Summary Operations Management Midterm Exam Review and Notes
Summary Operations Management Midterm Exam Review and Notes
Chap. 1
-Operations management: the systematic design, direction and control of processes that transform
inputs into services and products for internal, as well as external customers
-Study it so that companies can learn the best, cheapest, most efficient ways to make customers
happy
-To provide products and/or services with The Right 6: with right level of quality, to right
customer, at right time, at right place, in right quantity, for right cost or price
A Process View
-Process: any activity or group of activities that takes one or more inputs, transforms them, and
provides one or more outputs for its customers
-Operation: a group of resources performing all or part of one or more processes
Shows the role of operations in an organization
-Supply Chain: an interrelated series of processes within and across firms that produce a service or
product to the satisfaction of customers
-Supply Chain Management: the synchronization of a firm’s processes with those of its suppliers and
customers to match the flow of materials, services, and information with customer demand
-all processes have inputs and outputs and then provide outputs to customers
-ex. Of a firm, dept., small group or even and
individual
-circles=operations through which services, products
or customers pass and where processes are
performed
-arrows=flows
-dotted line= participation by customers and
information on performance from both internal and
external sources
-Internal Customers: one or more employees or processes that rely on inputs from other employees
or processes in order to perform their work
-External Suppliers: the businesses or individuals who provide the resources, services, products and
materials for the firm’s short term and long term needs
-Internal Suppliers: employees or processes that supply important information or materials to a
firm’s processes
-Two Major Processes
-Services and Manufacturing
-Differ:
-the nature of their output- manufacturing gives physical products and can be produced,
stored, and transported, services are intangible and perishable
-the degree of customer contact- services much higher and customers have an active role
-manufacturing: capital intensive, quality easily measured, long response time
-services: labor intensive, quality not easily measured, have short response time
-Similar:
-service providers don’t just offer services and manufacturing providers don’t just offer
products ex. Restaurant- good food and good service wanted
-do keep inventory
-Operations Strategy: the means by which operations implements the firm’s corporate strategy and
helps to build a customer-driven firm, links long and short term operations decisions to corporate
strategy and develops the capabilities the firm needs to be competitive
-translates service or product plans and competitive priorities for each market segment into
decisions affecting the supply chains that support those market segments,
-the pattern of decisions that have been made for a company’s processes and supply chains
-any gap between a competitive priority and the capability to achieve that priority must be closed
by and effective operations strategy
-Corporate Strategy: coordinates the firm’s overall goals with its core processes, specifies businesses it
will pursue, isolates threats, and identifies growth objects
-4 considerations:
-Environmental Scanning: process by which managers monitor trends in the environment for
potential opportunities or threats in order to stay ahead of competition ex. Economic trends,
new entrants into the market, social changes, political conditions
-Developing Core Competencies: unique resources and strengths that and organization’s
management considers when formulating strategy, reflects the collective learning of the
organization-how to coordinate processes and integrate technologies
-Workforce
-Facilities
-Market and Financial Know-How
-Systems and Technology
-Developing Core Processes: should drive its core processes-customer relationship, new
service/product development, order fulfillment, and supplier relationship- some companies
have all 4 while others focus on only a few; want to provide the greatest competitive strength
-Global Strategies: ex. Buying foreign services or parts, combating threats from foreign
competitors, planning ways to enter markets beyond traditional national boundaries,
-strategic alliance: an agreement with another firm that may take one of 3 forms:
-collaborative effort: arises when one firms has core competencies that another needs
but is unable to duplicate
-joint venture: 2 firms agree to produce a service or product jointly-often to gain
access to foreign markets
-technology licensing: one company licenses its service or production methods to
another
-locate abroad in another country- must recognize customs, preferences, and economy in
other countries
-Market Analysis: divides the firm’s customers into market segments and then identifies the needs of
each segment
-Market Segmentation: process of identifying groups of customers with enough in common to
warrant the design and provision of services or products that the group wants and needs, must
determine characteristics that clearly differentiate each segment and then can develop a sound
marketing program
-Needs Assessment: identifies the needs of each segment and assesses how well competitors are
addressing needs, then incorporates needs into design of product or service
-service or product needs: price, quality, degree of customization
-delivery system needs: delivery availability, convenience, courtesy, safety, accuracy, speed,
reliability, dependability
-volume needs: high or low volume, variability, degree of predictability
-other needs: ex. Reputation and number of years in business, legal services, ability to invest in
international financial markets
-Time-Based Competition: a strategy that focuses on the competitive priorities of delivery speed and
development speed
Capability Priority Definition Example
Cost Low-Cost Delivering a service or a product at the Costco designs all processes for efficiency
Operations lowest possible cost to the satisfaction so it is low cost
of the external or internal customers of
the process or supply chain
Quality Top Quality Delivering an outstanding product or Rolex delivering precision time pieces
service
Consistent Producing services or products that McDonald’s standardizes work methods
Quality meet design specifications on a and training processes to achieve
consistent basis consistent products and quality at all
sites
Time Delivery Speed Quickly filling a customer’s order Dell delivers reliable and inexpensive
computers in short times
On-Time Meeting delivery time promises UPS-uses logistics and expertise in
Delivery warehousing to deliver large volume
shipments on time
Development Quickly introducing a new service or Zara brings fashionable clothing designs
Speed product from the runway to market quickly
Flexibility Customization Satisfying the unique needs of each Ritz Carlton customizes to individual
customer by changing service or guest preferences
product designs
Variety Handling a wide assortment of services Amazon.com uses information
and products efficiently technology and customer relationships
and order fulfillment processes to
reliably deliver a variety of items
Volume Accelerating or decelerating the rate of USPS has severe demand peak
Flexibility production of services or products fluctuations at large facilities where
quickly to handle large fluctuations in processes are flexibly designed for
demand sending mail to numerous locations
-Order Winner: a criterion consumers use to differentiate the services or products of one firm from
those of another ex. Price, quality, time, flexibility, reputation, after sale support
-derived from the considerations customers use when deciding which firm to purchase from in a
given market segment
-Order Qualifier: minimal level required from a set of criteria for a firm to do business in a particular
market segment, doesn’t ensure competitive success, only positions firm to compete in the market
Trends in Operations
-Productivity: basic measure of performance, the value of outputs (services and products) produced
divided by the values of input resources (wages, costs of equipment)
-2 approaches
Productivity= Outputs -Labor Productivity: an index of the output per hour worked
Inputs ex. #sq. yards installed/hour, machine productivity
denominator=# of machines
-Multifactor Productivity: index of the output provided by more than
1 of the resources used in production-want it high
ex. Value of output/labor+materials+overhead cost
-Global Competition
-Firms can increase their market penetration by locating in foreign countries because it gives
them a local presence that reduces customer aversion to buying imports
-allows firms to balance cash flows from other regions of the world when economic conditions are
less robust in home country
Service Package
-Supporting Facilities: physical resources wherein services are produced and consumed by customers
-Facilitating Goods: physical products that are provided during the consumption of services by
customer
-Information
-Explicit Services: observable, tangible benefits customers expect to receive as part of service
-Implicit Services: psychological benefits customers sense as part of service
Supplement A
-Breakeven quantity: volume at which total revenues equal total cost
-Breakeven analysis: the use of the breakeven quantity; it can be used to compare processes by finding
the volume at which 2 different processes have equal total costs
F=fixed cost
Q= F P= revenue per unit sold
P–C C= variable costs
-Sensitivity Analysis: a technique for systematically changing parameter in a model to determine the
effects of such changes
Chap. 3
Process Strategy: the pattern of decisions made in managing processes so that the processes will
achieve their competitive priorities
-processes need to add customer value
-3 important principles:
-Key to successful process decisions is to make choices that fit the situation and that make sense
together; they should not work at cross-purposes, with one process optimized at the expense of
other processes, a more effective process is one that matches key process characteristics and has a
close strategic fit
-Individual processes are building blocks that create the firm’s whole supply chain
-Whether processes in the supply chain are performed internally or by outside suppliers and
customers, management must pay particular attention to the interfaces between processes;
dealing with these interfaces underscores the need for cross functional coordination
-Supply chain processes: business processes that have external customers or suppliers
-4 common process strategies
-Process Structure: determines the process type relative to the kinds of resources needed, how
resources are partitioned between them, and their key characteristics
-Layout: physical arrangement of operations created from the various processes- puts these
decisions into tangible form
-Customer Involvement: reflects the ways in which
customers become a part of the process and the
extent of their participation
-Resource Flexibility: the ease with which employees
and equipment can handle a wide variety of
products, output levels, duties and functions
-Capital Intensity: the mix of equipment and human
skills in a process, the greater the relative cost of
equipment, the greater the capital intensity
-Process divergence: extent to which the process is highly customized with considerable
latitude as to how its tasks are performed, if the process changes with each customer, every
performance of the service is unique ex. High- law, architecture, low- standardized telephone
services
-Flow: how the customer, object, or information being processed flows through the service
facility
-Flexible flow: the customers, materials or information move in diverse ways, with the path
of one customer or job often crisscrossing the path that the next one takes- goes with high
process divergence
-Line flow: the customer, materials, or information move linearly from one operation to
the next, according to a fixed sequence
cant
be a
top
performer if here
-3 process structures
a. Front Office: process with high customer contact where the service provider interacts
directly with the internal or external customer, high divergence and flexible flow
b. Hybrid Office: process with moderate levels of customer contact and standard services with
some options available
c. Back Office: a process with low customer contact and little service customization,
standardized and routine work, line flows, low divergence
Layout
-3 steps:
1. Gather information
2. Develop a block plan- allocates space and indicates placement of each operation
3. Design a detailed layout
-Gather Information on:
-space requirements
-available space
-closeness factors- closeness matrix: gives a measure of the relative importance of each pair of
operations being located close together
Customer Involvement
-Possible disadvantages
-can be disruptive and less efficient -quality measurement can be difficult
-requires interpersonal skills -may need to revise layout
-multiple locations may be necessary
-managing timing and volume of customer demands is more challenging
-Possible Advantages
-increased net value to the customer
-can mean better quality, faster delivery, greater flexibility, and lower cost
-may reduce product, shipping and inventory costs
-may help coordinate across the supply chain
-processes may be revised to accommodate the customers’ role
Resource Flexibility
-Managers must account for process divergence and diverse process flows when making resource
flexibility decisions
-Workforce
-Must decide whether to have a flexible workforce- workforce whose members are capable of doing
many tasks either at their own workstations or as they move from one workstation to another-
need greater skills, more training and education, one of the best ways to get reliable customer
service
-conditions have smooth steady output=full time workforce
-hourly, daily or seasonal peaks in demand= use of part time or temporary employees as a
supplement to full time employees
-Equipment
-low volumes= process designers should select flexible, general-purpose equipment
-high volumes and low customization= special purpose equipment
Capital Intensity
-the mix of equipment and human skills in the process; the greater the relative cost of equipment, the
greater is the capital intensity
-have to choose between little automation or tasks requiring specific equipment and little human
intervention
-Automation: a system, process or piece of equipment that is self-acting and self-regulating
-Automating manufacturing processes
-advantage: works best when volume is high
-disadvantage: prohibitive investment cost for low volume operations, doesn’t always align with
companies competitive priorities, must have high utilization
-Fixed Automation: a manufacturing process that produces one type of part or product in a fixed
sequence of simple operations, high volume, stable product design, long product life cycles
-Flexible (programmable) automation: a manufacturing process that can be changed easily to
handle various products- good for low and high customization
-Automating service processes
-using capital inputs as a labor-saving device is also possible for service processes ex. Learning
online instead of in class
-volume is essential
-Economies of Scope: economies that reflect the ability to produce multiple products more cheaply in
combination than separately, customization and low price become more compatible
-Process Reengineering: the fundamental rethinking and radical redesign of processes to improve
performance dramatically in terms of cost, quality service and speed
Chap.6
-Capacity: the maximum rate of output of a process or a system
-managers are responsible for ensuring that the firm has the capacity to meet current and future
demand or the organization will miss out on opportunities for growth and profit
-changing capacity impacts other processes in the chain, need to make sure its designed for
effectiveness
-Output measures: best utilized when applied to individual processes within the firm or when the
firm provides a relatively small number of standardized services and products ex. High volume
process like the ones in a car manufacturing plant= #cars produced/day, less useful when
customization and variety in the product mix increases
-Input measures: used for low volume, flexible processes, such as those associated with a custom
furniture maker (ex. # of workers), more customization and variety, problem is that demand is
invariably expressed as an output rate
-Utilization: degree to which a resource such as equipment, space or work force is currently being
used-indicates need for adding extra capacity or eliminating unneeded capacity
Utilization= Average output rate
Maximum Capacity X 100%
-maximum capacity- greatest level of output that a process can reasonably sustain for a longer
period of time- operating at this can sometimes lead to low customer satisfaction, minimal
profits, losing money (because overtime, overstaffing, decreased maintenance etc.)
-Economies of scale: average unit cost of a service or good can be reduced by increasing its output
rate, why?
-spreading fixed costs over more units
-reducing construction costs- doubling facility doesn’t double costs
-cutting costs of purchased materials- bargaining and discounts because higher volume
-finding process advantages
-Diseconomies of scale: average cost per unit increases as the facility’s size increases why?
-excessive size can bring:
-complexity
-loss of focus
-inefficiencies
-lose touch with employees
-can result in economies of scale and faster rate of learning, thus helping a firm reduce its
costs and compete on price
-by announcing expansion, the firm can preempt the expansion of other firms
-Wait and See Strategy:
-lags behind demand
-to meet short fall, relies on short term options ex. Overtime
-expand in smaller increments
-reduces risk of overexpansion based on overly optimistic
demand forecasts, obsolete technology, inaccurate
assumptions
-risks- being preempted, unable to respond to unexpectedly
increased demand
-short term
-Follow the leader: expanding when others do
N[1-(C/100)]
Where… Q= number of units in each lot
S= setup time (in hrs.) per lot
2. Identify gaps
-Capacity gap: and difference between projected capacity requirements (M) and current capacity
-complications when multiple operations and several resource inputs are involved
3. Develop alternative plans for reducing the gaps
-Base case: act of doing nothing and losing orders from any demand that exceeds current capacity,
or incur costs because capacity is too large
-many alternatives possible- short term, expanding, decrease capacity, layoffs etc.
4. Evaluate each alternative
-Qualitative concerns: looks at how each alternative fits the overall capacity strategy and other
aspects of the business is not covered by the financial analysis- particular concern= uncertainties
with demand, competitive reaction, technology change, strategic fit
-Quantitative concerns: estimates change in cash flows for each alternative over the forecast time
horizon compared to base case
Capacity management decisions:
-Where? Facility location? Offshore? Reshore?
-When? 3 expanding strategies
-How?
Chap. 7
Theory of Constraints (TOC): a systematic management approach that focuses on actively managing
those constraints that impede a firm’s progress toward its goal
-Focus on making materials flow rapidly through system, increase profit, look at big picture
-Performance measures in TOC:
-Inventory (I): all the money invested in a system in purchasing things that it intends to sell, as
inventory lessens, profit increases
-Throughput (T): rate at which a system generates money through sales, increase throughput,
profit increases
-Operating Expenses (OE): all the money a system spends to turn inventory into throughput,
decrease in operating expenses, net profit increases
-Utilization (U): degree to which equipment, space, or work force is currently being used, increase
in utilization at bottleneck, net profit increases
-5 steps:
1. identify the system bottleneck(s)
2. exploit the bottleneck(s)- create schedules that maximize the throughput of the bottlenecks
3. subordinate all other decisions to step 2- nonbottleneck resources should be scheduled to
support the schedule of the bottleneck ad not produce more than the bottleneck can handle
4. elevate the bottleneck(s)- after scheduling improvements in steps 1-3 have been exhausted and
the bottleneck is still a constraint to throughput, management should consider increasing the
capacity of the bottleneck ex. Add another machine
5. do not let inertia set in- system constraint(s) may shift and then all steps have to be repeated to
do the new constraint
-Key Principles of TOC:
-The focus should be on balancing flow, not on balancing capacity.
-Maximizing the output and efficiency of every resource may not maximize the throughput of the
entire system.
-An hour lost at a bottleneck or constrained resource is an hour lost for the whole system.
-An hour saved does not make the system more productive.
-Inventory is only needed in front of bottlenecks and in front of assembly and shipping points.
-Work should be released into the system only as frequently as needed by the bottlenecks.
-Bottleneck flows = market demand
-Activating a nonbottleneck resource is not the same as utilizing a bottleneck.
-It doesn’t increase throughput or promote better performance.
-Every capital investment must be viewed from the perspective of the global impact on throughput,
inventory and operating expense.
-a planning and control system that regulates the flow of work-in-process materials at the
bottleneck of the capacity constrained resource in a productive system
-drum= bottleneck schedule because it sets the beat/ production rate for the plant
-buffer= time buffer that plans early flows to the bottleneck and protects it from disruption and is
never starved for work
-rope= tying of material release to the drum beat, rate at which the bottleneck controls the
throughput of the entire plant, ensures material is not introduced at a rate faster than can handle
-effective when the product is simple and there are line flows
-strives to improve throughput by better utilizing bottleneck resources & protecting it from
disruption
Chap. 9
-Payments to suppliers: can often reduce total payments with increased inventory levels, price per
unit drops when quantity is large-incentive to order a lot
-Types of Inventory
-Raw Materials (RM): inventories needed for production of services or goods, inputs
-Work-in-Process (WIP): items, such as components or assemblies, needed to produce a final
product in manufacturing, or service operations, also in services ex. Repair shop
-Finished Goods: items in manufacturing plants, warehouses, and retail outlets that are sold to the
firm’s customers- could be raw materials for another firm
-Classify inventory by how it is created
-Cycle Inventory: portion of total inventory that varies directly with lot size (Q)
-lot sizing: determining how frequently and in what quantity to order inventory
-Q varies directly with elapsed time between orders
-the longer the time between orders for a given item, the greater the cycle inventory must be
-average cycle inventory=Q/2
-Safety Stock inventory: surplus inventory that protects against uncertainties in demand, lead
time, and supply changes, place the order earlier than when item is needed
-Anticipation Inventory: inventory used to absorb uneven rates of demand or supply
-use predictable, seasonal demand patterns to do this
-may do this when you often have uneven demand
-can help when suppliers are threatened with a strike
-Pipeline Inventory: inventory that is created when a order for an item is issued but not yet
received, firm must commit to enough inventory to cover lead time for the order
-longer lead times or higher demands per week create more pipeline inventory
-pipeline inventory= dL (d=avg demand, L=number of lead time periods)
-Inventory reduction tactics
-levers=tactics, primary-must be activated if inventory is to be decreased, secondary-decreases the
penalty cost of applying the primary level and the need for having inventory in the first place
-Cycle inventory
-Prim: Reduce lot size
-Sec: Reduce ordering and setup costs and allow Q to be reduced
-Sec: Increase repeatability (degree to which the same work can be done again) to eliminate
the need for changeover
-Safety Stock inventory:
-Prim- Place orders closer to the time when they must be received
-Sec-Improve demand forecasts
-Sec-Cut lead times
-Sec-Reduce supply chain uncertainty
-Sec-Rely more on equipment and labor buffers
-Anticipation inventory:
-Prim- Match demand rate with production rates
-Sec- Add new products with different demand cycles
-Sec- Provide off-season promotional campaigns
-Sec- Offer seasonal pricing plans
-Pipeline inventory:
-Prim- Reduce lead times
-Sec- Find more responsive suppliers and select new carriers
-Sec- Change Q in those cases where the lead time depends on the lot size
ABC Analysis
-Stock-Keeping Unit (SKU): an individual item or product that has an identifying code and is held in
inventory somewhere along the supply chain
-Goal of ABC analysis
-the planning and controlling of inventories in order to meet the competitive priorities of the
organization
-process of dividing SKUs into 3 classes, according to their dollar
usage, so that managers can focus on the items that have the
highest dollar value
-Class A SKUs: ~20% of SKUs but ~80% of the total dollar
usage, need to maintain high inventory turnover of these
-Class B SKUs: ~30% of SKUs but ~15% of the total dollar
usage, intermediate level of control, less frequent monitoring
-Class C SKUs: ~50% of SKUs but ~5% of total dollar usage,
loose control, low holding cost
-goal= identify the class A SKUs so management can control their inventory levels
-multiply annual demand rate for an SKU by the cost of one unit of that SKU to determine dollar
usage, rank SKUs by dollar usage and create chart and look for natural changes in slope-not exact-
and calculate the % it is of the total dollar usage
Economic Order Quantity (EOQ): the lot size (Q) that minimizes total annual inventory holding and
ordering costs
-5 assumptions
-Demand rate is constant and known with certainty.
-No constraints are placed on the size of each lot.
-Only two relevant costs are inventory holding cost and fixed cost per lot for ordering or setup.
-Decisions for one item can be made independently of decisions for other items.
-The lead time is constant and known with certainty.
-Don’t use the EOQ if:
-using make to order strategy
-order size is constrained by capacity limitations
-Modify the EOQ if:
-significant quantity discounts are given for ordering
-if replenishment for the inventory is not instantaneous
-Use the EOQ if:
-using make to stock strategy
-carrying costs and set up costs are known and relatively stable
Calculating EOQ:
-annual holding cost= average cycle inventory (Q/2) X unit holding cost (H)
-annual ordering cost= number of orders per year (D/Q) X ordering or set up costs (S)
-total inventory cost (C)= annual holding cost+ annual ordering or set up cost
(Q/2)(H) + (D/Q)(H)
-more efficient= EOQ formula= √
2DS/H
-Time between orders- TBOEOQ= EOQ/D (12 months/yr)
-Managerial insights from EOQ*
-Demand: increase demand= increase in EOQ—the increase in lot size is in proportion to the
square root of D
-Continuous Review (Q) System (also reorder point (ROP) system, fixed order quantity system)
-designed to track the remaining inventory of a SKU each time a withdrawal is made to determine
whether it is time to reorder
-done frequently and continuously
-if inventory is too low, the system triggers a new order
-scheduled receipts-orders that have been placed but haven’t yet been received-open orders
-Q is fixed but time between orders varies
-Tracks inventory position (IP)- measurement of a SKUs ability to satisfy demand
IP=OH+SR-BO where… OH=on hand inventory SR=scheduled receipts
BO=backorders
-Reorder point (R): the predetermined minimum level that an inventory position must reach before
a fixed quantity (Q) of the SKUs is ordered
-Selecting the reorder point when demand and lead time are
constant:
-R=total demand during lead time (equation= DxL)
-compare IP with R when deciding—a common error is to
ignore SR and BO
-Selecting the reorder point when demand is variable and lead
time is constant:
-Purchase with average demand, gives rise for need for
safety stocks
-Reorder point= avg. demand during lead time + safety
stock (dL+SS)
-z= number of standard deviations needed to achieve the cycle service level (found on
table)
-σdLT= standard deviation of demand during lead time-- same as σd (demand st.dev.
times the √L)
-Reorder point-R= dL +safety stock
-Two-Bin system:
-concept of a Q system can be incorporated into a visual system: a system that allows
employees to place orders when inventory visibly reaches a certain marker
-Two Bin System: visual system version of a Q system in which a SKUs inventory is stored at 2
different locations, if 1st one is empty it signals to send in the order and moves to the 2nd one
-Calculating total Q systems costs
-Total cost =Annual cycle inventory holding cost + Annual ordering cost + Annual safety
stock holding cost
- C = (Q/2)(H) + (D/Q)(S) + (H) (Safety stock)
-Periodic Review (P) System (also fixed interval reorder system, periodic reorder system)
-a system in which an item’s inventory position is
reviewed periodically rather than continuously
-Four of the original EOQ assumptions maintained
-No constraints are placed on lot size
-Holding and ordering costs
-Independent demand
-Lead times are certain
-Routine
-Time between orders is fixed- TBO is fixed at P***
-have demand uncertainty
-selecting time between reviews, choosing P (length of time between reviews) and T (target
inventory level)
-Selecting T when demand is variable and lead time is constant
-IP covers demand over a protection interval of P + L .
-The average demand during the protection interval is d(P + L), or
T = d (P + L) + safety stock for protection interval
-Safety stock = zσP + L , where σP + L = d P L
-Total costs for P system are the sum of the same 3 elements as in the Q system
-Total P system costs= C = (dP/2)(H) + (D/dP)(S) + Hzσ
D=annual demand P+L
in units per year
d=avg demand/week
-Comparative advantages
-Primary advantages of the P system
-Convenient because the replenishment is at fixed intervals-standardized pickup and delivery
times
-Orders can be combined when from same supplier, decreases costs
-Only need to know IP when review is made
-Primary advantages of Q systems
-review frequency of each SKU can be individualized, decrease total ordering and holding costs
-fixed lot sizes, if large enough, can result in quantity discounts
-lower safety stock=savings
-Hybrid Systems
-Optional replenishment system
Case Discussions
-BSB Inc.- the pizza wars, the campus pizza restaurant want to better itself to compete against the
new food court with name brands
-The Pizza Connection- need to redesign the pizza restaurant into a better layout for more sales and
profit
-State Automobile License Renewals- finding the bottleneck in the process
-Case if Industrial Cameras-patent expired and now has competitors and wants to reduce cost-EOQ,
holding and set up costs
-Quality and performance should be everyone’s concern because without the best of both the customer
may not be please with their order or service-you always want the best customer satisfaction
-video on BP oil spill mess up, Challenger space shuttle disaster and Toyota recall problem
-Does not mean companies should have 100% satisfaction of ALL customers and potential
customers! This is because not everyone is “the right” customer-you always want to 100% satisfy
ALL current customers and the right potential customers. To do this you have to decide who the
right customers are also.
-for services –customer service leads to a lot of the customer satisfaction
-Positive Customer experience
-Stick the “dismount”
-in class example: the telephone help desk employee- conclusion: best to end on a positive note
because the customer will typically remember what happens last
-Get the bad news out of the way first
-During-distract, segment the pleasure, combine the pain
-let customer control processes and give people clear choices, even if none are particularly
desirable-know values and norms of customer
-in class example: dental hygienist teeth cleaning-guy in pain but still some left-ask
Costs of Quality
-Quality: a term used by customers to describe their general satisfaction with a service or product
graph=quality loss function
-difficult to measure accurately but should still measure
-Defect: any instance when a process fails to satisfy its customer
-want to determine process gaps-reflect potential dissatisfied customers and additional costs of
quality= ~20-30% of gross sales
-4 categories of cost that are associated with process performance gaps:
-Prevention costs: costs associated with preventing defects before they happen, cheapest costs ex.
Redesigning the process to remove the cause of poor performance, make processes simpler must
invest additional time, effort and money to do this ex. Training, design, and quality systems
-Appraisal costs: costs incurred when the firm assesses the performance level of its processes
prevention costs increase=appraisal costs decrease because fewer resources need quality
inspection ex. Inspection, testing, inventory counts
-Internal Failure costs: costs resulting from defects that are discovered during the production of a
product or service ex. Process downtime, disposal costs from
-2 categories:
-Rework: if some aspect of a service must be performed again or if a defective item must be
rerouted to some previous operation(s) to correct the defect
-Scrap: if defective item is unfit for processing (waste)
-External Failure cost: costs that arise when a defect is discovered after the customer receives the
product or service, highest cost area of failures!
-customer may complain to friends/family about bad service and spread itdecreases market
share and profits costly for company to correct defects
-Also include warranty and litigation costs
-Warranty: a written guarantee that the producer will replace or repair defective parts or
perform the service to the customer’s satisfaction ex. 90 days
-it costs more and more for prevention and appraisal costs when aiming for 100% good quality
products so the most optimal solution is for prevention and appraisal costs to about equal internal
and failure costs
Six Sigma
-A comprehensive and flexible system for achieving, sustaining, and
maximizing business success by minimizing defects and variability in
processes-originally developed by Motorola
-Approach to align processes with their target performance measures with low
variability
-Goal of achieving low rates of defective output developing processes whose
mean output for a performance measure is +/- 6 standard deviations (sigma)
from the limits of the design specifications
-Can do for manufacturing and non-manufacturing processes-popularized by
GE
-Six Sigma improvement model:
-Define: determine characteristics of the process’s output that are critical to customer satisfaction
and identify any gaps between these characteristics and the process’s capabilities-use flowcharts
and process charts
-Measure: quantify the work the process does that affects the gap-select measure, identify data
sources, prepare data collection plan
-Analyze: use the data on measure to perform process analysis-use tools ex. Pareto charts, scatter
diagrams, cause and effect diagrams, and statistical process control-use to determine where
improvements are necessary
-Improve: modify or redesign existing methods to meet the new performance objectives, implement
changes
-Control: monitor the process to make sure that high performance levels are maintained-can use
data tools stated above
firms using this develop teachers who are responsible for teaching and assisting teams involved
in a process improvement project
-Green belt: devote part of time to teaching and helping teams and the rest of time to normally
assigned duties
-Black belt: highest level of 6 sigma training, full time teachers and leads of teams involved in
projects
-Master black belt: full time teachers who review and mentor black belts
Acceptance Sampling
-The application of statistical techniques to determine whether a quantity of material should be
accepted or rejected based on the inspection or test of a sample
-limits the buyers’ risk of rejecting good-quality materials or accepting bad-quality materials
-taking a sample is less expensive
-Acceptable quality level (AQL): the quantity level desired by the consumer--statement of the
proportion of defective items that the buyer will accept in a shipment
-used to measure the current process performance and for detecting whether the process has changed
-Variable control charts
-R-charts (range charts): used to monitor process variability
R=average of several past ranges central line
UCLR=D4R D3 and D4=constraints that provide 3 standard deviation limits for
LCLR=D3R a given sample size- get values from given table
-X-bar charts: used to see whether the process is generating output consistent with a target value
set by management or whether its current performance, with respect to the average performance
measure, is consistent
-constructed after process variability is in control because you use R
X=average of past sample means or target valuecentral line
UCLx=X+A2R A2=constant to provide 3 standard deviation limits for the sample
LCLx=X+A2R mean-get value from given table
-D3, D4, and A2 values from table change as a function of the sample size
-make charts using these values and then plot all of the sample ranges and sample means on the
graphs to see if they are in statistical control
-In class exercise with the coin catapult
-Attribute control charts
-P-chart: population proportion defective: control proportion of defective services or products
generated by the process
-sampling involves yes/no decisions so the underlying distribution is the binomial distribution
P=average population proportion defective or a target value central line
Z=# of standard deviations from average (3 is common)
UCLp=P+zσp where p p 1 p / n
LCLp=P-zσp
-make chart using these numbers
-Steps for using:
1. random sample of size n is taken, number of defective services or products counted
2. number of defectives/sample size=Pput on chart
3. when falls outside of control limits, look for cause (assignable)
4. observation below LCL=improvement
-C-chart: more than one defect per unit-a chart used for controlling the number of defects when
more than one defect can be present in a service or product
-the underlying distribution is the Poisson distribution
C= mean of the distributioncentral line
UCLc=C+zσc where σc=Öc (square root of C-bar)
LCLc=C+zσc
Process Capability
-Ability of the process to meet the design specifications for a service or product
-Nominal value: a target for design specifications
-Tolerance: an allowance above or below the nominal value
-Process capability index: measures the potential for a process to generate defective outputs relative to
either upper or lower specifications, measures how well a process is centered and whether the
variability is acceptable-measure for variable data
-σ=st. dev. of process distribution
-minimum=worst case situation
-checks to see if avg. is +/- 3 st. dev.
-if Cp passes and Cpk doesn’t can assume the problem is that the process is not centered adequately
-If process is centered or on-target then Cpk=Cp
-If process is not centered or on-target Cpk<Cp
-Cp is the upper bound on the value of Cpk
-To understand process ask W4H=Who, What, When, Where and How; and ask FTQ2C= Flow, Time,
Quality, Quantity, and Cost
A Systematic Approach
-A six-step blueprint for process analysis:
1. Identify Opportunities
-need to pay attention to 4 core processes Supplier Relationship, New service/Product
Development, Order Fulfillment, and Customer Relationship
-monitor customer satisfaction
-look at the strategic issues- is there a good strategic fit? Gaps? Etc.
-Suggestion system: a voluntary system by which employees submit their new ideas on process
improvements
2. Define the Scope
-establishes the boundaries of the process to be analyzed
-Design team: group of knowledgeable, team-oriented individuals who work at one or more
steps in the process, conduct the process analysis and make the necessary changes
-Facilitators: full time specialists
-Steering team: several managers from various departments
3. Document the Process
-includes making a list of the process’s inputs, suppliers (internal and external), outputs, and
customers (internal and external)- this info is shown in a diagram or table
-then understand the different steps performed in the process using diagrams, tables and
charts
4. Evaluate the Performance
-need to have good performance measures
-Metrics: performance measures that are established for a process and the steps within it
-good to start with competitive priorities-then collect information on how the process is
currently performing on each one
5. Redesign the Process
-with careful analysis of the process and its performance on the selected metrics-can uncover
disconnects (gaps) between actual and desired performance; need to dig and find root cause of
them and then come up with ideas for improvement
Evaluating Performance
-metrics may reveal a performance gap
-Data analysis tools
-Checklists: a form used to record the frequency of occurrence of certain process failures-first step
in analysis of a metric; yes/no, scale, time, percetages
-Process failure: any performance short falls, such as error, delay, environmental waste etc.
-Histograms and bar charts-use data from checklist
-Histogram: summarization of data measured on a continuous scale, showing frequency
distribution of some process failure- the central tendency and dispersion of the data
-Bar graph: a series of bars representing the frequency of occurrence of data characteristics
measured on a yes/no basis
-Pareto Charts: a bar chart on which factors are plotted along the
horizontal axis in decreasing order of frequency-puts into %s
-80-20 rule: 80 percent of the activity is caused by 20% of the
factors- by concentrating on the 20% you can attack 80% of
process failure problems
-Scatter Diagrams: a plot of 2 variables showing whether they are
related-verifies or negates whether a factor is
”Bone”
causing (correlation) a particular process failure
-Cause-and-effect diagram (Fishbone diagram or “Head”
Ishikawa diagram): a diagram that relates a key
performance problem to its potential causes,
allows managers to trace disconnects directly to
the operations involved
-Head: main performance gap “Ribs”
-Bones: major categories of potential causes-
Machines, manpower, methods, materials,
other (usually these)
-Ribs: likely specific causes
-Graphs: representations of data in a variety of pictorial forms
-Line chart: represent data sequentially with data points connected by line segments to
highlight trends in data
-Pie chart: represent process factors as slices of a pie-size of each is in proportion to the
number of occurrences of the factor (100%)
-Data snooping: when managers often must act as detectives, sifting data to clarify the issues involved
and deducing the causes
-Process simulation: the act of reproducing the behavior of a process using a model that describes each
step, shows how process dynamically changes over time
-All are best when looking for a long-term program of continuous improvement
-Basic steps:
-Planning: identify what is being benchmarked and the firm (s) of comparison, determine
performance metrics, and collect data
-Analysis: determine gap between firm’s current performance and that of the benchmark firm-
identify causes
-Integration: establish goals and obtain resources needed
-Action: develop cross-functional teams, action plans, team assignments; implement plans,
monitor progress, recalibrate benchmarks as improvements are made
-In class: main example of all of these concepts was with the Pencil Pushers case look at this case for
help and also can look at the team based homework
Introduction
-Value stream: all the actions (both value-creating and non-value creating) currently required to
bring a product through the main flows essential to every product:
-Production flow-from raw materials to the arms of the customer (what book and lean systems are
focused on)
-Design flow- from concept to launch
-Want to improve the whole (big picture) not just optimize the parts and processes
-Value stream mapping helps you see and understand the flow of material and information as a
product makes its way through the value stream-shows what has value and where waste is and serves
has blueprint to make a lean system
-Focus on one product family (definition above) per one map
-Usually individual processing areas only know what is going on in their section so they work in a way
that is optimum for them but not for the value-stream’s perspective as a whole
-Have one value-stream manager who oversees everything and understands whole process
-Flow Kaizen: value stream improvement, focuses on material and information flow
-Process Kaizen: elimination of waste, focuses on people and process flow
-A current state map isn’t important unless you draw a future state map (most important)
Current-State Map
-ALWAYS draw by hand, in pencil
-Five major chunks of a value-stream map (draw in this order)
1. Customer
2. Main fulfillment process
3. Supplier
4. Information control or production control
5. Timeline computations
1. Draw customer and enter in customer requirements in data box
-may include daily output or container requirements
2. Use process boxes to draw the production processes-indicates one area of material flow
-a section that may have multiple workstations to complete the process but is all considered one
process until the assembly is disconnected and continued elsewhere with the possibility of
inventory accumulating
-drawn from left to right on the bottom of the map
3. Add a data box under each process box
-Use seconds when calculating
-typical process data to be put in the box is:
-Processing time (P/T)- average time it takes to complete one unit-value creating time
P/T=(C/T)*FTE
-FTE- number of full-time employees for a processing step
FTE=(P/T)/(C/T)
-or solved if a certain number of workers only spend a percentage of time on a process
-Cycle time (C/T)-average time between successive units being completed (how often)-time
that elapses between one part coming off the process to the next part coming off
C/T=(P/T)/FTE
-Changeover time (C/O)- time it takes to switch from producing one product type to another-
given
-Takt time- time per piece required to satisfy demand, synchronizes pace of production to
match pace of sales
=total available time/total demand
-Batch Size (EPE)- solve with problem information
-Utilization-ratio of amount of time or resource used to
amount of time or resource available
utilization (%)= ((C/T)/takt time) *100
-Days of inventory: shown in a triangle where it
accumulates between processes
=units of inventory/daily demand
-Total Lead (production) time: the time it takes one piece
to move all the way through a process or a value stream,
from start to finish
sum of days of inventory and all process times
-Total Process time: add up all process lengths (in seconds usually)
4. Add in supplier box
5. Add in inbound and outbound shipping arrows from
supplier to the process and the end of the process to the
customer. Also include the mode of transportation.
6. Add in information flow with arrows, from right to left in
the top half- a lightning bolt arrow indicates the information
flows electronically. Ad in small boxes to explain what the
information flows are.
7. Add in push arrows or FIFO (stated in problem) boxes
between process data boxes
8. Draw a timeline under the process data boxes showing the
production lead-time and total process times
-see example of a value stream map
-can sometimes use a FIFO (first in, first out) lane between two processes
-can make a pacemaker process to set the pace for processes following it
Future-State Map
-after highlighting the sources of waste, you will use the future state map to eliminate them
-look at your current state map and see where you can implement
-want to eliminate overproduction
-Bottleneck happens where utilization is over 100%-need to find a way to get rid of it
-can combine processes (continuous flow) with low utilization or take away workers
-change delivery so it delivers more often
-find a way so there is not a lot of inventory between processes (WIP-work in progress)
there are many possible future states, not one right one. You just have to do what is best for your
company
-Customer service levels: pressure from sales and marketing groups for superior service levels for
the organizations customers; what sales, marketing and finance groups sometimes want imposes
on supply chain design
-Service/product proliferation: when you add new markets, it adds complexity to the supply chain,
need balance between cost of operating supply chain and the need to market new services and
products
-Centralized placement: keeping all the inventory of a product at a single location such as a firm’s
manufacturing plant or a warehouse and shipping directly to each of its customers
-advantage comes from inventory pooling: a reduction in inventory and safety stock because of the
merging of variable demands from customers-- demand remains fairly stable
-disadvantage: added cost of shipping smaller, uneconomical quantities to customers over long
distances
-Forward placement: locating stock closer to customers at a warehouse, distribution center,
wholesaler or retailer
-advantage: faster delivery times, decreased transportation costs
-disadvantage: pooling effect of inventories is reduced because of increased safety stocks to take
care of uncertain demand
Mass Customization
-a firm’s highly divergent processes generate a wide variety of customized services or products at
reasonably low costs-firm allows customers to select from a variety of standard options to create the
service or product of their choice ex. Mixing paint
-Competitive advantages:
-managing customer relationships-get detailed inputs from customers and put in database
-eliminating finished goods inventory-don’t need to forecast, can use a configurator for order
placement
-increasing perceived value of services or products-by customers
-Supply chain design for mass customization
-Assemble to order strategy: produce/ purchase standardized components, assemble to a specific
customer order, no finished goods inventory ex. My twinn dolls
-Modular design: enables customization, final service/product can be assembled from a set of
standardized modules cheap and fast
-Postponement: some of final activities in the provision of a service or product are delayed until the
orders are received; avoids inventory buildup
-Channel assembly: process of using members of the distribution channel as if they were
assembly stations in the factory
Outsourcing Processes
-Make-or-buy decision: a managerial choice between whether to outsource a process or do it in-house;
if you want vertical integration=make, outsource=buy
-Can use breakeven analysis to decide what to do
-Vertical integration: 2 directions
-Backward integration: a firm’s movement upstream toward the sources of raw materials, parts,
and services through acquisitions-reduces risk of supply ex. Grocery chain has own plant to
produce house brand of ice cream etc.
-better control over costs of supply and reliability of supply (delivery, quality, quantity)
-Forward integration: acquiring more channels of distribution, such as distribution centers
(warehouses) and retail stores, or even business customers
-better control over costs of demand and reliability of demand info (delivery, quality, quantity)
-the more processes in the supply chain that the organization performs itself, the more vertically
integrated it is
-best when input volumes are high
-Outsourcing: paying suppliers and distributors to perform processes and provide needed services and
materials
-best with firms that have low volumes
-firms can do processes more efficiently and with better quality
-Offshoring: supply chain strategy that involves moving processes to another country
-Outsourcing decision factors to outsource or offshore a process of stay:
-comparative labor costs -logistics costs
-rework and product returns -tariffs and taxes
-market effects -internet
-labor laws and unions
-Pitfalls of outsourcing:
-Pulling the plug too quickly-decide to outsource before making a good
effort to fix existing process
-Technology transfer- joint venture, need to bring one partner up to
speed-can set up other to be a competitor
-Process integration- hard to integrate outsourced processes with
firm’s other processes
-Sins:
-outsourcing activities that shouldn’t be -selecting wrong supplier
-neglecting to take into consideration people -writing a bad contract
-losing control over outsourced activities -not developing exit strategy
-not capturing and factoring in hidden costs
Strategic Implications
-2 distinct designs used to competitive advantage:
-Efficient supply chains
-popular design: build-to-stock (BTS): built to a sales forecast and sold to customers from
finished goods stock ex. Groceries, books, appliances
-Responsive supply chains
-react quickly
-common designs:
-assemble-to-order (ATO)
-make-to-order (MTO)
-design-to-order (DTO)-designed and built entirely to customer specifications ex. Custom
suit
-Environments best suited for each: Design Features of each:
-poor
supply chain performance is often the result of using the
wrong supply chain design
2. Design Collaboration: jointly designing a new series of services or products with key suppliers, draw
key suppliers into development process
-eliminate costly delays and mistakes
-Early supplier involvement: a program that includes suppliers in the design phase of a service or
product
-Presourcing: a level of supplier involvement in which suppliers are selected early in a product’s
concept development stage and are given significant, if not total, responsibility for the design of
certain components or systems of the product ex. In automotive industry
-Value analysis: a systematic effort to reduce the cost or improve the performance of services or
products, either purchased or produced
3. Negotiation: obtain an effective contract that meets the price, quality, and delivery requirements of
the supplier relationship process’s internal customers
-Competitive orientation: a supplier relation that views negotiations between buyer and seller as a
zero-sum game: whatever one side loses, the other side gains, and short-term advantages are
prized over long-term commitments
-determined by purchasing power
-other sources of power include:
-Referent: supplier values identification with the buyer
-Expert: the buyer has access to knowledge, information, and skills desired by the supplier
-Reward: buyer has the ability to give rewards to the supplier
-Legal: buyer has legal right to prescribe behavior for the supplier
-Coercive: buyer has the ability to punish the supplier
-the buyer or the supplier can have the power
-Cooperative orientation: a supplier relation in which the buyer and seller are partners, each
helping the other as much as possible; long-term commitment, buyer shares information with
supplier about future buying intentions, decreases number of suppliers in supply chain
-Sole sourcing: the awarding of a contract for a service or item to only one supplier
-not always great because it may increase the risk of interruption in supply
4. Buying: procurement of the service or material from the supplier
-4 approaches to e-purchasing:
-Electronic Data Interchange (EDI): technology that enables the transmission of routine
business documents having a standard format from computer to computer over telephone or
direct leased lines
-Catalog hubs: decrease costs, system whereby suppliers post their catalog of items on the
Internet and buyers select what they need and purchase them electronically
-Exchanges: an electronic marketplace where buying firms and selling firms come together to
do business
-Auction: a market place where firms place competitive bids to buy something; reverse
auction- suppliers bid for contracts with buyers
-Locus of control: when an organization has several facilities-must decide whether to buy centrally
or locally
5. Information Exchange: facilities exchange of pertinent operating information, such as forecasts,
schedules, and inventory levels between the firm and its suppliers
-Radio frequency identification (RFID): a method for identifying items through the use of radio
signals from a tag attached to an item; the tag has information about the item and sends a signal
to a device that could read it and edit it and that can be transmitted around
-Vendor managed inventory (VMI): a system in which the supplier has access to the customer’s
inventory data and is responsible for maintaining the inventory on the customer’s site
- Elements= collaborative effort w/ cust, customer service, cost savings, written agreement
Order Fulfillment Process
-the order fulfillment process is linked to the customer relationship process by producing and
delivering the service or product to the firm’s customers
-4 nested processes:
-Customer demand planning: facilitates the collaboration of a supplier and its customers for the
purpose of forecasting customer requirements for a service or a product
-Supply planning: takes demand forecasts produced by the customer demand planning process, the
customer service levels and inventory targets provided by inventory management and the
resources provided by aggregate and detailed capacity planning to generate a plan to meet
demand
-planning aggregate resource levels are very important so that the supply is in balance with
the demands
-Production: executes the supply plan to produce the service or product
-production processes must be integrated with the processes that that supply the inputs,
establish the demands and deliver the product to the customers
-Logistics: delivers the product or service to the customer
-5 services determine the design and implementation of logistics processes:
-Degree of ownership:
-have most control over the process if the firm owns and operates it=private carrier-
high cost
-third party logistics provider (3PL)-negotiate with for special services
-Facility location-serve as points of service, storage or manufacturing
-Mode selection:
-Truck: greatest flexibility, rates are better than train for small quantities and short
distances, have good transit times
-Train: move large quantities cheaply, long and variable transit times
-Ship: high capacity, low costs, slow transit time, highway or rail still needed after
-Pipeline: highly specialized; for liquid, gases, or solids in slurry form, low cost
-Airplane: fastest, most costly
-Capacity: need to solve how much is needed-ownership and modal selection intertwined
-Expected value of an alternative use to evaluate capacity alternatives
=(probability of a level of demand occurring)(payoff for using the alternative if that
level of demand materialized)
this value is summed over all possible levels of demand
-Amount of Cross-docking: the packing of products on incoming shipments so that they can
be easily sorted at intermediate warehouses for outgoing shipments based on their final
destinations