Dr. Dooyoung Shin
Department of Management
College of Business
Minnesota State University, Mankato
* What is „Operations‟?
Activities associated with transforming inputs into useful outputs in
order to create a result of value
* Why „operations’ should be considered the heart of every
Fundamentally, organizations exist to create value, and operations
involve tasks that create value. Operational innovation can provide
organizations with long-term strategic advantages over their
* What is Operations Management (OM or POM)?
OM is the systematic direction and control of the processes that
transform (value-adding) inputs into finished goods or services.
The inputs get transformed at operations into outputs.
Four major ways of transformation
1. Alter: physical change
2. Transport: Flower, garbage, etc.
4. Inspect: Medical exams, jewelry appraisals, elevator
* What Makes a Firm Competitive? – Five Key Principles
Quality that improves constantly
Quality that is characterized by continuous innovations that create a
From top to bottom, from board room to the factory floor – Total
2. Low Cost
Not instead of quality but as a result of quality
The customer is part of the process
Not merely to satisfy the customer's needs today but to anticipate their
needs of tomorrow
4. Employee Involvement & Empowerment
Consider employees not as a cost of production but as a resource for
Must be recognized that long term commitment of and to workers is at
least important than machinery or technology
5. Continuous Improvement
Means never being satisfied never-ending improvement
Change America's traditional attitude from
"If it ain't broke, don't fix it" to "If it ain't perfect, don't leave it."
* Differences in Japanese and Western Approaches to
Production & Operations Management
Japanese companies are more active about process improvement and
simplification than their Western counterparts.
The Japanese have a more enlightened attitude toward employees.
The Japanese appreciate the power of continuous improvement.
Japanese companies have a better understanding of the pervasiveness
of invisible waste - and how to eliminate it.
- waste of producing defects
- waste of transportation
- waste of overproduction
- waste of waiting
- waste of occurring in processing itself
- waste of movement
- waste of inventory
o “Waste” = anything that prevents us from achieving maximum
quality, minimum price, and prompt delivery to our
customers constitute waste.
o Resistance to Change = Waste
* The Goal of Production/Operations Activities
To produce the right product/service at the right time, in the
right quantity, with the highest quality, at the lowest cost,
and with the shortest delivery time.
* Why do we include „Service‟?
The U.S. is shifting from a manufacturing-based economy to a service-
Service industries already employ more than 70 % of the nation's
workers (transportation, communication, medical, financial, etc.).
Three Key Differences Between Manufacturing and Services
Direct customer interaction
* Differences Between Manufacturing and Service
Characteristic Manufacturing Service
-Output Tangible Intangible
-Customer Contact Low High
-Variability of Input Low High
-Labor content Low (Capital-intensive) High (Labor-intensive)
-Uniformity of output High Low
Productivity Easy, Straightforward Difficult
- Opportunity to correct
Quality Problems before
Delivery to customer High Low
- Inventory Much Little
- Evaluation Easier More difficult
- Patentable Usually Not usually
* OPERATIONS STRATEGY
Productivity deals with the effective use of resources.
Competitiveness focuses on how effective an organization is in the
market place compared with other organizations that offer similar
products or services.
Strategy relates to the plans that determine the direction an organization
takes in pursuing its goals.
Operations Strategy deals with the effective use of operations
resources, reflects the goals and strategies of the business, and enables
operations function to contribute to the long-term competitiveness and
the performance of the business.
3 Key Questions To be Addressed in Formulating an Operations
Q1. What business are we in, and who are the customers and
Q2. How can Operations produce "Order Winners"?
- “Order Winners”: the thing that can actively stimulate customers
to buy the product (attractive and fascinating
- “Qualifying Criteria”: characteristics necessary to be considered
for the order (necessary, must-be-in
Q3. How can we coordinate Strategy, System design, and day-to-day
Developing an Operations Strategy?
* Competitive Priorities
the dimensions that a firm's production system must possess to
support the demands of the markets the firm wishes to compete in.
Major Competitive Priorities
Cost (low cost)
Quality (High-performance design, consistent quality)
Time (Fast delivery time, On-time delivery, Development
Flexibility (Customization, Volume flexibility)
* Time-based Competition (Strategy)
Attempts to transform an entire organization into one focused on the
total time required to deliver a product or service
The goal is not to devise the best way to perform a task, but to either
eliminate the task altogether or perform it in parallel with other tasks so
that overall response time is reduced.
Organizations seek to improve service to the customer and to gain a
competitive advantage over rivals.
Example: Projection TV, Auto Industry, Custom plastic injection
Product innovations appear on the market earlier
- Planning time, Product/service design time, Processing time,
Changeover time, Delivery time, Response time for complaints, etc.
How can we reduce times?
“Over-the-Wall” Approach vs. “Concurrent (Simultaneous)
a measure of how well the resources of a firm are used in producing
goods and services
Measuring Productivity (Why?)
- To evaluate an individual or an organization
- To learn, as an organization, what methods work to improve
Productivity = -----------------
- Example: Auto Industry: Productivity = No. of cars produced
per day worker
GM Chrysler Ford Japanese
0.2 0.23 0.29 0.33
Productivity in the current period
Productivity Index = ----------------------------------------------
Productivity in a base period
- Example 1: - Base period: produces 4 units using 2 labor hours
- Current period: produces 6 units using 2.5 labor hours
- Productivity Index?
Example 2: Calculate the productivity for the following
a. Three employees process 600 insurance policies in a
week. They work 8 hours per day, 5 days per week.
b. A team of workers make 400 units of product, which is
valued by its standard cost of $10 each (before
markups for other expenses and profit). The
accounting department reports that for this job the
actual costs are $400 for labor, $1000 for materials,
and $300 for overhead.
Improving Productivity (How to Improve?)
- Factors that affect productivity: methods, capital, quality, technology and
a. Motivation and teamwork: Change the attitude of managers, workers
b. Investment: Invest in properly selected technology and equipment, and
in improving the organization‟s human resource base
c. Manage day-to-day operations more effectively: rely on optimization
techniques, allocate limited resources more effectively, improve
resource utilization, etc.
- Example (Productivity Improvement at Ford)
- 43% labor productivity gain (1980 – 1990)
- How did they improve?
- Maximum use of existing facilities
- Application of state-of-the-art technologies
- Heavy emphasis on car designs
- Cooperative programs with UAW
* Productivity increases when firms:
1. Become more efficient: output increases with little or no increase in
2. Downsize: Output remains the same and input is reduced
3. Expand: both output and input grow with output growing more rapidly
4. Retrench: both output and input decrease with input decreasing faster,
5. Achieve breakthrough: output increases while input decreases.
* Contemporary Issues and Trends in Today‟s Operations Management
1. Intense competition
2. Global markets, global sourcing, and global financing
3. Importance of strategy
4. Product variety and customization
5. Management of supply chains
6. More services
7. Emphasis on quality
9. Advances in technology (Internet, e-commerce, etc.)
10. Worker involvement and empowerment
11. Environmental and ethical concerns
a. Qualitative Forecasting
b. Quantitative Forecasting
c. Two Most Important Factors of Forecasting: and
1. Quantitative Forecasting
Applicable when the following conditions exist:
- Past information is available
- Assumption of Continuity
Types of Quantitative Forecasting
1) Time Series Method
- Prediction of the future is based on past values of a variable and/or
- The objective is to discover the pattern in the historical data
series and extrapolate that pattern into the future.
a. A Classical Decomposition
b. Moving Average
c. Exponential Smoothing
d. Box-Jenkins Model (Mathematical Model)
2) Causal Forecasting (Regression Analysis)
- assumes that the factor to be forecasted exhibits a cause-effect
relationship with one or more independent variables.
- The objective is to discover the form of that relationship and use it
to forecast future values of the dependent variable.
1) Definition: A time series (TS) is a set of measurements, ordered
through time, on a particular quantity of interest
2) Components of a Time Series (TS)
a. Trend (T): a relatively stable, long-term, upward or downward pattern
b. Seasonal (S): a regular pattern which repeats itself every year
c. Cyclical (C): a wave-like variations of more than one year's duration
d. Residual (R): Irregular and Random variations. Consist of
nonrecurring, sporadic factors that are not described as or
attributed to T, C, or S.
3) Time Series Methods
*** Smoothing Methods ***
- used in adjusting data to cancel out the effect of random variations
and reveals the components that we are looking for.
An operations manager wants to estimate future forecasts based on the
following data collected during a study of customer demand pattern.
Year Units Sold (000)
Find the future forecast for the year 2010 using each of the following
a. Naive Approach
b. A four-period (n = 4) Moving Average model
c. A four-period Weighted Moving Average model using (0.1, 0.2, 0.3,
d. Simple Exponential Smoothing (SES) with = 0.4
e. Simple Exponential Smoothing with = 0.3. Which smoothing
constant ( = 0.4 or = 0.3) is better? Why?
f. Linear Trend Approach (Time Series Regression Forecasting)
g. Which forecast (b, c, d, e, or f) would you like to recommend? Why?
Explain clearly by showing all your work.
(1) The Naive Approach – The Last-value Forecasting
(2) Moving Average (MA)
- Based on the idea that any large random component at any point in time
will exert a smaller effect if the observation at that point is averaged
with its immediate neighbors.
- Steps (To find an n-period Moving Average (MA) forecast)
i) Compute an average of the most recent n data values.
(most recent n data values)
MA = --------------------------------------
ii) Use this average as the forecast for the next period.
- The effect of n:
- Weighted Moving Average:
(3) Simple Exponential Smoothing (SES)
- It works well when there are no seasonal and trend components.
- It gives weight to the data but it gives weight to recent observations
F t = A t 1 + (1 - ) F t 1 or F t = F t 1 + (A t 1 - F t 1 ),
where is a smoothing constant ( 0 1).
- Procedure (to find a forecast with a given )
1) Put F1 = A1.
2) Use the formula to find F2, F3, ..., FN+1, where N = the last (terminal)
3) Future Forecast: FN+1 = FN+2 = FN+3 = ......
* The Effect of
- If TS appears to contain substantial random components, don't give
much weight to the most current observation alone. Use a small .
- If TS is rather smooth, then use a high .
- Also, a higher value of will be able to respond to a sudden change
- i.e., Large value of ☞ smoothing,
Small value of ☞ smoothing
- The meaning of α = 1 ☞
How to find the best value of α? ☞ How to obtain the most accurate
forecast using the Simple Exponential Smoothing (SES)?
* Forecast Error, et = At - Ft
(At - Ft)2
* MSE = ---------------- where MSE = Mean Squared Errors.
| At - Ft |
* MAD = ----------------- where MAD = Mean Absolute Deviation
* Simple Exponential Smoothing with α = 0.4
t At F t Forecast Error
(e t = At - Ft ) | et | e t2
1 3 3 0 0 0
2 2 3 -1 1 1
3 6 2.6 3.4 3.4 11.56
4 4 3.96 0.04 0.04 0.0016
* Forecast for 2010: F 11 = 0.4 (18) + (1 – 0.4) ( )=
MSE = ------------ =
10 - 1
MAD = --------- =
* Suppose that the SES (α = 0.3) forecast is: F 11 = 13.2452 and
MAD = 3.615, MSE = 23.9255.
* Which smoothing constant is better? Why?
(4) Linear Trend Approach (Time Series Regression Forecasting)
- To deal with trend component
- based on least square approach
- Given a set of n data points and values of y (actual data values) and
t, we find
n( ty) - ( t)( y)
b = ----------------------
n( t2) - ( t)2
y - b( t)
a = ---------------- , where t = 1, 2,... n, b = slope of the line,
n and a = y intercept.
- Then the linear trend line becomes: yt = a + bt
t yt ty t2
1 3 3 1
2 2 4 4
3 6 18 9
4 4 16 16
5 8 40 25
6 6 36 36
7 14 84 49
8 12 96 64
9 16 144 81
10 18 180 100
Sum 55 89 635 385
Σt Σy Σ ty Σ t2
Which forecasting method provides the most accurate forecast
for the problem?
Forecasting Forecast MAD MSE
Method (t = 11)
Naïve Approach 18
Moving Average 15
with n = 4
Moving Average 15.8
with n = 4 (0.1,
0.2, 0.3, 0.4)
Linear Trend 18.6
1. Two different forecasting techniques (Simple exponential Smoothing
(SES) and Linear Trend Approach (LTA)) were used to forecast demand
for cases of bottled water. Actual demand data are given as follows:
Period Demand SES LTA
Note: You have to answer the following questions by showing all your work
(computations, steps, procedures, etc.), and also attach computer output
with your interpretations.
a. Obtain a forecast for period 9 using the SES method with = 0.6 and
compute MSE and MAD.
b. Obtain a forecast for period 9 using the LTA and compute MSE and MAD.
c. Given your results, which forecast appears to be the most accurate? Why?
Explain by showing all your work.
2. Medica, Inc. provides medical laboratory services to patients of Health
Providers, a group of 10 family-practice doctors associated with a new
health maintenance program. Managers are interested in forecasting the
number of patients requesting blood analysis per week. Supplies must be
purchased and a decision made regarding the number of blood samples to be
sent to another laboratory because of capacity limitations at the main
laboratory. Recent publicity about the damaging effects of cholesterol on the
heart has caused a national increase in requests for standard blood test. The
following table shows the data obtained during the past 15 weeks. Find the
forecast for the next four weeks using the most appropriate (accurate)
forecasting method and justify the accuracy of the forecasts.
Week Patients Arrivals
* CAUSAL METHODS (REGRESSION ANALYSIS)
Objective: To determine a linear functional relationship between a
dependent variable and one or more independent variables for a given
set of data.
Simple Linear Regression (SLR) Model
- Find the best fitted linear line for a given set of data.
- Regression Equation (Regression Line, Regression Model)
y = a + bx,
where y = the predicted (dependent) variable
x = the predictor (independent) variable
b = regression slope of the line
a = y - intercept
- Given a set of n data points and values of y and x, we find
n(xy) - (x)(y)
b = ----------------------
n(x2) - (x)2
y - b(x)
a = ---------------- .
- Then the estimated regression line (model, equation, function)
y = a + bx
1. The ABC Co. is a 10-year old medium-sized manufacturer of heating
and cooling equipment. Sales are growing rapidly, and production
capacity needs to be increased. The company‟s management wonders
if national housing starts could be a good indicator of the company‟s
National Housing ABC‟s Annual Sales
Year Starts (millions) (millions of dollars)
1 2.1 230
2 1.8 215
3 2.4 270
4 2.8 310
5 3.1 360
6 2.6 370
7 2.4 375
a. Develop a simple linear regression model between ABC‟s sales and
national housing starts. Forecast ABC‟s sales for the next 2 years. The
National Home Builders Association estimates that national housing
starts will be 2.6 million and 3.0 million for the next two years.
b. Is the relationship between national housing starts and ABC‟s sales
significant? That is, is your regression model in (a) useful (adequate
and significant)? Explain.
c. What percentage (%) of variation in ABC‟s sales is explained by
national housing starts? Interpret the meaning of your answer.
d. Find the relative strength of the relationship between national housing
starts and ABC‟s sales and interpret it.
e. Obtain a computer output and interpret the numbers in it.
2. Mr. Johnson, Operations Manager of a plastics firm, has the responsibility
of scheduling intermittent production runs of various grades of plastic pipe
so as to maintain factory inventories at specified levels. He has formulated
his own index (X) – from published and employment data- which he feels
may be useful in predicting the demand of class 160 PVC pipe (Y).
Index (X) 3 6 2 5 4 8 6 3 7 10
In tons (Y) 6 7 4 10 8 12 10 5 12 18
a. Mr. Johnson has to provide the firm‟s president with a forecasting model
using a regression analysis. What should be his regression model
(equation)? Show all your work.
b. Find a forecast for the demand of PVC pipe when an index is 6 by using
the regression model obtained in (a).
c. Find the relative strength of linear correlation between the index and the
demand, and interpret it in detail.
d. Mr. Sharp, the president of the firm, is not convinced with the adequacy
of the regression model in (a) suggested by Mr. Johnson. Mr. Sharp
believes that the model is not significant (useful) enough to generate
accurate forecasts. Is Mr. Sharp‟s criticism valid? Explain in detail by
showing all your work.
e. How good is Mr. Johnson‟s regression model obtained in (a) in estimating
observations? Explain carefully by showing all your work.
3. The manager of Swan Ice Cream Parlor needs an accurate forecast of the
demand for ice cream. The store orders ice cream from a distributor a week
ahead, and if too little is ordered the store loses business. If they order too
much, it must be thrown away. The manager believes that a major
determinant of ice cream sales is temperature; that is, the hotter it is, the
more ice cream people buy. Using an almanac, the manager has determined
the average daytime temperature for 10 weeks selected at random and then
from store records, has determined the ice cream consumption for the same
10 weeks. The data are summarized as follows.
Week Temperature (Gallons Sold)
1 73 110
2 65 95
3 81 135
4 90 160
5 75 97
6 77 105
7 82 120
8 93 175
9 86 140
10 79 121
Note: You have to answer the following questions by showing all your work
(computations, steps, procedures, etc.), and also attach computer output with
a. Develop a linear regression model for this data.
b. Forecast the ice cream consumption if the average weekly daytime
temperature is expected to be 85 degree.
c. Is your regression model useful (significant)? Show all your work
including your hypotheses.
d. Determine the relative strength of the linear relationship between
temperature and ice cream consumption and interpret its meaning.
e. Compute the coefficient of determination for the data and interpret its
f. Suppose that the president of the company has proposed his own model on
the basis of another forecasting technique, and suggests that the manager
use that model: Y = -100 + 3.0 X. How would you justify that your model
obtained in (a) is better (or worse) than the president‟s model? Carefully
explain by showing all your work.
Chicken Palace periodically offers carryout five-chicken dinners at special
prices. In order to examine a possible relationship between the price and the
number of dinners sold, the company collected the following data.
Price Dinners Sold
$ 2.70 760
$ 3.50 510
$ 2.00 980
$ 4.20 250
$ 3.10 500
$ 4.05 360
a. How many dinners can Chicken Palace expect to sell if they set the price at
$3.00 each? Explain by developing an estimated regression model.
b. Is the price a good predictor in determining the sales forecast of the
dinners? Why or why not? Explain by showing all your work.
c. Determine the relative strength of the linear relationship between the
price and the dinners sold, and interpret its meaning. Explain clearly by
showing all your work.
d. How good is your regression model used in (a) above? Explain by showing
all your work.
* Example: ABC Co.
a. Develop a simple linear regression model between ABC‟s sales and
national housing starts. Forecast ABC‟s sales for the next 2 years. The
National Home Builders Association estimates that national housing starts
will be 2.6 million and 3.0 million for the next two years.
National Housing Annual Sales
Starts ( x ) (y) xy x2 y2
2.1 230 483 4.41 52,900
1.8 215 387 3.24 46,225
2.4 270 648 5.76 72,900
2.8 310 868 7.84 96,100
3.1 360 1116 9.61 129,600
2.6 370 962 6.76 136,900
2.4 375 900 5.76 140,625
Sum: 17.2 2130 5364 43.38 675,250
Σx Σy Σ xy Σ x2 Σ y2
- To evaluate the performance of a regression equation.
1) Residual Analysis
y2 - a· y - b · xy
MSE = ---------------------------
- The smaller, the better.
- Useful when two or more regression models are considered
- Example (ABC, Co.):
3) t - test
- To test for the significance (usefulness, adequacy) of the
regression equation (regression model, regression slope)
- To test for the significance of the independent (predictor)
variable ☞ To test whether the independent variable really affects
the dependent variable)
- To test for the significance of the linear relationship between two
* t- test procedures
Step 1. State the null and alternative hypotheses.
Ho : The regression model is not significant. (The population
regression slope is zero.)
H1:: The regression model is significant. (The population slope
is not zero.)
Step 2. Compute the t-test statistic ( ttest ).
ttest = ---------------------------------
MSE . -----------------
x2 - [(x)2/n]
Step 3. Describe the decision rule: Reject Ho if | ttest | 2.
Step 4. Conclusion
* Example (ABC Co.):
b. Is the relationship between national housing starts and ABC‟s sales
significant? That is, is your regression model in (a) useful (adequate
and significant)? Is the National Housing Starts a good predictor
4) R (Coefficient of Determination)
- R2 determines how good the regression model is in estimating
( x)( y)
b[ xy - -------------]
R = -------------------------------
y2 - ---------
- Range of R 2 : 0 R2 1
- Interpretation of R2: it indicates a proportion (%) of variability
in y explained (eliminated) by x using the given regression
- Example (ABC Co):
Correlation Analysis: r (Coefficient of Correlation)
- A measure of linear association between two random variable x and y.
- determines the relative strength of the linear relationship.
- The coefficient of correlation, r:
n(xy) - (x)(y)
r = -----------------------------------------------
n(x2) - (x)2 n(y2) - (y)2
- Range of r: - 1 r 1
- Interpretation/Meaning of r:
- Example (ABC Co.):
* The relationship between r and R2
* Computer Output
* Product Design
Problems with the Traditional Design (Sequential Design) Process:
Cost of getting new products to market
Number of revisions on late stages
Slowness of sequential decision making
Segregation into functional areas
Distancing between design and manufacturing
Designs too complicated for workers to make
Designs too complicated for customers to use
Lax application of effective design procedures
Invented here, made elsewhere
Effective Design (Concurrent Design) – A Contemporary Approach
- Effective designs provide a competitive edge by:
Bring new ideas to the market quickly
Doing a better job of satisfying customer needs
Making new products easier to manufacture, use, and repair than
Concurrent Design Process
Also known as simultaneous or concurrent engineering
Simultaneous decision making by design teams
Details of design more
Encourages price-minus instead of cost-plus pricing
Requires careful scheduling because many tasks are performed in
* Example: Team Taurus (Ford) $400 M. under budget, Team Viper,
Neon (Chrysler), 3 months, $2 M. reduction, etc.
* Japanese auto manufacturing companies designs for only 30% of parts
(suppliers do the rest), American companies designs 81% of
Design For Manufacture (Manufacturability) (DFM)
Designing a product so that it can be produced easily and economically.
The concept of DFM begins with the view that product design is the
first step in manufacturing a product. It considers the
manufacturability of a product early in the design phase.
Use good (effective) design practices.
DFM identifies product design characteristics that are inherently easy to
manufacture, focuses on the design of component parts that are easy to
fabricate and assemble, and integrates product design with process
Benefits of DFM:
- Simpler product structure with reduced parts
- Lower product cost
- Reduced defect rates
- Higher reliability
- Shorter product development cycles
1. Minimize the number of parts
2. Develop a modular design
3. Design parts for many use
4. Avoid separate fasteners
5. Eliminate adjustments
6. Make assembly easy and foolproof. If possible, design for top-down
7. Design for minimal handling and proper presentation
8. Avoid tools
9. Minimize subassemblies
10. Use standard parts when possible
11. Simplify operations
12. Design for efficient and adequate testing and replacement of parts
13. Use repeatable, well-understood process
14. Design of robustness
15. Analyze failures
(e.g., IBM‟s Proprinter: 65% fewer parts, 90% faster for assembly than
Japanese competitors, Ford‟s front bumper had ten parts to GM‟s 100)
Design for Assembly (DFA)
A set of procedures for reducing the number of parts in an assembly,
evaluating methods for assembly and determining an assembly
To minimize cost of assembly within constraints imposed by other
Failure Mode and Effects and Analysis (FMEA)
A systematic approach to analyzing the causes and effects of product
The objective of FMEA is to anticipate failures and design them
out of the system.
It begins with listing the functions of the product and each of its parts.
Failure modes, such as fatigue, leakage, buckling, binding, or
excessive force required, are then defined.
All failure modes are ranked in order of their seriousness and
likelihood of failure. Failures are addressed one by one (beginning
with the most catastrophic), causes are hypothesized, and design
changes are made to reduce the chance of failure.
Value Analysis (VA)/ Value Engineering (VE)
- VA is a method for improving the usefulness of a product without
increasing its cost or reducing the cost without reducing the
usefulness of the product. ☞ Obtaining the maximum performance
per unit cost is the basic objective of VA.
Value: the ratio of function or performance (usefulness) to the cost
☞ the relative value of individual components
VA helps eliminate unnecessary features and functions.
VA can result in great cost savings or a better product for the
customer or both.
- Every material, every part, and every operation is subjected to a
rigorous analysis that includes questions such as these:
- Can we do without it?
- Does it do more than is required?
- Does it cost more than it is worth?
- Can something else do a better job?
- Can it be made by a less costly method? With less costly tooling?
With less costly material?
- Can it be made cheaper, better, or faster by someone else?
Design for Environment (DFE)
- Each year Americans dispose of 350 million home and office appliances
(50 million of them hair dryers), more than 10 million PCs and 4 billion
pounds of carpet.
- DFE means designing a product from material that can be recycled or
easily repaired rather than discarded.
Minimize materials and energy used in production, consumption, and
Using recycled materials
Recycling consumed product
Longer product life
Easy to repair
Easy to disassemble
Elimination of waste
* Process Design/Facility Layout
Choosing a set of relative locations of all machines, equipment, work
stations, utilities, etc., for which the cost (transportation) with location
are a minimum.
Major factors Affecting Choice of Process Designs
nature of product/service demand: patterns of demand and price-
degree of vertical integration: forward and backward integration
product flexibility: product and volume flexibility
degree of automation
Others: Safety, Environmental/legal requirements, etc.
Trends in U.S. Manufacturing Layouts
- Group Technology (Cellular Manufacturing) layouts within larger
- Automated materials-handling layouts
- that allow workers to see the entire line and
easily travel between work stations
- More open work areas with fewer walls that obstruct views of adjacent
- Smaller and more layouts
- Less space provided for inventories
Types of Facility Layout
1. Product Layouts
2. Process Layouts
3. Fixed-Position Layouts
4. Group Technology (GT) Layouts (or Cellular Layout)
1. Product Layout (Line Layout) – Assembly Line
Equipment/Machines are arranged according to the sequence of
operations to be performed on the product.
Good for volume (mass production), products
a. Operations are often routine and highly repetitive.
b. purpose equipment is needed.
c. Fixed-path material handling systems (conveyors) are used.
d. A high rate of output and low unit cost
e. Labor and machines/equipment have a degree of
f. Work-In-Process (WIP) inventory is
g. Fairly in response to changes in the production rate, or
product or process design changes
h. Highly vulnerable to machine breakdowns or high absenteeism
i. Preventive maintenance is essential.
j. Group incentive schemes must be used.
k. e.g., Automobile assembly, Food processing, Automatic Car
Wash, Food Cafeteria, etc.
What is “Lean Production System”?
Key Principles Requirements
* Team Work * 1/2 the human efforts in the factory
* Communication * 1/2 the manufacturing space
* Efficient use of resources * 1/2 the investment tools
and elimination of wastes * 1/2 the time to develop new products
* Continuous improvement * 1/2 the engineering hours
2. Process Layout (Functional or Job Shop Layout)
Machines, equipment and process of the same functional type are
Good for a manufacturing facility which produces a variety of
nonstandard products in relatively small batches.
a. Utilization of machines and labor is
b. Routing and scheduling of jobs are difficult.
c. WIP inventory is
d. Can handle a variety of processing requirements (flexibility).
e. Not particularly vulnerable to equipment failures.
f. purpose equipment is needed.
g. Variable-path material handling equipment (fork lift, trucks) is
h. Individual incentive plans are possible.
i. e.g. Custom machine shops, hospitals or medical clinics,
departments, colleges and universities, etc.
3. Fixed-Position (Project) Layout
The product is stationary while resources (men, machines and materials)
are brought to it.
a. The product is large and complex.
b. Good for construction and industrial project.
c. Variable-path material handling equipment is used.
d. Costs of layout/re-layout is moderate.
e. Labor and equipment have a moderate degree of utilization.
f. e.g., Ship building, Heavy construction (buildings, bridges, dams,
roads), Aircrafts manufacturing.
4. Group Technology (GT) or Cellular Layout
Machines are grouped into a cell and the cell acts like a product layout
island within a large process layout environment.
a. WIP inventory is low.
b. Material Handling is reduced.
c. Set up costs are reduced.
d. Product quality is improved.
e. Queuing, set up and throughput times are reduced.
f. Operator mobility and responsibility are increased.
a. One-time heavy capital investment
b. Rearrangement of existing facilities can be disruptive and costly.
Assembly Line Balancing (ALB) – Product Layout
Overall Design of a Production Line
Planning of the proper sequence of operations
Setting the production rate for the line or determining the optimum
number of assembly workers
Balancing the workload on the individual work stations (assembly
ALB consists of assigning the individual tasks to the work stations
(assembly workers) in such a way that some appropriate measure
of line performance is optimized (minimized). (i.e., Minimize the
idle time, Minimize the number of work stations, Minimize the cycle
i) Each task should be assigned to only one work station,
ii) The total processing time of all tasks assigned to a work station (or
assembly worker) must not exceed the given cycle time, and
iii) The precedence relationships should be satisfied.
If a line is balanced perfectly (100%), then all stations (workers) have
an equal amount of work to perform, and smooth production flow
with no delay should be achieved.
OT = Operating Time per day
D = Desired Output (target production rate)
CT = Cycle Time (CT = ------)
Cycle time: The amount of time available at each work station
(worker) to complete the assigned tasks for one unit of output
t = the total work content (the sum of total task processing times)
Nmin = minimum number of stations required.
D ( t) ( t)
Nmin = --------- = ------------
Nact = actual (or optimal) number of stations. It is obtained based on a
The Feasible Range of Cycle Time (CT):
tmax CT t (Note: tmax = the longest task processing time)
To measure the efficiency of an assembly line (utilization) :
total idle time ( t)
Efficiency = 1 - % of idle time = 1 - ------------------ = --------------
To Solve an ALB Problem - Techniques
i) Exact Methods: Linear Programming, Integer Programming, etc.
ii) Inexact Methods (Heuristic Rules)
** Assign tasks with the Most Number of Following Tasks
** Assign tasks with the Longest-Task-Time (LTT) Heuristic
The following tasks must be performed on an assembly line in the sequence
and times specified. (Assume OT= 28,800 seconds/day) Note that t = 245.
Task Task Processing time Immediate predecessors
A 50 -
B 40 -
C 20 A
D 45 C
E 20 C
F 25 D
G 10 E
H 35 B,F,G
a) Draw the precedence diagram.
b) What is the theoretical minimum number of stations (N m in ) required to
meet a forecasted demand of 400 units per day?
c) What is a feasible range of the cycle time?
d) Using the most number of following tasks rule, balance the line to
produce 400 units per day? Break the tie, if any, using the longest task
processing time rule.
e) How good is your assembly line? Explain by computing a line efficiency.
A company is setting up an assembly line to produce 192 units per eight-
hour shift. The following table identifies the tasks, processing times and
Task Processing Immediate
A 40 -
B 80 A
C 30 B
D 25 B
E 20 B
F 15 C,D,E
G 120 A
H 145 G
I 130 H
J 115 F,I
a) Draw the precedence diagram.
b) What is the theoretical minimum number of stations required to produce
c) What is a feasible range of the cycle time?
d) Using the Most Number of Following Tasks Heuristic, balance the
assembly line? Break the tie, if any, using the longest task processing time
e) How good is your assembly line? Explain by using a line efficiency.
The following tasks must be performed on an assembly line in the sequence
and times specified. (Assume OT = 480 minutes/day)
Task Immediate Task Processing
Predecessor Time (min.)
A - 6
B A 2
C A 5
D A 7
E A 1
F B 2
G C,D,E 3
H F 6
I G 5
J H 4
K I,J 4
a. Draw a precedence diagram.
b. What is the theoretical minimum number of stations required to meet a
demand of 40 units per day?
c. What is a feasible range of the cycle time?
d. Using the Most number of following tasks rule, balance the line to
produce 40 units per day? Break the tie, if any, using the longest task
processing time rule.
e. How good is your assembly line?
A long-term strategic decision that establishes a firm‟s overall level of
Why is “Capacity Planning” important?
- It determines the ability of a firm to meet future demands and it also
affects a firm‟s ability to compete.
- It affects product lead times, customer responsiveness, etc.
- Capacity is the major determinant of the initial cost and has an impact
on the operating costs.
- Once implemented, decisions are very expensive to modify.
- capacity can lose customers and limit growth.
capacity can drain a company‟s resources and prevent investments in
more lucrative ventures.
- When to increase capacity and how much to increase capacity are
- Capacity is an upper limit on the output rate.
- Measuring capacity depends on the particular situation. Examples are
machine hours, man hours, tons of steel/day, hospital beds, etc.
- There are 3 different definitions of capacity.
1) Design Capacity: Maximum possible output under ideal conditions.
2) Effective Capacity: Maximum possible output given the need for
maintenance, changing product mix (setups), rest periods, scheduling
3) Actual Output: Rate of output actually achieved. This is less than
effective capacity because of machine breakdowns, absenteeism,
defective output, material shortages, etc.
- These are useful in defining system effectiveness.
- Example: Design capacity = 50, Effective capacity = 40,
Actual Output = 36
Efficiency = Utilization =
- Because effective capacity acts as a lid on actual output, the real key
to improving capacity utilization is to increase
Meeting Capacity Requirements
- Long-term: expansion; related to overall level of capacity (e.g.,
- Short-term: overtime, 3rd shift, subcontracting; variations in
capacity requirement created by seasonal, random, and irregular
- Long-term capacity planning is crucial to a firm‟s success because it
often involves large investments in facilities and equipment and
because such decisions are not easily reversed.
- For long-term considerations, the following aspects should be
1) Flexibility should be designed into systems to facilitate future
expansion, if necessary.
2) Interrelationships between different parts of the system. e.g.,
Increase in hospital beds should be accompanied by more operating
rooms, physicians‟ offices, parking space, etc.
3) Capacity increments can only be made in lumps (chunks).
4) Product Mix should be chosen so as to have stable capacity
requirements (number of products (variety), new products vs.
5) (Dis) Economies of Scale
- Economies of Scale: A concept that states that the average unit cost
of a good or service can be reduced by increasing its output rate.
** Benefits of Economies of Scale**
- Fixed costs can be spread over a larger number of units.
- Construction costs do not increase linearly with output levels.
- Quantity discounts are available for material purchases.
- Production efficiency increases as workers gain experience.
- Best Operation Level (BOL): an annual volume of outputs that
results in the average unit cost.
- Diseconomies of Scale: a concept that states that the average unit
cost increases as the firm‟s output increases.
This happens when the firm‟s output passes the BOL.
Evaluating Capacity Planning Alternatives
1) Cost Volume Analysis (Break-Even Point Analysis)
$ TR FC: Fixed Costs
VC: Variable unit cost
TC: Total Costs
TC Rev.: Revenue per unit
Q: Quantity of Output
BEP: Break-Even Point
TR: Total Revenue
FC P: Profit = TR-TC
SP: Specified Profit
- Total Cost (TC) = FC + VC x Q
- Total Revenue (TR) = Rev. x Q
- Profit (P) = TR – TC = Rev. x Q – (FC + VC x Q )
= Q (Rev. – VC) – FC
- BEP (Q) =
Rev. – VC
- Volume needed to generate a specified profit (SP):
SP + FC
Rev. – VC
- Other Methods
- Financial Analysis (payback, Present value, Internal Rate of
- Decision Theory (Payoff table, decision tree, etc.)
* Example 1.
The owner of Old-fashioned Berry Pies, is contemplating adding a new line of
pies, which will require leasing new equipment for a monthly payment of $
6000. Variable costs would be $3 per pie, and pies would retail for $7 each.
a. How many pies must be sold in order to break even?
b. What would the profit (loss) be if 1000 pies are made and sold in a
c. How many pies must be sold to realize a profit of $4000?
* Example 2: Make or Buy Analysis
A firm‟s manager must decide whether to make or buy a certain item used in
the production of vending machines. Cost and volume estimates are as
Annual Fixed Cost $150,000 None
Variable cost/unit $60 $80
Annual Volume (units) 12,000 12,000
a. Given these numbers, should the firm buy or make this item?
b. There is a possibility that volume could change in the future. At what
volume (Q) would the manager be indifferent between making and
Why is “Location Planning” important?
- The location of a facility has a significant impact on costs and revenues.
- Once implemented, it is very costly to change the decision.
- Expansion of an existing facility
- Adding a new location
- Relocating: Closing down an existing facility and opening up a new
- Do nothing: maintain the status quo
1) Plant Location
2) Warehouse Location (distribution oriented; minimize distribution
- To determine warehouse location within the constraints of demand in
customer zones in such a way that distribution cost is minimized for a
given customer service level.
- Distribution cost = transportation cost + customer service cost +
warehouse operating cost
General Classification of Criteria
1) Critical: Criteria are critical if their nature may preclude the location
of a plant at a particular site, regardless of other conditions
that might exist.
2) Objective: Criteria that can be evaluated in monetary terms, such as
labor, raw materials, utilities, and taxes.
3) Subjective: Criteria characterized by a qualitative type of
measurement. (e.g.., the nature of union relationship and activity)
Factors which affect Location Decisions
- Location of raw materials
- Location of markets
- Living facilities and services
- Taxes – state and local
- Environmental regulations
- Utilities – water, electricity, waste disposal, etc.
- Land – cost, size, development
- Transportation – road, rail, air, costs
- Zoning restrictions (environmental and legal)
Evaluating Location Alternatives
1) Break-Even Point (BEP) Analysis
- Determine the fixed costs and variable costs for each location, and plot
the total cost as a function of production volume for all locations on
the same graph.
- Example 1.
Minnesota Manufacturing Co. (MMC) must select a location for its new
product from among three different alternatives. The following cost
data have been gathered:
Location A Location B Location C
Fixed Cost $ 10,000 $20,000 $50,000
Variable Cost $5/unit $4/unit $2/unit
a. Suppose that a desired production volume (Q) is 5,000. Which location is
the best? Why? Explain by showing all your work.
b. (Sensitivity Analysis) Suppose that the company projects an
increasing customer demand in a few years which can be much higher
than the current operating volume of 5,000. Will then the current optimal
decision remain best in such a case? Why or why not? Find the range
of production volume under which each location becomes the best
alternative. Justify your answer carefully by showing all your work
including a graph.
What is the Sensitivity Analysis?
It investigates the sensitivity of the current optimal solution to the
changes of the future customer demand by determining the range of
production volume under which each alternative becomes the best.
- Example 2.
Location Fixed Costs Var. Cost Total Cost
A 100,000 $20 100,000+ 20Q
B 150,000 $15 150,000+ 15Q
C 125,000 $18 125,000+ 18Q
a. Suppose that a desired production volume (Q) is 12,000. Which
location is the best? Why? Explain by showing all your work
b. Find the range of production volume under which each process
becomes the best alternative. Explain clearly by showing all your
work including a graph.
- Example 3.
Location Fixed Costs Var. Cost Total Cost
A 150,000 $62 150,000+ 62Q
B 300,000 $38 300,000+ 38Q
C 500,000 $24 500,000+ 24Q
D 600,000 $30 600,000 + 30Q
a. Suppose that a desired production volume (Q) is 15,000. Which
location is the best? Why? Explain by showing all your work
b. Find the range of production volume under which each location
becomes the best alternative. Explain clearly by showing all your
work including a graph.
2) Factor Rating Method
Step 1: Determine the factors that are relevant in choosing a location,
and assign weights to them.
Step 2: For each location, assign points against each factor (on a 10
point, 100 point, or other scale).
Step 3: Multiply the weights by the points for the various factors and
sum up for each alternative.
Step 4: The location with the highest weighted sum is chosen.
* Example 1. (Scale: 0 – 100, 100 being the highest)
Factor Weight Points Weighted
A B A B
1. Proximity to Raw Materials .2 80 60
2. Transportation costs ($ 000) .15 $70 $55
3. Labor supply .3 70 90
4. Environmental Regulations .15 80 85
5. Utilities .2 90 95
Which location (A or B) would you recommend? Why? Show all your work.
* Example 2.
A large computer research center laboratory is investigating three alternative
locations for a new facility. The rating scale and economic information for the
Rating Factors Miami Seattle New York Weight
Annual Operating costs ($000,000) 76.5 68.5 82.5 .25
Housing availability 4 5 2 .05
Ability to recruit scientists 4 4 3 .3
Degree of unionization of 5 3 4 .05
Urban transportation system 3 4 4 .05
Proximity to customers 1 4 5 .05
Zoning restrictions 3 4 4 .1
Recreation 4 5 4 .05
Educational and health services 4 5 3 .1
Note: A five-point rating scale is used: 5 = excellent, 1 = poor
Which location would you recommend? Why? Explain clearly by showing all
1. What is Total Quality Management (TQM)?
Definition: Managing the entire organization (all the activities of all
functions) so that it excels in all dimensions of products and services
that are important to the customer while reducing internal time and
cost, and enhancing the workplace climate.
- Quality extends throughout the organization in everything it does, and
that quality is ultimately defined by the customer.
2. TQM Principles
Top management leadership of the quality improvement
Focus on continuous improvement
Respect for employees and their knowledge; employees are actively
involved and empowered in the improvement process.
Reduction of product and process variation
Provision of ongoing education and training of employees
Familiarity with a statistical way of thinking and the use of statistical
methods throughout the organization (Factual approach to decision
making – Management By The Fact)
Emphasis on prevention rather than detection
View of vendors (suppliers) as long-term partners
Performance measures that are consistent with the goals of the
Emphasis of product and service quality in design
Cooperation and involvement of all functions within an organization
Awareness of the needs of internal customers
Substantial cultural change
3. Possible Outcomes and Major Results of TQM
Loyal customers (satisfied, excited, delighted customers)
A culture (climate) that supports and encourages teamwork and leads
to more satisfying, motivating, and meaningful work for employees
A general ethic of continuous improvement
Reduction of costs, increase in productivity, market share, profitability,
competitiveness, and time to respond to problems, needs and
Value to community and society
3.1. Successful Implementation of TQM
4. Oh! Quality!
“It is the nature of competition in business today that if you are not
getting better, you are getting behind…. Because somebody,
somewhere will have discovered another breakthrough that will drive
the industry‟s quality standard to yet a higher level. That is the quality
challenge that every competitive business faces. It is the challenge
that every successful company will have to meet.”
What is Quality?
“The totality of features and characteristics of a product or service that
bear on its ability to satisfy stated or implied needs” - American
Society for Quality
Two Perspectives on the Definition of Quality
1) Producer (Manufacturer)-based Definition:
- Conformance to specifications: How close a part conforms to
- Reflects both consistent quality and high-performance design
2) Customer-Oriented Definition:
- Value: How well the product or service serves its intended
purpose at a price that customers are willing to pay?
- Fitness of use: How well the product performs?
- Product characteristics (style, appearance, durability, reliability,
craftsmanship, serviceability, etc.), product or service support
(after service, warranty, advertising, etc.), psychological
impressions (server behavior, courtesy, reputation of the brand
name, knowledge of the salesperson, responsiveness, etc.)
Dimensions of Customer Perceptions on Quality
- Reliability and Durability
- Appearance (Aesthetics)
- Others: Safety, etc.
Why is quality important?
- Company‟s reputation
- Business Performance Measures (costs, market share,
productivity, profitability, etc.)
- Improved customer satisfaction
- Employee morale
- Product liability & lawsuits
- International implications
- Value to society and community
5. New Emerging Concepts, Tools and Techniques for Quality
* Quality Function Deployment (QFD) – Translating the Voice of the
A systematic procedure for taking essentially verbal customer
requirements (needs, wants, demands) and converting them into
operationally meaningful technical concepts that product designers
can use as basis for their work – Listening, understanding, interpreting,
and translating what the customer says form the philosophical heart of
QFD facilitates product design decisions by giving focus to what is
really important to the customer (true quality), with lower cost and
with better customer acceptance.
QFD is a planning, communication, and documentation tool that
determines where energy, efforts, quality improvement tools, and
technology need to be applied in order to sustain the overall product
QFD helps develop products or services that go beyond customer
expectations, that delight or excite customers in addition to meeting
their basic needs
* Benchmarking: The Search of Industry Best Practices
the process of continually comparing a company's performance on
critical customer requirements against the best in the industry (direct
competitors) or the class (companies recognized for superiority in
performing certain functions) in order to determine which areas
should be targeted for improvement.
The Benchmarking Process
1) Identify a critical process that needs improvement.
2) Identify an organization that excels in the process, preferably the
3) Contact the benchmark organization, visit it, and study the
4) Analyze the data.
5) Improve the critical process at your own organization.
- Boeing: manufacturing cycle time (from 18 months to 10
- General Mills: machine changeover (from 3 hours to 17 minutes)
6. Malcolm Baldrige National Quality Award
Based on Public Law 100-107 signed on August 20, 1987
Represents the US government's endorsement of quality as an essential
part of successful business strategy in the 1980s and beyond
The purpose: 1) To promote quality awareness and practices
2) To recognize quality achievements,
3) To publicize successful quality strategies and
Seven Criteria (http://www.quality.nist.gov), 2009
1) Leadership (120 pts.)
2) Strategic Planning (85 pts.)
3) Customer and Market Focus (85 pts.)
4) Measurement, Analysis, and Knowledge Management (90 pts.)
5) Workforce Focus (85 pts.)
6) Process Management (85 pts.)
7) Results (450 pts.)
Applications of the Baldrige Quality Criteria
- As a practical tool for assessing operations, the Baldrige guidelines
can be used:
1) To help define and design a total quality system
2) To evaluate ongoing internal relationship among departments,
division, and functional units within an organization
3) To assess and assist outside suppliers of goods and services to a
4) To assess customer satisfaction
7. ISO 9000 “Say What you do and Do What you Say”
The set of quality standards offered by the International
Standards Organization (ISO)
It focuses on the process, procedures, activities, operations,
controls, and management of operations, and only secondarily on
The product itself is not certified as having high quality; only the
process for making the product is certified.
The ISO 9000 series provides guidance for suppliers of products
who want to implement which a customer can evaluate the
adequacy of a supplier‟s quality system.
A quality manual and careful record keeping is usually required
as part of the documentation
Early: Conformance quality, Later: Design quality
A catalyst for management change
- Registration project creates the momentum to initiate
changes (areas to be improved, procedure writing, etc.)
A control mechanism
- Improvements are achieved through the standardization of
approaches, procedures and methods
The basis for TQM
- provides a sound basis from which to progress toward TQM
- Within the context of TQM, it could create a valuable
weapon for those company personnel who are trying to
institutionalize a process of continuous improvement
ISO 9000: 2000
- It represents a fundamental change in approach, and is a major, and
needed, improvement over the two earlier versions. (Increased focus
on top management commitment, Customer satisfaction, Emphasis
on processes and Continual improvement)
- The standard now incorporates eight quality management principles that
come directly from TQM.
1) Customer focus: understanding their needs, striving to exceed their
2) Leadership: establishing direction, unity of purpose, and a
supporting work environment.
3) Involvement of People: ensuring that all employees at all levels are
able to fully use their abilities for the organization‟s benefit.
4) Process Approach: recognizing that all work is done through
processes, and managed accordingly.
5) System Approach to Management: expands on the previous
principle in that achieving any objective requires a system of
6) Continual improvement: as a permanent organizational objective,
recognizing and acting on the fact that no process is so good that
further improvement is impossible.
7) Factual approach to decision making: acknowledgement that
sound decisions must be based on analysis of factual data and
8) Mutually beneficial supplier relationships: synergy can be found
in such relationships.
- It should be considered as a series of minimum quality system
requirements – lowest common denominator of quality system
requirements for all industry.
8. Quality Gurus
W. Edwards Deming (1900-1993) www.deming.org
“Everyone doing his best is not the answer. It is necessary that people
know what to do. Drastic changes are required. The responsibility
for change rests on management. The first step is to learn how to
The Deming Philosophy
- The Deming philosophy focuses on continual improvements in
product and service quality by reducing uncertainty and
variability in design, manufacturing, and service processes,
driven by the leadership of top management.
Management must accept the responsibility for building
good systems that produce quality products; don't build
quality through inspection.
Made numerous efforts to convey the message of quality to
upper-level managers but his efforts was ignored. ☞ Goal:
to change perspectives in management and often radically.
Recognizes quality as continuous improvement of a stable
a. The major cause of poor quality is variation. To reduce
variation, the systems should be continuously improved.
b. All systems must be stable in a statistical sense.
Deming’s 1950 Tokyo Lectures on Quality
1) Quality would be the basis of future international industrial
competition. ☞ Key Competitive Advantage
2) Quality and productivity improvements go hand-in-hand.
☞ Higher quality equals less scrap and rework
3) To effectively manage for quality, quality must become
everyone’s job and it is therefore a distinct and explicit
senior management responsibility
4) To improve quality effectively, it is essential to advance
beyond the trial and error methods of the past. ☞
advocate scientific methods for solving quality problems
The Deming Prize is the QC Award of Japan.
Deming’s 14 Points: convey important insights for
Joseph Juran (1904 - 2008) http://www.juran.com
Like Deming, Juran taught quality principles to the Japanese
in the 1950s and was a principal force in their quality
reorganization. Juran echoed Deming’s conclusion that U.S.
business face a major crisis in quality due to the huge costs
of poor quality and the loss of sales to foreign competition.
Like Deming, he believes strongly in top management
commitment, support, and involvement in the quality effort.
“Zero-Defects” is not a practical goal.
New thinking about quality that includes all levels of the
managerial hierarchy. Upper management in particular
requires training and experience in managing for quality.
Unlike Deming, however Juran did not propose a major
cultural change in the organization, but rather sought to
improve quality by working within the system familiar to
Proposed a simple definition of quality: “fitness for use.”
Advocated the use of quality cost accounting and analysis to
focus attention on quality problems.
1) Quality Planning – the process of preparing to meet
2) Quality control – the process of meeting quality goals
3) Quality improvement – the process of breaking
through to unprecedented levels of performance.
Comparison between Deming and Juran
- The focus on top management commitment
- The need for continuous improvement
- The use of quality control techniques (statistical
- The importance of training
Philip B. Crosby (1926 – 2001)
Quality means conformance to requirements, not elegance.
Requirements must be clearly stated so that they cannot be
misunderstood. Setting responsibility is the responsibility
There is no such thing as the economics of quality; doing the
job right the first time is always cheaper. Quality is free.
What costs money are all actions that involve not doing jobs
right the first time.
The only performance measurement is the cost of quality,
which is the expense of non-conformance.
The only performance standard is “Zero Defects (ZD).” The
theme of ZD is do it right the first time.
Unlike Juran and Deming, Crosby’s approach is primarily
behavioral. He emphasized using management and
organizational processes rather than statistical techniques
to change corporate culture and attitudes.
Comparison of Quality Philosophies: Similarities
Each views quality as imperative in the future
competitiveness in global markets; makes top management
commitment an absolute necessity; places responsibility for
quality on management, not the workers; demonstrates that
quality management practices will save, not cost money;
stresses the need for continuous, never-ending
improvement; acknowledges the importance of the
customer and strong management/worker partnerships;
and recognizes the need for and difficulties associated with
changing the organizational culture.
Armand V. Feigenbaum
Best known for coining the phrase ‘Total Quality Control
Views quality as a strategic business tool that requires
involvement from everyone in the organization, and
promoted the use of quality costs as a measurement and
Responsibility for TQC must be shared and should not rest
with the quality assurance (QA) or quality control (QC)
Defines "hidden plant" as the proportion of plant capacity
that exists in order to rework unsatisfactory parts.
Acknowledges Deming's and Juran's influence on his thinking.
Instrumental in the development of the broad outlines of
Japanese quality strategy.
Influenced the development of a participative, bottom-up
view of quality, which became the trademark of the
Japanese approach to quality management.
Originated quality control (QC) circles in both concept and
practice, and "Fishbone Diagram (Cause and Effect
In 1968, he began using the term company-wide quality
control (CWQC) to differentiate the Japanese approach to
TQC from Feigenbaum's views.
Key Elements of Ishikawa’s Philosophy
1) Quality begins with education and ends with
2) The first step in quality is to know the requirements of
3) The ideal state of quality control occurs when
inspection is no longer necessary.
4) Remove the root cause, not the symptoms.
5) Quality control is the responsibility of all workers and
Manufacturing-based definition of quality as conformance to
specification limit is inherently flawed.
Quality: loss imparted to society during product use as a
result of functional variation and harmful effects.
Measured quality as the variation from the target value of
a design specification, and then translated that variation
into an economic “loss function” that expresses the cost of
variation in monetary terms. → Quality Loss Function
Quality Robustness: products can be produced uniformly
and consistently in a variety of adverse manufacturing and
Advocated certain techniques of experimental design to
identify the most important design variables in order to
minimize the effects of uncontrollable factors on product
variation. “Quality is a virtue of design.”
9. Quality Measures in Services
Evaluating the Service Quality
- More difficult for customer to measure than quality of manufactured
- Customer‟s perceptions of service quality result from a comparison
of their expectations (expected quality) before they receive and their
actual experience (actual quality) with the service. ☞ It is judged on
the basis of whether it meets expectations.
- Quality perceptions are derived from the service process as well as
from the service outcome.
Dimensions of Service Quality
a. Time and Timeliness: How long a customer must wait for
service, and if it is completed on time.
b. Completeness: Is everything the customer asked for provided?
c. Courtesy: How customers are treated by employees.
d. Consistency: Is the same level of service provided to each
customer each time?
e. Accessibility and convenience: How easy it is to obtain the
f. Accuracy: Is the service performed right every time?
g. Responsiveness: How well the company reacts to unusual
situations, which can happen frequently in a service company.
10. Quality as a Competitive Advantage:
Why is quality considered “the issue of the survival”?
Why should quality be recognized as a “competitive weapon”?
How does quality improve the firm‟s competitive position?
a. Market share increases with
- high quality level
- improving quality, even if at low levels
b. Increase in profit margin from
- charging premium for high quality level
- reducing cost through high conformance to quality in
Cost Implications: The relationship between Quality and
11. The Effect of Quality Management on Productivity
Measuring Product yield and Productivity
Y = I Q + I(1 – Q) R,
Where I = Planned number of units of product started in the
Q = percentage (%) of good units produced,
R = percentage (%) of defective units that are successfully
Y = Yield.
Example 1. The Colonial Furniture Co. manufactures two-drawer oak
file cabinets that are sold unassembled through catalogs. The company
initiates production of 150 cabinet packages each week. The percentage
of good-quality cabinets averages 80 % per week, and the percentage of
poor-quality cabinets that can be reworked is 60 %.
a. Determine the weekly product yield of file cabinets.
b. If the company desires a product yield of 145 units per week, what
increase in the percentage good-quality products must result?
Example 2: A manufacturing company has a weekly product input of
1700 units. The average percentage of good-quality product is 83 %. Of
the poor-quality products, 60 % can be reworked and sold as good-
quality products. Determine the weekly product yield and the product
yield if the good-product quality is increased to 92 %.
Measuring the Impact of Quality Improvement on Cost
Kd I + Kr P
C = -----------------------,
Where K d = direct manufacturing cost per unit,
K r = rework cost per unit,
P = number of reworked units, (i.e., P = I(1 – Q) R)
I = input (planned number of units),
Y = yield, and
C = Unit product cost.
Example 1: Burger Doodle is a fast-food restaurant that processes an average
of 700 food orders each day. The average cost of each order is $6.25. Four
percent of the orders are incorrect and only 30 percent of the defective orders
can be corrected successfully with additional food items at an average cost of
$1.75. The remaining defective orders have to be thrown out.
a. Compute the average unit product cost.
b. In order to reduce the number of wrong orders, Burger Doodle is going to
invest in a computerized ordering and cash register system. The cost of
the system will increase the average order cost by $.10 and will reduce
defective orders to 1 percent. Is this a worthy investment? Why or why
not? Explain clearly by showing all your work?
12. Costs of Poor Quality (Economics of Quality)
1) Prevention Costs
a. Costs associated with preventing defects before they happen
b. Product design, process design, employee training and vendor programs
2) Appraisal Costs
a. Costs of assessing quality through inspection, quality audits, and quality
b. By implementing “ ”, appraisal costs can be
3) Internal Failure Costs
a. Costs from yield (scrap) losses and rework
b. includes lost materials, labor hours, equipment capacity, longer lead
times, and higher inventory
4) External Failure Costs
a. Costs of warranty repairs and lost market share
b. Also legal liability and lawsuits
13. The Seven Basic Quality Control (QC) Tools
1) Flowchart: A flowchart is a pictorial summary of the flow of the various
operations (e.g., tasks, decisions, and flows) of a process.
2) Cause-and-Effect Diagram (Fishbone Diagram)
- used to organize the causes of a process or product problem in a logical
format. very useful in .
3) Check Sheet
- used to collect data about a product or process in an organized manner so
the data can be analyzed with a statistical tool; e.g., a Pareto diagram,
histogram, run chart, or control chart.
- A histogram constructs a pictorial representation of a frequency
distribution for a measurable process or product characteristic.
5) Pareto Diagram
- A Pareto diagram separates the " few" product or process
problems from the "trivial many (useful many)" product or process
problems. It is used to establish priorities with respect to process
or product problems.
6) Run Chart and Control Chart
- A run chart is usually a time-sequenced plot of a quality characteristic
and a control chart is used to distinguish special causes of variation from
system causes of variation.
7) Scatter Diagram
- It graphically depicts the strength and direction of the relationship
between two process/products characteristics.
1. SPC monitors quality characteristics during the production process so as to:
- measure the current quality of goods or services
- detect whether the process itself has changed in a way that will affect
2. Two Kinds of Variability in the Output
1) Random (inherent): (e.g., natural variability such as humidity,
temperature, dust in the air, vibration of the
* If all the variability is judged to be random, then the process is said
to be „in control‟.
- Random Variability (Pattern):
a. Most of the points are near the centerline.
b. A few of the points spread out and approach the control
c. None of the points exceed the control limits, and there is no
abnormal non-random pattern)
2) Non-random (Assignable): (e.g., tool wear and tear, human errors,
machine/equipment malfunction or misalignment, defective raw
- Examples of non-random variability (pattern): „out of control‟
1) Define (obtain) the upper control limit (UCL) and lower control limit
(LCL) of the control chart. (e.g. 1-sigma (68.26%), 2-sigma (95.44%),
3-sigma (99.74%), etc.)
2) The number of samples (subgroups) and a sample size (n) per sample
are determined. And, periodic samples of process outputs are
examined and each appropriate measure (e.g., average, range, etc.) is
plotted in a chart.
3) If all points are within the acceptable control limits and there is NO
non-random pattern in the control chart, the process is permitted to
continue (i.e., the process is „in control‟). If any point falls outside the
control limits, and/or any significant non-random pattern exists, then
the process is „out of control‟. The process should be stopped, the cause
should be investigated and corrective actions should be taken, if necessary.
4. Control Charts for Variables (measured)
(1) Range ( R ) Charts
- The primary objective of Range charts is to monitor the variability in
UCL = D 4 R
LCL = D 3 R , where D 4 and D 3 are obtained from the Table
Note: UCL stands for Upper Control Limit, and
LCL stands for Lower Control Limit.
(2) Sample Mean ( X ) Charts
- The primary objective of Mean charts is to monitor the central
tendency of the data set.
* Note: If the process standard deviation is UNKNOWN, then the sample
range, R may be used as a measure of process variability.
UCL = + A2 R
LCL = - A2 R , where A 2 is obtained from the Table
and = mean of sample means.
Example. Control charts (variable charts)
The Goodman Tire and Rubber Company periodically tests its tires for treaded
wear under simulated road conditions. To study and control its manufacturing
processes, the company uses X and R charts. Twenty samples, each
containing three radial tires, were chosen from different shifts. The results are
shown below (in hundredths of an inch). Is the process in control? Explain
carefully by constructing a 3-sigma (99.74%) control chart.
Sample Tread Wear Average ( X i) Range ( R i)
1 31 42 28 33.67 14
2 26 18 35 26.33 17
3 25 30 34 29.67 9
4 17 25 21 21.00 8
5 38 29 35 34.00 9
6 41 42 36 39.67 6
7 21 17 29 22.33 12
8 32 26 28 28.67 6
9 41 34 33 36.00 8
10 29 17 30 25.33 13
11 26 31 40 32.33 14
12 23 19 25 22.33 6
13 17 24 32 24.33 15
14 43 35 17 31.67 26
15 18 25 29 24.00 11
16 30 42 31 34.33 12
17 28 36 32 32.00 8
18 40 29 31 33.33 11
19 18 29 28 25.00 11
20 22 34 26 27.33 12
R1 + R2 + ... R20 14 + 17 + ... + 12
R = --------------------- = ------------------------- = 11.4
X1 + X2 + ... + X20 33.67 + 26.33 + ... + 27.33
X = ------------------------ = ------------------------------------ = 29.17
5. Control Charts for Attributes (discrete or countable data)
These attribute charts are used when the characteristics of the process
are counted rather than measured.
(1) P - Charts
These are for the proportion (%) of defectives in a sample.
P - charts are most appropriate when both defectives and non-
defectives can be counted (i.e., when observations can be placed into
one of two categories; good or bad, pass or fail, operate or don‟t
Based on the Binomial distribution, but for large samples, the Normal
distribution gives a good approximation.
P (1 - P )
UCL = P + Z ------------
P (1 - P )
LCL = P - Z · ------------,
where P = average % defective in the
sample, n = sample size and Z = sigma.
A sportswear firm has set up for automated production of a line of sweaters.
Twenty samples of size n = 50 are to be withdrawn randomly during the first
week of production in order to establish control limits for the process. Defects
remain in the shipment but bring less revenue, for they eventually sell as
"seconds." The defectives detected in the 20 samples are shown below.
Construct a 3–sigma (99.74 %) control chart for this process. Is the
production process “in control”? Explain.
Sample Number of Percentage of
Number Defective Items Defective Items (P i )
1 2 .04
2 3 .06
3 4 .08
4 1 .02
5 0 .00
6 2 .04
7 4 .08
8 1 .02
9 1 .02
10 3 .06
11 0 .00
12 1 .02
13 2 .04
14 1 .02
15 0 .00
16 3 .06
17 7 .14
18 2 .04
19 1 .02
20 2 .04
The Western Jeans Company produces denim jeans. The company wants to
establish a control chat to monitor the production process and maintain high
quality. The company has taken 20 samples (one per day for 20 days), each
containing 100 pairs of jeans, and inspected them for defects, the results of
which are as follows.
Sample Number of Sample Number of
1 6 11 12
2 2 12 10
3 4 13 14
4 10 14 8
5 6 15 6
6 4 16 16
7 12 17 12
8 10 18 14
9 8 19 18
10 10 20 16
Which control chart is most appropriate for this problem? Why? Is the
production process in control? Explain by showing all your work including a
control chart with 95% control limit.
(2) C - Charts
These are used for the number of defects in a sample. It is most
appropriate when we can count only the number of defects
(occurrences); nonoccurrences cannot be counted . (e.g., scratches,
chips, dents or errors per item, calls, complaints, failures, equipment
breakdowns per unit of time, etc.)
Based on a Poisson distributions for the sample. Normal approximation
to the Poisson is used.
UCL = C + Z C
LCL = C - Z C
Where C = a mean (average) number of defects in each unit, and
Z = sigma
The Mankato Transit System (MTS) uses the number of written passenger
complaints per day as a measure of its service quality. For 20 days, the number
of complaints received was as follows:
Day (sample) No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Total
No. of Complaints 6 5 6 5 4 5 3 4 3 0 2 1 2 2 1 1 0 1 0 0 51
Construct a 99 % control chart. Plot the values on a control chart. Is MTS
providing a quality service for its customers? Explain carefully.
A 99 % Control Limit? – An equivalent Sigma from the
A Decreasing (or Increasing) Trend Pattern in P and C-
Process Capability Analysis
- Statistical Process Control (SPC): the ability of the process to
maintain a state of good statistical control
- Process Capability: the ability of the process to produce parts that
conform to engineering specifications (tolerance limits)
- This is measured by computing a process capability index, C pk
Practical Impact of Process Capability
Index (C pk ) Meaning Costs of Poor Quality
0.67 4.56% 30-40 % of sales (Non-Competitive)
1.00 0.26% 20–30 % of sales
1.33 6 in 100000 15-20 % of sales (Industry Average)
1.5 3.4 ppm < 10% of sales (World Class)
Motororla‟s Six Sigma
1.63 1 ppm
*Note: ppm: defective parts per million
“Today, companies no longer compete on products – they
compete through supply chains.”
What is a supply chain and supply chain
Why is it important?
What is the right supply chain for your product?
Supply Chain is the network of facilities and activities that performs
the functions of product development, procurement of materials from
vendors, the movement of materials between facilities, the
manufacturing of products, the distribution of finished goods to
customers, and after-market support for sustainment.
Supply Chain Management (SCM): is concerned with the effective
management and optimization of procurement, manufacturing,
distribution, logistics, and customer service activities and the linkages
existing among them, regardless of whether these activities are
performed internally or externally to the firm.
Objective of Supply Chain Management
- To synchronize the requirements of the final customer with the flow
of materials and information along the supply chain in order to
reach a balance between high customer service and cost.
Four Characteristics of Supply Chain Management (SCM)
1) Treats the supply chain as a , not a series of
autonomous functions or segments.
2) “Supply” is considered the shared objective of every function
or segment in the chain, and SCM relies on strategic decision
3) It embraces the of systems throughout the chain,
which goes beyond the superficial contact that is traditional.
4) It views as last resorts for resolving imbalances
between various segments of the supply chain.
Examples: Wal-Mart - Innovative Information Sharing across the
3500 stores, 40 distribution centers in U.S. and 1200 stores in
outside U.S., 65000 suppliers
Super-efficient supply chain offers wide range of goods and
services at lower prices in the shortest possible time than its
competitors. (Replenish time: Wal-Mart (2 days), competitors (5
days), Shipping costs: Wal-Mart (3 % of sales), competitors (5 %)
Supplier partnerships allow Wal-Mart to understand the cost
structure of each good or service provided by the supplier, and they
work together to drive out costs.
Huge order quantities allow extraordinary price discounts.
Distribution centers run on a real-time information system where
handled devices, barcodes, and radio-frequency chips (RFID)
embedded in each good or pallet allow Wal-Mart to run a very
efficient distribution center.
Most supplier factories are tied directly into Wal-Mart‟s store
Benefits: faster inventory turnover, less warehouse space needed,
better working capital and cash flow management, fast response to
sales surges and fads, less safety stock, and prices that average
14% lower than competitors.
- Used innovative SCM as a strategic weapon: executives are
increasingly viewing SCM as a significant opportunity area
- Heavily utilized up-to-date information technology
Factors Impacting the Supply Chain
1) Reduced number of suppliers – a few, highly reliable vendors
2) Increase in competition – the emergence of a global economy has
dramatically increased the number of competitors that offer similar
3) Shorter Product Life Cycles
4) Increase in Vendor-Managed Inventories (VMI)
- An extreme application of the forward placement tactics which
involves locating the inventories at the customer
e.g., Continuous Replenishment Program (CRP) by Campbell
Soup Co.: A VMI method in which supplier monitors
inventory levels at the customer and replenishes the stock as
needed to avoid shortages
6) Advances in Technology
7) Shared or Reduced Risk
Negative Aspect of SCM: The Bullwhip (Whiplash) Effect
- It refers to the phenomenon where orders to the suppliers tend to
have larger variance than sales to the buyer (i.e., demand
distortion), and the distortion propagates upstream in an amplified
form (i.e., variance amplification)
- Four Major Causes of the Bullwhip Effect
a. Demand Forecast Updating: forecasts readjustments made at each
supply chain (demand signal processing) contribute to the bullwhip
b. Order Batching: companies batch or accumulate demands before
issuing an order (periodic ordering and push ordering) - amplify
variability and regular surges in demand.
c. Price fluctuations: Special promotions (price discounts, quantity
discounts, coupons, rebates, etc.) and trade deals (e.g., special
discounts, price terms, and payment terms) create “forward
buying”. As a result, the customer‟s buying pattern does not reflect
its consumption pattern, and the variation of the buying quantities
is much bigger than the variation of the consumption rate.
d. Rationing and shortage gaming- result when demand exceeds
supply and products are rationed to members of the supply chain
and when overreacting customers anticipating shortage give the
supplier inaccurate information on the real demand.
* How to Counteract the Bullwhip Effect
a. Change the way suppliers forecast product demand by making this
information from the final seller level available to all levels of the
b. Eliminate Order batching
c. Stabilize prices
d. Eliminate gaming
Requirements for a Successful Supply Chain
1) Trust between vendor and customer
2) Long-term relationships – evergreen contracts
3) Information sharing
4) Individual strength of organizations
Definition – What is it?
- An inventory is a stock of goods that is held for future use.
Why is “Inventory Management” important?
- Inventory represents the largest investment in assets for most
manufacturers and merchandisers.
- Inventories affect customer service, utilization of facilities and
equipment, capacity and efficiency of labor. Therefore, the plans for
concerning the acquisition and storage of materials, or “inventories”
are vital to the production system.
- Inventory carrying (holding) costs normally represent one of the
highest costs of the logistics system.
Types of Inventories
- Raw Materials
- Work-In-Process (WIP)
- Finished Goods
- Tools and Supplies (maintenance, repair and operating supplies)
Reasons for Holding Inventory – Traditional Perspectives
- To meet expected customer demand
- To facilitate production activities
- To decouple internal operations
- To provide a hedge against stockouts, price increases
- To take advantage of quantity discounts
* What about the Japanese Perspectives?
Holding Inventory May Result in the Following Costs
- capital cost (interest)
- shrinkage (lost or stolen items)
- obsolescence (loss of value due to styles etc.)
- storage (energy, cooling system)
- deterioration (age or environmental degradation)
Main Objectives of Inventory Management
1) Maximize Customer Service Level
2) Minimize the Total Costs associated with inventory
Inventory Decisions (3 Key Questions)
1) How often should the inventory status be determined? (i.e., What is
the review interval?)
2) When should a replenishment order be placed? - Timing (i.e., Reorder
Level or Reorder Point (ROP))
3) How large should the replenishment order be? (i.e., Optimal Order
Quantity or Production Quantity)
Inventory Review System
1) Periodic Review - Inventory levels are monitored at regular intervals
of time. At the end of every period, inventory levels are computed
Ending Balance = Beginning Balance - Demand.
If ending balance < reorder point (ROP), a new order is placed.
- Advantages: Cheaper, easier to operate
- Disadvantages: Riskier (greater chance of stockout)
2) Continuous Review - Inventory levels are constantly monitored. New
levels are computed each time a transaction
New Balance = Old Balance + Supply, or
New Balance = Old Balance - Demand.
Whenever the balance falls below the reorder point (ROP), an
order is placed.
- Advantages: Safer (smaller chance of stockout)
- Disadvantages: More expensive to operate.
Priority Inventory Management System (ABC Classification
- The logic behind this approach is that about 20% of the company‟s
products account for about 80% of the sales and possibly an even
larger percentage of the profits.
- The first step is to rank products by sales or contribution to company
profitability, and classify products as follows:
Class A: very important, (15 – 20 % of items but 70-80% of dollar
Class B: moderately important,
Class C: least important (low-volume or low contribution items: 60
– 70 % of items but about 15% of dollar value)
- Pay most attention to A and B items, especially A items (e.g.,
increase stocking rates and safety stocks) and least attention to C
Main Costs Considered in Inventory Models
1) Ordering Cost, S ($/order), if used in EOQ model
Setup Cost, S ($/setup), if used in EPRS model
2) Inventory Holding (Carrying) Cost, H ($/unit/year) or
Sometimes, holding costs are given as annual percentage (%) of a
given unit value of the item.
Ex. H = IU, where I = annual % estimate of inventory holding
cost and U = unit cost.
- interest, storage costs, loss/spoilage, obsolescence.
3) Shortage (stockout) Cost
- When demand exceeds the supply of inventory on hand
- lost profit (opportunity cost of not making a sale)
- loss of customer goodwill
Four Primary Inventory Models
1) Economic Order Quantity (EOQ) Model
2) Economic Production Run Size (EPRS) Model
3) Quantity Discount Model
4) Probabilistic Inventory Model
1. The Economic Order Quantity (EOQ) Model
Underlying Assumptions of the EOQ Model
1) Demand occurs at a constant rate, and is known with certainty.
2) Lead time is constant, and is known with certainty.
3) Each order is received in a single batch.
4) Stockouts (shortages) are not permitted.
5) Costs are assumed to remain stationary.
6) No quantity discounts.
7) Only one product.
Q = Order Quantity (Qo = Optimal Order Quantity)
D = Annual Demand
S = Ordering Cost Per Order
H = Inventory Holding Cost ($/unit/year) or H = I U
Derivation of Annual Ordering Cost (AOC), Annual Holding Cost
(AHC), Annual Total Cost (TC) and EOQ
* Annual Ordering Cost (AOC) = ----- S
* Annual Holding Cost (AHC) = ------ H = ----- (I· U)
* Annual Total Cost (TC) = AOC + AHC
* At what order quantity the TC becomes the minimum? What is
the key logic behind the EOQ model?
EOQ (Economic Order Quantity/Optimal Order Quantity)
EOQ, Qo = -----------
1 year 365 days
- Order Cycle time, t = --------------------------------- = ----------------
number of orders per year (D/Q)
- Reorder Point (ROP) = ------- LT where LT = a constant lead time.
- In an optimal solution (i.e., EOQ),
1) the order quantity (EOQ) will remain the same over time.
2) the order will be received just when the inventory level is zero.
1. ABC TV manufacturing Co. uses 2000 10-inch CRT tubes a year. Those
CRT tubes are purchased from a supplier located in New York at $10 each.
Annual carrying cost per CRT tube is estimated to be 20 % of the unit cost,
and ordering cost is $ 20 per order. Mr. John Doe, Production Manager of
the company is trying to develop an inventory planning by determining an
optimal order quantity of CRT tubes so that he can minimize an annual
Currently, however, without having any training in the area of inventory
management, he simply orders 500 tubes per order (i.e., 4 times a year).
a. Find the annual total cost of the current ordering policy by computing
annual ordering cost (AOC) and annual inventory holding cost (AHC).
b. From the cost calculation in (a), Mr. John Doe noticed that his company‟s
current AHC is unusually high, compared with AOC. Thus, he decided to
change his order quantity from 500 to 100. Compute the annual total cost
of this new policy (Q = 100). What changes in AOC, AHC and TC can
you observe? What recommendations do you want to make for Mr. John
Doe if he wants to balance his AHC and AOC?
c. If he uses the EOQ approach, what will be the optimal order quantity,
and how much can he save annually?
d. What will happen to the annual total cost (TC) if the annual carrying cost
rate I is doubled? Explain carefully by using the solution obtained in (c).
2. Garden Variety Flower Shop uses 800 clay pots a month. The pots are
purchased at $2 each. Annual carrying costs are estimated to be 25 % of
cost, and ordering costs are $30 per order. Currently the manager orders
once a month.
a. What is the total cost of current ordering policy?
b. How much could the shop save annually if they use the EOQ approach?
2. Economic Production Run (Lot) Size (EPRS) Model (or
EOQ with Non-instantaneous Replenishment)
Let p = a daily production rate (P = an annual production rate)
d = a daily usage (demand) rate. (D = an annual demand rate)
Note: p > d or P > D, and (p - d) = a daily inventory build-up rate.
The length of production run = ------ or --------
The pure consumption period = --------
Maximum Inventory, Imax = ----- (p - d) for any Q
If Q = Optimal (i.e., Q o ), then Imax = ------- · -------
EPRS, Qo = -------- · ------- (Optimal Production Quantity)
Production Cycle = -------
Energy Sol Corp. produces a certain energy-saving device. The demand for the
device, D, is 1,800 units per year (or 6 units each day (i.e., d = 6), assuming
300 working days in a year). The company can produce at an annual rate, P, of
7,200 units (or 24 per day, i.e., p = 24). Setup cost, S, is $300. There is an
inventory holding cost, H, of $36 per unit, per year. Mr. Sharp, Operations
Manager of the company wants to determine the economic production run size
(optimal production quantity) that will minimize the annual total cost. But
without knowing any quantitative techniques, Mr. Sharp just produces 72 units
per setup (i.e., Q = 72).
a. How long does it take to produce 72 units? – The length of the
b. What is the maximum possible inventory (I m ax ) when they complete the
production of 72 units?
c. What is the length of pure consumption period?
d. What is the production cycle?
e. What is the annual total cost (TC) of the current policy?
f. Determine the optimal production quantity using the EPRS approach?
What is the minimum total cost? How much can Mr. Sharp save by using
the EPRS approach instead of the current policy?
A company is about to begin production of a new product. The manager of the
department that will produce one of the components for the product wants to
know how often the machine used to produce the item will be available for
other work. The machine will produce the item at a rate of 200 units a day.
Eighty units will be used daily in assembling the final product. Assembly will
take place five days a week, 50 weeks a year. The manager estimates that it
will take almost a full day to get the machine ready for a production run, at a
cost of $60. Inventory holding costs will be $2 a year.
a. What is the optimal production quantity (EPRS)?
b. What is the length of a production run in days?
c. During the production, at what rate will inventory build up?
d. If the manager wants to run another job between runs of this item, and
needs a minimum of 12 days per cycle for the other work, will there be
enough time? Explain carefully by showing all your work.
The Relationship Between EOQ and EPRS:
- EOQ is a special case of EPRS model where P (production rate)
“Make or Buy” Analysis – A Key Application of EOQ & EPRS
- In order to determine which option is more economical, we compute
the annual total costs (TC) of the two options, and select the one that
has the lowest total cost.
* Buy Option (EOQ):
Total Cost (TC) = Annual Ordering Cost + Annual Holding Cost + Annual
TC = ----- S + ----- (I U) + UD
* Make Option (EPRS):
Total Cost = Annual Setup Cost + Annual Holding Cost +Annual
Manufacturing Cost + Additional costs, if any
D I m ax
TC = ----- S + ------ (I U) + UD + Additional costs
1. Zak's Zippers is contemplating manufacturing their own zippers rather than
distributing the zippers it receives from ZZZ, Inc. Zak's figures it must sell
the zipper at the same price or else the yearly demand of 4,000 dozen
zippers will be greatly affected. Presently the purchase cost per dozen
zippers is $10, whereas the proposed manufacturing cost for labor and raw
materials is estimated at $8 per dozen. In any event, the holding costs are
estimated at 20% of the purchase or manufacturing cost of the item. Reorder
costs are currently $40 per order. However, set-up costs for each production
cycle are estimated at $400. If Zak's can lease a machine with production
capacity of 8,000 dozen zippers per year at an annual cost of $5,000, which
policy (Make or Buy) would you recommend to management and why?
Explain carefully by showing all your work.
2. One decision faced by many manufacturing firms is whether to make or buy
a particular component of the manufacturing process. Harrison Sound
Corporation manufactures stereo systems. The company has a choice of
either manufacturing the digital display unit for their Model 243 receiver
themselves or purchasing the unit from Allied Electronics. Allied will
charge Harrison $7.50 per unit and Harrison estimates the cost of placing a
single order with Allied is $48. If Harrison manufactures the units
themselves there will be a set-up cost for production of $1,600, an annual
production rate of 50,000 units a year possible, and a per unit production
cost of $7. Suppose Harrison expects to have an annual demand for these
display units equal to 10,000, and the holding cost rate is 20%.
Which policy (Make or Buy) would you recommend to management and
why? Explain carefully by showing all your work.
3. Quantity Discount Model
- When a volume discount is provided, the determination of optimal order
quantity should be based on the annual total cost (TC) of each option
instead of the lowest unit cost or a feasible EOQ.
Total Cost (TC) = Annual Ordering Cost + Annual Holding Cost + Annual
TC = ----- S + ----- (I U) + UD
Case 1: When H = I·U (i.e., H is given as an annual percentage ( I )
of the unit price, U)
- Each curve will have a different EOQ.
- As price decreases, each curve's EOQ will be to the right of the next
higher curve's EOQ.
Step 1. Starting with the lowest unit price, compute the EOQ. If this
EOQ is feasible for the lowest pricebreak, then an Optimal
Order Quantity is achieved. If this EOQ is not feasible, then
compute the EOQ of the next lowest pricebreak until a feasible
EOQ is obtained. Go to Step 2.
Step 2. Compute the annual total cost (TC) of the feasible EOQ and
ALL LOWER pricebreaks.
Step 3. Compare the total costs (TC) and choose an optimal order
quantity that provides the lowest TC.
1. Faye's Fabric Boutique can order zippers for resale according to the
following quantity discount schedule:
Order Size Unit Cost ($)
0 - 999 1.00
1000 - 2499 .95
2500 and up .90
If annual demand for zippers is 5000, ordering cost is $10 per order, and
annual inventory carrying cost is 5% of unit cost, what order quantity do
you recommend? Why? Show all your work.
2. A mail-order house uses 20,000 boxes of gummed labels a year. Carrying
costs are 20 % of unit price, and ordering costs are $30 per order. A
supplier has provided the following discount schedule. Determine the
optimal order quantity and the number of orders per year.
Number of boxes Price per box
1000 to 1999 $ 1.25
2000 to 4999 1.20
5000 to 9999 1.18
10000 or more 1.15
3. ABC. Co. will begin stocking remote control devices. Expected monthly
demand is 800 units. The controllers can be purchased from either supplier
A or supplier B. Their price lists are as follows:
Supplier A Supplier B
Quantity Unit Price Quantity Unit Price
1-199 $14.00 1-149 $14.10
200-499 13.80 150-349 13.90
500 + 13.60 350 + 13.70
Ordering cost is $40 per order and annual holding cost is 25 % of unit price
per unit. Which supplier should be used and what order quantity is optimal if
the intent is to minimize total annual costs? Explain clearly by showing all
4. Probabilistic Inventory Model
- The primary objective of Probabilistic Inventory Model is to determine
an optimal timing (in terms of ROP).
Uncertainty in Inventory Decision Making
- There are two main areas of uncertainty:
1) Rate of Customer Demand
2) Length of Lead Time
- As a buffer against uncertainty, some extra inventory is held, and this
is called safety stock.
- Thus, in the face of uncertainty, the reorder point (ROP) is increased by
the amount of the safety stock.
Determination of Safety Stock
- The amount of safety stock to hold is determined by the desired
customer service level (SL).
- Service level (SL) represents the proportion (%) of time that
demand is met during the lead time.
- Service Level = Probability of No Stockout
= 1 - Probability of Stockout
= Prob. that lead time demand < ROP
= P(D < ROP)
1) Constant Demand, Constant Lead Time ☞ EOQ
2) Variable Demand, Constant Lead Time
d = Constant demand rate
d = Average demand rate
d = Standard deviation of customer demand rate
LT = Constant lead time
- In case of variable demand and/or variable lead time, we assume that
the distributions of demand and lead time follow NORMAL
Probabilistic Inventory Model (Variable Demand, Constant Lead
ROP = Expected demand during lead time + Safety Stock
= dLT + z LT (d)
where z = a safety factor
1. A local grocery store sells FZZ Diet Pop. The lead time demand for FZZ
Diet Pop is normally distributed with a mean of 200 cases and a standard
deviation of 40 cases. An order quantity of 400 cases was determined to be
the optimal order quantity through EOQ analysis. (Assume LT=1)
a. What percentage of the time will stockout be experienced with a
safety stock of 50 cases?
b. From part (a) above, the store manager noticed that the service level
obtained in part (a) would not be sufficient in meeting the store‟s target
service level of 95 %. What level of safety stock would the grocery
have to carry to maintain a 95 % service level?
2. Demand for walnut fudge ice cream at the Swan Ice Cream Dairy can be
approximated by a normal distribution with a mean of 21 gallons per day
and a standard deviation of 3.5 gallons per day. The new production
manager desires a service level of 90 percent. Lead time is 2 days.
a. What ROP would be consistent with the desired service level?
b. If the manager wants to maintain 10 gallons of safety stock, what would
be the corresponding stockout risk?
3. The injection molding department of a company uses an average of 30
gallons of special lubricant a day. The supply of the lubricant is replenished
when the amount on hand is 170 gallons. It takes four days for an order to
be delivered. Safety stock is 50 gallons, which provides a stockout risk of 9
percent. What amount of safety stock would be needed if the acceptable risk
of a stockout is 3 percent? Explain clearly by showing all your work.
4. You are in charge of inventory control of a highly successful product
retailed by your firm. Weekly demand for this item varies, with an average
of 200 units and a standard deviation of 16 units. It is purchased from a
wholesaler at a cost of $12.50 per unit. The supply lead time is 4 weeks.
Placing an order costs $50, and the inventory carrying rate per year is 20
percent of the item‟s cost. Your firm operates 50 weeks per year.
a. What is the optimal order quantity?
b. How many units of the item should be maintained as safety stock for 99
percent protection against stockouts during an order cycle?
c. If supply lead time can be reduced to 2 weeks, what is the percent
reduction in the number of units maintained as safety stock for the same
99 percent stockout protection?
d. If through appropriate sales promotions, the demand variability is
reduced so that the standard deviation of weekly demand is 8 units
instead of 16, what is the percent reduction (compared to that in part
(b)) in the number of units maintained as a safety stock for the same 99
percent stockout protection? Assume that lead time is 4 weeks.
To Understand Japan and the Japanese
(i) The lack of natural resources makes it necessary to import vast
amounts of materials. - To overcome this handicap, it is essential for
the Japanese industries to put forth their best efforts in producing,
better quality goods having higher added value and at an even
lower production cost than those of the other countries.
(ii) Japanese traits
- Group consciousness, sense of equality, desire to improve, and
diligence born from a long history of a homogeneous race.
- High degree of ability resulting from higher education brought by
desire to improve,
- Centering their daily living around work
(iii) Japanese Management Characteristics
- Lifetime employment system
- Labor unions by companies
- Little discrimination between shop workers and white-collar staff
- Chances available to workers for promotion to managerial positions
Japanese Production System – Underlying Philosophy
(i) Reduction of Cost through „Elimination of Waste‟
- This involves making up a system that will thoroughly eliminate waste
by assuming that anything other than the minimum amount of
equipment, materials, parts, and workers (working time) which are
absolutely essential to production are merely surplus that only raises
(ii) People Preparation – “Respect-for-Humanity (People)” system
- Discipline (enforce safety and quality-critical standards)
- Flexibility (job rotation, remove barriers)
- Creativity (aim of job, responsibility, incubation time, encourage ideas
- Equality (remove unfair policies; single status)
- Quality of Work Life (involvement, security, enjoyment)
- Personal development (develop intelligent people)
- Autonomy (delegate, line stop)
(iii) Total Quality
- Management leadership
- Integration of efforts
- Customer is the next process
- break down barriers
- Continuous improvement
- Habits of never-ending improvement
- Pursue perfection
- Ownership Culture
- Correct your own errors
- Line stop authority
- Visibility of problems
- Quality at the source
Just-In-Time (JIT) - Inventory is viewed as a „waste‟.
- A manufacturing philosophy developed in Japan for the high volume
production of discrete units (e.g., Toyota Auto.)
- Inventory is controlled by a visual (Kanban) system that virtually
assures that WIP will be kept to a minimum.
- A major tenet is to avoid holding any unnecessary inventory. Instead,
the firms rely upon the careful scheduling of work, on-time delivery of
(zero- defects) supplies, and skilled workers who are capable of
handling any problems that may arise during production.
- Teamwork and close cooperation of everyone is vital.
A JIT System: Key Elements
- High quality levels
- Production smoothing/uniform plant loading
- Low inventories
- Have a flexible work force capable of using multiple skills. (multi-
- Strive for very short setup times and very small lot sizes. (one piece
production and conveyance)
- Insist that defect-free materials and supplies be delivered when
needed (few, reliable suppliers) – JIT Purchasing.
- Use a Kanban or comparable system to pull needed inventory through
the systems (in response to final assembly schedule)
- Preventive maintenance and repair
- Teamwork/Cooperative Spirit
- Continuous Improvement
- Cellular and/or U-shaped layout