LN346_Summer 2010_student

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        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.
          3.   Store:
          4.   Inspect: Medical exams, jewelry appraisals, elevator
                        certifications, etc.

* What Makes a Firm Competitive? – Five Key Principles
1. Quality

   Quality that improves constantly

   Quality that is characterized by continuous innovations that create a
    loyal customer

   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

3. Customer-driven

   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-
    based economy.

   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
 -Measurement of
    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


      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
    molding, etc.

   The Rationale:

    Time           Cost
                   Product innovations appear on the market earlier
                   Customer service

   Which Times?

    - 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)

* Productivity

   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
                                and government

    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

  8. Flexibility
  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

     - Quantifiable

     - 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
       past errors.

     - 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)

2000                  3
2001                  2
2002                  6

2003              4
2004              8
2005              6
2006              14
2007              12
2008              16
2009              18

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:

        Large n:
        Small 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
      more heavily.

    - Formula:

       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)
        time period.

     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
     more quickly.

  - 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
     5       8
     6       6
     7      14
     8      12
     9      16
    10      18

* 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 + bt

     - Example
                   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)
 Exponential        14.723
Smoothing with
    = 0.4
 Exponential        13.2452
Smoothing with
    = 0.3
 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

      1           68
      2           75
      3           70
      4           74
      5           69
      6           72
      7           80
      8           78

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

   1                  27
   2                  44
   3                  37
   4                  35
   5                  53
   6                  38
   7                  57
   8                  61
   9                  39
   10                 55
   11                 54
   12                 52
   13                 60
   14                 60
   15                 75


  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 + bx,

               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 + bx

  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
      your interpretations.

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.

Example 4.

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

    Diagnostic Checking

      - To evaluate the performance of a regression equation.

1) Residual Analysis

2) MSE

              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
     variable? Explain.

4) R (Coefficient of Determination)

   - R2 determines how good the regression model is in estimating
                                    ( x)( y)
                      b[ xy - -------------]
               R = -------------------------------
                                   ( y)2
                         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
   existing products

  Concurrent Design Process

     Also known as simultaneous or concurrent engineering

     Simultaneous decision making by design teams

     Integrates                 and

     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
               component parts)

 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

 DFM Guidelines:

 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
    design requirements

 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
    Reduced packing

* 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-
     volume relationship

    degree of vertical integration: forward and backward integration

    product flexibility: product and volume flexibility

      degree of automation

      product quality

      Others: Safety, Environmental/legal requirements, etc.

  Trends in U.S. Manufacturing Layouts

 - Group Technology (Cellular Manufacturing) layouts within larger
   process layouts

 - 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
   work stations

 - 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

  Characteristics

       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
   grouped together.

  Good for a manufacturing facility which produces a variety of
   nonstandard products in relatively small batches.

  Characteristics

       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.

  Characteristics

       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.

  Advantages

     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.

     g. example:

  Disadvantages

       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

   Definition

    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

    Key Constraints:

       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.

   Example:

   Notations

     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 = --------- = ------------
             OT             CT

 Nact = actual (or optimal) number of stations. It is obtained based on a
       certain technique.

 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 - ------------------ = --------------
                                           (Nact)(CT)         (Nact)(CT)

 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

Example 1.

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.

Example 2.

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
immediate predecessors.

     Task        Processing      Immediate

                 Time(sec)      Predecessors

      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
             Total 720

a) Draw the precedence diagram.

b) What is the theoretical minimum number of stations required to produce
   192 units?

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.

Example 3.

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
   critical decisions.

 Measuring Capacity

  - 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
        problems, etc.

     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.

                              Actual Output
            *            =
                             Effective Capacity

                              Actual Output
           *             =
                             Design Capacity

       - 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.,
        facility size)

 -      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.
   mature one).

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
                 BEP                  Q

        - 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
                                  Return, etc.)
            - 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

                                   Make              Buy

 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.

 Options

  - 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

 Types

  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

       - Labor

       - 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)

       - others

    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
locations are:

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
    hourly workers
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
your work.

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
    Customer-first orientation
    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!
      Why 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
                specifications (tolerance)

       - 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
     - Performance
     - Reliability and Durability
     - Conformance/Response
     - Serviceability
     - Appearance (Aesthetics)
     - Reputation
     - Features
     - 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
     - Others:

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

   Example

* 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
           benchmark activity.

        4) Analyze the data.

        5) Improve the critical process at your own organization.

   Examples:

     - 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”

   Background

         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.

         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

 Benefits

      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
        interrelated processes.

     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.

   Summary

     - 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
  traditional managers

 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.

      Quality Trilogy

          1) Quality Planning – the process of preparing to meet
             quality goals.

          2) Quality control – the process of meeting quality goals
             during operations.

          3) Quality improvement – the process of breaking
             through to unprecedented levels of performance.

 Comparison between Deming and Juran

      Similarities

           - 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
       of management.

      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
      evaluation tool.

     Responsibility for TQC must be shared and should not rest
      with the quality assurance (QA) or quality control (QC)
      function alone.

     Defines "hidden plant" as the proportion of plant capacity
      that exists in order to rework unsatisfactory parts.

 Kaoru Ishikawa

     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
            all divisions.

 Genichi Taguchi

      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
       environmental conditions.

      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?

   Market Implications

     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
                production process,
         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.

  4) Histogram

    - 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
                         building, etc.)

      * 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
     materials, etc.)

      - Examples of non-random variability (pattern): „out of control‟

3. Procedure

 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
      the range.
     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
              20                          20

    X1 + X2 + ... + X20        33.67 + 26.33 + ... + 27.33
X = ------------------------ = ------------------------------------ = 29.17
              20                              20

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
     operate, etc.)

    Based on the Binomial distribution, but for large samples, the Normal
     distribution gives a good approximation.

    Control Limits
                                        
                                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.

Example 1.

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
               total 40

Example 2.

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
              Defectives                         Defectives
  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.

    Control Limits
                            
         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
                  Appendix B

                 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
                            (defective rate)

0.5               13.36%

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

  2                  0

 *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
                     supply chain

    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
    information system.

   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.

   Lesson:

     - 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
     supply chain.

  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
  - Others

  * 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)
 - insurance
 - 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
                        takes place.

           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 = IU,      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.

  Notations

    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

                                    Q            Q
     * Annual Holding Cost (AHC) = ------  H = ----- (I· U)
                                    2            2

     * 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.

    Remarks

     - 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
   total cost.
   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.

                                     Qo        Imax
    The length of production run = ------ or --------
                                      p        p-d

    The pure consumption period =          --------

    Maximum Inventory, Imax         = ----- (p - d)    for any Q

                                            2DS      p-d
If Q = Optimal (i.e., Q o ), then Imax =   ------- · -------

                                           H         p

                  2DS        p
    EPRS, Qo = -------- · -------         (Optimal Production Quantity)
                   H        p-d

    Production Cycle = -------

Example 1.

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
    production run?

 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?

Example 2.

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)
           becomes infinity.

    “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
                                                       Purchasing Cost
                          D       Q
                  TC = ----- S + ----- (I U) + UD
                          Q        2

     * 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) + UD + Additional costs
                     Q         2


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
                                                        Purchasing Cost
                             D        Q
                     TC = ----- S + ----- (I U) + UD
                             Q         2

    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.

    * Procedures:

     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.

* Examples

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

your work.

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)

   Different Models

    1) Constant Demand, Constant Lead Time ☞ EOQ

    2) Variable Demand, Constant Lead Time

    Notations

      d = Constant demand rate
       d = Average demand rate
      d = Standard deviation of customer demand rate
      LT = Constant lead time

    Assumptions

     - 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

                =        dLT                    +             z  LT (d)

                      where z = a safety factor

* Examples

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
   the cost.

(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
    to grow)

  - 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

  - Detection

     - Visibility of problems
     - Error-proofing

   - Prevention

      - Quality at the source
      - SPC

 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-
    functional workers)

  - 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

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