OPERATIONS MANAGEMENT

(Heizer & Render)

Prepared by

MUHAMMAD ZUBAIR SALMAN

• Chapter 1: Operations and Productivity
• Chapter 2: Operations Strategy in a Global Environment
• Chapter 3: Managing projects Managing projects involves 3 steps:
• Chapter 4: Forecasting
• Chapter 5: Design of Goods and Services
• Chapter 6: Managing Quality
• Chapter 7: Process Strategy
• Chapter 8: Location decisions
• Chapter 9: Layout Strategy

Chapter 1: Operations and Productivity

What is Operations Management?
Production: the creation of goods and services

Operations Management (OM): Activities that add value to the creation of goods and services
by transforming inputs to outputs.

Organizing to produce goods and services

Organizations need to perform three functions to ensure a smooth production and the
organization’s survival:

1. Marketing: generates the demand or takes the order for a product or service.

2. Productions/ Operations creates the product.

3. Finance / accounting tracks how well the organization is doing, pays the bills, and collects
money.

We study OM for four reasons:

1. To see how the OM activity functions, and how people organize themselves for productive
enterprise.
2. To know how goods and services are produced.
3. To understand what operations managers, do.
 4. To find a way an organization can improve its profitability and its service to society, since
OM is a costly part of an organization.

The management process is the application of planning, organizing, staffing, leading, and
controlling in order to the achieve objectives. This process is applied to the decision’s operations
managers make in the OM function.

The Heritage of Operations Management

Some people of note that have contributed to OM are:

-Eli Whitney (1800), who made interchangeable parts popular through standardization and
quality control.

-Frederik W. Taylor (1801), who wanted to find the best way to produce and be resourceful, and
who believed managers should be responsible for:

1. Matching employees to the right job

2. Providing a proper training
3. Providing proper work methods and work
4. Establishing legitimate incentives for work to be accomplished

Industrial engineering, management science, physical sciences and information sciences have
also contributed to OM. Information sciences contributed to improving productivity and provided
society with more diverse goods and services at the same time.

Operations in the service sector

Services: Economic activities that produce an intangible product (such as education,
entertainment, lodging, government, financial and health services).

Characteristics of Goods Characteristics of Services

Tangible product Intangible product

Consistent product Inconsistent product definition

definition
Cannot be inventoried
Can be inventoried
Produced and consumed at same time
Production usually
separates from High customer interaction, interaction
consumption demands uniqueness
Low customer interaction Frequently dispersed; frequently
brought to
Distributed to more clients
at one time the client, Knowledge-based, hard to automate
through for example local
offices Often unique

Easy to automate

Often not unique

Since the activities of the operation functions are often the same for both goods and services,
there isn’t a clear difference between them. Almost all goods are a combination of a service and
a tangible product, and service can also be essential to production.

Pure service: a service that does not include a tangible product.

Service Sector: segment of the economy that includes trade, financial,

lodging, education, legal, medical, and other professional occupations. Currently
the biggest sector in the economy.

Some changes that have occurred/are occurring in OM are:

• A more global focus due to reliable worldwide communication and transport networks.
• Just-in-time systems due to short product life cycles.
• E-commerce because of the Internet, fast international communication, and computer-
aided design.
• Mass customization due to flexible production processes and worldwide markets.
• Empowered employees and high ethical social responsibility due to a change in the
sociocultural area and a global review of ethics.
• Environmentally sensitive manufacturing because of environmental issues and increasing
costs of waste disposal.

Productivity: the ratio of outputs (goods and services) divided by one or more inputs (such as
labor, capital, or management).

Since efficiency improves when productivity improved, it is important to use resources in the
most efficient way, so that more value is added to the good or service. This can be done by:

• Reducing inputs while keeping the output the same.

• Increasing the output while keeping inputs the same.

Outputs are goods and services, while inputs are capital, labor, physical resources and
management. A country can improve the standard of living my measuring the productivity and
improving it.
 Single-factor productivity: the ratio of one resource (input) to the goods and services
produced (outputs). A common measure of productivity is when input is measured in labor-
hours.

Productivity: Units produced / Input Used

Multifactor Productivity: the ratio of many or all resources (inputs) to the goods and services
produced (outputs). Also known as total factor productivity.

Productivity: Output / (labor + material + energy + capital + other inputs)

Measurement Problems

• Quality may change while the quantity of inputs and outputs remains constant.
• External elements may cause an increase or decrease in productivity.
• Precise units of measure may be lacking.

Especially in the service sector productivity measurement is difficult because the product is not
easy definable.

Productivity variables
Managers can improve productivity by changing labor, capital or management.

If the labor force is better educated and healthier, they have a better contribution to productivity.
Three key variables for improved labor productivity are:

1. Basic education (needed for effectivity)

2. Diet
3. Social overhead that makes labor available

In developed nations there are even more challenges to management:

1. Maintaining and enhancing the skills of labor.

2. Better utilized labor with a stronger commitment.

There is always a trade-off between Capital and labor. When the interest rate is higher, there is
less investment in capital because the return on investment has been reduced.

What also contributes to productivity is more effective use of capital.

Management ensures that labor and capital are effectively used to increase productivity. In
order to improve productivity, effective use of knowledge and capital is needed, and the
manager’s job is to select the best new capital investments and improve the productivity of the
existing ones.

Knowledge society: a society in which much of the labor force has migrated from manual work
to work based on knowledge.
While there are many good theories on how to improve goods-production based activities, the
productivity in the service sector is more difficult to improve, since work in the service sector is
often:

• labor-intensive
• focused on unique individual attributes or desires
• an intellectual task performed by professionals
• difficult to mechanize and automate
• difficult to evaluate for quality

Ethics and Social Responsibility

The changes in the environment, laws and values represent the challenges that come from
conflicting perspectives of stakeholders.

Managers must meet the demand of the marketplace while doing everything in a socially
responsible and ethical way. Therefore, managers should have a moral awareness and focus on
increasing productivity, as well as developing safe quality products, maintaining a clean
environment and a safe workplace.

Chapter 2: Operations Strategy in a Global

Environment

New standards of global competitiveness as quality, variety, customization, convenience,

timeliness and costs contribute to efficiency and add value to goods. They also increase
complexity, risk and competition.

Maquiladoras (free trade zones): allow Mexican manufacturers to pay only the value added by
Mexican workers, meaning costs of taxation are reduced.

The advantages of shifting low-skilled jobs to other, low cost countries are:

• The firm can reduce its costs

• By moving the low-skilled jobs, the higher cost workers can perform more valuable tasks.
• By reducing wage costs, the savings can be invested in improving products and facilities.

Tariffs are also reduced by trade agreements.

World Trade Organization: an international organization that promotes world trade by lowering
barriers (WTO) to the free flow of goods across borders.

NAFTA: a free trade agreement between Canada, Mexico and the U.S.
The European Union is also a trading group that has reduced the trade barriers among the
participating countries through standardization and a common currency.

Advantages of shifting markets to other countries:

• The supply chain can be improved when moving facilities to countries that have unique
resources such as expertise, labor, or raw materials.
• Products and services can be easier customized to meet unique cultural needs in the
foreign markets.
• The response time to meet customers’ requirements can be reduced.
• Firms can learn about opportunities for new products and services.
• The life cycle of a product can be expanded.
• By offering more employment opportunities global organizations can attract better
employees.

Mission: the purpose or rationale for an organization’s existence.

Once a mission has been decided, each functional area within the firm determines its supporting
mission. Functional areas are the major disciplines required by the firm such as marketing,
finance and production.

Strategy: how an organization expects to achieve its mission and goals. Missions are achieved
in three ways:

1. Differentiation: deliver goods that are better

2. Cost leadership: deliver goods that are cheaper
3. Response: deliver goods that are more responsive

Competitive advantage: the creation of a unique advantage over competitors.

There are different ways a company can compete with other companies:

Competing on differentiation

Differentiation: to distinguish the offerings of the organization in any way that the customer
perceives as added value.

Experience Differentiation: engages the customer with the product through imaginative use

of the five senses, so that the customer “experiences” the product.

Competing on Cost

Low-cost leadership: achieving maximum value as perceived by the customer by

having a low production cost.

Competing on Response

Response: set of values related to rapid, flexible, and reliable performance. There are three
aspects of response:

• The flexibility: ability to match changes to innovations

• The reliability of scheduling
• The quickness

The three concepts are implemented through the six specific strategies:

1. Flexibility in design and volume

2. Low price
3. Delivery
4. Quality
5. After-sale service
6. Abroad product line

Strategic decisions are implemented by deciding what the key tasks and the needed staffing are
in order to achieve them. These decisions are:

1.Goods, service and design

2.Quality

3.Process and Capacity design

4.Location selection

5.Layout design

6.Human resources and job design

7.Supply-chain management

8.Inventory

9.Scheduling

10.Maintenance
Pims (Profit impact of market strategy): a program established in cooperation with GE to
identify characteristics of high-return-on-investment firms, which are high product quality, high
capacity utilization, high operation efficiency, low investment intensity, and low direct cost per
unit. These findings should be considered when an organization develops a strategy.

Dynamics: changes in the organization (internal factors) and in the environment (external
factors).

Strategy development and implementation

It is the Operations manager’s job to implement an OM strategy, provide competitive advantage

and increase productivity, which can be done by identifying critical success factors, and
integrating them with the company activities.

SWOT analysis: determining internal strengths and weaknesses and external opportunities and
threats.

Critical success factors: activities or factors that are key to achieving competitive advantage.

Activity map: a graphical link of competitive advantage, CSFs, and supporting activities.

International business: A firm that engages in cross-border transactions.

Multinational Corporation (MNC): A firm that has international involvements, owning or

controlling facilities in more than one country.

There are four major operations strategies in the global environment:

International strategy: global markets are penetrated using exports and licenses. This strategy
has the least advantages and local responsiveness considerations.
Multi domestic strategy: decisions made are adapted to each country in order to increase local
responsiveness, and there is a degree of autonomy in each branch. These are often
subsidiaries, franchises, or joint ventures with certain independence. This strategy has low cost
advantage but has quick responsiveness to its location.

Global strategy: operation decisions are centralized, and headquarters coordinates the

standardization and learning between facilities, also known as economies of scale. This strategy
is good for cost reduction, but it has low local responsiveness.

Transnational strategy: combines the efficiency of a global scale and the benefits of local
responsiveness. This strategy recognizes that a core competence can exist across countries.

Chapter 3: Managing projects Managing projects

involves 3 steps:
1. Planning: such as goal setting, defining the project, and organizing teams.
2. Scheduling: relating resources (people, money, supplies) to specific activities, or relating
activities to each other.
3. Controlling: monitoring resources and budgets, and revising plans, as well as shifting
resources to fit time a cost demand.

Project organization: an organization formed to ensure that projects or programs are being
managed and paid attention to in a right way.

Work breakdown structure (WBS): divides work into more detailed parts in order to define the
project more clearly.

Gantt charts: planning charts used to schedule resources and to allocate time. Gantt charts can
be used for:

1. Showing the relation of each activity to other activities as well as the whole project.
2. Identifying the activities that have priorities.
3. Encouraging the setting of realistic time and cost estimates for each activity.
4. Helping to make better use of resources by identifying the bottlenecks in the project.
Computer programs can be used to provide detailed cost breakdowns, labor curves, cost
distribution tables, cost and hour summaries, raw material and expenditure forecasts. Variance
reports, time analysis reports, and work status reports.

PERT (program evaluation and review technique): a project management technique that
uses three estimates for each activity.

Critical path method (CPM): a project management technique that uses only one estimate per
activity.

Critical path: the longest time path through a network. The activities on a critical path will delay
the entire project if they are not completed on time.

Activity-on-node (AON): a network diagram in which nodes elect activities.

Activity-on-arrow (AOA): a network diagram in which arrows elect activities. In a network that
uses AOA, the nodes represent the starting and finishing times of an activity, and they are also
called events.

Dummy activity: an activity that doesn’t take any time but is inserted into a network to maintain
the logic. A dummy ending activity can be for example added to the end of an AON diagram for
a project that has multiple ending activities.

Critical path analysis: a process that helps to determine a project schedule. In order to find the
critical path, a starting and ending time is calculated for each activity. There are four possibilities:

1. Earliest start (ES): earliest time at which an activity can start (considering that all previous
activities have been completed).
2. Earliest finish (EF): Earliest time at which an activity can be finished.
3. Latest start (LS): latest time at which an activity can start, without delaying the completion
time of the entire project.
4. Latest finish (LF): Latest time by which an activity must finish to not delay the completion
time of the entire project.

Forward pass: a process that identifies the early start and early finish times of all activities.
EF = ES + activity time

ES = EF of all immediate previous activities.

Backward pass: a process that identifies the late start and late finish times of all activities.

LS = LF - activity time

LF = LS of all immediately following activities.

Slack time: free time for an activity. The activities without any slack time are critical
activities and are almost always on the critical path.

Slack time = LS – ES (or LF – EF)

The critical path is a path through the network that starts at the first activity of the project, ends
at the last activity. It is continuous and contains only critical activities.

Optimistic time: the best completion time of an activity that could be gained in a PERT network.

Pessimistic time: the worst completion time of an activity that could result in a PERT network.

Most likely time: the most probable time that an activity could take in a PERT network.

Expected activity time: t = (a + 4m + b) / 6

Variance of activity completion time: = [(b-a)/6]^2

Project variance: SUM (variances of activities on critical path)

Z: number of standard deviations the due date lies from the mean or the expected date.
Z = (due date – Expected date of completion) / project variance

Crashing: to shorten the time of an activity in a network in order to reduce time on the critical
path, so that total completion time is reduced.

Crash cost per period = (crash cost – normal cost) / (normal time – crash time)

Some advantages of PERT and CPM are:

• Useful when scheduling large projects

• Straightforward
• Helps identify activities that need to be paid most attention to.

Some limitations:

• Activities must be well defined and independent.

• Time estimate tend to be subjective.
• Too much emphasis might be placed on critical activities or the critical path.

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Chapter 4: Forecasting

Forecasting: predicting future events, making good estimates. The forecast is the only estimate
of demand until the actual demand is known. A forecast is classified by the three categories:

1. Short-range forecast: Maximum period of 1 year, used for planning purchasing, job
scheduling, workforce levels, job assignments and production levels.
2. Medium-range forecast: For a period from 3 months to 3 years, used for sales and
production planning and budgeting.

3. Long-range forecast: lifespan > 3 years, used for planning new products, capital
expenditures and other long-range forecasts.
The last two categories deal with more wide-ranging issues and support management. They are
less accurate and use less quantitative methodologies than short-term forecasting.

The four stages of the product life cycle (important to forecasting) are: Introduction, Growth,
Maturity and Decline.

Three types of forecasts are:

1.Economic Forecast: recognizing indicators valuable to the preparations of organizations.

medium- to long-range forecasts.

3.Technological Forecast: long term forecasts concerned with the rates of technological
progress.

3.Demand forecasts/sales forecast: projections of a company’s sales for each time period for
the planning period.

There are seven steps in forecasting:

1. What will the forecast be used for?

2. What items must be forecasted?
3. What is the time horizon for the forecast?
4. What forecasting model will be used?
5. Data is gathered.
6. Forecast is made.
7. Results are validated and implemented.

Quantitative analysis and qualitative approach are both approaches to general forecasting:

Qualitative forecasts: forecasts that incorporate factors as intuition, emotions, personal

experiences and value system. This method uses four techniques:

1. Jury of executive opinion: makes a group of demand by taking the opinions of a group
of high-level experts or managers, often in combination with statistical models.
2. Delphi method: uses a group process that allows experts to make (anonymous)
forecasts. Decision makers, staff personnel and respondents are the participants in this
method.
 3. Sales force composite: based on a salesperson’s estimation of next period’s sales.
These are reviewed and combined at district and national levels to reach an overall

forecast. Might not be trustworthy since salespersons might underestimate in order to reach the
estimation more easily.

4. Consumer Market survey: uses customers or potential customers inputs regarding

future purchasing plans. This can be used in improving product design and planning, as
well as forecasting.

Quantitative forecast: forecasts that employ one or more mathematical models that rely on

historical data and/or causal variables to forecast demand. There are two categories:

1.Associative model: incorporate the variables that can influence the quantity being forecasted.

2.Time-series models. these models use a series of past data points to make a forecast:

• The Naive approach: a forecasting technique that assumes demand in the next period is
equal to demand in the most recent period.
• Moving averages: the forecasting method that uses an average of the n most recent
periods of data to forecast the next period. These forecasts can be useful if we can
assume the market will stay stable over time.

Moving average= ∑ Demand in previous n periods / n

(n is number of periods in the moving average)

If you want to place more emphasis on recent values, weights can be used when there is a clear
pattern.

Weighted moving average= [ ∑ (Weight for period n) x (Demand period n) ] / ∑ Weights

These averages are not very sensitive to real changes in the data, they are behind on the actual
values and refer more to the past and require records of past data.
Exponential Smoothing: a weighted moving- average forecasting technique in which data
points are weighted by an exponential function. This method is easy to use and little past data is
needed.

New forecast= Last period’s forecast + α (Last forecast period’s actual demand-Last
period’s forecast)

α is the smoothing constant: the weighted factor used in an exponential smoothing forecast (a
number between 0 and 1). More weight is given to past data when the constant is low.

The forecast error tells us how well the model performed against itself using past data.

Forecast error= Actual Demand - Forecast value

Mean absolute deviation (MAD): a measure of the overall forecast error for a model.

MAD= ∑ [Actual – Forecast] / n

Mean absolute percent error (MAPE): the error as a percentage of the actual values.

MAPE= [100 ∑ |Actual i – Forecast i | / Actual I] / n

Seasonal variations in data are regular up-and-down movements in a time series that relate to
recurring events. When seasonal factors are multiplied by an estimate of average demand to
produce a seasonal forecast, it’s called a multiplicative seasonal model.

Tracking signal: a measurement of how well the forecast is predicting actual values. The
forecast values are compared to the new available data. When the tracking signal is positive, the
demand is greater than forecast and vice versa.

Tracking signal = [Running sum of the forecast errors (RSFE)] / [Mean absolute deviation
(MAD)]
Bias: a forecast that is consistently higher or consistently lower than actual values of a time
series.

Adaptive smoothing: an approach to exponential smoothing forecasting in which the

smoothing constant is automatically changed to keep errors to a minimum.

Focus forecasting: forecasting that tries a variety of computer models and selects the best
ones for a particular application. It is based on two principles:

1. Sophisticated forecasting models are not always better than simple ones.
2. There is not a single technique that should be used for all products or services

Chapter 5: Design of Goods and Services

Product decision: the selection, definition and design of products.

An effective product strategy links products decision with investment, market share, and product
life cycle.

There are three options for product strategies: differentiation, low cost, and rapid response.

Product life cycles determine the strategies needed for a product. There are four phases:

Introduction: the product is still being fine-tuned by means of research, and the product,

process and suppliers are still being developed.

Growth: the product design begins to stabilize, and effective forecasting of the capacity

needed becomes necessary.

Maturity: the competitors are established, and the product is being produced in high

volumes. Innovation might be needed, as the product line and options are being reduced.

Decline: the product does not grow anymore and might generate losses, in which case it

might have to be terminated unless it makes a special contribution.

Product-by value Analysis; A listing of products in descending order of their individual dollar
contribution to the firm, as well as the total annual dollar contribution of the product. This report
allows managers to evaluate possible strategies for each product, and it tells managers which
product offerings are not good and should be eliminated.

Generating new products

Brainstorming: a technique in which a diverse group shares idea on a particular topic in order
to generate creative ideas about possible products and product development.

To develop a new product, the operations manager must be aware of the following steps:

1. Understanding the customer

2. Economic change

3. Sociological and demographic change

4. Technological change

5. Political/legal change

6. Market practice, professional standards, suppliers, distributors

Product Development System

Quality function: a process for determining customer requirements.

Quality function Deployment (QFD): translating them into the attributes that each functional
area can understand and act on.

House of quality: a part of the quality function deployment process that uses a planning
matrix to show how the customer needs are implemented by the firm in order to meet these

needs:

- Identify customer needs

• Identify how the good/service will satisfy customer needs

• Relate customer wants to product attributes
• Identify relationships between the firm’s attributes
• Develop importance ratings
• Evaluate competing products

• Determine the desirable attributes to the

actual ones.

There are four approaches to organizing product development:

1.The traditional U.S approach; distinct departments who focus on a particular part of the
process.

2.The approach where a product manager ‘‘champions’’ the product through the development
system and organization.

3.The approach where product development teams are used.

4.The Japanese approach, in which teams are unnecessary, because within the

Organization there is already much teamwork and group effort and less structure.

Product development teams: Teams charged with moving from market requirements for a

product to achieving product success.

Concurrent engineering: Use of participating teams in design and engineering activities.

Manufacturability and Value engineering: activities that help improve a product’s design,
production, maintainability and use, including:

1. Reduced complexity of products

2. Additional standardization of products

3. Improved functional aspects of product

4. Improved job design and job safety

5. Improved maintainability of the product

6. Robust design

Robust design: a design that can be produced to requirements even with unfavorable
conditions in the production process.

Modular design: when parts or components of a product are subdivided into modules that are
easily interchanged or replaced.

Computer-aided Design (CAD): use of a computer to develop and document a product.

Design for Manufacture and Assembly (DFMA): software that allows designers to look at the
effect of design on manufacturing of the product.

3-D object modelling: an extension of CAD that builds small prototypes. It speeds

development process by avoiding a longer and formal manufacturing process.

Standard for the Exchange of Product Data (STEP: provides a format allowing the electronic
transmittal of three-dimensioned data.

Computer-aided Manufacturing (CAM): the use of information technology to control

machinery.

The benefits of CAD and CAM include:

-Product quality

-Shorter design time

-Product cost reductions

-Database availability

-New range of capabilities

Virtual reality: a form of communication in which images substitute for reality and typically allow
the user to respond interactively.

Value analysis: a review of successful products that takes place during the production process.

In order to ensure the manufacturing of products is done ethically and ecologically, products
should be made recyclable by using less harmful ingredients or recycled materials, lighter
components, less energy and less material to produce them.

Time based competition: competition based on time; rapidly developing products and moving
them to market.

Firms use both internal, as external development strategies.

External developments strategies include joint ventures, alliances, and the purchasing of
technology or gaining expertise by acquiring a developer.

Internal development strategies include the migrations of, and the enhancement of existing
products as well as new products developed internally.

Joint venture: firms establish joint ownership to pursue new products or markets. In this method
of purchasing technology, both organizations learn, and risks are shared.

Alliances: cooperative agreements that allow firms to remain independent, but that they pursue
strategies consistent with their individual mission.

A company can also buy a firm in order to gain technology, in which case the main concern is
whether the speed and development of the acquired firm fits with the buyer.
Defining the product

Engineering drawing: A drawing that shows dimensions, tolerances, materials, and finishes of
a component. The Bill of Material (BOM) lists the components, their description, and the
quantity of each required to make one unit of a product.

The Make or buy decision distinguishes between what the firms wants to produce and what it
wants to purchase.

Group technology is a component coding system that specifies the type of processing and the
parameters of the processing; it allows similar products to be grouped. When this is well
implemented, the following advantages appear:

-Improved design

-Reduced raw material and purchases

-Simplified production planning and control

-Reduced tooling setup time, and work-in process and production time

Documents for production

Assembly drawing: an exploded view of the product, usually via a three-dimensional or

isometric drawing.

Assembly chart: a graphic means of identifying how components flow into subassemblies and
ultimately into a final product.

Route sheet: a listing of the operations necessary to produce the components with the material
specified in the bill of material.

Work order: an instruction to make a given quantity of a particular item, usually to a given
schedule.

Engineering change Notice (ECN): a correction or modification of an engineering drawing or

bill of material.

Configuration management: A system in which a product’s planned and changing components

are accurately identified and for which control and accountability of change are maintained.

Product Life cycle product Management (PLM): a bundle of software programs that ties
together many phases of design and manufacture.
Service design

Services have unique characteristics, and that’s why designing them is not easy. There are
several ways in which costs can be reduced, and the product can be enhanced:

• Designing the product in such a way that customization is as late in the process as
possible.
• Modularizing the product so that customization takes the form of changing modules. This
way modules can be designed as standard entities.
• The service can be divided into small parts and identify those parts that can be used for
automation or reduced customer interaction. This way a ‘win-win; situation can arise,
where both the manufacturer and the consumer satisfaction grows.
• Focus design on the Moment of truth: the moment between the service provider and
customer that exemplifies, enhances, or detracts from the customer’s expectations.
• The documentation for a service will often take the form of explicit job instructions that
specify what must happen now of truth.

Application of decision trees to product design

The objective of decision trees is to determine the expected value of each course of action.

The transition to production: moving a product from development to production.

Chapter 6: Managing Quality

Quality: The ability of a product or service to meet customer needs.

It is important that the operations managers know what the customer expects, since improving
quality improves profitability.

Implications of Quality

1. Company reputation (Perception of new products, employment practices, supplier relations).

2. Product liability (Reduce risk)

3. Global implications (Improved ability to compete)

Cost of quality: the cost of doing things wrong, that is, the price of nonconformance. There are
four categories of costs associated with quality:

- Prevention costs (reducing the potential for defects)

- Appraisal co-International Quality Standards

International quality standards

ISO 9000: a set of quality standards developed by the International Standards Organization.

ISO 14000: Improved layout rooting and machine loading an environmental management
standard established by the International Standards Organization (ISO)

Core elements of quality standard are the management of environmental issues, auditing,
performance evaluation, labeling, and life-cycle assessment.

The advantages are:

-Positive public image and reduced exposure to liability

-Better approach to pollution prevention

-Compliance with regulatory requirements

-Reduction in need for multiple audits

Total Quality Management (TQM): management of an entire organization so that it excels in all
aspects of products and services that are important to the customer.

PDCA: a continuous improvement model of plan, do, check, act.

-Represents continual improvement of all processes

-Involves all operations and work center including suppliers and customers

-It evolves through the categories People, Equipment, Materials, Procedures

Six Sigma (also known al DMAIC): a program to save time, improve quality, and lower costs.

Six sigma is focuses on customer satisfaction, and it is a set of seven tools.

The Six Sigma Improvement Model:

1. Define critical outputs and identify gaps for improvement

2. Measure the work and collect process data

3. Analyze the data

4. Improve the process

5. Control the new process to make sure new performance is maintained

Employee empowerment: enlarging employee jobs so that the added responsibility and
authority is moved to the lowest level possible in the organization.

Quality Circle: a group of employees meeting regularly with a facilitator to solve work

related problems in their area.

Benchmarking: Selecting a standard of performance that represents the very

best performance for a process or activity.

Just-in-time (JIT)

- JIT cuts the cost of quality

- JIT improves quality

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

Taguchi Concepts

• Experimental design methods to improve product and process design

- Identify key component and process variables affecting product variation

Quality robust: products that are consistently built to meet customer needs despite adverse
conditions in the production process.

Quality loss function: a mathematical function that identifies all costs connected with poor
quality and (QLF) shows how these costs increase as product quality moves from what the
customer wants.

L= D^2C

L=Loss to society

D^2=square of the distance from the target value

C=cost of the deviation at the specification limit

Target-oriented quality: a philosophy of continuous improvement to bring the product exactly

on target.

Tools for Generating

Check sheets: an organized method of recording data.

Scatter diagrams: A graph of the value of one variable vs. another variable.

Cause and effect diagrams: A tool that identifies process elements (causes) that might affect
an outcome, also known as Ishikawa diagram or a fish-bone chart. The technique discovers
possible locations of quality problems.

Tools to Organize

Pareto chart: a graph to identify and plot problems or defects in descending order of

frequency

Flow charts (Process Diagrams): a chart that describes the steps in a process.

Tools for Identifying Problems

Histogram A distribution showing the frequency of occurrence of a variable.

Statistical process control chart: A chart with time on the horizontal axis to plot values of a
statistic
Statistical process Control (SPC): a process used to monitor standards by taking
measurements and corrective action as a product or service is being produced.

Control chart: A graphic presentation of process data over time.

Inspection: a way of making sure that an operation is producing at the quality that is expected
of it. The type of process and the value added at each stage affect the decision about when and
where to inspect.

Source Inspection is the controlling or monitoring at the point of production or purchase, with
the idea that each supplier, process and employee treats the next step in the process as the
customer so that perfect production is ensured for the next customer.
Poka-yoke is a foolproof device or technique that ensures production of goods every time, by
avoiding errors and provide quick feedback for production.

Attribute inspection is an inspection that classifies items as being either good or defective, but
not to the degree of failure.
On the contrary, Variable inspection classifies items as failing on a continuum scale such as
dimension, size or strength.

Supplement 6: Statistical Process Control

x-chart: a quality control chart for variables that indicates when changes occur in the central

tendency of a production process.

R-chart: a control chart that tracks the “range” within a sample; indicates that a gain or loss

in uniformity has occurred in dispersion of a production process.

Natural variations: variability that affect every production process to some degree and are to be
expected; also known as common causes.

Assignable variation: variation in a production process that can be traced to specific causes.

Samples: to measure the process, we take samples and analyze the sample statistics
following these steps

Types of Data

Variables Attributes
- Continuous random variables - Classify products as either
good or bad or count defects
- May be in whole or in fractional - Categorical or discrete
numbers random variables
- Defect-related characteristics
- Characteristics that can take
any real value

Central Limit Theorem: the theoretical foundation for x-charts. It states that the distribution of
x’s will tend to follow a normal curve as the number of samples increases, irrespective of the
distribution of the population of all parts.
1. The mean of the sampling distribution (x) will be the same as the population mean μ

2. The standard deviation of the sampling distribution (σx) will equal the population standard
deviation (σ) divided by the square root of the sample size.

Process control

Population and Sampling distribution

Charts for variables

- For variables that have continuous dimensions (Weight, speed, length, strength, etc.).

- x-charts are to control the central tendency of the process.

- R-charts are to control the dispersion of the process.

- These two charts must be used together.

Setting chart limits:
For x-Charts when we know σ:

Upper control limit (UCL) = x + z σ x

Lower control limit (LCL) = x - z σ x

Where:
x = mean of the sample means or a target value set for the process

Z = number of normal standard deviations

σ x = standard deviation of the sample means

σ = population standard deviation

n = sample size

For x-Charts when we don’t know σ:

Upper control limit (UCL) = x + A2R

Lower control limit (LCL) = x - A2R

Where:
R = average range of the samples

A2 = control chart factor found in Table below

X = mean of the sample means

R-chart

- Type of variables control chart.

- Shows sample ranges over time.

- Monitors process variability.

- Independent from process mean.

Mean and range charts

Mean and range Charts (2)

Control charts for Attributes

- For variables that are categorical (Good/bad, yes/no, acceptable/unacceptable).

- Measurement is typically counting defectives.

- Charts may measure.

- Percent defective (p-chart).

- Number of defects (c-chart).

Control Limits for P-Charts: population will be a binomial distribution but applying the Central
Limit Theorem allows us to assume a normal distribution for the sample statistics.

Where:
p = mean fraction defective in the sample

Z = number of standard deviations

σ p = standard deviation of the sampling distribution

n = sample size

Control limits for C-charts: population will be a Poisson distribution, but applying the Central
Limit Theorem allows us to assume a normal distribution for the sample statistics

Which control chart to use

Using an x-chart and R-chart:

- Observations are variables.

- Collect 20 - 25 samples of n = 4, or n = 5, or more, each from a stable process and compute

the mean for the x-chart and range for the R-chart.

- Track samples of n observations each.

Using the p-chart:

• Observations are attributes that can be categorized in two states.

• We deal with fraction, proportion, or percent defectives.
 • Have several samples, each with many observations.

Using a c-Chart:

• Observations are attributes whose defects per unit of output can be counted.
• The number counted is often a small part of the possible occurrences.
• Defects such as number of blemishes on a desk, number of typos in a page of text, flaws
in a bolt of cloth.

Run test: a way to examine the points in a control chart to see if non-random variation is
present.

Process capability: the ability to meet design specifications.

Chapter 7: Process Strategy

Process strategy: an organization’s approach to transform resources into goods and services.

Four process strategies:

1. Process focus: a production facility organized around processes to facilitate low volume,

high-variety production.

Advantages:

• More general-purpose equipment

• Greater product flexibility
• Lower initial capital investment

Disadvantages:

• More difficult production planning and control

• Low equipment utilization
• More highly trained personnel

2. Repetitive focus: a product-oriented production process that uses modules, it is the classic
assembly line. The production is standardized and makes used of an assembly line. Employees
are modestly trained, as the job is repetitive.

Modules: parts or components of a product previously prepared often in a continuous

process.

3.Product Focus: a facility organized around products; a high-volume, low-variety process.

The facilities are also called continuous processes, because they have long production runs.

High volume, low variety, simple scheduling and less broadly skilled employees and special

purpose equipment.

4.Mass customization: focus rapid, low-cost production that caters to constantly changing

unique customer desires: providing what the customer wants when the customer wants it.

Flexible equipment and employees.

Built-to-order: producing to customer orders, rather than forecasts, which drives down

inventories and at the same time pressures scheduling and supply chain performance.

A crossover chart is a chart of costs for more than one process at possible volumes.

Process Analysis and Design

Each step of the process must add value, in order to receive competitive advantage with good
services and goods.

Flow diagram: a drawing used to analyze movement of people or material, which can give a
quick view of the big picture.

Time function (or Process) mapping: a flow diagram but with time added on the horizontal
axis.

Value-stream helps managers understand how to add value in the flow of material.
Mapping: information acquired through the production process. It goes beyond the immediate
organization to customers and suppliers.

Process charts: charts using symbols to analyze the movement of people or material. They are
designed for a much more detailed view of the process, adding items such as value-added time,
delay, distance, and storage.

Service blueprinting: a process analysis technique that lends itself to a focus on the customer
and the provider’s interaction with the customer.

Flexibility: the ability to respond with little penalty in time, cost, or customer value.

Production Technology
Computer numerical Control (CNC): machinery with its own computer and memory.

Automatic identification System (AIS): a system for transforming data into electronic form, for
example bar codes.

Process control: the use of information technology to control a physical process. In the system,
data is collected and translated into digital signals, of which the outcome can take several forms.

Vision systems: using video cameras and computer technology in inspection roles. These
systems are mostly used when the inspected items are similar.

Automated storage and retrieval system (ASRS): Computer-controlled warehouses that

provide for the automatic placement of parts into and from designated places within the
warehouse.

Automated guided Vehicle (AGV) Electronically guided and controlled cart used to move

materials.

Flexible manufacturing System (FMS): a system using an automated work cell controlled
by electronic signals from a common centralized computer facility.

Computer-integrated Manufacturing (CIM): a manufacturing system in which CAD, FMS,

inventory control, warehousing and shipping are integrated.

Process redesign is the fundamental rethinking of business processes

to bring about dramatic improvements in performance.

Supplement 7: Capacity Planning

Capacity: the “throughput” or number of units a facility can hold, receive, store or produce in a
period.

Capacity Planning Answers

- How much long-range capacity is needed

- When more capacity is needed

- Where facilities should be located (location)

- How facilities should be arranged (layout)

Design capacity: the maximum output of a system in each period under ideal conditions.

capacity that can be expected given the product mix, methods of scheduling, maintenance and
standards of quality.

Effective capacity: capacity that can be expected given the product mix, methods of
scheduling, maintenance and standards of quality.

Utilization: Actual output as a percent of design capacity.

Utilization= Actual Output / Design capacity

Efficiency: Actual output as a percent of effective capacity.

Efficiency=Actual Output/ Effective Capacity

Actual (or Expected) output = (Effective capacity) x (Efficiency)

In order to forecast demand accurately flexibility must be designed into the systems, the product
life cycle must be considered, and capacity changes must be approached with a bigger picture in
mind.

Strategies for Matching Capacity to Demand

1. Making staffing changes: considerations of the experience curve

2. Adjusting equipment and processes

3. Improving methods to increase throughput

4. Redesigning the product to facilitate more throughput

Capacity Management Demand Management

- Vary staffing - Vary prices
- Change equipment & processes - Vary promotion
- Change methods
- Redesign the product for faster - Offer complementary products
processing - change lead times

Break-even analysis: technique for evaluating process & equipment alternatives, of which the
goal is to find the point at which total cost equals total revenue. Assuming revenue and costs are
related linearly to volume, all information is known with certainty and the money has no time
value.

Fixed costs are costs that continue even if no units are produced.

Variable costs are the costs that vary with the volume of units produced. The difference

between selling price and variable cost is contribution.

The revenue function increases by the selling price of each unit.

Break-even units= Total Fixed Costs / [Price – Variable Cost]

When investments are made on capacity, they should be selected as part of a coordinated plan,
and they should give a competitive advantage. Product life cycles should be considered, and
operating factors in the financial return analysis should be included as well.

Analyzing capacity should include capital investment, variable cost, cash flows, and net present
value.

Net present Value: a means of determining the discounted value of a series of future cash

receipts.

Present value (P) = Future value / (1 + i)^n

Wherein I is the interest rate and n is the number of years.

There are limitations to the present value approach:

• Investments with the same NPV can have different projected lives
• We do not always know the future interest rates

• Payments are not always made at the end of a period, as suggested.

Chapter 8: Location decisions

Location has a large effect on the risk and profit of the company, since transportation costs as
well as other location costs take of a large part of the expenses. Location decision are made
because of:

• Changes in labor productivity

• Exchange rates
• Local attitudes
• Cost
• Shifts in demographic and customer demand

Location options are:

• Expanding an existing facility instead of moving

• Maintaining current sites while adding another facility
 • Closing the existing facility and moving to another location

Industrial location strategies focus on minimizing costs, while retail and professional services
location strategies focus on maximizing revenue. Warehouse strategy is usually a combination
of cost and speed of delivery.

The objective of location strategy is to maximize the benefit of the location to the firm.

When innovation is the focus of the strategy, competitiveness and innovation are affected by:

1. The presence of high quality and specialized inputs such as scientific and technical talent.
2. An environment that encourages investment and intense local rivalry
3. Pressure and insight gained from a sophisticated local market, and local presence of
related and supporting industries.

Globalization has taken place because of the development of:

• Market economics
• Better international communication
• More reliable, rapid travel and shipping
• More easy capital flow between countries
• Large labor cost differences

The labor cost per unit is also called the labor content.
labor content = labor cost per day / production (in units per day)

Firms can also take advantage of a favorable exchange rate by moving to another country.

Tangible costs: costs that can be identified readily measured with some precision.
Intangible costs: location costs that can’t easily be quantified, such as quality of life, or
government.

The primary location factor for service companies is proximity to the market. They often locate
near raw materials and suppliers because of perishability, transportation costs or bulk.

Clustering: location of competing companies near each other, often because a critical mass of
information, talent, venture capital, or natural resources.

Methods of evaluating location alternatives

Factor-rating method: a method that introduces objectivity into the process of identifying hard-
to-evaluate costs. The factor-rating method has six steps:

1. Develop a list of relevant factors, also called key success factors.

2. Assign a weight to each of the factors to reflect its importance relative to the company’s
objectives.
3. Develop a scale for each factor.
4. Score each location for each factor, using the scale.
 5. Multiply the score by the weight for each factor and calculate the sum of factors for each
location.
6. Make a recommendation based on the maximum point score, considering the results of
other (quantitative) accounts as well.

Location cost-volume analysis: a method used to make an economic comparison of location

alternatives. This analysis has three steps:

1. Determine the fixed and variable cost for each location.

2. Plot the costs for each location with costs on the vertical axis of the graph and annual
volume on the horizontal axis.
3. Select the location that has the lowest total cost for the production volume expected.

Centre-of-gravity method: a mathematical technique that is used for finding the best location
for a single distribution point that services several areas or stores. This method chooses the
ideal location that minimizes the weighted distance between itself and the location it serves,
where the distance is weighted by the number of containers shipped (Qi)

The x-coordinate of the center of gravity = SUM dixQi / SUM Qi

The y-coordinate of the center of gravity = SUM diyQi / SUM Qi

Transportation model: a technique for solving linear programming problems. It determines the
best pattern of shipments from several points of supply to several points of demand in order to
minimize total production and transportation costs.

The eight most important factors which determinate volume and revenue in service firms are:

1. Purchasing power of the 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

Geographic information system (GIS): a system that’s stores and displays information that
can be linked to a geographic location, for example census data, maps of streets and urban
areas, as well as utilities.

Chapter 9: Layout Strategy

The objective of layout strategy is to develop an economic layout that will meet the firm’s
competitive advantage.

Layout design considerations

- Higher utilization of space, equipment, and people

- Improved flow of information, materials, or people

- Improved employee morale and safer working conditions

- Improved customer/client interaction

- Flexibility

Office Layout: The grouping of workers, their equipment, and spaces/offices to provide for
comfort, safety, and movement of information. The layout is flexible and often changes due to
technological changes. The flow of information is of main importance in the layout, and the
relationship chart is a useful tool for deciding the office layout. An approach that addresses flow,
allocates space, and responds to customer behavior.

Retail Layout: layouts that are based on the idea that sales and profitability depend on
customer exposure to products. The main objective is to maximize profitability per square foot of
floor space.

Five helpful ideas for Supermarket layout

1. Locate high-draw items around the periphery of the store

2. Use prominent locations for high-impulse and high-margin items

3. Distribute power items to both sides of an aisle and disperse them to increase viewing of
other items

4. Use end-aisle locations

5. Convey mission of store through careful positioning of lead-off department

Slotting fees: fees manufacturers pay to get shelf space for their products.

Service surroundings: the physical surroundings in which a service takes place, and
how they affect customers and employees.

- Ambient conditions - background characteristics such as lighting, sound, smell, and

temperature.

- Spatial layout and functionality - which involve customer circulation path planning, aisle
characteristics, and product grouping.

- Signs, symbols, and artefacts - characteristics of building design that carry social significance.

Warehouse layout: A design that attempts to minimize total cost by addressing trade-offs
between space and material handling. Material handling costs are all costs related to the
transaction. The relationship between receiving/unloading area and the shipping/loading area is
an important component of the layout.

Cross-docking: avoiding the placing of materials or supplies in storage by processing

them as they are received for shipment.

Random stocking: used in warehousing to locate stock wherever there is an open location. It
typically requires automatic identification systems (AISs) and effective information systems

Random assignment of stocking locations allows more efficient use of space

1. Maintain list of open locations

2. Maintain accurate records

3. Sequence items to minimize travel time

4. Combine picking orders

5. Assign classes of items to areas

Customizing: using warehousing to add value to the product through component modification,
repair, labelling, and packaging. It is a useful way to generate competitive advantage in markets
with rapidly changing products, especially in warehouses.

Fixed position layout addresses the layout requirements of stationary projects.

Advantages are that the product remains in one place, and the workers and the equipment come
to the site. However, the complicated factors are that the space at the site is limited, that
different materials are required at different stages of the project and that the volume of the
materials needed is dynamic.

Process-oriented (or functional) Layout: a layout that deals with low-volume, high-variety
production; like machines and equipment are grouped together. Characteristics:
- Large variety of inputs

- Large variety of outputs

- Much and varied transport

- Long and varied product lead times

Layout principle:

- Maximum utilization of each machine

- Maximum labor specialization

Job lots are groups or batches of parts that are processed together. Material costs in this
design depend on the number of loads that must be moved and the distance related costs.

Steps in Developing a Process-Oriented Layout

1. Construct a “from-to matrix”

2. Determine space requirements for each department

3. Develop an initial schematic diagram

4. Determine the cost of this layout

5. By trial-and-error (or more sophisticated means), try to improve the initial layout

6. Prepare a detailed plan that evaluates factors in addition to transportation cost

CRAFT is a computer program that systematically examines alternative departmental

rearrangements to reduce total material handling costs.
Work Cells: an arrangement of machines and personnel that focuses on making a single
product or family of related products.

Advantages of work Cells

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

Requirements of Work cells

1. Identification of families of products

2. A high level of training and flexibility on the part of employees

3. Either staff support or flexible, imaginative employees to establish work cells initially

4. Test (poka-yoke) at each station in the cell

Improving Layouts Using Work cells

For work cells, appropriate staffing is needed. Therefore, we determine the Takt time first:

Takt time is the frequency of production units necessary to meet customer orders.

Takt time= Total work available / Units require

Workers required= Total operation time required / Takt time

A Focused work center can be organized when a firm has identified a family of similar products
that have a large and stable demand. This center moves production from a general-purpose,
process-oriented facility to a large work cell that remains part of the present plant. When the
focused work center is in a separate facility, it’s called a focused factory.

Repetitive and Product-Oriented Layout: organized around products or families of similar

high-volume, low-variety products:

- Volume is adequate for high equipment utilization

- Product demand is stable enough to justify high investment in specialized equipment

- Product is standardized or approaching a phase of life cycle that justifies investment

- Supplies of raw materials and components are adequate and of uniform quality

Advantages: Disadvantages:
- Low variable cost per unit - High volume is required

- Low material handling costs - Work stoppage at any point halts

whole operation
- Reduced work-in-process
inventories - Lack of flexibility in product or
production rates
- Easier training and
supervision - Difficult maintenance management

- Rapid throughput - Very complex start-up

- High fixed costs

Fabrication line: A machine-paced, product-oriented facility for building components.

- Builds components

- Uses series of machines

- Repetitive process

- Machine paced

- Balanced by physical redesign

Assembly line: an approach that puts fabricated parts together at a series of workstations; used
in repetitive processes.

- Assembles fabricated parts

- Uses workstation

- Repetitive process

- Paced by tasks

- Balanced by moving tasks

Assembly-line balancing: minimizing the imbalance between and personnel while meeting the
output required of the line and minimizing delay. For this, the sequence of tasks must be known,
as well as the tools, equipment and work methods used.

Chapter 10: Human resources and Job design

The objective of a human resource strategy is to manage labor and design jobs, so people are
effectively and efficiently utilized.

1. People should be effectively utilized within the constraints of other operations management
decisions

2. People should have a reasonable quality of work life in an atmosphere of mutual commitment
and trust

Labor planning: a means of determining staffing policies with employment stability and work
schedules.

Employment stability Policies

- Follow demand exactly.

• Hold employment constant.

With a stable workforce the firm can be able to pay lower wages, and these savings can provide
competitive advantage. Employment policies must be determined, partly by the manager’s view
of labor costs.

Standard work schedule: For example, 9-5 in Europe, or five 8-hour days in the US.

Flextime: a system that allows employees within limits, to determine their own work schedules.
This fringe benefit may contribute to job satisfaction.

Flexible workweek: a work schedule that is different form the standard schedule. A
compressed workweek is when there are longer shifts but less days in a week.

Part-time status: when an employee works less than a normal week; less than 32 hours per
week often classifies an employee as “part time”.

When a firm is more flexible in staffing and establishing work schedules, the more efficient and
responsive it can be.

Job design: an approach that specifies the tasks that constitute a job for an individual or a
group.

Labor (or job) Specialization: the division of labor into unique (“special”) tasks. This can be
done in different ways:

-Development of dexterity and faster learning because of repetition

-Less loss of time by not changing jobs or tools by employees.

-Development of specialized tools because each employee only needs a few tools for a task.

Job enlargement: the grouping of a variety of tasks about the same skill level; horizontal
enlargement.

Job rotation: a system in which an employee is moved from one specialized job to another.
Job enrichment: a method of giving an employee more responsibility that includes some of the
planning and control necessary for job accomplishment.

Job enlargement: horizontal expansion, job enrichment is vertical expansion.

Employee Empowerment: enlarging employee jobs so that the added responsibility and
authority is moved to the lowest level possible in the organization.

According to Hackman and Oldham, jobs should have skill variety, job identity, job significance,
autonomy, and feedback.

Self-directed teams Group of empowered individuals working together to reach a common

goal.

Limitations of job expansion:

1. Higher capital cost

2. Individuals may prefer simple jobs

3. Higher wage rates for greater skills

4. Smaller labor pool

5. Increased accident rates

6. Current technology may not lend itself to job expansion

Motivation and Incentive Systems

Bonus: a monetary reward, usually in cash or stock options, given to management

Profit-sharing: a system providing some portion of any profit for distribution to employees

Gain sharing: a system of rewards to employees for organizational improvements

Incentive system: an employee award based on individual or group productivity.

Knowledge-based pay systems: a portion of the employee’s pay depends on demonstrated

knowledge or skills of the employee.

These pay systems have three dimensions:

-Horizontal skills reflect the variety of tasks the employee can perform

-Vertical skills reflect the planning and control aspects of the job

-Depth of skills reflect quality and productivity

Ergonomics: the study of work; often called human factors.

Methods Analysis: developing work procedures that are safe and produce quality products
efficiently. Important factors herein are:

1. Movement of individuals or material (Flow diagrams)

2. Activities of human and machine and crew activity (Activity charts)

3. Body movement (Micro-motion charts)

Flow diagrams are drawings used to analyses movement or people material.

Activity charts are used to study and improve the utilization of an operator and a machine or
some combination of these.

Operations charts analyses body movement, by pointing out wasted motion and idle time.

The visual workplace uses low-cost visual devices to share information quickly and accurately.

Such visual systems can help clarify the process and the links between work and organization
performance to employees as well as present performance details. They can also help with
housekeeping, for example by telling when maintenance need to be done or where certain
parts/materials are stored.
Anon is a call light that signals that there is a problem.

Ethics

Fairness, equity, and ethics are important constraints of job design. Important issues may relate
to equal opportunity, equal pay for equal work, and safe working conditions

It is helpful to work with government agencies, trade unions, insurers, and employees.

Labor standards: the amount of time required to perform a job, or part of a job.

• Effective manpower planning is dependent on the knowledge of the labor required

- Labor standards are the amount of time required to perform a job or part of a job

- Accurate labor standards help determine labor requirements, costs, and fair work

Chapter 12: Inventory Management

The functions of inventory are:

• Separate parts of the production process

• Decouple the firm from fluctuations in demand
• Take advantage of quantity discounts
• Hedge against inflation

Types of inventory

Raw material: materials that are usually purchased but have yet to enter the manufacturing
process.

Work-in-progress inventory (WIP): products or components that are no longer raw material
but have yet to become finished products.

MRO: Maintenance, repair and operating materials.

Finished goods: an end item ready to be sold, but still an asset on the company’s books.
Main Inventory Decisions:
• What do you keep in inventory and at which stage?
• How do you keep track of existing inventories?
• When to replenish and how much to order?

Advantages of inventory Disadvantages of inventory

- To” decouple” or separate various - Higher costs.
parts of the

production process.
- To provide a stock of goods that will - Item cost (if purchased).
provide a

“selection” for customers.

- To take advantage of quantity - Holding (or carrying) cost.
discounts and economies of scale in
production or transportation.
- Cycle inventory: products waiting - Difficult to control.
for more similar products to be
processed together.
- Seasonal inventory: anticipated - Hides production problems.
difference between moment
production and moment of sales.
- To buffer against variations in lead - Risk of demand shifts
times (safety stock). (obsolescence).
- To hedge against risks (inflation, - Loss of products (theft,
upward price changes, strikes, wars). damage, etc.).
Customer order decoupling point (CODP): The CODP indicates the point in the production
process after which production occurs only based upon customer demand.

The place of the CODP is important since there will be unnecessary inventory if it is too close to
the customer but lead times will be longer if you put it too far away from the customer.

ABC analysis: A method for dividing on-hand inventory into three classifications (A class, B
class, C class) based on annual dollar volume. To determine the annual dollar volume, we
measure the annual demand of each inventory item times the cost per unit.

Cycle counting: The continuous checking of the inventory with inventory records.

- Eliminates shutdown and interruption of production necessary for annual physical inventories.

- Eliminates annual inventory adjustments.

- Provides trained personnel to audit the accuracy of inventory.

- Allows the cause of errors to be identified and remedial action to be taken.

- Maintains accurate inventory records.

Shrinkage: retail inventory that is unaccounted for between receipts and sale. It occurs from
damage, theft and bad paperwork. Inventory theft is known as pilferage.

Holding Cost: the cost to keep or carry inventory in stock.

Ordering Cost: the cost of the ordering process.

Setup Cost: the cost to prepare a machine or process for production.

Setup time: the time required to prepare a machine or process for production.

Independent demand models are:

• Basic economic order quantity

• Production order quantity model
• Quantity discount model
Economic order: an inventory-control technique that minimizes the total of ordering
and Quantity model (EOQ) holding costs.

- Demand is known, constant, and independent

- Lead time (time between placement & receipt of order) is known & constant

- Receipt of inventory is instantaneous and complete

- Quantity discounts are not possible

- Only ordering and holding cost

- Stock-outs can be completely avoided if orders are placed at the right time

Q = Number of pieces per order

Q* = Optimal number of pieces per order (EOQ)

D = Annual demand in units for the Inventory item

S = Setup or ordering cost for each order

H = Holding or carrying cost per unit per year

Inventory usage over time

Annual setup cost= (annual demand/numbers of units in each order) * (setup or order cost per
order)

Annual holding cost= (order quantity/2) * (holding cost per unit per year)

Optimal order quantity: When annual setup cost = annual holding costs

Expected number of orders, N= Demand / Order quantity

Expected time between orders, T= Number of working days per year / N

Total annual costs= Setup costs + Holding costs

Robust: a model that gives satisfactory answers even with substantial variation in its
parameters.
In order to find the best order size, the Q must be found when TC is minimized.

Lead Time: time between placing an order and receiving it (or: time needed for producing the
requested products).

Reorder point: inventory level at which a new order must be placed to ensure timely
delivery. ROP = d*L

Safety stock is extra stock to allow for uneven demand, a buffer.

Demand per day= The annual demand / Number of working days in a year.

Production Ordering: an economic order quantity technique applied to production orders.

Quantity Model (POQ)

-There are time periods with production and time periods without production

-Products are sold continuously.

-Production occurs in fixed quantities (Q).

-Goal is to determine the number of products to produce per production run such that total costs
are minimized.

-Total costs consist of setup costs and holding costs

Setup Cost = (D/Q) * S

Holding Cost = (max inventory level/2 * H) = (0,5*H*Q) * (1 - d/p)

Max Inventory Level (during production run) = Total produced - Total used

= Q – dt = Q – d(Q/p) = Q(1 – d/p)

Total cost = holding cost + setup cost = 0.5 * HQ (1 – d/p) + (D/Q) * S

Quantity Discount: a reduced price for items purchased in large quantities

Steps to take:

1. For each price level, calculate the EOQ.

2. If the EOQ is lower than the minimum quantity to qualify for the discount, then take the
minimum quantity required.
3. Calculate total cost for each price level, based on the quantity determined in step 2.
4. Select the quantity that has the lowest total cost.

Probabilistic Model: A statistical modal applicable when product demand or any other variable
is not known but can be specified by means of a probability distribution.

Service level: The complement of the probability of a stock-out.

Cycle service level = 1 - Probability of stock-out in a

(cycle = period between two consecutive ordering)

A higher service level indicates more safety stock, which means a higher ROP.

Reorder points

Simple inventory models assume that everything is 100% predictable. There may be uncertainty.
Reorder point if all EOQ assumptions hold: ROP = d*L

Otherwise use safety stock: ROP = d*L + ss

With different situations, other probabilistic models can be used, such

as:
- Demand is variable and lead time is constant:

ROP = (average daily demand x Lead time in days) + (Z * σ LT)

-Lead time is variable, and demand is constant.

ROP = (Daily demand x Average lead time in days) = Z*(Daily demand) x σ LT

-Both demand and lead time are variable

ROP = (Average daily demand x Average lead time) + Z σ dLT

Fixed quantity (Q) System: an EOW ordering system, with the same order amount each time.

Perpetual inventory System: a system that keeps track of each withdrawal to inventory
continuously, so records are always current.

Fixed period (P) System: a system in which inventory orders are made at regular time
intervals. The assumptions of this system that are the same as the basic EOQ fixed-quantity
system are:

• The only relevant costs are the ordering and holding costs
• Lead times are known as constant
• Items are independent of one another

Chapter 13: Aggregate planning

Aggregate Planning is an approach to determine the quantity and timing of production for the
intermediate future.

Operational decisions: 0 – 3 months

Tactical decisions: 3 months to 1 year

Strategic decision: 1 – 5 years

Steps in Planning

- Setting goals & objectives

- Determining steps to achieve goals

- Setting start & completion dates

- Assigning responsibility
Scheduling decisions: making plans that match production to changes in demand

Disaggregation: the process of breaking the aggregate plan into greater detail

Capacity Options:
- changing inventory levels

- varying work force size by hiring or layoffs

- varying production capacity through overtime or idle time

- subcontracting

- using part-time workers

Demand Options:
- influencing demand (e.g. promotions)

- back ordering during high demand periods

- counter-seasonal product mixing

Mixing Options:

Chase Strategy: sets production equal to forecasted demand.

Level scheduling: Maintaining a constant output rate, production rate, or workforce level over
the planning horizon.

Mixed strategy: a planning strategy that uses two or more controllable variables to set a
feasible production plan. Mixed plans usually yield a better strategy, even though they are more
complex.

Graphical and charting techniques; Aggregate planning techniques that work with a few
variables at a time to allow planners to compare projected demand with existing capacity.
The five steps in this method are:

1. Determine the demand in 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 that may apply to the worker or stock level.
5. Develop alternative plans and examine their total costs.

Transportation method of linear programming produces an optimal plan for minimizing costs,
when the aggregate planning problem is seen as one of allocating operating capacity to meet
forecasted demand.

Management coefficients model is a formal planning model built around a manager’s

experience and performance, assumed that the manager’s past performance is good in order to
use it as a basis for future decisions.

Yield management. The aggregate planning process of allocating resources to customers at

prices that will maximize profit or yield.

Airlines, hotels, care rental agencies, cruise lines and electrical utilities all have perishable
inventory. They have the following characteristics that make yield management of interest:

-Service or product can be sold in advance of consumption

• Demand fluctuates
• Capacity is relatively fixed
• Demand can be segmented
• Variable costs are low and fixed costs are high

In order to make yield management work, three issues need to be managed:

1. Multiple pricing structures must be feasible and appear logical to the customer.
2. Forecasts of the use and duration of the use must be made.
3. Dealing with changes in demand.

Chapter 14: Material requirements planning (MRP) and ERP

MRP: a dependent demand technique that uses bill-of-material, inventory, expected receipts,
and a master production schedule to determine material requirements.

The planning process: Regardless of the complexity of the planning process, the aggregate
production plan and its derivative, the master production schedule, must be developed.

Master production Schedule (MPS): a timetable that specifies what is to be made and when.

Bill of Material (BOM): A listing of the components, and the quantity of each required to make
one unit of a product.

Modular bills: bills of material organized by major subassemblies or by product options.

Planning bills: a material grouping created in order to assign an artificial parent to the bill of
material.

Phantom bills of Material: bills of material for components, usually assembles, that exist only
temporarily; they are never inventoried.

Low-level coding: a number that identifies items at the lowest level at which they occur. It
ensures that an item is always at the lowest level of usage.

MRP management

When there are frequent changes in the MRP system, it is called System nervousness.
Two tools are helpful when trying to reduce this system nervousness:

-Time fences: a way of allowing a segment of the master schedule to be labeled as ‘’not to be
rescheduled’’.

-Pegging: tracing upward in the bill of material (BOM) from the component to the parent item.

Finite capacity planning: MRP software puts work into infinite size Buckets, that are time units
in a MRP system. Usually the time units are in weeks.

When integrating MRP and JIT, four approaches can be used:

Small bucket approach, in facilities where lead times are relatively stable and poor balance
between work centers is expected. This process schedules management in in-process facilities.

Bucketless system: time-phased data are referenced using dated records rather than defined
time periods, or buckets.

Back flush: A system to reduce inventory balances by deducting everything in the bill of
material on completion of the unit.

Balanced flow approach: planning and scheduling for repetitive operations. Execution is
achieved by maintaining a carefully balance flow of material to assembly areas with small lot
sizes.

Supermarket: the subassemblies, components, and hardware items are maintained

in a common area (‘‘supermarket’’), adjacent to the production areas where they are used.

Closed loop MRP system: a system that provides feedback to the capacity plan,

master production schedule, and production plan so planning can be kept valid at all

times.

Load Report: a report for showing the resource requirements in a work center for all work
currently assigned there as well as all planned and expected orders.

Tactics for smoothing the load and minimizing the impact of changed lead time include:

1.Overlapping: reduces the lead time, entails sending pieces to the second operation

before the entire lot has completed the first operation.

2.Operations splitting: sends the lot to two different machines for the same operation.

3.Lot splitting: breaking up the order and running part of it ahead of the schedule.
Material requirements Planning II (MRP II): a system that allows, with MRP in place, inventory
data to be augmented by other resource variables. In this case, MRP becomes material
resource planning.

Distribution resource Planning (DRP): a time-phased stock-replenishment plan for all levels of
a distribution network.

DRP requires the following:

1. Gross requirements, which are the same as expected demand or sales forecasts.

2. Minimum levels of inventory to meet customer-service levels.

3. Accurate lead time.

4. Definition of the distribution structure.

Enterprise Resource: an information system for identifying and planning the enterprise wide.

Planning (ERP): resources needed to take, make, ship, and account for customer orders.

Advantages of the MRP system

-Provides integration of the supply-chain, production, and administrative process.

-Creates commonality of databases.

-Can incorporate improved, reengineered, ‘‘best processes’

-Increases communication and collaboration among business units and sites

-Has a software database that is off-the-shelf coding

-May provide a strategic advantage over competitors.

Disadvantages of the MRP system

• Is very expensive to purchase, and even more costly to customize.

• Implementation may require major changes in the company and its processes.
• Is so complex that many companies cannot adjust to it.
• Involves an ongoing process for implementation, which may never be completed.
• Expertise in ERP is limited, with staffing being an ongoing problem.
 •

Efficient consumer response (ECR) systems are supply chain management systems in the
grocery industry; they tie sales to buying, to inventory, to logistics, and to production.

Chapter 15: Short-term Scheduling

Short term scheduling

Forward scheduling: a schedule that begins as soon as the requirements are known.

Backward scheduling: Scheduling that begins with the due date and schedules the final
operation first and the other job steps in reverse order.

Scheduling criteria - Minimize completion time

- Maximize utilization (make effective use of personnel and equipment)

- Minimize WIP inventory (keep inventory levels low)

- Minimize customer waiting time

Process-Focused (job shops); The scheduling focus is on generating a forward-looking

schedule that is initially achieved with MRP due dates and refined with finite capacity scheduling
techniques.

Work Cells are focused facilities that process families of similar components. The scheduling
focus is on generating a forward-looking schedule.

Repetitive facilities (assembly lines); The scheduling focus is on generating a forward-looking

scheduling that is achieved by balancing the line with traditional assembly-line techniques.
Product-focused Facilities (continuous): these facilities produce very high volume and
limited-variety products such as paper on huge machines. Scheduling generates a forward-
looking schedule that can meet a reasonably stable demand with the existing fixed capacity.

Planning files: The items in a material requirement planning system:

- master file contains information about each component the firm produces or purchases.

- routing file indicates each component’s flow through the shop.

- work-center file: which contains information about the work center, such as capacity and
efficiency.

Control files: files that track each work order’s actual progress against the plan.

Loading: the assignment of jobs to work or processing centers.

Input-Output control: a system that allows operations personnel to manage facility workflows
by tracking work added to a work center and its work completed.

ConWIP cards (ConstantWIP): control the amount of work in a work center, aiding input-output
control.

Gantt charts: planning charts used to schedule resources and allocate time. Disadvantages:
does not account for unexpected events, and it must be updated regularly

Assignment method: a special class of linear programming models that involves assigning
tasks or jobs to resources. It occurs in many different environments.

Four steps (Hungarian method)

1. Subtract costs from entries such that only opportunity costs remain: the penalty of not
making an optimal assignment.
2. Subtract the smallest number in each row from every number in that row; then subtract
the smallest number in every column from every number in that column.
 3. Draw the minimum number of vertical and horizontal straight lines necessary to cover all
zeroes in the table. If the number of lines equals either the number of rows or the number
of columns, then you can make an optimal assignment. OR:

- Subtract the smallest number not covered by a line from every other uncovered number. Add
the same number to any number(s) lying at the intersection of any two lines. Return to Step 2

4. Optimal assignments will always be at the zero locations of the table.

Sequencing: determining the order in which jobs should be done at each work center.

Priority Rules: rules used to determine the sequence of jobs in process-oriented facilities.

First come, first served (FCFS): the first job to arrive at a work center is processed first.

Earliest due date (EDD): the job with the earliest due date is processed first.

Shortest processing time (SPT): the job with the shortest processing time is processed first.

Longest processing Time (LPT): the job with the longest processing time is processed first.

Critical ratio (CR): the ratio of time remaining to required work time remaining is calculated, and
jobs are scheduled in order of increasing ratio.
Helps determine the status of specific jobs

• Establishes relative priorities among jobs on a common basis

• Relates both stock and make-to-order jobs on a common basis
• Adjusts priorities automatically for changes in both demand and job progress
• Dynamically tracks job progress

CR = time remaining / workdays remaining

= (Due date – Today’s date) / Work (lead) time remaining

Limitations of Rule Based Dispatching Systems

-Scheduling is dynamic; therefore, rules need to be revised to adjust to changes in process,

equipment, product mix, etc.

- Rules do not look upstream or downstream; idle resources and bottleneck resources in other
departments may not be recognized.

- Rules do not look beyond due dates.

Finite Capacity Scheduling (FCS): Computerized short-term scheduling that overcomes the
disadvantages of rule-based systems by providing the user with graphical interactive computing.

Theory of constraints (FOC): that body of knowledge that deals with anything that limits an
organization’s ability to achieve its goals.

1. Identify the constraints

2. Develop a plan for overcoming the constraints

3. Focus resources on accomplishing the plan

4. Reduce the effects of constraints by off-loading work or increasing capacity

5. Once successful, return to step 1 and identify new constraints

Bottleneck: An operation that limits output in the production sequence.

Techniques for Dealing with Bottlenecks

- Increase the capacity of the constraint.

• Ensure well-trained and cross-trained employees are available to operate and maintain
the work center causing the constraint.

• Develop alternate routings, processing procedures, or subcontractors.

• Move inspections and tests to a position just before the constraint.

- Schedule throughput to match the capacity of the bottleneck.

Control principle:

The drum is the beat of the system and provides the schedule or pace of production

The buffer is the inventory necessary to keep constraints operating at capacity

The rope provides the synchronization necessary to pull units through the system

Level material use: the use of frequent, high-quality, small lot sizes that contribute to just-in-
time production.

Chapter 16: JIT and lean operations

Just-in-time (JIT): a philosophy of continuous and forced problem solving that drives out waste.

Lean production: a way to eliminate waste through a focus on exactly what the customer
wants.

Waste reduction: waste is anything that does not add value.

The seven wastes of JIT: Overproduction, waiting, transportation, inefficient processing,
inventory, unnecessary motion and product defects. Moreover, any activity that does not add
value to a product from the customer’s perspective is waste.

Variability: any deviation from the optimum process that delivers perfect product on time, every
time. Variability occurs because:

• Employees, machines and suppliers produce units that do not conform to standards, are
late, or are not in the proper quantity.
• Engineering drawings or specifications are inaccurate.
• Production personnel try to produce before drawings or specifications are complete.
• Customer demands are unknown.

Pull system: a JIT concept that results in material being produced only when requested and
moved to where it is needed just as it is needed.
Push system: a system that pushes materials into downstream workstations regardless of their
timeliness or availability of resources to perform the work.

Manufacturing Cycle time: the time between the arrival of raw materials and the shipping of
finished products.

JIT partnerships: partnerships of suppliers and purchasers that remove waste and drive down
costs for mutual benefits.

Consignment inventory is an arrangement in which the supplier maintains title to the inventory
until it is used.

Relation between

- a planning and scheduling technique with fixed lead times (push control)

- a way to move material expeditiously (pull control)

Integrating MRP & JIT:

- Small bucket (daily, hourly) approach (or even bucketless approach) and back flushing

- Balanced flow approach: use MRP for planning and JIT for execution

Results of JIT

- Queue and delay reduction, speeds throughput, frees assets, and wins orders

- Quality improvement, reduces waste and wins orders

- Cost reductions, increases margin or reduces selling price

- Variability reductions in the workplace, reduces waste and wins orders

- Rework reduction, reduces waste and wins orders

Aim: competitive advantage

Just-in-time inventory: the minimum inventory necessary to keep a perfect system running.

Level schedules: scheduling products so that each day’s production meets the demand for that
day.

JIT objectives: Eliminate inventory, by eliminating problems, as well as increasing variability,

inventory, lot sizes, set-up time, and having an agreement with suppliers to supply to schedule.

JIT requires communicating schedules to suppliers, leveling schedules, freezing part of

schedules nearest to the due date, having small lots.

Kanban is the Japanese word for ‘card’ that has come to mean ‘‘signal”. A Kanban system
moves parts through production via a ‘‘pull’’ from a signal. It authorizes production from
downstream operations, and it is often used with fixed-size containers.

Potential Problems: applicable primarily to repetitive operations.

Implementing JIT requires discipline and a change in philosophy, since it is based on

cooperation and trust, and has problems with dealing with uncertainty, since there is little
inventory.

Toyota Production system is developed by Toyota Motor Company. It is the forerunner of lean
production concepts, emphasizing employee learning and empowerment.

Operations managers have developed a checklist, called 5Ss, for lean operations:

1. Sort/Segregate: keep what is needed and remove the rest from the work area.
2. Simplify/straighten arrange and use methods analysis tools to improve workflow and
reduce wasted motion.
3. Shine/sweep: clean daily
4. Standardize: remove variations from the process by developing standard operating
procedures and checklists
5. Sustain/self-discipline: review periodically to recognize efforts and to motivate to sustain
progress.
U.S managers often add two Ss that contribute to establishing and maintain a clean workplace:

-Safety: build good safety practices into the above 5 practices.

-Support/maintenance: reduce variability, unplanned downtime, and costs.

Taiichi Ohno identified seven categories of waste. These seven wastes are:

1. Overproduction: producing more than the customer orders or producing too earl.

2. Queues: idle time, storage and waiting add no value, so they are a waste.
3. Transportation: moving materials more than once is waste.
4. Inventory: unnecessary raw material, WIP, finished goods add no value.
5. Motion: movement of equipment or people that ads no value is waste.
6. Over processing: work performed on the product that adds no value is waste.
7. Defective product: returns, warranty claims, rework, and scrap are a waste.

Performance Analysis (Reader)

Flow diagrams: illustrate the movement of materials, information or people through all

(also see Chapter 7) processes required to transform resources into products or services.

Inter arrival time: can be defined as the time between two subsequent arrivals of products at
the entrance of the process.

Arrival rate: indicates the number of products that arrive per time unit (e.g. number of products
that arrive per hour).

Time-function mapping: flow diagram but with time added on the horizontal axes.

Value-stream mapping helps managers understand how to add value in the flow of material
and information through the production process.
Process charts: charts using symbols to analyses the movement of people or material.

Service blueprinting: a process analysis technique that lends itself to a focus on the customer
and the provider’s interaction with the customer.

Throughput time: time that passes between the moment at which the product is taken into
production and the moment at which the product is ready.

(Deterministic) throughput time can be estimated by adding up the cycle times of the different
operations. Deterministic means that you ignore any probability distributions and just use the
average value (or mean or expected value). Furthermore, waiting line effects are ignored.

Deterministic throughput time is smaller than (or equal to) the actual average throughput time.

Throughput time with multiple paths: at the start of the system it might be uncertain which
pass will be followed by the product or customer through the various processes in the system.
To calculate throughput time with multiple paths, follow the next steps:

1. Estimate the throughput time for one of the possible paths

2. Multiply the resulting throughput time with the probability that this path will be followed by
a product / customer.
3. Repeat steps 1 and 2 until all paths have been handled.
4. Estimate the throughput time by adding up the results of step 2 for all paths.

Design and effective capacity

Design capacity; Theoretical maximum output of a system or process in each period.

Effective capacity: Capacity that can be expected given the product mix, methods of
scheduling, maintenance and standards of quality.

Bottleneck: the slowest process in the system. Or in other words: that what determines the
speed of the entire process.

Determine the Bottleneck:

 Single Path Multiple Paths
1. Calculate the design capacity for 1. Calculate the design
each process. capacity of each process.

2. Calculate the expected number of 2. Calculate the arriving

products arriving in the system. products in the system for
each process.
- If the design capacity of all processes - If the design capacity of all
is sufficient, it can be concluded that the processes is sufficient, it can
bottleneck is the arrival process. be concluded that the
bottleneck is the arrival
- If one or more processes have process.
insufficient design capacity, the path
with the smallest design capacity is the - If one or more processes
bottleneck. have insufficient design
capacity, the path with the
smallest design capacity is
the bottleneck.

Departure Rate: the departure rate (i.e. throughput) of a system indicates the number of
products / customers that leave the system per time unit. It is determined by the output of the
bottleneck in the system.

Utilization rate: the available time in which a machine is used for production (including
operating times).

Work in Progress: the number of products that have been taken into production but have not
yet been finished. In general, the WIP cannot be computed exactly.

Little’s formula = L = λW

L is the average WIP, W the average lead time, λ is the average number arriving units per time-
unit.
Availability

MTBF = Mean Time between Failures, the average time the machine is working between two
failures.

MTTR = Mean Time to Repair, the average time that is needed to repair the machine.

Efficiency = Actual Output / Effective Capacity

Efficiency can be obtained from utilization by excluding failures, repair times and breaks from the
available time.

Productive utilization rate is calculated like normal utilization, only now set-up times are
excluded.