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					Introduction to OM
Introduction to Supply

                               SCM – Quality Management
Chain Management
SCM-Acquisition
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
                                 Production/Operations
•Information Technology
•Foundations
•Demand Management
•Supply Management
                                     Management
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management
•Quality Management
POM Tools
                                     Dr. Eliot Elfner
•Forecasting
•Lean Manufacturing
•Project Management
•Simulation
                                   St. Norbert College
•Statistical Process Control

                                       Spring 2008


                                                         1
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition                 Total Quality Management (TQM)
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
•Information Technology
•Foundations
                               • Total quality management is
•Demand Management
•Supply Management
•Inventory Management
                                 defined as managing the
•Capacity Management
•Production Management
•Transportation Management
                                 entire organization so that it
•Quality Management
POM Tools
•Forecasting
                                 excels on all dimensions of
•Lean Manufacturing
•Project Management
•Simulation
                                 products and services that
•Statistical Process Control
                                 are important to the
                                 customer
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                                       Quality Specifications
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
                               • Design quality: Inherent value of the product
•e-procurement
Webster Chapters
                                 in the marketplace
•Information Technology
•Foundations
•Demand Management
                                  – Dimensions include:
•Supply Management
•Inventory Management
                                     • Performance
•Capacity Management
•Production Management
•Transportation Management
                                     • Features
•Quality Management
POM Tools                            • Reliability/Durability
•Forecasting
•Lean Manufacturing
•Project Management
                                     • Serviceability
•Simulation
•Statistical Process Control         • Aesthetics
                                     • Perceived Quality.
                               • Conformance quality: Degree to which the
                                 product or service design specifications are
                                 met
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                                                  Costs of Quality
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement                                       Appraisal Costs
Webster Chapters
•Information Technology
•Foundations
•Demand Management
•Supply Management
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management
•Quality Management
                               External Failure         Costs
POM Tools                                                               Prevention Costs
•Forecasting                        Costs                 of
•Lean Manufacturing
•Project Management
•Simulation
                                                        Quality
•Statistical Process Control




                                                     Internal Failure
                                                          Costs
                                                                                       4
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                                             ISO 9000
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing

                               • Series of standards agreed upon by
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
•Information Technology
                                 the International Organization for
•Foundations
•Demand Management
                                 Standardization (ISO)
•Supply Management

                               • Adopted in 1987
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management
•Quality Management
POM Tools                      • More than 100 countries
•Forecasting
•Lean Manufacturing
•Project Management
•Simulation
                               • A prerequisite for global competition?
•Statistical Process Control


                               • ISO 9000 directs you to "document
                                 what you do and then do as you
                                 documented"
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                                           Six Sigma Quality
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory      • A philosophy and set
•Reverse Auctions
•e-procurement                   of methods
Webster Chapters                 companies use to
•Information Technology
•Foundations                     eliminate defects in
•Demand Management
•Supply Management               their products and
•Inventory Management
•Capacity Management             processes
•Production Management
•Transportation Management     • Seeks to reduce
•Quality Management
POM Tools
                                 variation in the
•Forecasting                     processes that lead
•Lean Manufacturing
•Project Management              to product defects
•Simulation
•Statistical Process Control   • The name, “six
                                 sigma” refers to the
                                 variation that exists
                                 within plus or minus
                                 three standard
                                 deviations of the
                                                               6
                                 process outputs
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition                 Six Sigma Quality (Continued)
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions              • Six Sigma allows managers to readily
•e-procurement
Webster Chapters                 describe process performance using a
•Information Technology
•Foundations                     common metric: Defects Per Million
•Demand Management
•Supply Management               Opportunities (DPMO)
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management                   Numberof defects
•Quality Management
POM Tools
                               DPMO                                      x1,000,000
•Forecasting
•Lean Manufacturing
•Project Management
                                         Numberof 
•Simulation                              opportunit 
                                                     ies x No. of units
                                         for error per 
•Statistical Process Control


                                         unit          
                                                       


                                                                                   7
       Six Sigma Quality (Continued)
Example of Defects Per Million              So, for every one
  Opportunities (DPMO) calculation.         million letters
                                            delivered this city’s
  Suppose we observe 200 letters            postal managers can
  delivered incorrectly to the wrong        expect to have 1,000
  addresses in a small city during a        letters incorrectly
  single day when a total of 200,000        sent to the wrong
  letters were delivered. What is the       address.
  DPMO in this situation?

                          200
        DPMO                        x1,000,000  1, 000
                   1    x200,000

   Cost of Quality: What might that DPMO mean in terms
     of over-time employment to correct the errors?
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                               Six Sigma Quality: DMAIC Cycle
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions              • Define, Measure, Analyze, Improve, and
•e-procurement
Webster Chapters                 Control (DMAIC)
•Information Technology
•Foundations
•Demand Management
                               • Developed by General Electric as a means of
•Supply Management
•Inventory Management            focusing effort on quality using a
•Capacity Management
•Production Management           methodological approach
•Transportation Management
•Quality Management
POM Tools
                               • Overall focus of the methodology is to
•Forecasting
•Lean Manufacturing
                                 understand and achieve what the customer
•Project Management
•Simulation                      wants
•Statistical Process Control
                               • A 6-sigma program seeks to reduce the
                                 variation in the processes that lead to these
                                 defects
                               • DMAIC consists of five steps….
                                                                            9
Introduction to OM
Introduction to Supply
Chain Management                Six Sigma Quality: DMAIC Cycle
SCM-Acquisition
•Purchasing Defined
•Make or Buy
•B2B Commerce
                                         (Continued)
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
•Information Technology        1. Define (D)    Customers and their priorities
•Foundations
•Demand Management
•Supply Management
•Inventory Management
•Capacity Management
                               2. Measure (M)   Process and its performance
•Production Management
•Transportation Management
•Quality Management
POM Tools                      3. Analyze (A)   Causes of defects
•Forecasting
•Lean Manufacturing
•Project Management
•Simulation
•Statistical Process Control
                               4. Improve (I)   Remove causes of defects

                               5. Control (C)   Maintain quality


                                                                              10
Introduction to OM
Introduction to Supply
Chain Management                  Example to illustrate the
SCM-Acquisition
•Purchasing Defined
•Make or Buy
•B2B Commerce
                                       process…
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
•Information Technology
•Foundations
                               • We are the maker of this cereal.
•Demand Management
•Supply Management
•Inventory Management
                                 Consumer reports has just
•Capacity Management
•Production Management
•Transportation Management
                                 published an article that shows
•Quality Management
POM Tools                        that we frequently have less
•Forecasting
•Lean Manufacturing
•Project Management
                                 than 15 ounces of cereal in a
•Simulation
•Statistical Process Control     box.
                               • What should we do?

                                                                    11
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
•Purchasing Defined
                                        Step 1 - Define
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
                               • What is the critical-to-quality
•Information Technology
•Foundations                     characteristic?
•Demand Management

                               • The CTQ (critical-to-quality)
•Supply Management
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management
•Quality Management
                                 characteristic in this case is
POM Tools
•Forecasting                     the weight of the cereal in the
•Lean Manufacturing
•Project Management
•Simulation                      box.
•Statistical Process Control




                                                                   12
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
•Purchasing Defined
                                          2 - Measure
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
•Information Technology
•Foundations
•Demand Management
                               • How would we measure to
•Supply Management
•Inventory Management
•Capacity Management
                                 evaluate the extent of the
•Production Management
•Transportation Management
•Quality Management
                                 problem?
POM Tools
•Forecasting
•Lean Manufacturing
                               • What are acceptable limits on
•Project Management
•Simulation
•Statistical Process Control
                                 this measure?



                                                                 13
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
•Purchasing Defined
•Make or Buy
                                   2 – Measure (continued)
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement


                               • Let’s assume that the
Webster Chapters
•Information Technology
•Foundations
•Demand Management
•Supply Management               government says that we must
                                 be within ± 5 percent of the
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management
•Quality Management              weight advertised on the box.
POM Tools
•Forecasting
•Lean Manufacturing
                               • Upper Tolerance Limit = 16 +
•Project Management
•Simulation
•Statistical Process Control
                                 .05(16) = 16.8 ounces
                               • Lower Tolerance Limit = 16 –
                                 .05(16) = 15.2 ounces

                                                                 14
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
•Purchasing Defined
                                    2. Measure (continued)
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
•Information Technology
•Foundations
•Demand Management
                               • We go out and buy 1,000
•Supply Management
•Inventory Management            boxes of cereal and find that
•Capacity Management
•Production Management
•Transportation Management
                                 they weight an average of
•Quality Management
POM Tools
•Forecasting
                                 15.875 ounces with a standard
•Lean Manufacturing
•Project Management
•Simulation
                                 deviation of .529 ounces.
•Statistical Process Control

                               • What percentage of boxes are
                                 outside the tolerance limits?

                                                                 15
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters                                     Process
•Information Technology
•Foundations                   Lower Tolerance       Mean = 15.875          Upper Tolerance
•Demand Management
                               = 15.2                Std. Dev. = .529       = 16.8
•Supply Management
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management
•Quality Management
POM Tools
•Forecasting                   What percentage of boxes are defective (i.e. less than 15.2
•Lean Manufacturing            oz)?
•Project Management
•Simulation
•Statistical Process Control
                               Z = (x – Mean)/Std. Dev. = (15.2 – 15.875)/.529 = -1.276

                               NORMSDIST(Z) = NORMSDIST(-1.276) = .100978

                               Approximately, 10 percent of the boxes have less than 15.2
                               Ounces of cereal in them!
                                                                                             16
Introduction to OM
Introduction to Supply
Chain Management
                                           Step 3 – Analyze
SCM-Acquisition                How can we improve the capability of our cereal
•Purchasing Defined
•Make or Buy                                box filling process?
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
•Information Technology
•Foundations
                                     –Decrease Variation
                                     –Center Process
•Demand Management
•Supply Management
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management
•Quality Management
                                     –Increase
POM Tools
•Forecasting
•Lean Manufacturing
                                      Specifications
•Project Management
•Simulation
•Statistical Process Control




                                                                             17
Introduction to OM
Introduction to Supply              Step 4 – Improve
Chain Management
SCM-Acquisition                 How good is good enough?
•Purchasing Defined
•Make or Buy
•B2B Commerce
                                  Motorola’s “Six Sigma”
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
•Information Technology
•Foundations
•Demand Management
•Supply Management
                               6s minimum from process
•Inventory Management
•Capacity Management
•Production Management
                                center to nearest spec
•Transportation Management                                 12s
•Quality Management
POM Tools
•Forecasting
•Lean Manufacturing
•Project Management
•Simulation
•Statistical Process Control
                                                           6s


                                   3   2   1   0   1   2    3



                                                                 18
Introduction to OM
Introduction to Supply

                                    Motorola’s “Six Sigma”
Chain Management
SCM-Acquisition
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
                               • Implies 2 ppB “bad” with no
Webster Chapters
•Information Technology          process shift
•Foundations

                               • With 1.5s shift in either direction
•Demand Management
•Supply Management
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management
                                 from center (process will move),
•Quality Management
POM Tools                        implies 3.4 ppm “bad”.
•Forecasting
•Lean Manufacturing                                              12s
•Project Management
•Simulation
•Statistical Process Control




                                         3   2   1   0   1   2    3


                                                                       19
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
•Purchasing Defined
                                        Step 5 – Control
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
                               • Statistical Process Control
•Information Technology
•Foundations
•Demand Management
                                 (SPC)
•Supply Management
•Inventory Management
•Capacity Management
                                 – Use data from the actual process
•Production Management
•Transportation Management
•Quality Management
                                 – Estimate distributions
POM Tools
•Forecasting
•Lean Manufacturing
                                 – Look at capability - is good
•Project Management
•Simulation                        quality possible
•Statistical Process Control

                                 – Statistically monitor the process
                                   over time

                                                                   20
Introduction to OM
Introduction to Supply
Chain Management                 Analytical Tools for Six Sigma and
SCM-Acquisition
•Purchasing Defined
•Make or Buy
                                Continuous Improvement: Flow Chart
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
                                                                       No,
•e-procurement
Webster Chapters
                                                                       Continue…
•Information Technology        Material
•Foundations
•Demand Management             Received
•Supply Management               from        Inspect
•Inventory Management                                              Defects
•Capacity Management           Supplier     Material for
•Production Management
                                                                   found?
•Transportation Management
                                             Defects
•Quality Management
POM Tools
•Forecasting
•Lean Manufacturing
•Project Management
•Simulation                                                Yes
•Statistical Process Control


                                Can be used to
                                find quality                     Return to
                                problems                          Supplier
                                                                 for Credit
Introduction to OM
Introduction to Supply
Chain Management                           Analytical Tools for Six Sigma and
SCM-Acquisition
•Purchasing Defined
•Make or Buy
                                          Continuous Improvement: Run Chart
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
                                                          Can be used to identify
•e-procurement
Webster Chapters
                                                          when equipment or
•Information Technology
•Foundations
                                                          processes are not
•Demand Management                                        behaving according to
                               Diameter
•Supply Management
•Inventory Management                                     specifications
•Capacity Management
•Production Management
                                          0.58
•Transportation Management
•Quality Management
                                          0.56
POM Tools                                 0.54
•Forecasting
•Lean Manufacturing                       0.52
•Project Management
•Simulation
                                           0.5
•Statistical Process Control              0.48
                                          0.46
                                          0.44
                                              1   2   3    4   5   6   7   8   9 10 11 12
                                                               Time (Hours)
                                                                                       22
Introduction to OM
Introduction to Supply
Chain Management                   Analytical Tools for Six Sigma and
SCM-Acquisition
•Purchasing Defined
•Make or Buy
                               Continuous Improvement: Pareto Analysis
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
•Information Technology                     80%
•Foundations                   Can be
•Demand Management
•Supply Management
                               used to
•Inventory Management          find when
•Capacity Management
•Production Management         80% of

                                            Frequency
•Transportation Management
•Quality Management
                               the
POM Tools                      problems
•Forecasting
•Lean Manufacturing
                               may be
•Project Management            attributed
•Simulation
•Statistical Process Control   to 20% of
                               the
                               causes

                                                        Design     Assy.     Purch.   Training
                                                                 Instruct.
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                                  Analytical Tools for Six Sigma and
•Purchasing Defined
•Make or Buy
                                Continuous Improvement: Checksheet
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions                                 Can be used to keep track of defects
•e-procurement                                    or used to make sure people collect
Webster Chapters
•Information Technology
                                                  data in a correct manner
•Foundations
•Demand Management
•Supply Management
•Inventory Management
                                                  Monday
•Capacity Management
•Production Management
                               Billing Errors
•Transportation Management
•Quality Management
POM Tools
                                  Wrong Account
•Forecasting
•Lean Manufacturing
•Project Management
                                  Wrong Amount
•Simulation
•Statistical Process Control
                               A/R Errors

                                  Wrong Account

                                  Wrong Amount
Introduction to OM
Introduction to Supply
Chain Management                                 Analytical Tools for Six Sigma and
SCM-Acquisition
•Purchasing Defined
•Make or Buy
                                                Continuous Improvement: Histogram
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory           Can be used to identify the frequency of quality defect
•Reverse Auctions
•e-procurement                      occurrence and display quality performance
Webster Chapters
•Information Technology
•Foundations
•Demand Management
•Supply Management
•Inventory Management
•Capacity Management
                               Number of Lots


•Production Management
•Transportation Management
•Quality Management
POM Tools
•Forecasting
•Lean Manufacturing
•Project Management
•Simulation
•Statistical Process Control




                                                  0       1        2          3      4
                                                Data Ranges              Defects in lot
Introduction to OM
Introduction to Supply
Chain Management                  Analytical Tools for Six Sigma and Continuous
SCM-Acquisition
•Purchasing Defined                Improvement: Cause & Effect Diagram
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
                               Possible causes:
Webster Chapters                                                The results
•Information Technology
•Foundations                                                    or effect
•Demand Management
•Supply Management
                                   Machine         Man
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management
•Quality Management            Environment                          Effect
POM Tools
•Forecasting
•Lean Manufacturing
•Project Management
•Simulation
•Statistical Process Control     Method           Material

                               Can be used to systematically track backwards to
                               find a possible cause of a quality problem (or
                               effect)
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                                   Analytical Tools for Six Sigma and
•Purchasing Defined
•Make or Buy
                                Continuous Improvement: Control Charts
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
                               Can be used to monitor ongoing production
Webster Chapters               process quality and quality conformance to stated
•Information Technology
•Foundations                   standards of quality
•Demand Management
•Supply Management
•Inventory Management          1020
•Capacity Management
•Production Management                                                       UCL
•Transportation Management     1010
•Quality Management
POM Tools
•Forecasting
                               1000
•Lean Manufacturing
•Project Management
•Simulation
                               990
•Statistical Process Control
                               980
                                                                             LCL

                               970
                                     0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

                                                                               27
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                                     Other Six Sigma Tools
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
                               • Failure Mode and Effect Analysis
Webster Chapters
•Information Technology
                                 (DMEA) is a structured approach to
•Foundations
•Demand Management
•Supply Management
                                 identify, estimate, prioritize, and
•Inventory Management
•Capacity Management
•Production Management
                                 evaluate risk of possible failures at
•Transportation Management
•Quality Management              each stage in the process
POM Tools
•Forecasting
•Lean Manufacturing            • Design of Experiments (DOE) a
•Project Management
•Simulation
•Statistical Process Control
                                 statistical test to determine cause-
                                 and-effect relationships between
                                 process variables and output

                                                                     28
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
•Purchasing Defined
                                     Basic Forms of Variation
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory                                  Example: A poorly trained employee
•Reverse Auctions
•e-procurement                 Assignable                  that creates variation in finished
Webster Chapters                                           product output.
•Information Technology
•Foundations
                                variation is
•Demand Management
•Supply Management
                                caused by factors
•Inventory Management
•Capacity Management            that can be
•Production Management
•Transportation Management      clearly identified
•Quality Management
POM Tools                       and possibly       Common variation
•Forecasting
•Lean Manufacturing
•Project Management
                                managed             is inherent in the
•Simulation
•Statistical Process Control                                    production
                                                                process
                                   Example: A molding process that
                                   always leaves “burrs” or flaws on a
                                   molded item.
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
•Purchasing Defined
•Make or Buy
                               Statistical Quality Control
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
                               • The quantitative aspects of
•Information Technology
•Foundations                     quality management
•Demand Management

                               • Processes usually exhibit some
•Supply Management
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management
•Quality Management
                                 variation in their output
                               • Some variation can be
POM Tools
•Forecasting
•Lean Manufacturing
•Project Management
•Simulation
•Statistical Process Control
                                 controlled and others are
                                 inherent in the process


                                                                  30
                 Taguchi’s View of Variation
  Traditional view is that quality within the LS and US is good
  and that the cost of quality outside this range is constant, where
  Taguchi views costs as increasing as variability increases, so seek
  to achieve zero defects and that will truly minimize quality costs.
       High                                 High


Incremental                          Incremental
Cost of                              Cost of
Variability                          Variability




       Zero                                 Zero

              Lower Target   Upper                 Lower   Target   Upper
              Spec  Spec     Spec                  Spec    Spec     Spec


              Traditional View                     Taguchi’s View
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
•Purchasing Defined
                                        Process Capability
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
•Information Technology
                               • Process limits
•Foundations
•Demand Management
•Supply Management
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management
•Quality Management
                               • Specification limits
POM Tools
•Forecasting
•Lean Manufacturing
•Project Management
•Simulation
•Statistical Process Control
                               • How do the limits relate to one
                                 another?
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition                  Process Capability Index, Cpk
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
                               Capability Index shows                  X  LTL    UTL - X 
•Reverse Auctions                                                     
                                                           C pk = min          or         
•e-procurement
Webster Chapters
                               how well parts being
                                                                       3s           3s   
•Information Technology
                               produced fit into design
•Foundations                   limit specifications.
•Demand Management
•Supply Management
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management
•Quality Management
POM Tools
•Forecasting                   As a production process
•Lean Manufacturing
•Project Management            produces items small shifts in
•Simulation
•Statistical Process Control
                               equipment or systems can
                               cause differences in
                               production performance from
                               differing samples.


                                                                   Shifts in Process Mean
Introduction to OM
Introduction to Supply
Chain Management                Process Capability – A Standard
SCM-Acquisition
•Purchasing Defined
•Make or Buy
                               Measure of How Good a Process Is.
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
•Information Technology
•Foundations
•Demand Management
•Supply Management
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management
•Quality Management
POM Tools
•Forecasting
                               A simple ratio:
•Lean Manufacturing
•Project Management
•Simulation
                                          Specification Width
•Statistical Process Control            _________________________________________________________



                                        Actual “Process Width”
                                      Generally, the bigger the better.

                                                                                                    34
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                                       Process Capability
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing


                                            X  LTL UTL  X 
•Vendor Managed Inventory
•Reverse Auctions


                                       Min
•e-procurement
Webster Chapters               C pk                 ;        
                                            3s        3s    
•Information Technology
•Foundations
•Demand Management
•Supply Management
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management
•Quality Management
POM Tools
•Forecasting
•Lean Manufacturing
•Project Management
•Simulation
•Statistical Process Control


                               This is a “one-sided” Capability Index
                               Concentration on the side which is
                                 closest to the specification - closest
                                 to being “bad”
                                                                          35
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
•Purchasing Defined
                                     The Cereal Box Example
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory      • We are the maker of this cereal. Consumer
•Reverse Auctions
•e-procurement
                                 reports has just published an article that shows
Webster Chapters                 that we frequently have less than 15 ounces of
•Information Technology
•Foundations
                                 cereal in a box.
•Demand Management
•Supply Management
•Inventory Management
                               • Let’s assume that the government says that we
•Capacity Management
•Production Management
                                 must be within ± 5 percent of the weight
•Transportation Management       advertised on the box.
•Quality Management
POM Tools
•Forecasting                   • Upper Tolerance Limit = 16 + .05(16) = 16.8
•Lean Manufacturing
•Project Management
                                 ounces
•Simulation
•Statistical Process Control
                               • Lower Tolerance Limit = 16 – .05(16) = 15.2
                                 ounces
                               • We go out and buy 1,000 boxes of cereal and
                                 find that they weight an average of 15.875
                                 ounces with a standard deviation of .529
                                 ounces.                                     36
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                                  Cereal Box Process Capability
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory      • Specification or Tolerance Limits
•Reverse Auctions
•e-procurement                    – Upper Spec = 16.8 oz
Webster Chapters
•Information Technology
                                  – Lower Spec = 15.2 oz
•Foundations
•Demand Management
                               • Observed Weight
•Supply Management
•Inventory Management
                                  – Mean = 15.875 oz
•Capacity Management
•Production Management
                                  – Std Dev = .529 oz
•Transportation Management
•Quality Management
                                                                   X  LTL UTL  X 
POM Tools                                               C pk  Min        ;        
                                                                   3s        3s 
•Forecasting
•Lean Manufacturing
•Project Management
•Simulation                                              15.875  15.2 16.8  15.875 
•Statistical Process Control                 C pk    Min             ;              
                                                            3(.529)       3(.529) 
                                                       C pk  Min.4253 ; .5829 
                                                                 C pk  .4253
                                                                                     37
Introduction to OM
Introduction to Supply
Chain Management                  What does a Cpk of .4253
SCM-Acquisition
•Purchasing Defined
•Make or Buy
•B2B Commerce
                                          mean?
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
                               • An index that shows how well the
•Information Technology
•Foundations                     units being produced fit within the
•Demand Management
•Supply Management
•Inventory Management
                                 specification limits.
                               • This is a process that will produce a
•Capacity Management
•Production Management
•Transportation Management
•Quality Management
POM Tools                        relatively high number of defects.
•Forecasting
•Lean Manufacturing
•Project Management
                               • Many companies look for a Cpk of
•Simulation
•Statistical Process Control     1.3 or better… 6-Sigma company
                                 wants 2.0!


                                                                     38
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
•Purchasing Defined
                                 Types of Statistical Sampling
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
                               • Attribute (Go or no-go information)
•e-procurement
Webster Chapters                 –   Defectives refers to the acceptability of
•Information Technology
•Foundations                         product across a range of characteristics.
•Demand Management
•Supply Management
•Inventory Management            –   Defects refers to the number of defects
•Capacity Management
•Production Management               per unit which may be higher than the
•Transportation Management
•Quality Management                  number of defectives.
POM Tools
•Forecasting
•Lean Manufacturing
                                 –   p-chart application
•Project Management
•Simulation
•Statistical Process Control
                               • Variable (Continuous)
                                 –   Usually measured by the mean and the
                                     standard deviation.
                                 –   X-bar and R chart applications
                                  UCL


           Normal Behavior

Statistical Process               LCL


Control (SPC)                           1    2    3    4    5    6    Samples
                                                                      over time
                                  UCL
Charts
Possible problem, investigate
                                  LCL

                                         1    2    3    4    5    6    Samples
                                                                       over time
                                  UCL


  Possible problem, investigate


                                  LCL

                                        1    2    3    4    5    6    Samples
                                                                      over time
Introduction to OM
Introduction to Supply
Chain Management               Control Limits are based on the
SCM-Acquisition
•Purchasing Defined
•Make or Buy
                                        Normal Curve
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
•Information Technology
•Foundations
•Demand Management
•Supply Management
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management                                       x
•Quality Management
POM Tools
                                               m
•Forecasting                                                     z
•Lean Manufacturing
•Project Management            -3   -2    -1   0   1   2   3
•Simulation
•Statistical Process Control

                                Standard
                                deviation
                                units or “z”
                                units.
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                                          Control Limits
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions              We establish the Upper Control Limits
•e-procurement
Webster Chapters               (UCL) and the Lower Control Limits (LCL)
•Information Technology
•Foundations
                               with plus or minus 3 standard deviations
•Demand Management
•Supply Management
                               from some x-bar or mean value. Based on
•Inventory Management
•Capacity Management
                               this we can expect 99.7% of our sample
•Production Management
•Transportation Management
                               observations to fall within these limits.
•Quality Management
POM Tools
•Forecasting
•Lean Manufacturing
•Project Management
•Simulation
•Statistical Process Control




                                              99.7%
                                        LCL            UCL   x
Introduction to OM
Introduction to Supply
Chain Management
                               Example of Constructing a p-Chart:
SCM-Acquisition
•Purchasing Defined
•Make or Buy
                                        Required Data
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions                   Sample     No. of    Number of
•e-procurement
Webster Chapters                                         defects found
•Information Technology             No.        Samples
•Foundations
                                                         in each sample
•Demand Management
•Supply Management                         1      100                 4
•Inventory Management
•Capacity Management
                                           2      100                 2
•Production Management                     3      100                 5
•Transportation Management
                                           4      100                 3
•Quality Management
POM Tools                                  5      100                 6
•Forecasting                               6      100                 4
•Lean Manufacturing                        7      100                 3
•Project Management
•Simulation                                8      100                 7
•Statistical Process Control               9      100                 1
                                          10      100                 2
                                          11      100                 3
                                          12      100                 2
                                          13      100                 2
                                          14      100                 8
                                          15      100                 3
Introduction to OM
Introduction to Supply
Chain Management               Statistical Process Control Formulas:
SCM-Acquisition
•Purchasing Defined
•Make or Buy
                                Attribute Measurements (p-Chart)
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters                Given:
•Information Technology
•Foundations
•Demand Management
•Supply Management
•Inventory Management                 T o ta l N u m b e r o f D e fe c tiv e s
•Capacity Management
•Production Management
                                 p =
•Transportation Management           T o ta l N u m b e r o f O b s e rv a tio n s
•Quality Management
POM Tools
•Forecasting
•Lean Manufacturing
•Project Management
                                      p (1- p)
•Simulation                    sp =
•Statistical Process Control             n        Compute control limits:

                                                               UCL = p + z sp
                                                               LCL = p - z sp
Introduction to OM
Introduction to Supply
Chain Management                Example of Constructing a p-chart:
SCM-Acquisition
•Purchasing Defined
•Make or Buy
                                            Step 1
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
                                                 Sample     n Defectives      p
Webster Chapters                                      1   100          4   0.04
•Information Technology
•Foundations
                               1. Calculate           2   100          2   0.02
•Demand Management
•Supply Management
                                  the sample          3   100          5   0.05
•Inventory Management
                                  proportions,        4   100          3   0.03
•Capacity Management
•Production Management                                5   100          6   0.06
•Transportation Management
•Quality Management
                                  p (these are        6   100          4   0.04
POM Tools
•Forecasting
                                  what can be         7   100          3   0.03
•Lean Manufacturing
                                  plotted on          8   100          7   0.07
•Project Management
•Simulation                                           9   100          1   0.01
•Statistical Process Control      the p-chart)      10    100          2   0.02
                                  for each          11    100          3   0.03
                                  sample            12    100          2   0.02
                                                    13    100          2   0.02
                                                    14    100          8   0.08
                                                    15    100          3   0.03
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                               Example of Constructing a p-chart:
•Purchasing Defined
•Make or Buy
•B2B Commerce
                                         Steps 2 & 3
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
                               2. Calculate the average of the sample
•Information Technology
•Foundations                   proportions
•Demand Management
•Supply Management
•Inventory Management
•Capacity Management
•Production Management
                                               55
•Transportation Management                p =      = 0.036
•Quality Management
POM Tools
                                              1500
•Forecasting
•Lean Manufacturing
•Project Management
•Simulation
                               3. Calculate the standard deviation of the
•Statistical Process Control
                               sample proportion

                                    p (1 - p)   .036(1- .036)
                               sp =           =               = .0188
                                       n            100
Introduction to OM
Introduction to Supply
Chain Management               Example of Constructing a p-chart:
SCM-Acquisition
•Purchasing Defined
•Make or Buy                               Step 4
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
                                   4. Calculate the control limits
Webster Chapters
•Information Technology
•Foundations
•Demand Management
                                          UCL = p + z sp
•Supply Management
•Inventory Management
•Capacity Management
                                          LCL = p - z sp
•Production Management
•Transportation Management

                                          .036  3(.0188)
•Quality Management
POM Tools
•Forecasting
•Lean Manufacturing
•Project Management
•Simulation
•Statistical Process Control


                                  UCL = 0.0924
                                  LCL = -0.0204 (or 0)
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                                Example of Constructing a p-Chart: Step 5
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
                               5. Plot the individual sample proportions, the average of
•Reverse Auctions
•e-procurement
                               the proportions, and the control limits
Webster Chapters
•Information Technology           0.16
•Foundations
•Demand Management
                                  0.14
•Supply Management
•Inventory Management
•Capacity Management              0.12
•Production Management
•Transportation Management
•Quality Management
                                   0.1                                                                         UCL
POM Tools
                                p 0.08
•Forecasting
•Lean Manufacturing
•Project Management               0.06
•Simulation
•Statistical Process Control      0.04

                                  0.02

                                     0                                                                         LCL
                                         1   2   3   4   5   6   7    8     9    10   11   12   13   14   15
                                                                 O b servation

                                                                                                                48
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                                    Example of x-bar and R Charts:
•Purchasing Defined
•Make or Buy
                                           Required Data
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions              Sample   Obs 1    Obs 2    Obs 3    Obs 4    Obs 5
•e-procurement
Webster Chapters
                                 1      10.68   10.689   10.776   10.798   10.714
•Information Technology          2      10.79    10.86   10.601   10.746   10.779
•Foundations
•Demand Management               3      10.78   10.667   10.838   10.785   10.723
•Supply Management
•Inventory Management
                                 4      10.59   10.727   10.812   10.775    10.73
•Capacity Management             5      10.69   10.708    10.79   10.758   10.671
•Production Management
•Transportation Management       6      10.75   10.714   10.738   10.719   10.606
•Quality Management
POM Tools
                                 7      10.79   10.713   10.689   10.877   10.603
•Forecasting                     8      10.74   10.779    10.11   10.737    10.75
•Lean Manufacturing
•Project Management              9      10.77   10.773   10.641   10.644   10.725
•Simulation
•Statistical Process Control
                                 10     10.72   10.671   10.708    10.85   10.712
                                 11     10.79   10.821   10.764   10.658   10.708
                                 12     10.62   10.802   10.818   10.872   10.727
                                 13     10.66   10.822   10.893   10.544    10.75
                                 14     10.81   10.749   10.859   10.801   10.701
                                 15     10.66   10.681   10.644   10.747   10.728
Introduction to OM
Introduction to Supply         Example of x-bar and R charts: Step 1. Calculate
Chain Management
SCM-Acquisition                sample means, sample ranges, mean of means,
•Purchasing Defined
•Make or Buy                                and mean of ranges.
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement                 Sample   Obs 1    Obs 2    Obs 3    Obs 4      Obs 5      Avg   Range
Webster Chapters                 1      10.68   10.689   10.776   10.798     10.714   10.732    0.116
•Information Technology
•Foundations
                                 2      10.79    10.86   10.601   10.746     10.779   10.755    0.259
•Demand Management               3      10.78   10.667   10.838   10.785     10.723   10.759    0.171
•Supply Management
•Inventory Management
                                 4      10.59   10.727   10.812   10.775      10.73   10.727    0.221
•Capacity Management             5      10.69   10.708    10.79   10.758     10.671   10.724    0.119
•Production Management
•Transportation Management       6      10.75   10.714   10.738   10.719     10.606   10.705    0.143
•Quality Management              7      10.79   10.713   10.689   10.877     10.603   10.735    0.274
POM Tools
•Forecasting
                                 8      10.74   10.779    10.11   10.737      10.75   10.624    0.669
•Lean Manufacturing              9      10.77   10.773   10.641   10.644     10.725   10.710    0.132
•Project Management
•Simulation
                                 10     10.72   10.671   10.708    10.85     10.712   10.732    0.179
•Statistical Process Control     11     10.79   10.821   10.764   10.658     10.708   10.748    0.163
                                 12     10.62   10.802   10.818   10.872     10.727   10.768    0.250
                                 13     10.66   10.822   10.893   10.544      10.75   10.733    0.349
                                 14     10.81   10.749   10.859   10.801     10.701   10.783    0.158
                                 15     10.66   10.681   10.644   10.747     10.728   10.692    0.103

                                                                           Averages   10.728 0.220400
Introduction to OM
Introduction to Supply              Example of x-bar and R charts: Step 2.
Chain Management
SCM-Acquisition                Determine Control Limit Formulas and Necessary
•Purchasing Defined
•Make or Buy                                   Tabled Values
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement                 x Chart Control Limits
Webster Chapters
•Information Technology
•Foundations
•Demand Management
                               UCL = x + A 2 R                  From Exhibit TN8.7
•Supply Management
•Inventory Management
•Capacity Management
•Production Management
                               LCL = x - A 2 R              n          A2    D3     D4
•Transportation Management                                  2        1.88      0   3.27
•Quality Management
                                                            3        1.02      0   2.57
POM Tools
•Forecasting                                                4        0.73      0   2.28
•Lean Manufacturing
•Project Management            R Chart Control Limits       5        0.58      0   2.11
•Simulation
•Statistical Process Control
                                                            6        0.48      0   2.00
                               UCL = D 4 R                  7        0.42   0.08   1.92
                                                            8        0.37   0.14   1.86
                               LCL = D 3 R                  9        0.34   0.18   1.82
                                                           10        0.31   0.22   1.78
                                                           11        0.29   0.26   1.74
Introduction to OM
Introduction to Supply
Chain Management                             Example of x-bar and R charts: Steps 3&4.
SCM-Acquisition
•Purchasing Defined
•Make or Buy
                                               Calculate x-bar Chart and Plot Values
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions                    UCL = x + A 2 R  10.728 - .58(0.2204 ) = 10.856
•e-procurement


                                     LCL = x - A 2 R  10.728 - .58(0.2204 ) = 10.601
Webster Chapters
•Information Technology
•Foundations
•Demand Management
•Supply Management
•Inventory Management                     10.900
•Capacity Management
•Production Management                    10.850                                                                           UCL
•Transportation Management
•Quality Management                       10.800
POM Tools
•Forecasting                              10.750
                               M ea n s




•Lean Manufacturing
•Project Management                       10.700
•Simulation
•Statistical Process Control
                                          10.650

                                          10.600
                                                                                                                           LCL
                                          10.550
                                                   1   2   3   4   5   6   7      8      9   10   11   12   13   14   15
                                                                               Sam ple
Introduction to OM
Introduction to Supply              Example of x-bar and R charts: Steps 5&6.
Chain Management
SCM-Acquisition                                     Calculate
•Purchasing Defined
•Make or Buy                                R-chart and Plot Values
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
                                         UCL = D 4 R  ( 2.11)( 0.2204 )  0.46504
•e-procurement
Webster Chapters
•Information Technology
                                         LCL = D 3 R  (0)( 0.2204 )  0
•Foundations
•Demand Management
•Supply Management
•Inventory Management
•Capacity Management              0 .8 0 0
•Production Management
•Transportation Management        0 .7 0 0
•Quality Management
                                  0 .6 0 0
POM Tools
•Forecasting                      0 .5 0 0
•Lean Manufacturing                                                                                                     UC
•Project Management            R 0 .4 0 0
•Simulation                                                                                                             L
•Statistical Process Control      0 .3 0 0

                                  0 .2 0 0

                                  0 .1 0 0

                                  0 .0 0 0
                                                                                                                        LCL
                                             1   2   3   4   5   6   7       8        9   10   11   12   13   14   15
                                                                         S a m p le
Introduction to OM
Introduction to Supply
Chain Management               Basic Forms of Statistical Sampling
SCM-Acquisition
•Purchasing Defined
•Make or Buy
                                       for Quality Control
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions              • Acceptance Sampling is
•e-procurement
Webster Chapters
•Information Technology
                                 sampling to accept or reject the
•Foundations
•Demand Management
•Supply Management
                                 immediate lot of product at hand
•Inventory Management
•Capacity Management
•Production Management         • Statistical Process Control is
•Transportation Management
•Quality Management
POM Tools
                                 sampling to determine if the
•Forecasting
•Lean Manufacturing
•Project Management
                                 process is within acceptable
•Simulation
•Statistical Process Control     limits
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
•Purchasing Defined
                                        Acceptance Sampling
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions              • Purposes
•e-procurement
Webster Chapters                 –   Determine quality level
•Information Technology
•Foundations
•Demand Management
                                 –   Ensure quality is within predetermined
•Supply Management
•Inventory Management
                                     level
•Capacity Management
•Production Management         • Advantages
•Transportation Management
•Quality Management
POM Tools
                                 –   Economy
•Forecasting
•Lean Manufacturing
                                 –   Less handling damage
•Project Management
•Simulation                      –   Fewer inspectors
•Statistical Process Control
                                 –   Upgrading of the inspection job
                                 –   Applicability to destructive testing
                                 –   Entire lot rejection (motivation for
                                     improvement)
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                                Acceptance Sampling (Continued)
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions              • Disadvantages
•e-procurement
Webster Chapters
•Information Technology
                                 –   Risks of accepting “bad” lots and
                                     rejecting “good” lots
•Foundations
•Demand Management
•Supply Management
•Inventory Management
•Capacity Management
•Production Management
                                 –   Added planning and documentation
•Transportation Management
•Quality Management
POM Tools
                                 –   Sample provides less information
•Forecasting
•Lean Manufacturing
                                     than 100-percent inspection
•Project Management
•Simulation
•Statistical Process Control
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                               Acceptance Sampling:
•Purchasing Defined
•Make or Buy
•B2B Commerce
                                Single Sampling Plan
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
                               A simple goal
•e-procurement
Webster Chapters
•Information Technology
•Foundations
•Demand Management
                               Determine (1) how many units, n,
•Supply Management
•Inventory Management
•Capacity Management
                               to sample from a lot, and (2) the
•Production Management
•Transportation Management     maximum number of defective
•Quality Management
POM Tools
•Forecasting
                               items, c, that can be found in the
•Lean Manufacturing
•Project Management            sample before the lot is rejected
•Simulation
•Statistical Process Control
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
•Purchasing Defined
                                                     Risk
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions              • Acceptable Quality Level (AQL)
•e-procurement
Webster Chapters
•Information Technology
                                 –   Max. acceptable percentage of defectives
•Foundations
•Demand Management
                                     defined by producer
                               • The a (Producer’s risk)
•Supply Management
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management       –   The probability of rejecting a good lot
•Quality Management
POM Tools
•Forecasting
                               • Lot Tolerance Percent Defective (LTPD)
•Lean Manufacturing
•Project Management
•Simulation
                                 –   Percentage of defectives that defines
•Statistical Process Control
                                     consumer’s rejection point
                               • The  (Consumer’s risk)
                                 –   The probability of accepting a bad lot
                                                Operating Characteristic Curve
The OCC brings the concepts of producer’s risk, consumer’s
risk, sample size, and maximum defects allowed together
                              1
                                                                                          The shape
                            0.9             a = .05 (producer’s risk)
Probability of acceptance




                            0.8                                                           or slope of
                            0.7                                                           the curve is
                                                              n = 99
                            0.6                               c=4
                                                                                          dependent
                            0.5                                                           on a
                            0.4                                                           particular
                            0.3                                    =.10                  combination
                            0.2                                   (consumer’s risk)       of the four
                            0.1                                                           parameters
                              0
                                  1    2    3   4   5    6    7    8       9   10 11 12
                                      AQL                    LTPD
                                                    Percent defective
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition                Example: Acceptance Sampling Problem
•Purchasing Defined
•Make or Buy
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
                               Zypercom, a manufacturer of video interfaces,
•e-procurement
Webster Chapters               purchases printed wiring boards from an outside
•Information Technology
•Foundations                   vender, Procard. Procard has set an acceptable
•Demand Management
•Supply Management             quality level of 1% and accepts a 5% risk of
•Inventory Management
•Capacity Management           rejecting lots at or below this level. Zypercom
•Production Management
•Transportation Management
•Quality Management
                               considers lots with 3% defectives to be
POM Tools
•Forecasting
                               unacceptable and will assume a 10% risk of
•Lean Manufacturing
•Project Management
                               accepting a defective lot.
•Simulation
•Statistical Process Control

                               Develop a sampling plan for Zypercom and
                               determine a rule to be followed by the receiving
                               inspection personnel.
Introduction to OM
Introduction to Supply         Example: Step 1. What is given and what
Chain Management
SCM-Acquisition
•Purchasing Defined
•Make or Buy
                                                is not?
•B2B Commerce
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
                               In this problem, AQL is given to be 0.01
•e-procurement
Webster Chapters               and LTDP is given to be 0.03. We are
•Information Technology
•Foundations
•Demand Management
                               also given an alpha of 0.05 and a beta of
•Supply Management
•Inventory Management          0.10.
•Capacity Management
•Production Management
•Transportation Management
•Quality Management
POM Tools
•Forecasting
•Lean Manufacturing            What you need to determine is your
•Project Management
•Simulation
•Statistical Process Control
                               sampling plan is “c” and “n.”
                  Example: Step 2. Determine “c”
                                 LTPD   .03
                                      =     = 3
First divide LTPD by AQL.        AQL    .01

 Then find the value for “c” by selecting the value in the
 TN7.10 “n(AQL)”column that is equal to or just greater than
 the ratio above.

Exhibit TN 8.10                    So, c = 6.

    c    LTPD/AQL       n AQL       c   LTPD/AQL     n AQL
    0       44.890       0.052      5       3.549     2.613
    1       10.946       0.355      6       3.206     3.286
    2        6.509       0.818      7       2.957     3.981
    3        4.890       1.366      8       2.768     4.695
    4        4.057       1.970      9       2.618     5.426
     Example: Step 3. Determine Sample Size
Now given the information below, compute the sample
size in units to generate your sampling plan

       c = 6, from Table
       n (AQL) = 3.286, from Table
       AQL = .01, given in problem

n(AQL/AQL) = 3.286/.01 = 328.6, or 329 (always round up)


Sampling Plan:
Take a random sample of 329 units from a lot.
Reject the lot if more than 6 units are defective.
Introduction to OM
Introduction to Supply
Chain Management
SCM-Acquisition
                               SCM – Quality Management
•Purchasing Defined
•Make or Buy
•B2B Commerce
                                       The End
•Outsourcing
•Vendor Managed Inventory
•Reverse Auctions
•e-procurement
Webster Chapters
                                 Production/Operations
•Information Technology
•Foundations
•Demand Management
•Supply Management
                                     Management
•Inventory Management
•Capacity Management
•Production Management
•Transportation Management
•Quality Management
POM Tools
                                     Dr. Eliot Elfner
•Forecasting
•Lean Manufacturing
•Project Management
•Simulation
                                   St. Norbert College
•Statistical Process Control

                                       Spring 2008


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