Lecture Notes to Accompany

Operations Management, 10th Edition

Stevenson (McGraw-Hill 2009)

For

BA 380: Operations Management

Summer 2010
Prepared by: Rene Leo E. Ordonez, PhD
Professor and Chair
School of Business
Southern Oregon University
Ashland, Oregon

Prepared by: Rene Leo E. Ordonez, PhD School of Business, SOU

Notes to Accompany Operations Management (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 2

BA 380: OPERATIONS MANAGEMENT

GUIDELINES:

 read the topics as outlined in the Lecture Notes

 view the accompanying digitized lectures
 attempt to work on (solve) the problems presented in the Lecture Notes
 replicate the computer-assisted solutions to the problems discussed in
the digitized lectures as well as those explained during the in-person
sessions
 formulate and bring questions about the readings/problems/concepts
and digitized lectures to the in-person sessions, or post them on the
Discussion Board (under Communication) in Blackboard
 visit Blackboard at least three times a week
 check emails at least once a day
 post all questions related to the class on the Discussion Board in
Blackboard instead of emailing the question to the instructor. Questions,
concerns, or comments that are student-specific may be sent via regular
email.
 organize study/help groups

Words to remember:
Prioritize, not procrastinate.
Spread out the work, not put things off until the last minute

Rene Leo E. Ordonez, PhD

Professor and Chair of Business
(541) 552-6720
ordonez@sou.edu

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
 Lecture Outlines and Digitized Lectures for
BA 380: Operation Management
Rene Leo E. Ordonez, PhD
School of Business
Southern Oregon University
Summer 2010 Edition

Note: The outlines listed below are based on the text Production Operations Management, 108h Edition,
by William Stevenson, Irwin-McGraw-Hill. The problems in each section are also taken from the same text.
This is a supplement material to the text.

Lecture Notes
Page Number
Introduction 2

Productivity, Competitiveness, Strategy 7

Forecasting 9

Reliability 27

Cost Volume Analysis and Capacity Planning 40

Decision Theory 46

Learning Curves 52

Introduction to Quality Control 58

Quality Control 61

Inventory Management 74

Project Management 87

Waiting Lines 96

Prepared by: Rene Leo E. Ordonez, PhD School of Business, SOU

Notes to Accompany Operations Management (Stevenson, 2009)
Prepared by: Rene Leo E. Ordonez, PhD School of Business, SOU
Notes to Accompany Operations Management (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 2

Introduction

What is Productions and Operations Management?

 A field of study involving the planning, coordinating, and executing of all

activities that create goods or provide services

 Focus: To explore a variety of decision making tools that operations

managers can use in the decision making process. These tools are
classified as

o Quantitative
 Queuing techniques
 Inventory Models
 Project models (PERT/CPM)
 Forecasting techniques
 Statistical models
 Breakeven analysis

o Analysis of trade-offs
 In inventory management we balance tradeoff between two
objectives – minimize cost of carrying inventory and
maximize customer service level

 The models in discussed will reflect tradeoffs between cost

and benefit

o System approach
 Emphasizes interrelationships among subsystems

 Main theme: the whole is greater than the sum of its

individual parts

 From a systems viewpoint, the output and objectives of the

organization as a whole takes precedence over those of any
on subsystem

o Establishing priorities
 Recognition of priorities means devoting more attention to
what is most important

 Uses the Pareto phenomenon – a relatively few factors are

most important – dealing with those will have a
disproportionately large impact on the results achieved

 80/20 rule

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Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 3

o Ethics
 Operations managers, like all managers have the
responsibility to make ethical decisions on:
 Worker safety, product safety, quality, the
environment, the community, hiring and firing
workers, worker’s rights

Why study Operations Management (OM)?

 Operations management activities at the core of all business

organizations

 35% or more of all jobs are in OM related areas (customer service, quality
assurance, production planning and control, scheduling, job design,
inventory management, etc.

 Activities in all other areas of business organizations (finance, accounting,

marketing, human resource, etc.) are interrelated with OM

 POM is all about management – all managers need to possess the

knowledge and skill in the content areas in OM – learn and understand
the variety of decision making tools in the decision making process

 A course that will prepare students in developing business plans (BA 499
–Business Planning is the capstone course for ALL business majors)

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BA 380: Operations Management Lecture Notes Page 4

Three Basic Functions of Business Organizations

 Finance, Production/operations, Marketing

Marketing
Production/
Operations

Finance

The operations function involves the creation of inputs into outputs

Inputs Transformation/ Outputs

Land conversion Goods and
Labor Services
process
Capital
Information

Feedback

Feedback Feedback
Control

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BA 380: Operations Management Lecture Notes Page 5

Examples of Types of Operations

Type of Operation Examples

Goods producing Farming, mining,
construction, manufacturing,
power generation

Storage/transportation Warehousing, trucking, mail

service, moving, taxis,
buses, hotel, airlines

Exchange Retailing, wholesaling,

banking, renting or leasing,
library loans

Entertainment Films, radio and TV, plays,

concerts, recording

Communication Newspapers, radio and TV

newscast, telephone,
satellite

Illustrations of the Transformation Process

Food
Processing Inputs Processing Output

Raw vegetables Cleaning Canned

Metal sheets Making cans vegetables
Water Cutting
Energy Cooking
Labor Packing
Building Labeling
Equipment

Hospital Inputs Processing Output

Doctors, nurses Examination Healthy patients

Hospitals Surgery
Medical supplies Monitoring
Equipment Medication
Laboratories Therapy

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 BA 380: Operations Management Lecture Notes Page 6

Examples of inputs, transformation, and outputs

Inputs Transformation Output

Land Processes Goods

Human Cutting, drilling Houses
Physical Transporting Autos
Intellectual Teaching Clothing
Raw materials Farming Computers
Energy Mixing Machines
Water Packing TVs
Chemical Canning Food products
Metals Consulting Textbooks
Wood Copying, faxing Magazines
Equipment Shoes
Machines Electronic items
Computers
Trucks Services
Tools Health care
Facilities Entertainment
Hospitals Car repair
Factories Delivery
Offices Gift wrapping
Retail stores Legal
Other Banking
Information Communication
Time

Production Good versus Service Operations

Characteristics Goods Services

Output Tangible Intangible

Customer contact Low High
Uniformity of input High Low
Labor content Low High
Uniformity of output High Low
Measurement of productivity Easy Difficult
Opportunity to correct quality High Low
problems before delivery to
customer

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 7

Productivity, Competitiveness and Strategy

Productivity – an index that measures outputs (goods or services) relative to the

input

Output
Productivity 
Input

Some Examples of Different

Types of Productivity Measures

Output Output Output Output

Partial measures Capital Energy
Labor Machine

Output Output
Multifactor measures Labor  Capital  Energy
Labor  Machine

Goods or Service Produced

Total Measures All inputs used to produce them

Factors that Affect Productivity

 Methods
 Capital
 Quality
 Technology
 Management

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Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 8

Strategy
 Has a long term impact on the nature and characteristics of the
organization
 Affects the ability of an organization to compete, or in the case of a
nonprofit organization, the ability to serve its intended purpose
 The nature of an organization’s strategy depends on its mission

Mission
 The basis of the organization – the reason for its existence

Mission statement
 Answers the question, “What business are we in?”
 Serves to guide formulation of strategies for the organization as well as the
decision making at all levels
 Without it an organization is likely to achieve its true potential because
there is little direction for formulating strategies

Strategies and Tactics

 Strategies are plans for achieving goals
 Strategies provide focus

 Tactics are the methods and actions to accomplish strategies

 The “how to” part of the process

Strategy Formulation – the formulation of an effective strategy must take into

account:

1) distinctive competencies of the organization – this can be accomplished by

doing a SWOT (strengths, weaknesses, opportunities, and threats)
analysis

price, quality, time, flexibility, service, location

2) scan the environment – the considering of events and trends that present
either threat or opportunities

External factors:
economic condition, political condition, legal environment, technology,
competition, markets

Internal factors:
Human resources, facilities and equipment, financial resources, customers,
products and services, technology, suppliers

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 9

Forecasting

Why forecast?

Features Common to all Forecasts

 Conditions in the past will continue in the future

 Rarely perfect
 Forecasts for groups tend to be more accurate than forecasts for
individuals
 Forecast accuracy declines as time horizon increases

Elements of a Good Forecast

 Timely
 Accurate
 Reliable (should work consistently)
 Forecast expressed in meaningful units
 Communicated in writing
 Simple to understand and use

Steps in Forecasting Process

 Determine purpose of the forecast

 Establish a time horizon
 Select forecasting technique
 Gather and analyze the appropriate data
 Prepare the forecast
 Monitor the forecast

Types of Forecasts

 Qualitative
o Judgment and opinion
o Sales force
o Consumer surveys
o Delphi technique

 Quantitative
o Regression and Correlation (associative)
o Time series

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Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 10

Forecasts Based on Time Series Data

 What is Time Series?

 Components (behavior) of Time Series data
o Trend
o Cycle
o Seasonal
o Irregular
o Random variations

Naïve Methods

Naïve Forecast – uses a single previous value of a time series as the

basis of a forecast.

Ft  Yt 1

Techniques for Averaging

 What is the purpose of averaging?

 Common Averaging Techniques
o Moving Averages
o Exponential smoothing

Moving Average

A i
Ft  i 1
n

Exponential Smoothing

Ft  Ft 1   ( At 1  Ft 1 )

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BA 380: Operations Management Lecture Notes Page 11

Techniques for Trend

Linear Trend Equation

yt  a  bt

where :
t  specified number of time periods from t  0
y t  forecast for time period t
a  value of yt at t
b  slope of the line

Curvilinear Trend Equation

yt  a  bt  ct 2

where :
t  specified number of time periods from t  0
y t  forecast for time period t
a  value of yt at t
b  slope of the line

Techniques for Seasonality

 What is seasonality?

 What are seasonal relatives or indexes?

 How seasonal indexes are used:

o Deseasonalizing data
o Seasonalizing data

 How indexes are computed (see Example 7 on page 109)

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 12

Accuracy and Control of Forecasts

Measures of Accuracy
o Mean Absolute Deviation (MAD)
o Mean Squared Error (MSE)
o Mean Absolute Percentage Error (MAPE)

Forecast Control Measure

o Tracking Signal

Mean Absolute Deviation (MAD)

MAD 
 Actual  Forecast
n

Mean Squared Error (or Deviation) (MSE)

MSE   ( Actual  Forecast ) 2

n 1

Mean Square Percentage Error (MAPE)

 Actual  Forecast X 100

MAPE  Actual
n

Tracking Signal

Tracking Signal 
 ( Actual  Forecast )
MAD

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 13

Problems:

2 – Plot, Linear, MA, exponential Smoothing

5 – Applying a linear trend to forecast
15 – Computing seasonal relatives
17 – Using indexes to deseasonalize values
26 – Using MAD, MSE to measure forecast accuracy

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 14

Problem 2 (118)

National Mixer Inc., sells can openers. Monthly sales for a seven-month period were as follows:

Sales
Month (000 units)
Feb 19
March 18
April 15
May 20
June 18
July 22
August 20

(a) Plot the monthly data on a sheet of graph paper.

(b) Forecast September sales volume using each of the following:

(1) A linear trend equation
(2) A five-month moving average
(3) Exponential smoothing with a smoothing constant equal to 0.20, assuming March
forecast of 19(000)
(4) The Naïve Approach
(5) A weighted average using 0.60 for August, 0.30 for July, and 0.10 for June

(c) Which method seems least appropriate? Why?

(d) What does use of the term sales rather than demand presume?

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 15

EXCEL SOLUTION

Plot of the monthly data

Click INSERT tab, click LINE option

Right Click on the time series data on the graph

Select Add Trendline

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 16

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 17

(1) Five-month moving average

(2) Exponential Smoothing with a smoothing constant of 0.20, assuming March forecast
of 19(000)

 Enter the smoothing factor in D1

 Enter “19” in D5 as forecast for March
 Create the exponential smoothing formula in D6, then copy it onto D7 to D11

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 18

(3) The Naïve Approach

(4) A weighted average using 0.60 for August, 0.30 for July, and 0.10 for June

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Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 19

Problem 5 (118)

A cosmetics manufacturer’s marketing department has developed a linear trend equation that can
be used to predict annual sales of its popular Hand & Foot Cream.

Ft =80 + 15 t

where: Ft = Annual sales (000 bottles) t0 = 1990

(a) Are the annual sales increasing or decreasing? By how much?

(b) Predict annual sales for the year 2010 using the equation

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Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 20

Problem 15 (120)

Obtain estimates of daily relatives for the number of customers at a restaurant for the evening
meal, given the following data. (Hint: Use a seven-day moving average)

Day Number Day Number

Served Served
1 80 15 84
2 75 16 77
3 78 17 83
4 95 18 96
5 130 19 135
6 136 20 140
7 40 21 37
8 82 22 87
9 77 23 82
10 80 24 98
11 94 25 103
12 125 26 144
13 135 27 144
14 42 28 48

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Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 21

Excel Solution

 Type a 7-day average formula in E6 ( =average(C3:c9) )

 In F6, type the formula =C6/E6
 Copy the formulas in E6 and F6 onto cells E7 to E27
 Compute the average ratio for Day 1 (see formula in E12)
 Copy and paste the formula in E12 onto E13 to E18 to complete the indexes for Days 2
to 7

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BA 380: Operations Management Lecture Notes Page 22

Problem 17 (121) – Using indexes to deseasonalize values

New car sales for a dealer in Cook County, Illinois, for the past year are shown in the following
table, along with monthly (seasonal) relatives, which are supplied to the dealer by the regional
distributor.

Units Units
Month Sold Index Month Sold Index
Jan 640 0.80 Jul 765 0.90
Feb 648 0.80 Aug 805 1.15
Mar 630 0.70 Sept 840 1.20
April 761 0.94 Oct 828 1.20
May 735 0.89 Nov 840 1.25
Jun 850 1.00 Dec 800 1.25

(a) Plot the data. Does there seem to be a trend?

(b) Deseasonalize car sales

(c) Plot the deseasonalized data on the same graph as the original data. Comment on the
two graphs.

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BA 380: Operations Management Lecture Notes Page 23

Excel Solution

(a) Plot of original data (seasonalized car sales)

(b) Deseasonalized Car Sales

Create formula in F6 (see

circled formula), then copy
onto F7 to F17

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BA 380: Operations Management Lecture Notes Page 24

(c) Graph of seasonalized car sales versus deseasonalized car sales

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BA 380: Operations Management Lecture Notes Page 25

Problem 22 (123) – Using MAD, MSE, and MAPE to measure forecast accuracy

Two different forecasting techniques (F1 and F2) were used to forecast demand for cases of
bottled water. Actual demand and the two sets of forecasts are as follows:

Predicted Demand
Period Demand F1 F2
1 68 66 66
2 75 68 68
3 70 72 70
4 74 71 72
5 69 72 74
6 72 70 76
7 80 71 78
8 78 74 80

(a) Compute MAD for each set of forecasts. Given your results, which forecast appears to
be the most accurate? Explain.

(b) Compute MSE for each set of forecasts. Given your results, which forecast appears to
be the most accurate? Explain.

(c) In practice, either MAD or MSE would be employed to compute forecast errors. What
factors might lead you to choose one rather than the other?

(d) Compute MAPE for each data set. Which forecast appears to be more accurate?

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BA 380: Operations Management Lecture Notes Page 26

Excel Solution =ABS(c8-d8) =(c8-d8)^2 =ABS(c8-d8)/c8

=AVERAGE(M8:M15)
=SUM(J8:J15)/(COUNT(J8:J15)-1)
=AVERAGE(G8:G15)

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BA 380: Operations Management Lecture Notes Page 27

Reliability

What is reliability?

 Measures the ability of a product, part, or system to perform its intended

function under a prescribed set of conditions

 Failure – situation in which the item does not perform as intended

 Reliabilities always specified with respect to certain conditions a.k.a.

normal operating conditions e.g. temp, humidity, maintenance

How can reliability be improved? By improving the following:

 Design
 Production techniques
 Testing
 Using backups
 Preventive maintenance procedures
 Education
 System design

Quantifying Reliability: Using Probability as a Measure

(1) The probability that a product or system will function when activated –
a point in time

(2) The probability that the product or system will function for a given
length of time -- product life used for warranty determination

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Product Reliability at a Point in Time

 Considers the reliability of the components/parts of a product or

system

Product Reliability over time

 Focuses on the length of service of the product (mean time

between failures)

 Failure rate is a function of time and can follow an exponential

distribution (see page 159)

 Or, can follow the Normal Distribution

Reliability over Time -- Exponential Distribution

f(T)
Reliability = e-T/MTBF

1 – e-T/MTBF

0 2 4 6 8 10 12 14 16

Time

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Values of e-T/MTBF

           
-T/MTBF -T/MTBF -T/MTBF
T/MTBF e T/MTBF e T/MTBF e
0.10 0.9048 2.60 0.0743 5.10 0.0061
0.20 0.8187 2.70 0.0672 5.20 0.0055
0.30 0.7408 2.80 0.0608 5.30 0.0050
0.40 0.6703 2.90 0.0550 5.40 0.0045
0.50 0.6065 3.00 0.0498 5.50 0.0041
0.60 0.5488 3.10 0.0450 5.60 0.0037
0.70 0.4966 3.20 0.0408 5.70 0.0033
0.80 0.4493 3.30 0.0369 5.80 0.0030
0.90 0.4066 3.40 0.0334 5.90 0.0027
1.00 0.3679 3.50 0.0302 6.00 0.0025
1.10 0.3329 3.60 0.0273 6.10 0.0022
1.20 0.3012 3.70 0.0247 6.20 0.0020
1.30 0.2725 3.80 0.0224 6.30 0.0018
1.40 0.2466 3.90 0.0202 6.40 0.0017
1.50 0.2231 4.00 0.0183 6.50 0.0015
1.60 0.2019 4.10 0.0166 6.60 0.0014
1.70 0.1827 4.20 0.0150 6.70 0.0012
1.80 0.1653 4.30 0.0136 6.80 0.0011
1.90 0.1496 4.40 0.0123 6.90 0.0010
2.00 0.1353 4.50 0.0111 7.00 0.0009
2.10 0.1225 4.60 0.0101 7.10 0.0008
2.20 0.1108 4.70 0.0091 7.20 0.0007
2.30 0.1003 4.80 0.0082 7.30 0.0007
2.40 0.0907 4.90 0.0074 7.40 0.0006
2.50 0.0821 5.00 0.0067 7.50 0.0006

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Reliability over Time -- Normal Distribution

T  MeanWearou tTime
z
S tan dardDeviationofWearo utTime

Reliability = P(Z > z)

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STANDARD NORMAL DISTRIBUTION

z 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
0.0 0.0000 0.0040 0.0080 0.0120 0.0160 0.0199 0.0239 0.0279 0.0319 0.0359
0.1 0.0398 0.0438 0.0478 0.0517 0.0557 0.0596 0.0636 0.0675 0.0714 0.0753
0.2 0.0793 0.0832 0.0871 0.0910 0.0948 0.0987 0.1026 0.1064 0.1103 0.1141
0.3 0.1179 0.1217 0.1255 0.1293 0.1331 0.1368 0.1406 0.1443 0.1480 0.1517
0.4 0.1554 0.1591 0.1628 0.1664 0.1700 0.1736 0.1772 0.1808 0.1844 0.1879
0.5 0.1915 0.1950 0.1985 0.2019 0.2054 0.2088 0.2123 0.2157 0.2190 0.2224
0.6 0.2257 0.2291 0.2324 0.2357 0.2389 0.2422 0.2454 0.2486 0.2517 0.2549
0.7 0.2580 0.2611 0.2642 0.2673 0.2704 0.2734 0.2764 0.2794 0.2823 0.2852
0.8 0.2881 0.2910 0.2939 0.2967 0.2995 0.3023 0.3051 0.3078 0.3106 0.3133
0.9 0.3159 0.3186 0.3212 0.3238 0.3264 0.3289 0.3315 0.3340 0.3365 0.3389
1.0 0.3413 0.3438 0.3461 0.3485 0.3508 0.3531 0.3554 0.3577 0.3599 0.3621
1.1 0.3643 0.3665 0.3686 0.3708 0.3729 0.3749 0.3770 0.3790 0.3810 0.3830
1.2 0.3849 0.3869 0.3888 0.3907 0.3925 0.3944 0.3962 0.3980 0.3997 0.4015
1.3 0.4032 0.4049 0.4066 0.4082 0.4099 0.4115 0.4131 0.4147 0.4162 0.4177
1.4 0.4192 0.4207 0.4222 0.4236 0.4251 0.4265 0.4279 0.4292 0.4306 0.4319
1.5 0.4332 0.4345 0.4357 0.4370 0.4382 0.4394 0.4406 0.4418 0.4429 0.4441
1.6 0.4452 0.4463 0.4474 0.4484 0.4495 0.4505 0.4515 0.4525 0.4535 0.4545
1.7 0.4554 0.4564 0.4573 0.4582 0.4591 0.4599 0.4608 0.4616 0.4625 0.4633
1.8 0.4641 0.4649 0.4656 0.4664 0.4671 0.4678 0.4686 0.4693 0.4699 0.4706
1.9 0.4713 0.4719 0.4726 0.4732 0.4738 0.4744 0.4750 0.4756 0.4761 0.4767
2.0 0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0.4812 0.4817
2.1 0.4821 0.4826 0.4830 0.4834 0.4838 0.4842 0.4846 0.4850 0.4854 0.4857
2.2 0.4861 0.4864 0.4868 0.4871 0.4875 0.4878 0.4881 0.4884 0.4887 0.4890
2.3 0.4893 0.4896 0.4898 0.4901 0.4904 0.4906 0.4909 0.4911 0.4913 0.4916
2.4 0.4918 0.4920 0.4922 0.4925 0.4927 0.4929 0.4931 0.4932 0.4934 0.4936
2.5 0.4938 0.4940 0.4941 0.4943 0.4945 0.4946 0.4948 0.4949 0.4951 0.4952
2.6 0.4953 0.4955 0.4956 0.4957 0.4959 0.4960 0.4961 0.4962 0.4963 0.4964
2.7 0.4965 0.4966 0.4967 0.4968 0.4969 0.4970 0.4971 0.4972 0.4973 0.4974
2.8 0.4974 0.4975 0.4976 0.4977 0.4977 0.4978 0.4979 0.4979 0.4980 0.4981
2.9 0.4981 0.4982 0.4982 0.4983 0.4984 0.4984 0.4985 0.4985 0.4986 0.4986
3.0 0.4987 0.4987 0.4987 0.4988 0.4988 0.4989 0.4989 0.4989 0.4990 0.4990

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 32

Availability

 Measures the fraction of time a piece of equipment is expected to

be operational
 Availability ranges between 0 and 1
MTBF
Ava i l ab i li t y 
MT BF  MTR

wh ere : MT B F - mean ti me
MT R - mean t ime to

Problems:

1– system reliability
2 – system reliability
4 – reliability and cost
7 – comparing reliabilities of 2 systems
12 – product life – exponential distribution
17 – product life – normal distribution
18 – product life – normal distribution

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BA 380: Operations Management Lecture Notes Page 33

Problem 1 (p180)

Consider the following system:

.90 .90

Determine the probability that the system will operate under each of these conditions:

(a) The system as shown

(b) Each component has a backup with a probability of 0.90 and a switch that is 100 percent
reliable.

(c) Backups with 0.90 reliability and a switch that is 99 percent reliable

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BA 380: Operations Management Lecture Notes Page 34

Problem 2 (180)

A product is composed of four parts. In order for the product to function properly in a given
situation, each of the parts must function. Two of the parts each have a 0.96 probability of
functioning, and two each have a probability of 0.99. What is the overall probability that the
product will function properly?

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BA 380: Operations Management Lecture Notes Page 35

Problem 4 (p180)

A product engineer has developed the following equation for the cost of a system component:
C=(10P)2, where C is the cost in dollars and P is the probability that the component will operate
as expected. The system is composed of two identical components, both of which must operate
for the system to operate. The engineer can spend $173 for the two components. To the nearest
two decimal places, what is the largest component reliability that can be purchased?

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BA 380: Operations Management Lecture Notes Page 36

Problem 7 (180)

A production line has three machines A, B, and C, with reliabilities of .99, .96, and .93,
respectively. The machines are arranged so that if one breaks down, the others must shut down.
Engineers are weighing two alternative designs for increasing the line's reliability. Plan 1 involves
adding an identical backup line, and Plan 2 involves providing backup for each machine. In either
case, three machines (A B, and C) would be used with reliabilities equal to the original three.

(a) Which plan will provide the higher reliability?

(b) Explain why the two alternatives are not the same.

(c) hat other factors might enter into the decision of which plan to adopt?

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 37

Problem 12 (181)

An electronic chess game has a useful life that is exponentially distributed with a mean of 30
months. Determine each of the following:

(a) The probability that any given unit will operate for at least:
(1) 39 months
(2) 48 months
(3) 60 months

(b) The probability that any given unit will fail sooner than:
(1) 33 months
(2) 15 months
(3) 6 months

(c) The length of service time after which the percentage of failed units will approximately equal:
(1) 50 percent
(2) 85 percent
(3) 95 percent
(4) 99 percent

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 38

Problem 17 (181)

A television manufacturer has determined that its 19-inch color TV picture tubes have a mean
service life that can be modeled by a Normal distribution with a mean of six years and a standard
deviation of one-half year.

(a) What probability can you assign to service lives of at least

(1) Five years?
(2) Six years?
(3) Seven and one-half years?

(b) If the manufacturer offers service contracts of four years on these picture tubes, what
percentage can be expected to fail from wear-out during the service period?

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Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 39

Problem 18 (182)
Refer to problem 17 above. What service period would achieve an expected wear-out rate of:

(a) 2 percent?

(b) 5 percent?

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Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 40

STRATEGIC CAPACITY PLANNING FOR PRODUCTS AND SERVICES

Cost Volume Analysis (CVA)

What is it?

 Focus: relationships between COST, REVENUE, and VOLUME of output

 Purpose: to estimate income of an organization under different operating
conditions
 Usefulness: as a tool for comparing capacity alternatives

What does CVA require?

 CVA requires the identification of two kinds of costs - Fixed and Variable
 Fixed cost – cost that does not change when output level is changed
(within a relevant range)
 Variable cost – cost that changes when the output level changes
 Mixed – cost items that contain both fixed and variable

Breakeven Analysis

What is it?

 A tool used to determine profit level (or for determining breakeven point)
for certain output level

 Important Equations

TR = R x Q

TC = FC + vcQ
Where:
P = TR – TC TR – total revenue
TC – total cost
vc – variable cost per unit
P = R x Q - (FC + vcQ) Q – units produced and sold
P – total profit
P = Q (R – VC) – FC R – revenue per unit
FC – total fixed cost
Q = (P + FC)/(R – VC)

QBEP = FC/(R – VC)

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 41

Problem 3 (p 211)

A producer of pottery is considering the addition of a new plant to absorb the backlog of demand
that now exists. The primary location being considered will have fixed costs of $9,200 per month
and variable costs of $0.70 per unit produced. Each item is sold to retailers at a price that
averages $0.90.

a. What volume per month is required in order to breakeven?

b. What profit would be realized on a monthly volume of 61,000 units? 87,000 units?

c. What volume is needed to provide a profit of $16,000 per month?

d. What volume is needed to provide a revenue of $23,000 per month?

e. Plot the total cost and total revenue lines.

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 42

Problem 4 (p 211)

A small firm intends to increase the capacity of a bottleneck operation by adding a new
machine. Two alternatives, A and B, have been identified, and the associated costs and
revenues have been estimated. Annual fixed costs would be $40,000 for A and $30,000 for
B; variable costs per unit would be $10 for A and $12 for B; and revenue per unit would be
$15 for A and $16 for B. (Note: this is somewhat different from the problem found in the
textbook).

a. Determine each alternative’s break-even point in units

b. At what volume of output would the two alternatives yield the same profits?

c. If the expected annual demand is 12,000 units, which alternative would yield the
higher profits?

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

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BA 380: Operations Management Lecture Notes Page 43

Excel Solution

$60,000

$50,000

$40,000

Total Cost Line

$30,000
Total Revenue Line

$20,000

$10,000

$-
0 10000 20000 30000 40000 50000 60000 70000

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 44

Problem 8 (p 211)

A manager is trying to purchase a certain part or to have it produced internally. Internal

production could use either of two processes. One would entail a variable cost of $17 per unit
and an annual fixed cost of $200,000; the other would entail a variable cost of $14 per unit and an
annual fixed cost of $240,000.

Three vendors are willing to provide the part. Vendor A has a price of $20 per unit for any volume
up to 30,000 units. Vendor B has a price of $22 per unit for demand 1,000 units or less, and $18
per unit for larger quantities. Vendor C offers a price of $20 per unit for the first 1,000 units and
$19 for additional units.

(d) If the manager anticipates an annual volume of 10,000 units, which alternative would be best
from a cost standpoint? For 20,000 units, which alternative would be best?

(e) Determine the range of quantity for which each alternative is best. Are there any alternatives
that are never best? Which?

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 45

Excel Solution

Errata: “B1” in the formulas above should be “B2”

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 46

Decision Theory

The Decision Process

 Specify objectives and criteria for making decisions

 Develop alternatives
 Analyze and compare alternatives
 Select the best alternative
 Implement the chosen alternative
 Monitor the results to ensure that desired results are achieved

Causes of Poor Decisions

 Mistakes in the decision process

 Bounded rationality
 Suboptimization

Decision Environments

 Certainty
 Risk
 Uncertainty

Decision Theory – represents a general approach to decision making and

suitable for a wide range of operations management decision (e.g. capacity
planning, product and service design, equipment selection, and location
planning)

Decision Theory is suitable for decisions characterized by:

1) a set of future conditions exists that will have a bearing on the result of the
decision
2) a list of alternatives for the managers to choose from
3) a known payoff for each alternative under each possible future condition

To use this approach (Decision Theory), the manager must:

1) identify the future conditions

2) develop a list of possible alternatives
3) determine/estimate the payoff associated with each alternative
4) if possible, estimate the likelihood of each possible future condition
5) evaluate alternatives according to some decision criterion

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Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 47

Evaluation of Alternatives Depends on the Degree of Certainty Associated with

the Future Condition

1) Decision Making Under Certainty (known future conditions)

2) Decision Making Under Uncertainty (no info on how likely future conditions
will be)
a. Maximin
b. Maximax
c. Laplace
d. Minimax Regret

3) Decision Making Under Risk (the likelihood of each future outcome is

known)
a. Expected Monetary Value criterion (EMV)
b. Expected Value of Perfect Information (EVPI)

Decision Trees

Sensitivity Analysis

Problems:
1 – DM under uncertainty
2 – DM under risk, EVPI, decision tree
3 – Sensitivity analysis
4 – DM under risk, EVPI, and decision tree

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 48

Problem 1 (229)

A small building contractor has recently experienced two successive years in which work
opportunities exceeded the firm’s capacity. The contractor must now make a decision on
capacity for next year. Estimated profits under each of the two possible states of nature
are as shown in the table below. Which alternative should be selected if the decision
criterion is:

(a) Maximax?
(b) Maximin?
(c) Laplace?
(d) Minimax Regret?

Next Year’s Demand

Alternative Low High
Do Nothing $50 $60
Expand 20 80
Subcontract 40 70
(Profit in $thousands)

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Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 49

Problem 2 (229)

Refer to Problem 1. Suppose after a certain amount of discussion, the contractor is able
to subjectively assess the probabilities of low and high demand:
P(low) = .3 and P(high) = .7

(a) Determine the expected profit of each alternative. Which alternative is best? Why?

(b) Analyze the problem using a decision tree. Show the expected profit of each
alternative on the tree.

(c) Compute the expected value of perfect information. How could the contractor use this
knowledge?

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 50

Problem 3 (229)

Refer to Problems 1 and 2. Construct a graph that will enable you to perform sensitivity
analysis on the problem. Over what range of P(high) would the alternative of doing
nothing be best? Expand? Subcontract?

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Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 51

Problem 4 (229)

A firm that plans to expand its product line must decide whether to build a small or large
facility to produce the new products. If it builds a small facility and demand is low, the net
present value after deducting for building costs will be $400,000. If demand is high, the
firm can either maintain the small facility or expand it. Expansion would have a net present
value of $450,000, and maintaining the small facility would have a net present value of
$50,000. If the large facility is built and demand is high, the estimated net present value is
$800,000. If demand turns out to be low, the net present value will be -$10,000.

The probability that demand will be high is estimated to be 0.60, and the probability of low
demand is estimated to be 0.40

(a) Analyze using a tree diagram

(b) Compute the EVPI. How could this information be used?

(c) Determine over which each alternative would be best in terms of the value of (demand
low)

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 52

Learning Curves

What is it?

 An integral part in corporate strategy, such as decisions concerning

pricing, capital investment, and operating costs based on experience
curves

 Individual learning – the improvement that results when people repeat a

process and gain skill or efficiency from the experience

 Usefulness: as a tool for estimating operating costs (particularly the labor

component)
 Manpower planning and scheduling
 Negotiated purchasing
 Pricing new products
 Budgeting, purchasing, and inventory planning
 Capacity planning

 A graph displaying the relationship between unit production time and the
cumulative number of units produced (or repetition)

Learning Curve
1.2

1
99%

0.8
Time Per Unit

0.6

90%
0.4

0.2 80%

70%
0
1
9
17
25
33

41
49
57
65
73
81
89
97
105

121
129
137
145
113

Number of Repetitions

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BA 380: Operations Management Lecture Notes Page 53

Learning Curve Theory Assumptions:

(1) The amount of time required to complete a given task or unit of a product
will be less each time the task is undertaken

(2) The unit time will decrease at a decreasing rate

(3) The reduction in time will follow a predictable pattern – that is, every
doubling of repetitions results in a constant percentage decrease in time
per repetition

Important: Learning curves are referred to in terms of the complements of their

improvement rates. A 100% curve would mean NO improvement at all

Relevant Equations:

(a) For computing the unit time requirement for the nth unit

Tn  T1  n b

where : Tn  time for the nth unit

T1  time for the first unit
n  nth unit
b  ln learning ratio/ ln 2

(b) For computing the cumulative time requirement for n units

Use the Multipliers on Table below

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BA 380: Operations Management Lecture Notes Page 54

LEARNING CURVE
COEFFICIENTS

70% 75% 80% 85% 90%

Unit Unit Total Unit Total Unit Total Unit Total Unit Total
Number Time Time Time Time Time Time Time Time Time Time
1 1.000 1 1 1 1 1 1 1 1 1
2 0.700 1.700 0.750 1.750 0.800 1.800 0.850 1.850 0.900 1.900
3 0.568 2.268 0.634 2.384 0.702 2.502 0.773 2.623 0.846 2.746
4 0.490 2.758 0.563 2.946 0.640 3.142 0.723 3.345 0.810 3.556
5 0.437 3.195 0.513 3.459 0.596 3.738 0.686 4.031 0.783 4.339
6 0.398 3.593 0.475 3.934 0.562 4.299 0.657 4.688 0.762 5.101
7 0.367 3.960 0.446 4.380 0.534 4.834 0.634 5.322 0.744 5.845
8 0.343 4.303 0.422 4.802 0.512 5.346 0.614 5.936 0.729 6.574
9 0.323 4.626 0.402 5.204 0.493 5.839 0.597 6.533 0.716 7.290
10 0.306 4.932 0.385 5.589 0.477 6.315 0.583 7.116 0.705 7.994
11 0.291 5.223 0.370 5.958 0.462 6.777 0.570 7.686 0.695 8.689
12 0.278 5.501 0.357 6.315 0.449 7.227 0.558 8.244 0.685 9.374
13 0.267 5.769 0.345 6.660 0.438 7.665 0.548 8.792 0.677 10.052
14 0.257 6.026 0.334 6.994 0.428 8.092 0.539 9.331 0.670 10.721
15 0.248 6.274 0.325 7.319 0.418 8.511 0.530 9.861 0.663 11.384
16 0.240 6.514 0.316 7.635 0.410 8.920 0.522 10.383 0.656 12.040
17 0.233 6.747 0.309 7.944 0.402 9.322 0.515 10.898 0.650 12.690
18 0.226 6.973 0.301 8.245 0.394 9.716 0.508 11.405 0.644 13.334
19 0.220 7.192 0.295 8.540 0.388 10.104 0.501 11.907 0.639 13.974
20 0.214 7.407 0.288 8.828 0.381 10.485 0.495 12.402 0.634 14.608
21 0.209 7.615 0.283 9.111 0.375 10.860 0.490 12.892 0.630 15.237
22 0.204 7.819 0.277 9.388 0.370 11.230 0.484 13.376 0.625 15.862
23 0.199 8.018 0.272 9.660 0.364 11.594 0.479 13.856 0.621 16.483
24 0.195 8.213 0.267 9.928 0.359 11.954 0.475 14.331 0.617 17.100
25 0.191 8.404 0.263 10.191 0.355 12.309 0.470 14.801 0.613 17.713
26 0.187 8.591 0.259 10.449 0.350 12.659 0.466 15.267 0.609 18.323
27 0.183 8.774 0.255 10.704 0.346 13.005 0.462 15.728 0.606 18.929
28 0.180 8.954 0.251 10.955 0.342 13.347 0.458 16.186 0.603 19.531
29 0.177 9.131 0.247 11.202 0.338 13.685 0.454 16.640 0.599 20.131
30 0.174 9.305 0.244 11.446 0.335 14.020 0.450 17.091 0.596 20.727

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Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 55

Problem 1 (365)

An aircraft company has an order to refurbish the interiors of 18 jet aircraft. The work has
a learning curve percentage of 80. On the basis of experience with similar jobs, the
industrial engineering department estimates that the first plane will require about 300
hours to refurbish. Estimate the amount of time needed to complete:

(a) The fifth plane

(b) The first five planes

(c) All 18 planes

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Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 56

Problem 3 (365)

A small contractor intends to bid on a job installing 30 in-ground swimming pools.

Because this will be a new line of work for the contractor, he believes there will be a
learning effect for the job. After reviewing time records from a similar type of activity, the
contractor is convinced that an 85 percent curve is appropriate. He estimates that the first
pool will take his crew 8 days to install. How many days should the contractor budget for?

(a) The first 10 pools?

(b) The second 10 pools?

(c) The final 10 pools?

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BA 380: Operations Management Lecture Notes Page 57

Problem 5 (366)

A manager wants to determine an appropriate learning percentage for a certain activity.

Toward that end, times have been recorded for completion of each of the first six
repetitions. They are:

Time
Repetition (minutes)
1 46
2 39
3 35
4 33
5 32
6 30

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BA 380: Operations Management Lecture Notes Page 58

Introduction to Quality

What is QUALITY?

Broadly defined -- quality refers to the ability of a product or service to

consistently meet or exceed customer expectation

The Dimensions of Quality

1) Performance - refers to the main characteristics of the product or

service (use)
2) Special features - refers to the extra characteristics
3) Conformance - refers to how well a product or service corresponds to
a customer's expectations
4) Reliability - consistency of performance without breakdown
5) Durability - refers to the useful life of the product or service
6) Service after sale - handling of complaints, or checking on customer
satisfaction
7) Aesthetics - pleasing to look at
8) Safety - safe when use as directed

The determinants of quality (degree to which a product or service successfully

satisfies its intended purpose) are:

1) Design - the starting point for the level of quality eventually achieved
2) How well it conforms to design - the degree to which goods and
services conform to the intent of the designer
3) Ease of use - instruction on how to use the product must be easy to
understand, injuries caused to consumer can end up in litigation
4) Service after delivery - technical support/contact from the service
provider

Some of the consequences of poor quality

 Loss of business
 Liability
 Productivity
 Costs
1. Internal failure costs - failures discovered during
production
2. External failure costs - failures discovered after
delivery to customer
3. Appraisal costs - cost of activities designed to
ensure quality or to uncover defects
4. Prevention costs - cost of preventing defects from
occurring

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BA 380: Operations Management Lecture Notes Page 59

Difference between modern quality management and the formerly traditional

approach

Quality Control by prevention vs. Quality Control by detection

Quality Gurus:

1. Deming - a statistics professor at NYU in the 40s, and is credited for

Japan's focus in quality and productivity

 Known for his 14-point prescription for achieving quality in an

organization (see page 426 for list)

 Four key elements in Deming's 14 points

i. appreciation for system
ii. a theory of variation
iii. a theory of knowledge
iv. psychology

2. Juran - like Deming also taught Japanese manufacturers how to improve

quality
 Views quality as fitness-for-use

 Believes that 80% of quality defects are management controllable

 Describes Quality management as trilogy consisting of (1) quality

planning, (2) quality control (3) quality improvement

1. Quality planning is necessary to establish

processes that are capable of meeting quality
standards
2. Quality control is necessary to know when
corrective action is needed
3. Quality improvement will help find better ways
of doing things

 Key element of Juran's philosophy is the commitment of management

to continual improvement

3. Crosby - developed the concept of zero defects and popularized the phrase
"do it right the first time"
 Like Deming and Juran, he believes management's role in achieving
quality
 Believes in the concept "quality is free"

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BA 380: Operations Management Lecture Notes Page 60

4. Ishikawa - Key contributions include the development of the cause-and-effect

diagram (a.k.a the fishbone diagram)

5. Taguchi - best known for the Taguchi loss function - a formula for determining
the cost of poor quality
 The idea is that deviation of a part from a standard causes a loss
 His method is credited with helping Ford Motor Company to reduce its
warranty losses

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BA 380: Operations Management Lecture Notes Page 61

Quality Control

Purpose of QC

 To assure that the process is performing in an acceptable manner

 Done through monitoring the process via inspection

Quality Assurance Relies on inspection

 Inspection after production (acceptance sampling)

 Inspection during production (statistical process control, or SPC)

Basic Issues in Inspection:

1) How much and how often to inspect
2) At what points in the process to inspect
3) Whether to inspect in a centralized or on-site location
4) Whether to inspect attributes (counting something) or variables
(measure something)

Where to inspect:

 Raw materials and purchased parts

 Finished products
 Before a costly operation
 Before an irreversible process
 Before covering a process

Key Concepts:

 Variation is the enemy of quality

 Every process exhibits some form of variation
 The degree of this variation is a measure of the capability of the process
 Process variation can be classified as:
o common cause variation - inherent in system
o special cause variation - presence is detected using SPC

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Control Charts

 Key tool for monitoring and controlling processes. A control chart is a time-
ordered plot of sample statistics

 Purpose: used for detecting presence of special cause variation.

 Components of a Control Chart

(1) Upper Control Limit
(2) Middle Value
(3) Lower Control Limit

Possible Errors in SPC

 Type I error
 Type II error

Managerial Considerations Concerning Control Charts

1. At what points in the process to use control charts
2. What size samples to take
3. What type of control chart

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Four Common Types of Charts

A. Control charts for Variables

(1) Mean chart (a.k.a x-bar chart) - used to monitor the average of the
process

UCL  x  z ( / n)
LCL  x  z ( / n)

UCL  x  A2 R
LCL  x  A2 R

where :
x  grand mean
z  confidence level
  population standard deviation
n  sample size
R  average range
A2  value from table given a sample size

(2) Range chart (a.k.a. R-chart) - used to monitor the variability of the
process

UCL  D4 R
LCL  D3 R

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B. Control charts for Attributes

(1) p-chart (proportion chart) - used to monitor the proportion of defectives

p (1  p)
UCL  p  z
n
p (1  p )
LCL  p  z
n

where :
p  average proportion
z  confidence level

(2) c-chart (used when the goal is to control the number of defects per
unit

UCL  c  z c
LCL  c  z c

where :
c  average number of defects
z  confidence level

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Charts Illustrating a Process Not in Control

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Table for A2, D3 and D4

       
Factor for R
Chart
Number of Factor
Observation for x- Lower Upper
s in bar Control Control
Subgroup Chart Limit Limit
n A2 D3 D4

2 1.88 0.00 3.27

3 1.02 0.00 2.57
4 0.73 0.00 2.28
5 0.58 0.00 2.11
6 0.48 0.00 2.00
7 0.42 0.08 1.92
8 0.37 0.14 1.86
9 0.34 0.18 1.82
10 0.31 0.22 1.78
11 0.29 0.26 1.74
12 0.27 0.28 1.72
13 0.25 0.31 1.69
14 0.24 0.33 1.67
15 0.22 0.35 1.65
16 0.21 0.36 1.64
17 0.20 0.38 1.62
18 0.19 0.39 1.61
19 0.19 0.40 1.60
20 0.18 0.41 1.59
       

Problems
4 – Control charts for Variables – Mean and Range charts
6 – Control chart for Attributes – p-chart
7 – Control chart for Attributes – c-chart
8 – How many to produce given a certain production survival rate

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Problem 10.4 (p. 492)

Computer upgrades have a nominal time of 80 minutes. Samples of 5 observations each have
been taken, and the results are listed below. Determine the upper and lower control limits for
mean and range charts, and decide if the process is in control.

SAMPLE
1 2 3 4 5 6
79.2 80.5 79.8 78.9 80.5 79.7
78.8 78.7 79.4 79.4 79.6 80.6
80.0 81.0 80.4 79.7 80.4 80.5
78.4 80.4 80.3 79.4 80.8 80.0
81.0 80.1 80.8 80.6 78.8 81.1

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Excel Solution

UCL  x  A2 R UCL  D4 R
LCL  x  A2 R LCL  D3 R

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Problem 10.6 (493)

A medical facility does MRIs for sports injuries. Occasionally a test yields inconclusive results and
must be repeated. Using the following sample data and n=200, determine the upper and lower
control limits for the fraction of retests using two-sigma limits.

Is the process in control? If not eliminate any values that are outside the limits and compute the
revised limits.

SAMPLE
1 2 3 4 5 6 7 8 9 10 11 12 13
Number of
defectives 1 2 2 0 2 1 2 0 2 7 3 2 1

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Excel Solution

p (1  p)
UCL  p  z
n
p (1  p )
LCL  p  z
n

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PROBLEM NO. 10 – 7 (493)

The postmaster of a small western city receives a certain number of complaints each day
about mail delivery. Assume that the distribution of daily complaints is Poisson. Construct
a control chart with three sigma limits using the following data. Is the process in control?

SAMPLE
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Number of
complaints 4 10 14 8 9 6 5 12 13 7 6 4 2 10

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Excel Solution

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Problem 18 (495)

A production process consists of a three-step operation. The scrap rate is 10 percent for the first
step and 6 percent for the other two steps.

(a) If the desired daily output is 450 units, how many units must be started to allow for loss
due to scrap?

(b) If the scrap rate for each step would be cut in half, how many units would this save in
terms of the scrap allowance?

(c ) If the scrap represents a cost of $10 per unit, how much is it costing the company per day
for the original scrap rate?

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INVENTORY MANAGEMENT

Importance of Inventory Management -- Good inventory management is essential to the

successful operation for most organizations because of:

1. The amount of money invested in inventory represents, and

2. The impact that inventories have on daily operations of an organization

Definitions:

Inventory – a stock or store of goods

Independent vs. Dependent demand items

Independent demand items are the finished goods or other end items that are sold to someone

Dependent demand items are typically subassemblies or component parts that will be used in the
production of a final or finished product

Our focus: inventory management of finished goods, raw materials, purchased parts, and retail
items

Functions of Inventories

1. To meet anticipated demand

2. To smooth production requirements
3. To decouple components of the production
4. To protect against stockouts
5. To take advantage of order cycles
6. To hedge against price increases, or to take advantage of quantity discounts
7. To permit operations (work in process)

Objectives of Inventory Control

1. Maximize level of customer service

2. Minimize costs (carrying costs and ordering costs)

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Requirements for Effective Inventory Management

(1) A system to keep track of the inventory

 periodic,
 perpetual,
 two-bin, and
 universal product code (UPC)

(2) A reliable forecast of demand

(3) Knowledge of lead times and lead time variability

-lead time  time between submitting a purchase order and receiving it
-lead time variability  reliability of the supplier

(4) Estimates of inventory holding costs, ordering costs, and shortage costs
Holding cost
Ordering cost
Stockout cost

(5) A classification system for inventory items

ABC approach – classifies inventory
according to some measure of importance
($ value) where A – very important,
C – least important

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Formula for EOQ with Non-instantaneous Replenishment

2 DS p
Qo 
H p u

where: D – annual demand

S – setup cost
H – Holding (carrying cost) per unit
p – production or delivery rate
d – usage rate

C. Quantity Discounts Model

1. Compute the common EOQ

2. Only one of the unit prices will have the EOQ in its feasible range. Identify
the range that:

 If the feasible EOQ is on the lowest price range, that is the optimal
order quantity

 If the feasible EOQ is in any other range, compute the total cost for
the EOQ and for the price breaks of all lower unit costs. Compare
the total costs – EOQ is the one that yields the lowest total cost.

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When to Order (reorder points - ROPs) Models

Objective: minimize the risk (probability) of stockouts

4 Determinants of the ROP

1. rate of demand
2. lead time
3. extent of demand and/or lead time variability
4. degree of stockout risk acceptable to management

Basic Formula for Computing ROP

ROP  Expected demand during lead time  Safety stock

A. Constant demand and constant lead time

ROP  d  LT or simply dLT

B. Variability is present in demand during lead time

ROP  dLT  z dLT

use this formula if an estimate of expected demand during lead

time and its standard deviation are available

ROP  d LT  z LT  d

use this formula when data on lead time and demand are not
readily available

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Shortages and Service Levels

The ROP computation does not reveal the expected amount of shortage for a
given lead time service level

Information on expected number of shortage per cycle, or per year can be

determined using the following:

A. Expected number of units short per cycle, E(n)

E ( n)  E ( z ) dLT

where : E (n) - expected number of units short per cycle

E ( z ) - standardized number of units short using Table 12.3 (p. 569)
 dLT - standard deviation of lead time demand

B. Expected number of units short per year, E(N)

D
E ( N )  E ( n)
Q

C. Annual Service Level

E ( z ) dLT E ( n)
AnnualServiceLevel  1   1
Q Q

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Service Level for Single-period Model

Used to handle ordering of perishables

(fresh fruits, vegetables, seafood, flowers), and

Items that have a limited useful life

(newspaper, magazines)

Analysis focuses on two costs: shortage and excess

Cs
SL 
C s  Ce

where : C s  shortage cost per unit

C e  excess cost per unit

Problems:

2 – ABC Inventory Classification

3 – Basic EOQ
4 – Basic EOQ
11– EOQ with Non-instantaneous Delivery
13 – EOQ with Discount
28 – EOQ, ROP, Shortages
33 – EOQ for multiple products

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Problem 2(594)

The following classification table contains figures on the monthly volume

and unit costs for a random sample of 16 units from a list of 2,000
inventory items at a health care facility.

Item Unit Cost Usage

K34 10 200
K35 25 600
K36 36 150
M10 16 25
M20 20 80
Z45 80 200
F14 20 300
F95 30 800
F99 20 60
D45 10 550
D48 12 90
D52 15 110
D57 40 120
N08 30 40
P05 16 500
P09 10 30

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Problem 11 (586)

A company is about to begin production of a new product. The manager of the

department that will produce one of the components for the product wants to know
how often the machine used to produce the item will be available for other work.
The machine will produce the item at a rate of 200 units per day. Eighty units will
be used daily in assembling the final product . Assembly will take place 5 days a
week, 50 weeks per year. The manager estimates that it will take almost a full day
to get the machine ready for production run, at a cost of $60.
Inventory holding costs will be $2 per unit per year.

(a) What run quantity should be used to minimize total annual cost?

(b) What is the length of a production run in days?

© During production, at what rate will inventory build up?

(d) If the manager wants to run another job between runs of this item, and
needs a minimum of 10 days per cycle for the other work, will there be enough time?

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Problem 13 (596)

A mail-order house uses 18,000 boxes a year. Carrying costs are 60 cents per year per box,
and ordering costs are $96. The following price schedule applies. Determine:
(Note: some info on this problem are different from the problem solved in the digitized lecture)

Number of Price per

Boxes Box
1000 to 1999 $ 1.25
2000 to 4999 $ 1.20
5000 to 9999 $ 1.15
10000 or more $ 1.10

(a) The optimal order quantity

(b) The number of orders per year.

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Problem 28 (598)

A regional supermarket is open 360 days per year. Daily use of cash register tape
averages 10 rolls. Usage appears normally distributed with a standard deviation of 2
rolls per day. The cost of ordering tape is $1, and carrying costs are $0.40 per roll.
a year. Lead time is three days.

(a) What is the EOQ?

(b) What ROP will provide a lead time service level of 96%?

© What is the expected number of units short per cycle with 96%? Per year?

(d) What is the annual service level?

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Problem 33 (590)

Given the following list of items,

Estimated
Annual Ordering Holding
Item Demand Cost Cost (%) Unit Price
D S P
H4-010 20000 50 20% 2.5
H5-201 60200 60 20% 4
P6-400 9800 80 30% 28.5
P6-401 16300 50 30% 12
P7-100 6250 50 30% 9
P9-103 4500 50 40% 22
TS-300 21000 40 25% 45
TS-400 45000 40 25% 40
TS-041 800 40 25% 20
V1-001 26100 25 35% 40

(a) Classify the items as A, B, and C

(b) Determine the EOQ for each item.

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Project Management

What is a project?

 Unique, one-time operations designed to accomplish a set of objectives in

a limited time frame
 Examples: construction of new buildings, installing a new computer
network system, launching a space shuttle, producing a movie, etc
 Once underway, projects must be monitored to contain cost and meet
timelines
 This chapter is devoted to a description of graphical and computational
methods that are used for planning and scheduling projects

Key Decisions in Project Management

 Deciding which projects to implement

 Selecting the project manager
 Selecting the project team
 Planning and deciding the project
 Managing and controlling project resources
 Deciding if and when a project should be terminated

Planning and Scheduling With Gantt Charts

 Gantt chart - a popular tool for planning and scheduling simple projects
 Used to monitor progress over time by comparing planned progress to actual
progress

Planning with PERT/CPM

 PERT (program evaluation review technique) and CPM (critical path method)
are two of the most widely used techniques for planning and coordinating
large-scale projects

 By using PERT/CPM, managers are able to obtain:

(a) A graphical display of project activities
(b) An estimate of how long the project will take
(c) An indication of which activities are most critical to timely project
completion
(d) An indication of how long an activity can be delayed without lengthening
the project

 Network Diagram – a.k.a. precedence diagram is a chart used in PERT

that depicts major project activities and their sequential relationships
o Activity on Node (AON)
o Activity on Arrow (AOA)

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 Path – a sequence of activities that leads from the starting node to the
finishing nodes

 Critical path – the path with the longest time

 Critical activities – activities that are on the critical path. They have zero
slack

 Network conventions
a b c

a
c

a
c

b d

a c

a c

b d

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Deterministic vs Probabilistic Time Estimates

 Deterministic times – if time estimates can be made with a high degree of

confidence that actual time will not differ significantly

 Probabilistic times – must include an indication of the extent of probable

variation

t0  4tm  t p
te 
6
(t p  to ) 2
2 
36

A Computing Algorithm

ES – earliest time activity can start

EF – earliest time an activity can finish
LS – latest time an activity can start
LF – latest time an activity can finish

EF = ES + t

ES EF ES

LS = LF - t

LS LF LS

LS LF LS

ES EF ES
t

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Problem 1 (see page 802)

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Problem 3 (Not in text)

The information below pertains to a project that is about to commence. As the project
manager, which activities would you be concerned with in terms of timely project completion?
Explain.

Immediate Estimated Estimated

Activity Precedecessor Time (days) Activity Precedes Time (days)
a -- 15 a B 15
b A 12 b C,D 12
c B 6 c E 6
d B 5 d End 5
e C 3 e End 3
f -- 8 f G,H 8
g F 8 g I 8
h F 9 h J 9
i G 7 i End 7
j H 14 j K 14
k J 6 k End 6
End D,E,I,K

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Problem 7 (819)

Three recent college graduates have formed a partnership and have opened
an advertising firm. The first project consists of activities in the following
table.

Immediate
Activity Predecessor to tm tp
A -- 5 6 7
B -- 8 8 11
C A 6 8 11
D -- 9 12 15
E C 5 6 9
F D 5 6 7
G F 2 3 7
H B 4 4 5
I H 5 7 8
End E,G,I

(a) Draw the precedence diagram

(b) What is the probability that the project can be completed in 24 days or less? In 21 days
or less?

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Excel Solution

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Problem 11(820)

The following precedence diagram reflects three time estimates for each activity. Determine:

9-1 0-1 2
(e) 8
3 5 -7-1 0
(k )
8-1 0-1 4
( i)
6
1 1-1 2-1 3 1 4-1 8-2 6
(b ) (f) 11
5 -6 - 7
8 -8 - 8
(c ) 4 1 3-1 3-1 3
(a)
1 2 (g)
6 -6 - 6
7 (m )
1 1-1 2-1 4 10
(d )
5
7-1 0-1 2 9 1 0-1 1-1 2
(h) ( l)

(a) The expected completion time for each path and its variance

(b) The probability that the project will require more than 49 weeks.

(c) The probability that the project can be completed in 46 weeks or less.

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Queuing

What is queuing theory?

 The mathematical approach to the analysis of lines

 Useful in planning and analysis of service capacity

 Goal of queuing -- minimize total cost - costs associated with customers

waiting in line for service and those associated with capacity

System Characteristics

1) Population source
o Infinite source
o Finite source

1) Number of servers (channels)

o Single
o Multiple

2) Arrival and service patterns

o Probability distribution (exponential, Poisson, etc)

3) Queue discipline (order of service)

o First-come-first-served

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F o u r C o m m o n V a r ia t io n s o f Q u e u e S y s t e m s

S in g le c h a n n e l,
s in g le p h a s e

S in g le c h a n n e l,
m u lt ip le p h a s e

M u lt ip le c h a n n e l,
s in g le p h a s e

M u lt ip le c h a n n e l,
m u lt ip le p h a s e

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Queuing Models:

Infinite Sources
 Assumptions:
o Poisson arrival rate
o System operates under steady state (average arrival and
service rates are stable)

Important note: The arrival () and service rates () must be in the
same units

Four Basic Models

5) Single channel, exponential service time
6) Single channel, constant service time
7) Multiple channel, exponential service time
8) Multiple priority service, exponential service time

Finite Source

(4) Appropriate for cases in which the calling population is limited to a

relatively small number of potential calls
(5) Example -- one person may be responsible for handling breakdown on
15 machines
(6) The mathematics of finite-source model can be complex, analysts
often use finite queuing tables in conjunction with simple formulas to
analyze these systems

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Important Note: To solve queuing problems use the Excel templates that
accompany the text

Five Typical Measures of System Performance

Operations Managers Look at

1) Average number of customers waiting (in line or in system)

2) Average time customers wait (in line or system)
3) System utilization (percentage of capacity used)
4) Implied cost of given level of capacity and its related waiting line
5) The probability that an arrival will have to wait for service

Infinite-source Symbols
 Customer arrival rate
 Service rate
LQ The average number of customer waiting for service
LS The average number of customers in the system
 The system utilization
Wq The average time customers wait in line
Ws The average time customers spend in the system
1
 Service time
P0 The probability of zero units in the system
Pn The probability of n units in the system
M The nunber of servers (channels)
Lmax The maximum expected number waiting in line

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Problem 1 (861)

Repair calls are handled by one repairman at a photocopy shop. Repair time, including travel
time, is exponentially distributed, with a mean of two hours per call. Requests for copier
repairs come in at a mean rate of three per 8-hour day (assume Poisson).

Determine:

(a) The average number of customers awaiting repairs.

(b) System utilization

(c) The amount of time during an 8-hour day that the repairman is not out on call

(d) The probability of two or more customers in the system.

Excel Solution

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 100

Problem 2 (861)

A vending machine dispenses hot chocolate or coffee. Service time is 30 seconds per cup
and is constant. Customers arrive at a mean rate of 80 per hour, and this rate is Poisson
distributed. Determine:

(a) The average number of customer waiting in line

(b) The average time customers spend in the system

(c) The average number in the system

Excel Solution

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 101

Problem 4 (844)

A small town with one hospital has two ambulances to supply ambulance service. Requests
for ambulances during non-holiday weekends average 0.45 per hour and tend to be Poisson
distributed. Travel and assistance time averages one hour per call and follows an
exponential distribution. Find:

(a) System utilization

(b) The average number of customers waiting

(c) The average time customers wait for an ambulance

(d) The probability that both ambulances will be busy when a call comes in

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)
BA 380: Operations Management Lecture Notes Page 102

Problem 10 (845)

Two operators handle adjustments for a group of 10 machines. Adjustment time is

exponentially distributed and has a mean of 14 minutes per machine. The machines operate
for an average of 86 minutes between adjustments. While running, each machine can turn
out 50 pieces per hour. Find:

(a) The probability that a machine will have to wait for an adjustment

(b) The average number of machines waiting for adjustment

(c) The average number of machines being serviced

(d) The expected hourly output of each machine, taking adjustments into account

(e) Machine downtime represents a cost of $70 per hour; operator cost (including salary
and fringe benefits) is $15 per hour. What is the optimum number of operators?

Excel Solution

Prepared by Rene Leo E. Ordonez, PhD SOU School of Business

Notes to Accompany Operations Management, 10th Edition (Stevenson, 2009)