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Summary - Operations Management, Midterm Exam Review

and Notes
Operations Management (Ohio State University)

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Operations Management Midterm Study Guide

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

-coordination among different business functions is

necessary and key to developing a common strategy

-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

-Nested Processes: a process within a process

-Customer-Supplier Relationships in terms of:

-External Customers: customer who is either an end user or intermediary (financial institutions,
manufacturers, retailers) buying the firm’s finished services or products

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-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

The Supply Chain View

-Core Processes: a set of activities that delivers value to external customers

-Supplier-Relationship Process: selects the suppliers of services, materials, and information and
facilitates the timely and efficient flow of these items into the firm ex. Negotiating fair prices
-New Service/Product Development Process: designs and develops new services or products from
inputs received from external customer specifications or from the market in general through the
customer relationship process
-Order Fulfillment Process: a process that includes the activities required to produce and deliver
the service or product to the external customer
-Customer Relationship Process: identifies, attracts and builds relationships with external
customers, and facilitates the placement of orders by customers, marketing could be a part of this
process
-Support Process: a process that provides vital resources and inputs to the core processes and
therefore is essential to the management of the business, allow core processes to function ex.
Budgeting, recruiting, scheduling

-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

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-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

Competitive Priorities and Capabilities

-Competitive Capabilities: the cost, quality, time, and flexibility dimensions that a process or supply
chain actually possesses and is able to deliver
-Competitive Priorities: the critical dimensions that a process or supply chain must possess to satisfy
its internal or external customers, both now and in the future, to be successful, changes and evolves
over time along with changing business conditions and customer preferences

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-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

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-5 developments have stimulated the need for sound global strategies

-improved transportation and communications technologies
-loosened regulations on financial institutions
-increased demand for imported services and goods
-reduced import quotas and other international trade barriers due to formulation of regional
trade blocks ex. NAFTA
-comparative cost advantages ex. In China (known for manufacturing) and India (known for
service, software companies, technology companies) cheaper cost of labor
-Disadvantages of globalization
-political risks
-nationalization-government may take over a firm’s assets without paying compensation
-may have to relinquish proprietary technology
-employee skills may be lower
-Ethical, Workforce Diversity and Environmental Issues
-ethical dilemmas have been intensified by increased global presence and rapid technology change
-some countries are more sensitive to conflicts of interests, bribery, discrimination against
minorities and women, unsafe workplaces
-need to be environmentally conscious, taking sustainability initiatives

Operations Management as a Set of Decisions

-Strategic decisions: development of new and maintenance of existing capabilities, supply chain, cost
and quality, support firms goals and objectives
-Tactical decisions: support strategic, process improvement and performance measurement, managing
and planning projects, generating productions and staffing plans, managing inventory and scheduling
resources

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

Noodles and Company Example

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

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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 Structure in Services

-Nature of Service Processes (dimensions of Customer

Contact: extent to which the customer is present, is actively involved, and receives personal attention
during the service process)
High Contact Low Contact
-Physical Presence Present Absent
-What is Processed People Possessions or Information
-Contact Intensity Active, Visible Passive, out of site
-Personal Attention Personal Impersonal
-Method of Delivery Face-to-Face Regular mail or email
(moment of truth)
-Elements of Customer-Contact Matrix
-Customer Contact and Customization
-Horizontal dimension- represents the service provided to customers in terms of customer
contact and competitive priorities (a key one is how much customization is needed)
-Left side: high customer contact and highly customized services, customer is present and
active and receives personal attention, process more visible to customer
-Right side: low customer contact, passive involvement, less personalized attention, process out
of customer’s sight
-Process divergence and flow
-Vertical dimension

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-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

Process Structure in Manufacturing

-Manufacturing processes convert materials to goods that have a physical form

-Elements of Product-Process Matrix
-Volume: depends on first and foremost  horizontal (both)

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-Product Customization- higher customization means lower volumes

-Process Characteristics
-Vertical: still process
divergence and flow

-4 Process Structures (form a continuum)

a. Job Process: process with the flexibility needed to produce a wide variety of products in
significant quantities, with considerable divergence in the steps performed, customization high,
volume for any one product is low
b. Batch Process: most common, a process that differs from the job process with respect to volume,
variety, and quantity, volumes a little higher
c. Line Process: process that lies between batch process and continuous processes on the
continuum; volumes are high and products are standardized, which allows resources to be
organized around particular products, divergence and variability low
d. Continuous Flow Process: the extreme end of high-volume standardized production and rigid
line flows, with production not starting and stopping for long intervals
-Production and Inventory Strategies
-Make-to-order: strategy that makes products to customer specifications in low volumes, high
divergence, job or small batch process
-Assemble-to-order: strategy for producing a wide variety of products from relatively few
subassemblies and components after the customer orders are received
-Postponement: final activities in the provision are delayed until the orders are received
-Mass Customization: uses highly divergent processes to generate a wide variety of customized
products at reasonably low costs
-Make-to-stock: strategy that involves holding items in stock for immediate delivery, thereby
minimizing customer delivery times, has high volumes
-Mass Production: line process that uses the make-to-stock strategy

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

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-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

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-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

-How 4 processes tie together example

-Service: Front Office ----vice versa for back office
Process Structure: high divergence, flexible flows
Customer involvement: customer present and involved, unique service
Resource Flexibility: high
Capital Intensity: depends on volume
-Manufacturing: Job Process
Process Structure: high divergence, flexible flows
Customer involvement: not a big factor except for choices made on customization & variety
Resource Flexibility: high
Capital Intensity: low

-Process Reengineering: the fundamental rethinking and radical redesign of processes to improve
performance dramatically in terms of cost, quality service and speed

King Sooper’s Bakery- continuous flow?

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

-Long-term capacity planning- deal with

investments in new facilities and equipment at the organizational level and require top management
participation and approval because they are not easily reversed- at least 2 years in the future
-Measures of capacity- no single measure is best for all situations

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-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

Capacity Timing and Sizing Strategies

-Sizing capacity cushions
-average utilization rate near 100% indicates to increase capacity or decrease order acceptance to
avoid declining productivity
-Capacity Cushion: the amount of reserve capacity a process uses to handle sudden increases in
demand of temporary losses of production capacity- measures amount by which the average
utilization falls below 100%
-= 100%-Average Utilization Rate (%)
-Factors leading to large capacity cushions:
-demand varies ex. Grocery shopping different days at different times
-demand is uncertain
-supply uncertainty
-Factors leading to small capacity cushions:
-unused capacity costs money
-can uncover inefficiencies that were difficult to detect when it was larger ex. Absenteeism,
unreliable suppliers
-Timing and sizing expansions (3 strategies)- when to adjust capacity levels and by how much
expanding can be done, in response to changing market trends
-Expansionist strategy:
-stays ahead of demand
-minimizes chance of sales lost to insufficient capacity

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-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

Systematic Approach to Long-Term Capacity Decisions

1. Estimate future capacity requirements
-Capacity requirement: what a process capacity should be for some future time period to meet the
demand of customers, given the firm’s desired capacity cushion- output or input measure
-Forecasts need to be made for several time periods in a planning horizon: set of consecutive time
periods considered for planning purposes
-Simplest way to express capacity requirements is as an output rate
-high volume, less variety
-demand forecasts for future years are used as a basis for extrapolating capacity requirements
in the future
-ex. Demand is expected to double in next 5 years, capacity requirements also double
D=50, D in 5 years=100, capacity cushion=20%  [100/(1-.2)]=125 customers
-Output measures may be insufficient when:
-high variety and process divergence
-product or service mix is changing
-productivity rates are expected to change
-significant learning effects are expected
-when just one service or product is processed at an operation and the time period is a
particular year the capacity requirement is…

-capacity requirement= Processing hours required for year’s demand

Hours available from a single capacity unit (such as an
employee/machine) per year, after deducting desired cushion

M= Dp . where… M= Capacity requirement

N[1-(C/100)] D= demand forecast for the year (units produced)
P= processing time (hrs/units produced)
N= total number of hours per year during which the
process operates
C= desired capacity cushion (%)
-Setup time: time required to change a process or an operation from making one service or
product to making another , equation with this added in below

- M= [Dp + (D/Q)s]product 1 + [Dp + (D/Q)s]product 1 + … + [Dp + (D/Q)s]product n

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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

Managing Constraints across the Organization

-Constraint: any factor that limits the performance of a system and restricts its output
-Capacity: maximum rate of output of a process or a system, when constraints exist at any step,
capacity can become imbalanced
-3 types of constraints
-Physical (machine, labor, workstation capacity, material shortages)
-Market (demand less than capacity)
-Managerial (policy, metrics, or mind sets that create constraints that impede work flow)
-Have to manage capacity choices at the individual process level and the organization level
-Bottleneck: a capacity constraint resource (CCR) whose available capacity limits the organization’s
ability to meet the product volume, product mix, or demand fluctuation required by the marketplace
ex. Loan dept. not processing enough loans
-Capacity is only as large as its slowest step (bottleneck)

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

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-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.

Identification and Management of Bottlenecks

-Throughput time: the total elapsed time from the start to the finish of a job or a customer being
processed at one or more work centers
-Where can bottlenecks occur?
-internal or external, where it lies can be identified in 2 ways:
-it has the highest total time per unit processed, takes the longest
-it has the highest average utilization and total workload
-Setup time: time it takes to change from one service or product to the next, affect size of the lots
traveling through the job or batch processes
-when setup time in lengthy and degree of divergence is greater, identifying bottlenecks is harder
-Relieving Bottlenecks
-carefully monitor short term schedules and keep bottleneck busy
-long-term investments in new equipment and facility expansions, operating more
-can reengineer process

-Product mix decisions

-managers might be tempted to produce the products with the highest contribution margin or unit
sales
-contribution margin: amount each project contributes to profits and overhead, no fixed costs
considered traditional approach (previous bullet too)
-select the best product mix according contribution margin at the bottleneck station bottleneck
approach
-know how to identify bottlenecks, solve with both approaches and make decision (math problems)
-Drum-Buffer-Rope system

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-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

Inventory Management across the Organization

-Inventory: a stock of materials used to satisfy customer demand or to support the production of
services or goods
-Inventory management: the planning and controlling of inventories in order to meet the competitive
priorities of the organization, needs to be effective and efficient
-too much inventory on hand reduces profitability
-too little on hand creates shortages in the supply chain and damages customer confidence
-inventory involves tradeoffs
-Lot size: the quantity of an inventory item management either buys from a supplier or manufactures
internally
-Pressures for small inventories
-Inventory holding cost (carrying cost): sum of the cost of capital plus the variable costs of keeping
items on hand, such as taxes, insurance
-Cost of Capital: opportunity cost of investing in an asset relative to the expected return on assets
of similar risk, largest component of holding costs ex. w/ inventory use the weighted average cost
of capital (WACC)
-Storage and handling: ex. Rent space- holding cost incurred when a firm could use the space in
another way
-Taxes, insurance, shrinkage: taxes increase when inventory increases, shrinkage: (pilferage
(theft)), obsolescence (cant be sold in full value), deterioration through spoilage or damage- lost
values)
-Pressures for large inventories
-Customer service: high inventory reduces the possibility of stockout and backorders which upset
customers and they take their business elsewhere
-Stockout- order that can not be satisfied=loss of sale
-Backorder- cant be filled when promised or demanded but filled later
-Ordering cost: cost of preparing a purchase for a supplier or a production order for
manufacturing, for the same item-the ordering cost is the same no matter what size
-Set-up cost: cost involved with changing over a machine or workspace to produce a different item,
independent of order size
-Labor and equipment utilization: creating more inventory= reduces number of unproductive
setups, holding inventory reduces costly rescheduling of production orders when components are
not in inventory, stabilizes output rate when demand is cyclical or seasonal, this approach
minimizes the need for overtime, layoffs, extra shifts and hiring
-Transportation cost: outbound cost can sometimes be reduced with larger inventory, minimizes
the need to expedite shipments, placing several orders at the same time can lead to discounts for
inbound shipping

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-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

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-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

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-Order/Setup costs: decrease S= decrease in EOQ—weeks of supply decreases and inventory

turnover increases because the lot size decreases
-Holding costs: decrease H=increase in EOQ—larger lots are justified when holding costs decrease

Inventory Control Systems

-The EOQ and other lot sizing methods answer:
-How much should we order?
-When should we place the order?
-Distinction between types of inventory:
-Independent demand items: items for which demand is influenced by market conditions and is not
related to the inventory decisions for any other item held in stock or produced ex. Retail
merchandise, office supplies, uniforms, maintenance
-Dependent demand items: those required as components or inputs to a service

-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)

-Choosing an appropriate service-level policy

-service level (cycle service level)- desired probability of
not running out of stock in any one ordering cycle-begins at the time the order is placed and
ends when it arrives in stock
-intent is to provide coverage over the protection interval: period over which safety stock must
protect the user from running out of stock- for the Q system, the protection interval is the lead
time
-Finding the safety stock
-normal distribution
-safety stock= zσdLT
-where…

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-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

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-Optimal review, min-max, or (s,S) system, like the P system

-Reviews IP at fixed time intervals, and if the position has dropped to (or below) a
predetermined level, to place a variable-sized order to cover expected needs
-Ensures that a reasonable large order is placed
-Base-stock system
-Replenishment order is issued each time a withdrawal is made
-Order quantities vary to keep the inventory position at R
-Minimizes cycle inventory, but increases ordering costs
-Appropriate for expensive items

The Goal Movie

-Premise:
-Main character: Rogo
-His college teacher and “mentor”-Jonah
-Rogo’s company is losing money and he has 3 weeks to turn it around or his boss is going to close
down the Bearington plant
-Signs that indicated they were in trouble: too much inventory and bad shipping
-They bought robots and Rogo thought they were a success, he thought this because they increased
productivity but they really increased the inventory and lowered sales because the whole facility
wasn’t very efficient
-The “normal” way to solve this would be to hire more workers, work overtime, buy more
machines-think in the short term but this spends money
-The 3 measures Jonah suggested should be used to evaluate the manufacturing system’s
performance:
-increase revenue, decrease expenses, decrease inventory
-when the system capacity is reduced to match market demand… market demand becomes a
constraint
-excess inventory=excess capacity
-work cannot start on a new process until the previous process is finished
-Jonah’s definition of bottleneck resources: costs you money to run it, nonbottleneck resources:
doesn’t cost you money
-When Rogo was on a hike with his son and the boyscouts he noticed there was one kid that was
the slowest; when he slowed down, it slowed everyone down because they had to wait for him to
catch up, the group cant move any faster than the slowest hiker=== metaphor for a bottleneck!-
caused a bottleneck spread because everyone kept going as the slow kid was behind
-the value of time on a bottleneck is priceless?
-want to find the bottleneck and do whatever you can to make it move faster- on the hike they
distributed all the stuff in the slow kids bag so it wasn’t as heavy and he could speed up
-the bottleneck in the factory was the new machine because it was down during setups, solved this
by getting a 2nd old machine to help alleviate the load on the new machine
-they decided to cut batch sizes because it would move faster through the facility then
-when setups are increased on non bottleneck resources in order to allow small batches it has no
effect on the cost because the workers are there anyways and there is no extra time being spent at
the bottleneck
-want to identify the bottleneck, exploit the system constraint, subordinate to the system
constraint, elevate the constraint to a new level
-THE GOAL IS: TO MAKE A PROFIT

Case Discussions

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-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

Operations Management Final Study Guide- Add to Midterm study guide

Chapter 5-Quality and Performance

-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:

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-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 itdecreases 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

Ethics and Quality

-Balancing the traditional measures of quality performance and the overall benefits to society ex.
Heart surgeon wants to aim for zero complications in every surgery but if it comes at a cost of turning
down high-risk patients, is society being served in the right way?
-Ethical considerations-deciding how you want to handle your products and services in a way that is
fair for your customers
-Identify deceptive business practices-3 elements:
1. The conduct of the provider is intentional & motivated by a desire to exploit the customer
2. The provider conceals the truth based on what is actually known to the provider
3. The transaction is intended to generate a disproportionate economic benefit to the provider at
the expense of the customer
These behaviors are unethical, diminish the quality of a customer’s experience and may impose a
substantial threat on society. Also if these behaviors happen, the customer with unfavorably asses
the company and is unlikely to return.
-Companies should develop a culture around ethics and train employees to understand how ethics
interfaces with jobs to avoid ethical problems in the future
-The message companies that engage in unethical behaviors send is that the company’s product cant
compete so they must deceive to make their company profitable

Total Quality Management

-a philosophy that stresses 3 principles for achieving high levels of process
performance and quality-also includes other important elements
-Customer Satisfaction: customers, internal or external, are satisfied when
their expectations regarding a service or product have been met or exceeded-
often use the term quality to describe their level of satisfaction with a
product or service (good quality=higher profits)-has multiple dimensions
-Conformance to specifications: ability to meet certain advertised or
implied performance standards ex. on-time deliver, delivery speed
-Fitness for use: assessing how well product or service performs
-Psychological impressions: atmosphere, image, or aesthetics ex. Nicely dressed
-Value: how well the service/product serves its intended purpose at a price customers are
willing to pay
-Support: provided by the company
-Employee Involvement: changing org culture and encouraging teamwork
-Culture change: one of the main challenges in developing the proper culture is to define
customer for each employee

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-External: people/firms who buy the service or product

-Internal: employees in the firm who rely on the output of other employees
-Must do a good job at serving their internal customers if they want their external
customers to be satisfied
-Quality at the Source: a philosophy whereby defects are caught and corrected where they
were created
-Teams-small groups of people who have a common purpose, set own performance goals and
approaches, and hold selves accountable for success
-Employee Empowerment: moves responsibility for decisions further down the
organizational chart-to the level of the employee actually doing the job
-3 approaches:
-Quality Circles (problem-solving teams): small groups of supervisors and employees
who meet to identify, analyze, and solve process and quality problems die out if
management fails to implement any of their suggestions
-Special Purpose teams: groups that address issues of paramount (supreme) concern to
management, labor, or both
-Self-managed team: small group of employees who work together to produce a major
portion, or sometime all, of a service or product; employees have control over their jobs-
highest worker participation
-Continuous Improvement: based on Japanese concept Kaizen, philosophy of continually seeking
ways to improve processes, focus is to reduce waste ex. Time, amount of scrap, number of injuries
-any process can be improved-people most closely associated with a process are in the best
position to identify the changes that should be made
-main idea is to not wait until a massive problem occurs before acting
-employees should be given problem solving tools (SPC methods later in chapter) and a sense
of ownership of the process-shows them they have control
-Train work teams in problem solving using the Deming Wheel-The plan-do-study-act cycle:
-Plan: select a process that needs improvement-document process by analyzing data, sets
goals and ways to achieve them-after all this, develops a plan with quantifiable measures
for improvement
-Do: team implements plan and monitors progress-collects data
-Study: analyze data collected during the “do” step to find out how closely the results
correspond to the goals set in “plan” step
-Act: if results are successful, document process so it becomes the standard procedure

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

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-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

Statistical Process Control

-The application of statistical techniques to determine whether a process is delivering what the
customer wants
-detects defective services or products
-to indicate a process has changed
-inform management of improved process changes
-Variation of outputs: is unavoidable but want to minimize; Causes:
-Performance measurements-evaluated in 2 ways
-Variables: service or product characteristics that can be measured ex. Weight, length, time
-Attributes: service or product characteristics that can be quickly counted for acceptable
performance-yes/no decision
-a transformational process can be described in terms of location, spread and shape
-Sampling
-Complete inspection: inspect each service or product at each stage of the process for quality,
most thorough, costs of giving defects to customers>inspection costs
-Sampling plan: a plan that specifies a sample size, the between successive samples and
decision rules that determine when action should be taken-good when inspection costs are high
-Sampling Distribution
-a process will produce output that can be described by a process distribution
-purpose is to estimate a variable or attribute measure without doing a
complete inspection
-a process can be described in terms of location, spread, and shape-affected by
variation
-some processes can be approximated by normal distribution- n>4
-Mean: n -Standard Deviation: square root of variance  x 2
x2   i
x i
2
 x  x
i
 i
n
i 1  or  
x n 1 n 1
n

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-Xi=observation of a quality characteristic n=total # of observations X-bar=mean

-Range: difference between largest observation in a sample and the smallest

-Common causes of variation: the purely random, unidentifiable sources of variation that is
unavoidable with the current process, expensive to eliminate
-if process variability results only from this-assume process is in statistical control, stable, and
under normal operating conditions
-Assignable causes of variation: any variation causing factors that can be identified and eliminated
(also known as special causes), affect process for a short period of time ex. Employee becomes ill,
machine needing repair
-Control Charts: a time-ordered diagram that is used to determine whether observed variations are
abnormal
-UCL: upper control limit, larger value
-LCL: lower control limit, smaller value
-defined off of common control limits, both are based on the sampling distribution and judge
whether action is required
-nominal value: central line, average or average wanted; if location of distribution=nominal value,
then it is unbiased and centered
-Steps:
-take random sample from process and calculate a variable/attribute performance measure
-if statistic falls outside chart’s control limits or exhibits unusual behavior, look for an
assignable cause
-eliminate cause if it degrades performance (easier); incorporate cause if it improves
performance, reconstruct chart with new data
-repeat procedure periodically
-In statistical control means that the process will not produce
observations with a discernable pattern other than that the
observations will fall within upper and lower control limits (A)
-B. Run: a sequence of observations with a certain
characteristic take action when 6 or more observations
show a downward or upward trend-6 points trend rule
-also 9 points 1 side rule when 9 points are on 1 side of the
line
-C. sudden change from normal path-monitor process-14
points oscillating rule
-D. Extreme point rule: process went out of control twice because 2 results exceed control
limits
-2 types of errors:
-Type 1 error: an error that occurs when the employee concludes that the process is out of
control based on a sample result that falls outside the control limits, when in fact it was due to
randomness
-Type 2 error: an error that occurs when the employee concludes that the process is in control
and only randomness is present, when actually the process is out of statistical control
-Video in class-7 quality control tools: check sheet, cause-and-effect diagram (most used), run
chart, Pareto diagram, scattergram, histogram, and control chart

Statistical Process Control Methods

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-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 valuecentral 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=Pput 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 distributioncentral 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

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-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.

-critical value is usually 1/1.33 depending on 3 or 4 st. dev.

-if Cpk is greater than the critical value then the process is capable
-Process capability ratio: a test to see if the process variability is capable of producing output within a
product’s specifications-if it is causing the problem-measure for variable data
-critical value is the same as the one for Cpk

-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

-Use continuous improvement to determine the capability of a process

1. Collect data on process output and calculate mean and standard deviation of the distribution
2. Use data from process distribution to compute process control charts
3. Take at least 20 samples with size n and plot on charts; see if it is in statistical control, if not, re-
calculate and find causes
4. Calculate Cpk, if acceptable-process is capable, if unacceptable calculate C p-if acceptable-
variability is fine and just need to center process, if unacceptable-focus on reducing variability
until it passes the test
-Quality engineering: an approach originated by Genichi Taguchi that involves
combining engineering and statistical methods to reduce costs and improve
quality by optimizing product design and manufacturing processes
-Quality loss function: rationale that a service or product that barely
conforms to the specifications is more like a defective service or product
than a perfect one, equals zero when on target value and rises when it goes
towards specifications

International Quality Documentation Standards

-Especially important in international trade
-ISO 9001:2008 documentation standards-of quality program, quality management
-ISO 14000:2004 environmental management system-raw material use and hazardous wastes
-ISO 26000:2010 social responsibility guidelines
-Benefits of ISO certification= takes long and is expensive but can have a sales advantage, increase
profitability, and increase marketing

Baldrige Performance Excellence Program

-An award that promotes, recognizes, and publicizes quality strategies and achievements
-7 criteria=
-Leadership -Strategic Planning
-Customer Focus -Workforce Focus
-Measurement, Analysis, and Knowledge management -Operations Focus
-Results-given the most weight when selecting winners

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Chapter 4-Process Analysis

-To understand process ask W4H=Who, What, When, Where and How; and ask FTQ2C= Flow, Time,
Quality, Quantity, and Cost

Process Analysis Across the Organization

-Process Analysis: The set of tools used to identify opportunities for improvement, document current
processes, evaluate processes to find performance gaps, redesign processes, and implement desired
changes.
-Goal=continual improvement
-Techniques:
-Flowcharts -Service blueprints
-Work measurement techniques -Process charts
-Data analysis tools:
-Checklists -Bar graphs
-Cause and effect diagrams -Simulation
-Pareto charts
-Processes can be analyzed, understood, and redesigned so they are providing the most value to their
customers (internal and external) by focusing not only on operations and sales departments but all
other departments in the company too

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

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-justifiable ideas are put into a new process design

6. Implement Changes
-want widespread participation-increases commitment
-brings to life the steps needed to bring the redesigned process online

Documenting the Process

-Flowcharts: (also known as flow diagrams, process maps,
relationships maps, or blue prints) a diagram that traces the flow of
information, customers, equipment, or materials through the various
steps of a process
-has colors, shading and different shapes that represent different
types of steps-rectangle shape is most common
-divergence is shown when an outgoing arrow splits into 2 or more
arrows that lead to different boxes
-yes/no decision point- 2 arrows coming off a box leading to different
processes whether answer is yes or no
-Use nested charts when you can’t fit all details in one chart
-Swim Lane Flowchart: a visual representation that groups functional areas
responsible for different sub-processes into lanes; most appropriate when the
business process spans several department boundaries-each department is
separated by parallel lines
-shows cross-functional work processes and shows connections
between departments
-Service Blueprints: a special flowchart of a service process that shows
which steps have high customer contact (very important)
-has a line of visibility that identifies which steps are visible to the
customer and which are not
-or can create 3 levels showing how much control the customer has
over each step
-Process Charts- an organized way of documenting all the activities
performed by a person or group of people, at a workstation, with a
customer or on materials
-analyzes a process using a table and provides information about
each step in the process
-requires time estimates
-Activities organized into 5 categories:
- Operation, l: changes, creates, or adds something ex. Drill hole
-Transportation, Æ: materials handling, moves object ex.
Shipping
-Inspection, n: checks or verifies something but doesn’t change
ex. Weigh product
-Delay, »: subject held up ex. Clean up time
-Storage, q: put away until later ex. inventory
-the annual cost of the project can be estimated

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

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-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

Redesigning the Process

-Generating ideas: questioning and brainstorming
-ideas can be uncovered by asking 6 questions:
-What is being done? -When is it being done?
-Who is doing it? -Where is it being done?
-How well does it do on the various metrics of importance? -How is it being done?
-Brainstorming: letting a group of people, knowledgeable about the process, propose ideas for
change by saying whatever comes to mind and then evaluate the ideas to find the best
-Benchmarking: a systematic procedure that measures a firm’s processes, services, and products
against those of industry leaders-focuses on setting quantitative goals for improvement
-Types:
-Competitive: based on comparisons with a direct industry competitor
-Functional: compares areas such as administration, customer service and sales operations
with those of outstanding firms in any industry-collected by professionals
-Internal: using an organizational unit with superior performance as the benchmark for other
units-advantageous for firms with several units or divisions- most accessible

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-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

Managing and Implementing Processes

-Seven mistakes to avoid:
-Not connecting with strategic issues
-Not involving the right people in the right way
-Not giving the design teams and process analysts a clear charter and then holding them
accountable
-Not being satisfied unless fundamental “reengineering” changes are made
-Not considering the impact on people
-Not giving attention to implementation
-Not creating an infrastructure for continuous process improvement

Chapter 8- Lean Systems

-Example in class: Boeing in Everett Washington implementing lean systems

-Lean systems affect a firm’s core and supporting processes and also its customers and suppliers
through marketing, human resources, engineering, operations, accounting etc.

Continuous Improvement Using a Lean Systems Approach

-Lean system: operations systems that maximize the value added by each of a company’s activities by
removing waste and delays for them
-specify what creates value from the customer’s perspective-value is the solution to a “problem”
that your customers face
-Just-in-time (JIT) philosophy: the belief that waste (also called muda) can be eliminated by cutting
unnecessary capacity or inventory and removing non-value-added activities in operations
-processes flow simply and smoothly
-JIT system: a system that organizes the resources, information flows, and decision rules that enable a
firm to realize the benefits of JIT principles
-8 types of lean waste:
-Overproduction -Waiting
-Transportation -Motion
-Defects -Inventory
-Underutilization of employees
-Inappropriate processing: using expensive equipment when simpler machines will suffice
-Kaizen: continuous improvement in quality and productivity
-key is understanding that excess capacity or inventory hides underlying problems with the
processes that produce a service or a product
-ex. Video in class of guy making toast
-Honda example in class about how to find waste Acronym DOWNTIME= same as 8 types of lean
waste except underutilization of workers=not using works properly and inappropriate
processing=extra processing

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-Lean systems provide…

-a mechanism for management to reveal the problems by
systematically lowering capacities or inventories until the
problems are exposed
-philosophy=continuous improvement occurs with ongoing
involvement and input of new ideas from employees
- Metaphor of boat in water and rocks under surface
-In services: water surface represents service system
capacity ex. Staff levels
-In manufacturing: water surface represents product
and component inventory levels
-Rocks represent: problems encountered in the fulfillment of services and products
 when water surface is high enough, the boats pass over the rocks because there is a high
level of capacity or the inventory covers up problems, as the water surface decreases the
rocks are exposed; with lean systems, companies create methods to demolish exposed rock

Supply Chain Considerations in Lean Systems-2 salient characteristics:

-Closer supply ties…
-need because they operate with low levels of capacity slack or inventory so they need supplies
shipped frequently, smaller lead times, supplies to arrive on schedule and supplies to be of high
quality
-improves supplies profit margins and can lower component prices
-one of the first actions taken in lean systems is decreasing the number of suppliers and making
sure they are located close in order to promote strong partnerships and better synchronize
product flow
-in a JIT II system the supplier has an in-plant representative at the company they supply for
-Small Lot Sizes
-Lot: quantity of items that are processed together
-Advantages:
-reduce average level of inventory -pass through system faster
-more efficiently utilize capacities
-if you have defective items, takes less time to examine all, less delays
-achieve uniform workload and prevent overproduction
-GOAL= Single-Digit setup: setup is less than 10 minutes long
-Disadvantages:
-increased set up frequency
-may have more idle employees, equipment, and materials

Process Considerations in Lean Systems-characteristics

-Method of material flow
-Push method: a method in which production of the item begins in advance of customer needs-
mostly conventional systems, not lean
-ex. Cafeteria with set food options and pre-prepared food options because rush of people
eating at once-must forecast number expected to serve
-Pull method: a method in which customer demand activates production of the service or item-
most firms with lean systems do this
ex. Got to restaurant and look at menu to decide what you want, chef then prepares it for you
then and there
-How to choose between push and pull?
-often situational -assemble to orderuse both

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-standardized componentspush -customers request something specificpull

-Quality at the Source
-How is obtained and defined?
-defects are caught and corrected where they are created
-goal= workers act as their own quality inspectors and never pass defective units on to the next
process
-Poka-yoke: mistake-proofing methods aimed at designing fail-safe systems that minimize human
error ex. Make a product that can only be assembled in one way
-Jidoka: automatically stopping the process when something is wrong and then fixing the problems
on the line itself as they occur
-visual management system: safety, quality, goals, delivery, cost performance for a given work
station if visible to workers at all times
-an alternative is pushing problems down the line to be solved later
-Andon: a system that gives machines and machines operators the ability to signal the occurrence
of any abnormal conditions ex. Tool malfunction, shortage of parts
-shown with audio alarms, blinking lights, test displays, chords that can be pulled
-Uniform work stations
-use reservation systems-schedule in advance
-use differential pricing to manage demand ex. Red eye flights
-assemble same type and number of units each day
-Takt time: cycle time needed to match the rate of production to the rate of sales or
consumption =total available time/total demand
-Heijunka: the leveling of production load by both volume and product mix; doesn’t build products
according to the actual flow of customer orders, levels total volume so the same amount and mix
are made each day 2 options:
-Mixed-model assembly: a type of assembly that produces a mix of models in smaller lots ex.
4C’s, 3A’s and 2D’s per 1 cycle and then repeated
-Lot size of one: ex. C-D-C-A-C-A-C-D-A=1 cycle and this is repeated over and over
-feasible only with brief set up times
-the capacity requirements at the feeder workstations are smoothed
-Standardized components and work methods
-used in highly repetitive service operations
-in manufacturing, increases totally quantity
-standardized task performed more each day which increases productivity
-Flexible workforce
-trained to work more than one job
-benefit: can shift workers to help relieve bottlenecks as they arise without need for inventory
buffers
-relieves boredom and refreshes workers
-Automation
-use of more machines instead of workers
-key to low-cost operations
-benefits: greater profits (because prices can be cut), greater market share
-more is not always better-humans can do some jobs better than robots or automated assembly
systems
-Five S Practices: conducive to visual controls and lean production; methodology for organizing,
cleaning, developing, and sustaining a productive work environment 5 practices that build on one
another, are interconnected and are done systematically
-Sort: separate needed items from unneeded items (discard)
-Straighten: neatly arrange what is left-place for everything, organize so its easy to find

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-Shine: clean and wash work area

-Standardize: establish schedules and methods of performing the cleaning and sorting- cleanliness
and state of readiness maintained
-Sustain: create discipline to perform the first 4 S practices where everyone understands, obeys,
and practices the rules-make it a habit
-lowers cost, improves on time delivery and productivity, increases quality, better use of floor
space, safe working environment, builds discipline to make lean systems work well
-Total preventative maintenance: (total productive maintenance), can reduce the frequency and
duration of machine downtime; perform routine maintenance and then test specific parts that may
need to be replaced to prevent them from failing during production
-employees may be responsible for maintaining their own equipment

Toyota Production System (TPS)

-great example of lean systems
-built a learning organization-sets up operations as experiments for
employees
-4 principles:
-All work should be specified as to content, sequence, timing, and
outcome.
-All customer-supplier connections should be direct and
unambiguous; specify people, form and quantity, expected time
and way requests are made
-All pathways should be simple and direct
-All improvements should be made in accordance to scientific
method, under the guidance of a teacher, and at the lowest
possible organization level-where employees are actually doing the work
-Created the House of Toyota to capture 4 principles

Designing Lean System Layouts

-line flows recommended
-2 techniques for creating:
-One worker, multiple machines (OWMM)- a one-person cell in which a worker operates several
different machines simultaneously to achieve line flow
-reduces labor and inventory requirements
-Group technology (GT)- an option for achieving line-flow layouts with low volume processes; tis
technique creates cells not limited to just one worker and has a unique way of selecting work to be
done by cell
-groups parts/products with similar characteristics into groups called families and sets aside
groups of machines for their production-based on size, shape, demand etc.
-goal: minimize machine changeover/setup

Value Stream Mapping

-a qualitative lean tool for eliminating waste (muda), shows the activities within a process
required to create and deliver value
-waste in many processes can be as high as 60%
-spans supply system from firm’s receipt of raw materials to delivery of finished goods
-creates a visual “map” of every process involved in the flow of materials and information
in a product’s value chain
-Steps shown in diagram
-Much more information about this in book Learning to See (notes later in study guide)

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The Kanban System

-a Japanese word meaning “card” or “visible record” that refers to
cards used to control the flow of production through a factory
-developed by Toyota-use a 2 card system
-container has a card, empty the container and take card off, when
refilled put the card back on
-General operating rules:
-each container must have a card
-assembly line always withdraws materials from fabrication cell-
pull system; does not push parts
-containers of parts must never be removed from storage area without a Kanban first being
posted on the receiving post
-containers should always contain the same number of good parts or else production flow can be
disrupted
-only non-defective (good) parts should be passed along to the assembly line to make the best use
of materials and workers time-quality at source
-total production should not exceed the total amount authorized on the Kanbans in the system
-Other Kanban systems:
-Container system: container used as a signal device-empty container signals the need to fill it
-amount of inventory is adjusted by adding or removing containers
-Containerless system: using visual means as a signal device; in assembly-line operations,
operators use their work bench area to put completed units on painted squares (1 unit
square=container) and the number of squares is calculated to balance flow, when the unit is
removed, the empty square signals the need to produce another

Operational Benefits and Implementation Issues

-Organizational considerations:
-The human costs of lean systems:
-can stress out the workforce with high degree of regimentation which can cause productivity
losses or quality reductions
-may feel loss of autonomy
-managers can lessen some of this by allowing for some slack in the system (safety stock or
capacity slack) and by emphasizing work flows instead of worker pace, can also promote use
of work teams
-Cooperation and trust: is needed between the workforce and management because workers take
on more important responsibilities
-Reward systems and labor classifications- may need to be changed
-Process considerations: may need to change layout of plant, which can be costly ex. Move work
stations closer, cells of machines established, adding a loading dock for trucks
-Inventory and Scheduling:
-Schedule stability: schedules must be made stable for extended periods (ex. 3 months), needed so
production lines can be balanced and new assignments found for employees who may be
underutilized; reason is because lean systems cant respond quickly to scheduling changes because
little slack inventory or capacity is available to absorb changes
-Setups: need to reduce time of setups because with lean systems you use small lot sizes
-Purchasing and logistics: shipments of materials must be reliable because of low inventory levels;
want to try and get savings or discounts from suppliers but also harder to find suppliers that can
do frequent small shipments

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Learning to See-Supplemental book on Value Stream Mapping

-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

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-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

What makes a value stream lean?

-Companies have established principles on value stream mapping for other companies to now build off
of adapt to fit their own processes
-Overproduction:
-Each process in current value stream maps works according to schedules, not the actual needs of
the customer, which leads to overproduction and longer lead times
-The most significant source of waste is overproduction
-In lean manufacturing, you want to get one process to make only what the next
process needs when it needs it and this will generate the shortest lead time, highest
quality, and lowest cost
-Ways to improve-characteristics of a lean value system:
-Want to develop continuous flow wherever possible
-Can use supermarkets to control production where continuous flow doesn’t extend
upstream and need to use batches
-implement a pull system with a customer process that comes and takes what it
needs and a supplying process that replenishes it
-use a Kanban to know when it needs to be supplied-withdrawal and production
-also can keep safety stock to protect against sudden fluctuations in customer
orders

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-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

 best way to understand=look at examples and then do them yourself

Chapter 10- Supply Chain Design

Supply Chain Design Across the Organization

-Supply chain design: designing a firm’s supply chain to meet the competitive priorities of the firm’s
operations strategy-guided by the firm’s operations strategy and competitive priorities
-3 major areas of focus in creating an efficient supply chain (diagram on left)
-Supply chain efficiency curve-shows the trade-offs between costs and performance (diagram on
right)-red dot=actual, blue line=efficiency curve that you want to be as close as possible to

the challenge for the management of inefficient

supply chain operations is to improve operations planning for the current supply chain design, or to
improve the design of the supply chain itself
-goal=reduce costs and increase performance
-Significant leaps in efficiency and performance can be had with a better supply chain design-design
issues include:
-placement of inventories -mass customization
-outsourcing -supply chain collaboration
-supplier selection -closed-loop supply chains
-facility location
-Supply chain design internal organizational pressures:
-Dynamic sales volumes: costly to meet; involves excessive inventories, underutilized personnel, or
more expensive delivery to meet customer demands
-often caused by end of the month sales promotions

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-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

Supply Chain for Services and Manufacturing

-every firm or organization is a member of some supply chain because you
can’t produce products and services without one
-Similarities and differences between supply chains:
-Services:
-supply chain design is driven by need to provide support for the
essential elements of the various services it delivers
-need to be convenient and quick and may use many suppliers to
do so
-spend 30-40% of income on purchased services and materials
-Manufacturing:
-fundamental purpose=control inventory by managing the flow of
materials
-spend >60% of income on purchased services and materials
-want to have lowest cost of materials
-shows tiers to identify suppliers

Measures of Supply Chain Performance

-Inventory measures
-Average aggregate inventory value: total average
value of all items held in inventory for a firm
-Weeks of supply: inventory measure obtained by
dividing the average aggregate inventory by sales
per week at cost of goods sold
-Inventory turnover: inventory measure obtained
by dividing annual sales at cost of goods sold by
the average aggregate inventory value maintained
during the year
-Financial measures
-total revenue
-cost of goods sold-effect net income and
contribution margin
-operating expenses
-cash flow- cash to cash (time lag between
paying and receiving money)
-working capital- money used to finance on
going operations
-return on assets- (ROA)=net income/total
assets-diagram shows how each of them effect
ROA
Inventory Placement

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-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

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-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

Chapter 12-Supply Chain Integration

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Supply Chain Integration Across the Organization

-Supply chain integration: effective coordination of supply chain processes through the seamless flow
of information up and down the supply chain
-think of a supply chain as a river that flows from raw material suppliers to customers
-involves internal and external processes
-Example of a ketchup factory if an upstream supplier
has a major failure, the ketchup factory will dwindle to a
trickle-as if someone built a dam across the river
-upstream must react to demands placed on them by
downstream

Supply Chain Dynamics

-Bullwhip effect: the phenomenon in supply chains whereby ordering patterns experience increasing
variance as you proceed upstream in the chain
-handle of whip initiates action but the tip experiences the wildest action
-the slightest change in demands can ripple through the entire chain-can cause inventories or
shortages
-External disruptions: firm has least amount of control over
-Volume change- need quick reaction from suppliers
-Service and product mix changes
-Late deliveries- may force a firm to switch its schedule from production of one product model to
another
-Underfilled shipments-supplier send because of disruptions at own plants, has same consequences
as late deliveries
-Internal disruptions: affect suppliers
-Internally generated shortages
-Engineering changes
-Order batching- discount when purchasing large quantities
-New service or product introductions
-Service or product promotions-increase in demand
-Information errors
-Integrated supply chains
-External supply chain linkages -SCOR (supply chain operations reference) model: a

framework that focuses on a basic supply chain of plan,

source, make, deliver, and return processes, repeated
again and again along the supply chain-design is
complex and requires a process view

New Product or Service Development Process

-defines nature of materials, services, and information flows the supply chain must support
-essential to long term survival of firm

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-competitive priorities help managers develop services and products

that customers want
-Process shown in diagram
-Design: links creation of new services or products to the corporate
strategy of the firm and defines the requirements for the firm’s
supply chain
-ideas for new offerings proposed and screened for feasibility
and market worthiness
-how it will be produced and delivered
-Analysis: critical review of new offering and how it will be
produced to make sure it fits the corporate strategy, is compatible
with standards, satisfies customer needs, and has acceptable market risk; may lead to design being
revised
-Development: design processes to meet competitive priorities and add value, design market
program, train personnel
-Concurrent engineering: concept that brings product engineers, process engineers, marketers,
buyers, information specialists, quality specialists and suppliers together to design a product
and the processes that will meet customer expectations
-Full launch: promotions initiated, sales personnel briefed, distribution processes activated, and old
services or products that the new offering is to replace are withdrawn
-Ramp up: when production processes must increase volume to meet demands while coping
with quality problems and last minute design changes

Supplier Relationship Process

-These processes are the organizational responsibility of purchasing: the activity that decides which
suppliers to use, negotiates contracts, and determines whether to buy locally
1. Sourcing: selection, certification, and evaluation of suppliers and in general, the management of
supply contracts
-Supplier selection-start with total cost analysis
-Material costs= pD p=price/unit and D=annual requirements (demand)
-Freight costs: transporting product or equipment and personnel who will perform; depends on
location, size f shipment number of shipments, and mode of transportation
-Inventory costs:
-cycle inventory= Q/2 . Q= shipping quantity
-annual inventory costs= (Q/2 +dL)H d=average demand per day/week
-pipeline inventory= dL L= lead time H=holding costs
-Administrative costs: managerial time, travel and other variable costs associated with
interacting with a suppler
-Total annual cost =sum of all above costs
-competitive priorities and order winners are a good starting point in developing a list of
performance criteria to be used when selecting
-Green purchasing: process of identifying, assessing, and managing the flow of environmental
waste and finding ways to reduce it and minimize its impact on the environment
-becoming more and more important when choosing suppliers-want to make sure you
choose environmentally conscious ones
-use and substantiate claims such as green, biodegradable, natural, and recycled
-use sustainability as a criteria for certification
-Supplier certification and evaluation: verify that potential suppliers have the capability to provide
services or materials the buying firm requires

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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

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-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

The Customer Relationship Process

-The customer relationship process addresses the interface (boundary) between the firm and its
customers downstream in the supply chain
-Purpose: to identify, attract, and build relationships with customers and to facilitate the transmission
and tracking of orders
-Key nested processes:
-Marketing-determining the customers to target, how to target them, what to offer and prices, and
how to manage promotion campaigns
-Electronic commerce (E-commerce): application of information and communication
technology anywhere along the supply chain of business processes-2 types:
-Business-to-Consumer systems (B2C): allow customers to transact business over the
internet-can avoid department stores

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-Business-to-Business systems (B2B): biggest growth; commerce between firms that

facilitate trade up and down the supply chain
-Order placement process: involves activities required to execute a sale, register the specifics of
order request, confirm acceptance of order, and track progress of order until completed
-Internet provides the following advantages:
-cost reduction -revenue flow increase
-global access -pricing flexibility
-Customer service: helps customers with answers to questions regarding the service/product,
resolves problems, and provides information to assist customers-best not to outsource

Levers for Improved Supply Chain Performance

-Levers:
-Sharing data: point of sale data; helps visibility of end-user demand by suppliers upstream
-Collaborative activities: between customers and suppliers in customer demand planning and
environmental health and safety programs and design collaboration improves flows,
environmental stewardship and decreases surprises
-Reduce replenishment lead times: allows firm to wait longer before reacting to a change in
demand levels
-Reduce order lot sizes: reduces costs with ordering, transporting, and receiving inventory
-Ration short supplies to customers- on basis of past sales
-Use everyday low pricing (EDLP): encourages spikes in demand and levels it ex. Walmart
-Be cooperative and trustworthy
-Performance measures
-monitor to see where improvements can be made or to measure the impact of applying the levers-
periodically collect data and track
-monitor performance by measuring
-Costs -Time
-Quality -Environmental Impact
-Commonly used performance measures for the 3 supply chain processes above:

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