
$300 per unit

Cost of decreasing daily production rate $600 per unit

(layoffs)

250
Cost Information
Inventory carry cost $ 5 per unit per month
In-housecost
Subcontracting production
per unit = 38
$10units
per unitper day
Average pay rate x$124
5 per days
hour ($40 per day)

Overtime pay rate

= 4,712
$ 7 per units
hour
(above 8 hours per day)
Costs Subcontract
Labor-hours units
to produce a unit =6,200 - 4,712
Calculations
1.6 hours per unit
Cost of increasing
Regular-time daily production
labor
(hiring and training)
$37,696 =
rate 1,488
(= $300
7.6 units
per unit x $40 per
workers
day x 124 days)
Cost of decreasing daily production rate $600 per unit
Subcontracting
(layoffs) 14,880 (= 1,488 units x $10 per
unit)
Table 13.3
(38 x 1.6)/8=7.6
Total cost $52,576 251
 Expected Production Demand Per
Month Demand Days Day (computed)
Jan 900 22 41
Feb 700 18 39
Mar 800 21 38
Apr 1,200 21 57
May 1,500 22 68
June 1,100 20 55
6,200 124 i r i n g
g an d f
hi r i n
Plan 3 –
Production = Expected Demand
252
 Forecast demand and
Production rate per working day

monthly production
70 –

60 –

50 –

40 –

30 –

0 –
Jan Feb Mar Apr May June = Month
     
22 18 21 21 22 20 = Number of
working days
253
Cost Information
Inventory carrying cost $ 5 per unit per month
Subcontracting cost per unit $10 per unit
Average pay rate $ 5 per hour ($40 per day)
$ 7 per hour
Overtime pay rate (above 8 hours per day)
Labor-hours to produce a unit 1.6 hours per unit
Cost of increasing daily production rate $300 per unit
(hiring and training)
Cost of decreasing daily production rate $600 per unit
(layoffs)

254
 Basic
Production
Cost Information Cost Extra Cost of Extra Cost of
Daily cost
Inventory carrying (demand x Increasing Decreasing
$ 5 per unit per month
Forecast Prod 1.6 hrs/unit x Production Production
MonthSubcontracting
(units) cost per$5/hr)
Rate unit $10 per unit
(hiring cost) (layoff cost) Total Cost
Average pay 41(900
rate $ 5 per hour ($40 per day)
Jan 900 $ 7,200 — — $ 7,200
/22) $ 7 per hour
Overtime pay rate
(above 8 hours
$1,200 per day)
Feb 700 39 5,600 — 6,800
Labor-hours to produce a unit (= 2 x $600)
1.6 hours per unit
$600
Mar Cost800of increasing
38 daily6,400
production rate — $300 per unit 7,000
(hiring and training) (= 1 x $600)
$5,700
Apr Cost of decreasing
1,200 57 daily9,600
production rate $600 per unit — 15,300
(layoffs) (= 19 x $300)
$3,300
May 1,500 68 12,000 — 15,300
Table 13.3 (= 11 x $300)
$7,800
June 1,100 55 8,800 — 16,600
(= 13 x $600)
255
$49,600 $9,000 $9,600 $68,200
Cost Plan 1 Plan 2 Plan 3
Inventory carrying $ 9,250 $ 0 $ 0
Regular labor 49,600 37,696 49,600
Overtime labor 0 0 0
Hiring 0 0 9,000
Layoffs 0 0 9,600
Subcontracting 0 14,880 0
Total cost $58,850 $52,576 $68,200
Plan 2 is the lowest cost option
256
 CHAPTER 9

QUALITY CONTROL AND

IMPROVEMENT

Operations Management

257
The transcendent approach – views quality as synonymous with
innate excellence.
The manufacturing-based approach – is concerned with making
products or providing services that are free of errors and that
conform precisely to their design specification
The user-based approach – is concerned with making sure that
the product or service is fit for its purpose
Quality – the operation’s view-Quality is consistent conformance
to customers’ expectations
The customer’s view-quality is what he or she perceives the
product or service to be
Product-based – specific and measurable attributes of the
product
258
 Sales Gains via
 Improved response
 Flexible pricing
 Improved reputation
Improved Increased
Quality Reduced Costs via Profits

 Increased productivity
 Lower rework and scrap costs
 Lower warranty costs

259
 Inspection and
Inspection corrective Quality built
before/after action during into the
production production process

The least The most

progressive progressive

260
 Steps in designing a quality control system
First identify critical point in the process where
inspection is needed
Second decide on the type of measurement to be
used at each inspection point.
Variable measurement: utilizes a continuous scale for such
factors as length, height, and weight.
Attribute measurement: uses a discrete scale by counting the
number of defective items or the number of defects per units.
Third decide on the amount of inspection to use
Finally deciding who should do the inspections.

261
 How Much/How Often
Where/When
Centralized vs. On-site

Inputs Transformation Outputs

Acceptance Process Acceptance

sampling control sampling

262
Cost

Total Cost
Cost of
inspection
Cost of
passing
defectives

Optimal
Amount of Inspection

263
Raw materials and purchased parts
Finished products
Before a costly operation
Before an irreversible process
Before a covering process

264
Type of Inspection Characteristics
business points
Fast Food Cashier Accuracy
Counter area Appearance, productivity
Eating area Cleanliness
Building Appearance
Kitchen Health regulations
Hotel/motel Parking lot Safe, well lighted
Accounting Accuracy, timeliness
Building Appearance, safety
Main desk Waiting times
Supermarket Cashiers Accuracy, courtesy
Deliveries Quality, quantity
265
 Prevention costs - reducing the potential
for defects
 Appraisal costs - evaluating products,
parts, and services
 Internal failure - producing defective
parts or service before delivery
 External costs - defects discovered after
delivery
266
 Total Cost

External Failure

Prevention
Appraisal
Quality Improvement
267
 ISO 9000 series (Europe/EC)
 Common quality standards for products sold in
Europe (even if made in U.S.)
 2000 update places greater emphasis on
leadership and customer satisfaction
 ISO 14000 series (Europe/EC)

268
Core Elements:
 Environmental management
 Auditing
 Performance evaluation
 Labeling
 Life cycle assessment

269
SPC is statistical method for
determining whether a particular
process is in or out of control
The Control Process
Define
Measure
Compare
Evaluate
Correct
Monitor results

270
Encompasses entire organization, from
supplier to customer
Stresses a commitment by management to
have a continuing, companywide drive
toward excellence in all aspects of
products and services that are important
to the customer

271
 Continuous improvement
 Six Sigma
 Employee empowerment
 Benchmarking
 Just-in-time (JIT)
 Taguchi concepts
 Knowledge of TQM tools
272
 Concept recognizes that quality
improvement is a journey with no
end.
 Represents continual improvement of
all processes
 Involves all operations and work
centers including suppliers and
customers
 People, Equipment, Materials,
Procedures 273
 Two meanings
 Statistical definition of a process that is 99.9997%
capable, 3.4 defects per million opportunities
(DPMO)
 A program designed to reduce defects, lower costs,
and improve customer satisfaction
 A statistical based structured methodology for
identifying and eliminating causes of errors in process

274
 Empowerment is strengthening others’ belief
in their own sense of effectiveness and
sharing leadership power with others
 Getting employees involved in product and
process improvements
 85% of quality problems are due
to process and material
 Techniques
 Build communication networks
that include employees
 Develop open, supportive supervisors
 Move responsibility to employees
 Build a high-morale organization
 Create formal team structures 275
 Group of employees who meet
regularly to solve problems
 Trained in planning, problem solving,
and statistical methods
 Often led by a facilitator
 Very effective when done properly

276
Selecting best practices to use as a standard
for performance
 Determine what to
benchmark
 Form a benchmark team
 Identify benchmarking partners
 Collect and analyze benchmarking
information
 Take action to match or exceed the
benchmark
277
Relationship to quality:

 JIT cuts the cost of quality

 JIT improves quality
 Better quality means less inventory
and better, easier-to-employ JIT
system

278
 Engineering and experimental design
methods to improve product and process
design
 Identify key component and process
variables affecting product variation
 Taguchi Concepts
 Quality robustness
 Quality loss function
 Target-oriented quality
279
280