Supply Chain Approach - Full

Supply Chain Management
The Full spectrum Mastering the

SCM operations
ISC - MSC
Professor: Mr. Ian JC Corns

Mr. Ian JC CORNS
ian.corns@icloud.com
Professional Experience – Overview / 25 years International Business Experience
Corporate Advisor in Strategy - Finance - Business Dev - Supply Chain
Lecturer in Business Schools
President, SFDS Holdings & meta-campus.ai (based Paris, France)

CEO, Altedys / ME (based Dubai,UAE)
COO, Computer USA / ME (based Dubai,UAE)
VP EMEA, Unisphere Networks (based Boston,USA)
GM EMEA, General Electric Health Medical System (based NY,US)
VP EMEA, Fore Systems (based Pittsburgh, USA)
VP EMEA, Revlon (based New York, USA)
RD EMEA, P&G / Pampers (based Chicago,USA)
Market Analyst, Softbank IT Media group (based New York, USA)
Supply Chain Approach
AGENDA – OBJECTIVES
• 1. Introduction to the Field
• 2. Operations strategy & competitiveness
• 3. Project Management
• 4. Supply Chain design & structure
• 5. Facility location
• 6. Stock Management
• 7. Simulation
• 8. Synchronous Manufacturing & Theory of
constraints
• 9. Financial Analysis (1&2)
Chapter 1
Introduction to the Field

OBJECTIVES
• Understand Supply Chain & Operations
Management
• Why Study Operations Management?
• Transformation Processes Defined
• The Importance of SCM&OM
• Current Issues
What is Supply Chain Management?
• Supply-chain management is a total

system approach to managing the
entire flow of information, materials,
and services from raw-material
suppliers through factories and
warehouses to the end customer
What is a Supply Chain?
• All stages involved, directly or indirectly, in fulfilling a
customer request (Fulfill the Demand)
• Includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers
• Within each company, the supply chain includes all
functions involved in fulfilling a customer request
(product development, marketing, operations,
distribution, finance, customer service)
• -> Supply Chain includes the 7 dimensions of the

Company : Sales – Marketing – HR – Finance/ Legal –
Production – Distri - Logistics
• Customer is an integral part of the supply chain
• Includes movement of products from suppliers to
manufacturers to distributors and information, funds,
and products in both directions
• May be more accurate to use the term “supply
network” or “supply web”
• Typical supply chain stages: customers, retailers,
distributors, manufacturers, suppliers
• NOTE : All stages may not be present in all supply
chains (ex: no retailer or distributor for Dell)
How do we represent a Supply Chain?
The Supply Chain overview
SCM suppliers process
A map of the raw materials:
Ingredients:
Mandarin: Comes from China
Pear: Comes from Europe
Violet (leaves): Comes from the hills of Venice
Heart: blackberry + wild strawberry
Imprint: Vanilla (around the Indian Ocean),
Amber (semi solid mass of tree resins and
gums, mostly come from India from the
resinous tree Liquidamber oriantalis) and Musk
(strong smelling granules contained in a pocket
under the belly of a dear in the mating season)
Understanding the Supply Chain of
Fragonard
Development Purchasing Production Distribution Shop
Quality Quality
Insurance Insurance
Suppliers:
Essences
Market Manufacturing
Manufacturing/Assembly Wharehouse Delivery
Study Assembly
Suppliers:
Packaging
Purchasing: Raw Materials
Supplier 1: World
Crop of Raw Materials
ers
d
Or
Fragonard Supplier 2: World
Transformation
(Tourraine S.A)
Supplier 3: Grasse
Purchase of essences
A map of the raw materials:
Purchasing: Packaging
Supplier 1: Grasse
Bottle called “Estagnon”
Supplier 2: Grasse
Pumps & Tops
Fragonard Orders
Supplier 3: Grasse
Tags
Supplier 4: Grasse
Water & Alcohol
Flows in a Supply Chain
The Objective of a Supply Chain
• Maximize overall value created
• FYI: The notion of Maximization or

Minization envolves the notion of Lean
Supply Chain Surplus

= Customer Value – Supply Chain Cost
• Example: a customer purchases a wireless router
from Best Buy for $60 (revenue)
• Supply chain incurs costs (information, storage,
transportation, components, assembly, etc.)
• Difference between $60 and the sum of all of these
costs is the supply chain profit
• Supply chain profitability is total profit to be shared
across all stages of the supply chain
• Success should be measured by total supply chain
profitability, not profits at an individual stage
• Customer the only source of revenue…???
• Sources of cost : include flows of information,

products, or funds between stages of the supply
chain
• Effective supply chain management is the

management of flows between and among
supply chain stages to maximize total supply
chain surplus
Importance of
Supply Chain Decisions
Decision Phases of a Supply Chain
Sequences
• Supply chain strategy or design

– How to structure the supply chain over the next
several years
• Supply chain planning
– Decisions over the next quarter or year
• Supply chain operation
– Daily or weekly operational decisions
Supply Chain Strategy or Design
• Decisions about the structure of the supply chain and what
processes each stage will perform
• Strategic supply chain decisions
– Locations and capacities of facilities
– Products to be made or stored at various locations
– Modes of transportation
– Information systems
• Supply chain design must support strategic objectives
• Supply chain design decisions are long-term and expensive
to reverse – must take into account market uncertainty
(IMPORTANCE OF FORECASTING)
Supply Chain Planning
• Definition of a set of policies that govern
short-term operations
• Fixed by the supply configuration from
previous phase
• Starts with a forecast of demand in the
coming year
Supply Chain Planning
• Planning decisions:
– Which markets will be supplied from which locations
– Planned buildup of inventories
– Subcontracting, backup locations
– Inventory policies
– Timing and size of market promotions
• Must consider in planning decisions demand
uncertainty, exchange rates, competition over the
time horizon
Supply Chain Operation
• Time horizon is weekly or daily
• Decisions regarding individual customer orders
• Supply chain configuration is fixed and operating
policies are determined
• Goal is to implement the operating policies as
effectively as possible
• Allocate orders to inventory or production, set order
due dates, generate pick lists at a warehouse, allocate
an order to a particular shipment, set delivery
schedules, place replenishment orders
• Much less uncertainty (short time horizon)
Process View of a Supply Chain
• Cycle View: processes in a supply chain are divided
into a series of cycles, each performed at the
interfaces between two successive supply chain
stages
• Push/Pull View: processes in a supply chain are
divided into two categories depending on whether
they are executed in response to a customer order
(pull) or in anticipation of a customer order (push)
Push/Pull View of
Supply Chain Processes
• Supply chain processes fall into one of two categories
depending on the timing of their execution relative
to customer demand
• Pull: execution is initiated in response to a customer
order (reactive)
• Push: execution is initiated in anticipation of
customer orders (speculative)
• Push/pull boundary separates push processes from
pull processes
Supply Chain Macro Processes
• Supply chain processes discussed in the two

views can be classified into
– Customer Relationship Management (CRM)
– Internal Supply Chain Management (ISCM)
– Supplier Relationship Management (SRM)
• Integration among the above three macro

processes is critical for effective and successful
supply chain management
Supply Chain Macro Processes
Summary of Learning Objectives
1. Discuss the goal of a supply chain and explain the
impact of supply chain decisions on the success of a
firm.
2. Identify the three key supply chain decision phases
and explain the significance of each one.
3. Describe the cycle and push/pull views of a supply
chain.
4. Classify the supply chain macro processes in a firm.
Formulas for Measuring Supply-Chain
Performance
• One of the most commonly used measures in all of
operations management is “Inventory Turnover”
Cost of goods sold

Inventory turnover =
Average aggregate inventory value
• In situations where distribution inventory is
dominant, “Weeks of Supply” is preferred and
measures how many weeks’ worth of inventory is in
the system at a particular time
æ Average aggregate inventory value ö

Weeks of supply = çç ÷÷ 52 weeks
è Cost of goods sold ø
Example of Measuring Supply-Chain
Performance
Suppose a company’s new annual report claims
their costs of goods sold for the year is $160
million and their total average inventory
(production materials + work-in-process) is
worth $35 million. This company normally
has an inventory turn ratio of 10. What is this
year’s Inventory Turnover ratio? What does
it mean?
Example of Measuring Supply-Chain Performance
(Continued)
Cost of goods sold
= $160/$35
= 4.57
Since the company’s normal inventory turnover ration is 10, a

drop to 4.57 means that the inventory is not turning over as
quickly as it had in the past. Without knowing the industry
average of turns for this company it is not possible to
comment on how they are competitively doing in the
industry, but they now have more inventory relative to their
cost of goods sold than before.
What is Operations Management?
Defined
Operations management (OM) is defined

as the design, operation, and
improvement of the systems that create
and deliver the firm’s primary products
and services
Why Study Operations
Management?
Systematic Approach
to Org. Processes
Business Education Operations Career Opportunities

Management
Cross-Functional
Applications
What is a Transformation Process?
Defined
A transformation process is defined as a

user of resources to transform inputs into
some desired outputs
Transformations
• Physical--manufacturing
• Locational--transportation
• Exchange--retailing
• Storage--warehousing
• Physiological--health care
• Informational--telecommunications
What is a Service and What is a
Good?
• “If you drop it on your foot, it won’t hurt

you.” (Good or service?)
• “Services never include goods and goods

never include services.” (True or false?)
OM in the Organization Chart
Finance Operations Marketing
Plant Operations Director

Manager Manager
Manufacturing, Production control,

Quality assurance, Engineering,
Purchasing, Maintenance, etc
Core Services
Defined
Core services are basic things

that customers want from
products they purchase
Core Services Performance Objectives
Quality
Operations
Flexibility Speed
Managemen
t
Price (or cost

Reduction)
Value-Added Services
Defined
Value-added services
differentiate the organization
from competitors and build
relationships that bind
customers to the firm in a
positive way
Value-Added Service Categories
Problem Solving
Operations Sales Support

Information
Management
Field Support
The Importance of Operations Management
• Synergies must exist with other

functional areas of the
organization
• Operations account for 60-80% of
the direct expenses that burden a
firms profit.
Historical Development of OM
• JIT and TQC
• Manufacturing Strategy Paradigm
• Service Quality and Productivity
• Total Quality Management and Quality

Certification
Historical Development of OM (cont’d)
• Business Process Reengineering
• Supply Chain Management
• Electronic Commerce
Current Issues in OM
• Coordinate the relationships between
mutually supportive but separate
organizations.
• Optimizing global supplier, production, and

distribution networks.
• Increased co-production of goods and

services
Current Issues in OM (cont’d)
• Managing the customers experience
during the service encounter
• Raising the awareness of operations as a

significant competitive weapon
53
End of Chapter 1
©The McGraw-Hill Companies, Inc., 2006

Chapter 2
Operations Strategy and
Competitiveness
OBJECTIVES
• Operations Strategy
• Competitive Dimensions
• Order Qualifiers and Winners
• Strategy Design Process
• A Framework for Manufacturing Strategy
• Service Strategy Capacity Capabilities
• Productivity Measures
Operations Strategy
Strategy Process Example
Customer Needs More Product
Corporate Strategy Increase Org. Size
Operations Strategy Increase Production Capacity
Decisions on Processes
and Infrastructure Build New Factory
Competitive Dimensions
• Cost or Price
– Make the Product or Deliver the Service Cheap
• Quality
– Make a Great Product or Deliver a Great Service
• Delivery Speed
– Make the Product or Deliver the Service Quickly
• Delivery Reliability
– Deliver It When Promised
• Coping with Changes in Demand
– Change Its Volume
• Flexibility and New Product Introduction Speed
– Change It
• Other Product-Specific Criteria
– Support It
Dealing with Trade-offs
For example, if we reduce costs by reducing product quality
inspections, we might reduce product quality.
For example, if we improve

customer service problem
Cost
solving by cross-training
personnel to deal with a wider-
range of problems, they may
become less efficient at dealing Flexibility Delivery
with commonly occurring
problems.
Quality
Order Qualifiers and Winners
Defined
•Order qualifiers are the basic criteria
that permit the firms products to be
considered as candidates for purchase by
customers
•Order winners are the criteria that

differentiates the products and services
of one firm from another
Service Breakthroughs
• A brand name car

can be an “order
qualifier”
•Repair services can be “order

winners”
Examples: Warranty, Roadside Assistance,
Leases, etc
Strategy Design Process
Strategy Map What it is about!
Financial Perspective Improve Shareholder Value
Customer Perspective Customer Value Proposition
Internal Perspective Build-Increase-Achieve
Learning and Growth Perspective A Motivated and Prepared

Workforce
Kaplan and Norton’s Generic Strategy Map
In the Kaplan and Norton’s Generic Strategy Map, under
the Financial Perspective, the Productivity Strategy is
generally made up from two components:
1. Improve cost structure: Lower direct and

indirect costs
2. Increase asset utilization: Reduce working
and fixed capital
(Continued)
In the Kaplan and Norton’s Generic Strategy Map,
under the Financial Perspective, the Revenue Growth
Strategy is generally made up from two components:
1. Build the franchise: Develop new sources of

revenue
2. Increase customer value: Work with existing
customers to expand relationships with
company
(Continued)
under the Customer Perspective, there are three
ways suggested as means of differentiating a
company from others in a marketplace:
1. Product leadership
2. Customer intimacy
3. Operational excellence
(Continued)
under the Learning and Growth Perspective, there
are three principle categories of intangible assets
needed for learning:
1. Strategic competencies
2. Strategic technologies
3. Climate for action
Operations Strategy Framework
Customer Needs
New product : Old product
Competitive
dimensions & requirements
Quality, Dependability, Speed, Flexibility, and Price
Enterprise capabilities
Operations and& Supplier
Operations Capabilities
Supplier capabilities
R&DR&D Technology Systems
Technology People
Systems People Distribution Distribution
Support Platforms
Financial management Human resource management Information management
Steps in Developing a Manufacturing
Strategy
• 1. Segment the market according to the product

group
• 2. Identify product requirements, demand patterns,
and profit margins of each group
• 3. Determine order qualifiers and winners for each
group
• 4. Convert order winners into specific performance
requirements
Service Strategy Capacity Capabilities
• Process-based
– Capacities that transforms material or information and
provide advantages on dimensions of cost and quality
• Systems-based
– Capacities that are broad-based involving the entire
operating system and provide advantages of short lead
times and customize on demand
• Organization-based
– Capacities that are difficult to replicate and provide abilities
to master new technologies
What is Productivity?
Defined
Productivity is a common measure on

how well resources are being used. In
the broadest sense, it can be defined as
the following ratio:
Outputs
Inputs
Total Measure Productivity
Total Measure Productivity = Outputs
Inputs
or
= Goods and services produced
All resources used
Partial Measure Productivity
• Partial measures of productivity =
• Output or Output or Output or Output

Labor Capital Materials Energy
Multifactor Measure Productivity
• Multifactor measures of productivity =
• Output .
Labor + Capital + Energy
or
• Output .
Labor + Capital + Materials
Example of Productivity Measurement
• You have just determined that your service
employees have used a total of 2400 hours of labor
this week to process 560 insurance forms. Last week
the same crew used only 2000 hours of labor to
process 480 forms.
• Which productivity measure should be used?
• Answer: Could be classified as a Total Measure or
Partial Measure.
• Is productivity increasing or decreasing?
• Answer: Last week’s productivity = 480/2000 = 0.24, and this
week’s productivity is = 560/2400 = 0.23. So, productivity is
decreasing slightly.
End of Chapter 2
75
Technical Note 2
Optimizing the Use

of Resources with
Linear Programming

OBJECTIVES
• Linear Programming Basics
• A Maximization Problem
• A Minimization Problem
Linear Programming Essential Conditions
• Is used in problems where we have
limited resources or constrained
resources that we wish to allocate
• The model must have an explicit
objective (function)
– Generally maximizing profit or minimizing
costs subject to resource-based, or other,
constraints
Common Applications
• Aggregate sales and operations planning

• Service/manufacturing productivity analysis
• Product planning
• Product routing
• Vehicle/crew scheduling
• Process control
• Inventory control
Linear Programming Essential Conditions
(Continued)
• Limited Resources to allocate
• Linearity is a requirement of the model in
both objective function and constraints
• Homogeneity of products produced (i.e.,
products must the identical) and all hours of
labor used are assumed equally productive
• Divisibility assumes products and resources
divisible (i.e., permit fractional values if need
be)
Objective Function
Maximize (or Minimize) Z = C1X1 + C2X2 + ... + CnXn
• Cj is a constant that describes the rate

of contribution to costs or profit of (Xj)
units being produced
• Z is the total cost or profit from the

given number of units being produced
Constraints
A11X1 + A12X2 + ... + A1nXn£B1
A21X1 + A22X2 + ... + A2nXn ³B2
:
:
AM1X1 + AM2X2 + ... + AMnXn=BM
• Aij are resource requirements for each of the
related (Xj) decision variables
• Bi are the available resource requirements
• Note that the direction of the inequalities can
be all or a combination of £, ³, or = linear
mathematical expressions
Non-Negativity Requirement
X1,X2, …, Xn ³ 0
• All linear programming model formulations
require their decision variables to be non-
negative
• While these non-negativity requirements
take the form of a constraint, they are
considered a mathematical requirement to
complete the formulation of an LP model
An Example of a Maximization Problem
LawnGrow Manufacturing Company must determine the unit
mix of its commercial riding mower products to be
produced next year. The company produces two product
lines, the Max and the Multimax. The average profit is $400
for each Max and $800 for each Multimax. Fabrication hours
and assembly hours are limited resources. There is a
maximum of 5,000 hours of fabrication capacity available
per month (each Max requires 3 hours and each Multimax
requires 5 hours). There is a maximum of 3,000 hours of
assembly capacity available per month (each Max requires 1
hour and each Multimax requires 4 hours). Question: How
many units of each riding mower should be produced each
month in order to maximize profit?
Now let’s formula this problem as an LP model…
The Objective Function
If we define the Max and Multimax products as the two

decision variables X1 and X2, and since we want to
maximize profit, we can state the objective function as
follows:
Maximize Z = 400X1 + 800 X 2
Where
Z = the monthly profit from Max and Multimax
X1 = the number of Max produced each month
X 2 = the number of Multimax produced each month
Constraints
Given the resource information below from the problem:
Max (X1) Multimax (X2)

Required Time/Unit Required Time/Unit Available Time/Month
3 5 5,000 Fab
1 4 3,000 Assy
We can now state the constraints and non-negativity
requirements as:
3X1 + 5X 2 £ 5,000 (Fab.)
X1 + 4X 2 £ 3,000 (Assy.)
X1 , X 2 ³0 (Non - negativity)
Note that the inequalities are less-than-or-equal since the time resources
represent the total available resources for production
Solution
Produce 715 Max and 571 Multimax per month

for a profit of $742,800
An Example of a Minimization Problem
HiTech Metal Company is developing a plan for buying scrap metal for its
operations. HiTech receives scrap metal from two sources, Hasbeen
Industries and Gentro Scrap in daily shipments using large trucks. Each
truckload of scrap from Hasbeen yields 1.5 tons of zinc and 1 ton of lead
at a cost of $15,000. Each truckload of scrap from Gentro yields 1 ton of
zinc and 3 tons of lead at a cost of $18,000. HiTech requires at least 6
tons of zinc and at least 10 tons of lead per day. Question: How many
truckloads of scrap should be purchased per day from each source in
order to minimize scrap metal costs to HiTech?
Now let’s formula this problem as an LP model…

The Objective Function
If we define the Hasbeen truckloads and the Gentro truckloads as the two
decision variables X1 and X2, and since we want to minimize cost, we can
state the objective function as follows:
Minimize Z = 15,000 X1 + 18,000 X2

Where
Z= daily scrap cost
X1 = truckloads from Hasbeen
X2 = truckloads from Gentro
Hasbeen
GENTRO
Constraints
Given the demand information below from the problem:
Hasbeen (X1) Gentro (X2)

Tons Tons Min Tons
1.5 1 6 Zinc
1 3 10 Lead
We can now state the constraints and non-negativity requirements as:
Note that the inequalities

are greater-than-or-equal
1.5X1 + X2 > 6(Zinc/tons) since the demand
information represents the
X1 + 3X2 > 10(Lead/tons) minimum necessary for
production.
X1, X2 > 0(Non-negativity)
Solution
Order 2.29 truckloads from Hasbeen and 2.57

truckloads from Gentro for daily delivery. The daily
cost will be $80,610.
Note: Do you see why in this solution that

“integer” linear programming methodologies
can have useful applications in industry?
91
End of Technical Note 2

Chapter 3
Project Management
OBJECTIVES
• Definition of Project Management

• Work Breakdown Structure
• Project Control Charts
• Structuring Projects
• Critical Path Scheduling
Project Management
Defined
• Project is a series of related jobs usually directed
toward some major output and requiring a
significant period of time to perform
• Project Management are the management activities
of planning, directing, and controlling resources
(people, equipment, material) to meet the
technical, cost, and time constraints of a project
Gantt Chart
Vertical Axis: Always
Activities or Jobs Horizontal bars used to denote length of time for
each activity or job.
Activity 1
Activity 2
Activity 3
Activity 4
Activity 5
Activity 6
Time
Horizontal Axis: Always Time
Pure Project
A pure project is where a self-contained team
works full-time on the project
Structuring Projects Pure Project: Advantages

• The project manager has full authority over the
project
• Team members report to one boss
• Shortened communication lines
• Team pride, motivation, and commitment are
high
Structuring Projects Pure Project:
Disadvantages
• Duplication of resources
• Organizational goals and policies are
ignored
• Lack of technology transfer
• Team members have no functional area
"home"
Functional Project
A functional project is housed within
a functional division
President
Research and
Engineering Manufacturing
Development
Project Project Project Project Project Project Project Project Project

A B C D E F G H I
Example, Project “B” is in the functional

area of Research and Development.
Structuring Projects
Functional Project: Advantages
• A team member can work on several
projects
• Technical expertise is maintained within
the functional area
• The functional area is a “home” after the
project is completed
• Critical mass of specialized knowledge
Functional Project: Disadvantages
• Aspects of the project that are not
directly related to the functional area get
short-changed
• Motivation of team members is often
weak
• Needs of the client are secondary and are
responded to slowly
Matrix Project Organization Structure
President
Research and
Engineering Manufacturing Marketing
Development
Manager
Project A
Manager
Project B
Manager
Project C
Matrix: Advantages
• Enhanced communications between functional areas
• Pinpointed responsibility
• Duplication of resources is minimized
• Functional “home” for team members
• Policies of the parent organization are followed

Matrix: Disadvantages
• Too many bosses
• Depends on project manager’s

negotiating skills
• Potential for sub-optimization

Work Breakdown Structure
A work breakdown structure defines the
hierarchy of project tasks, subtasks, and
work packages
Level
Program
1 Project 1 Project 2
2 Task 1.1 Task 1.2
3 Subtask 1.1.1 Subtask 1.1.2
4 Work Package 1.1.1.1 Work Package 1.1.1.2

Network-Planning Models
• A project is made up of a sequence of activities that

form a network representing a project
• The path taking longest time through this network of
activities is called the “critical path”
• The critical path provides a wide range of scheduling
information useful in managing a project
• Critical Path Method (CPM) helps to identify the critical
path(s) in the project networks
Prerequisites for Critical Path
Methodology
A project must have:
well-defined jobs or tasks whose completion

marks the end of the project;
independent jobs or tasks;
and tasks that follow a given sequence.

Types of Critical Path Methods
• CPM with a Single Time Estimate
– Used when activity times are known with certainty
– Used to determine timing estimates for the project, each activity in
the project, and slack time for activities
• CPM with Three Activity Time Estimates
– Used when activity times are uncertain
– Used to obtain the same information as the Single Time Estimate
model and probability information
• Time-Cost Models
– Used when cost trade-off information is a major consideration in
planning
– Used to determine the least cost in reducing total project time
Steps in the CPM with Single Time Estimate
• 1. Activity Identification
• 2. Activity Sequencing and Network
Construction
• 3. Determine the critical path
– From the critical path all of the project and
activity timing information can be obtained
CPM with Single Time Estimate
Consider the following consulting project:
Activity Designation Immed. Pred. Time (Weeks)
Assess customer's needs A None 2
Write and submit proposal B A 1
Obtain approval C B 1
Develop service vision and goals D C 2
Train employees E C 5
Quality improvement pilot groups F D, E 5
Write assessment report G F 1
Develop a critical path diagram and determine

the duration of the critical path and slack times
for all activities.
First draw the network
Act. Imed. Pred. Time
A None 2
B A 1
C B 1
D C 2
E C 5
D(2)
F D,E 5
G F 1
A(2) B(1) C(1) F(5) G(1)
E(5)
Determine early starts and early finish times
ES=4
EF=6
ES=0 ES=2 ES=3 D(2) ES=9 ES=14

EF=2 EF=3 EF=4 EF=14 EF=15
A(2) B(1) C(1) F(5) G(1)

ES=4
EF=9
Hint: Start with ES=0

and go forward in the E(5)
network from A to G.
Hint: Start with LF=15 or the
total time of the project and go
backward in the network from
Determine late starts ES=4
EF=6
G to A.
and late finish times
ES=0 ES=2 ES=3 D(2) ES=9 ES=14
EF=2 EF=3 EF=4 EF=14 EF=15
LS=7
LF=9
A(2) B(1) C(1) F(5) G(1)
ES=4
LS=0 LS=2 LS=3 EF=9
LS=9 LS=14
LF=2 LF=3 LF=4 LF=14 LF=15
E(5)
LS=4
LF=9
Critical Path & Slack
ES=4
EF=6 Slack=(7-4)=(9-6)= 3 Wks
ES=0 ES=2 ES=3 D(2) ES=9 ES=14

EF=2 EF=3 EF=4 EF=14 EF=15
LS=7
LF=9
A(2) B(1) C(1) F(5) G(1)
ES=4
LS=0 LS=2 LS=3 EF=9
LS=9 LS=14
LF=2 LF=3 LF=4 LF=14 LF=15
E(5)
LS=4
Duration=15 weeks
LF=9
Example 2. CPM with Three Activity Time
Estimates
Immediate
Task Predecesors Optimistic Most Likely Pessimistic
A None 3 6 15
B None 2 4 14
C A 6 12 30
D A 2 5 8
E C 5 11 17
F D 3 6 15
G B 3 9 27
H E,F 1 4 7
I G,H 4 19 28
Example 2. Expected Time
Calculations ET(A)= 3+4(6)+15
6
Immediate Expected
Task Predecesors Time
A None 7 ET(A)=42/6=7
B None 5.333
C A 14 Immediate
D A 5 A None 3 6 15
E C 11 B None 2 4 14
C A 6 12 30
F D 7 D A 2 5 8
E C 5 11 17
G B 11 F D 3 6 15
H E,F 4 G B 3 9 27
H E,F 1 4 7
I G,H 18 I G,H 4 19 28
Opt. Time + 4(Most Likely Time) + Pess. Time

Expected Time =
6
Ex. 2. Expected Time Calculations
ET(B)= 2+4(4)+14
Immediate Expected
6
Task Predecesors Time
A None 7
B None 5.333 ET(B)=32/6=5.333
C A 14
D A 5 Immediate
E C 11 Task Predecesors Optimistic Most Likely Pessimistic
A None 3 6 15
F D 7 B None 2 4 14
G B 11 C
D
A
A
6
2
12
5
30
8
H E,F 4 E C 5 11 17
F D 3 6 15
I G,H 18 G B 3 9 27
H E,F 1 4 7
I G,H 4 19 28

Expected Time =
6
Ex 2. Expected Time Calculations
Immediate Expected ET(C)= 6+4(12)+30
Task Predecesors Time 6
A None 7
B None 5.333
C A 14 ET(C)=84/6=14
D A 5
E C 11 Immediate
F D 7 A None 3 6 15
G B 11 B
C
None
A
2
6
4
12
14
30
H E,F 4 D A 2 5 8
E C 5 11 17
I G,H 18 F D 3 6 15
G B 3 9 27
H E,F 1 4 7
I G,H 4 19 28

Expected Time =
6
Example 2. Network
Duration = 54 Days
C(14) E(11)
A(7) H(4)
D(5) F(7)
I(18)
B G(11)
(5.333)
Example 2. Probability Exercise
What is the probability of finishing this project in
less than 53 days?
p(t < D)
D=53
t
TE = 54
D - TE
Z =
å cp
s 2
P essim . - O ptim . 2
A ctivity variance, s 2
= ( )
6
Task Optimistic Most Likely Pessimistic Variance

A 3 6 15 4
B 2 4 14
C 6 12 30 16
D 2 5 8
E 5 11 17 4
F 3 6 15
G 3 9 27
H 1 4 7 1
I 4 19 28 16
(Sum the variance along the critical path.) å = 41

s 2
p(t < D)
t
D=53 TE = 54
D - TE 53 - 54
Z = = = -.156
å cp
s 2 41
p(Z < -.156) = .438, or 43.8 % (NORMSDIST(-.156)
There is a 43.8% probability that this project will be

completed in less than 53 weeks.
Ex 2. Additional Probability Exercise
• What is the probability that the project

duration will exceed 56 weeks?
Example 2. Additional Exercise Solution
p(t < D)
t
TE = 54
D=56
D - TE 56 - 54
Z = = = .312
å cp
s 2 41
p(Z > .312) = .378, or 37.8 % (1-NORMSDIST(.312))

Time-Cost Models
• Basic Assumption: Relationship between

activity completion time and project cost
• Time Cost Models: Determine the

optimum point in time-cost tradeoffs
– Activity direct costs
– Project indirect costs
– Activity completion times
CPM Assumptions/Limitations
• Project activities can be identified as entities (There is
a clear beginning and ending point for each activity.)
• Project activity sequence relationships can be
specified and networked
• Project control should focus on the critical path
• The activity times follow the beta distribution, with
the variance of the project assumed to equal the sum
of the variances along the critical path
• Project control should focus on the critical path
End of Chapter 3
Chapter 4
Product Design
OBJECTIVES
• Product Development Process
• Economic Analysis of Development
Projects
• Designing for the Customer
• Design for Manufacturability
• Measuring Product Development
Performance
Typical Phases of Product Development
• Planning
• Concept Development
• System-Level design
• Design Detail
• Testing and Refinement
• Production Ramp-up
Economic Analysis of Project
Development Costs
• Using measurable factors to help
determine:
– Operational design and development
decisions
– Go/no-go milestones
• Building a Base-Case Financial Model
– A financial model consisting of major cash
flows
– Sensitivity Analysis for “what if” questions
Designing for the Customer
House of Quality
Ideal Customer
Quality Function Product Value Analysis/
Deployment Value Engineering
Designing for the Customer:
Quality Function Deployment
• Interfunctional teams from marketing, design
engineering, and manufacturing
• Voice of the customer
• House of Quality
133
The House of Quality
Correlation:
X Strong positive
Positive
X X
X X Negative
Water resistance
X
* Strong negative
Energy needed
level needed
Accoust. Trans.
to close door
open door
Im Engineering
resistance
Door seal
Competitive evaluation
p
Cu or Characteris
force on
Window
X = Us
st. tantics
ground
Energy
A = Comp. A
Check
Customer ce t B = Comp. B
(5 is best)
o
to
Requirement 1 2 3 4 5
sEasy to close 7 X AB
Stays open on a hill 5 X AB
Customer Easy to open 3 XAB
A XB
requirements Doesn’t leak in rain 3
information forms No road noise 2 X A B
Importance weighting 10 6 6 9 2 3 Relationships:

the basis for this
level to 7.5 ft/lb
Reduce energy
Reduce energy
Strong = 9
Reduce force
current level
current level
current level
to 7.5 ft/lb.
matrix, used to Target values
Medium = 3
Maintain
Maintain
Maintain
Small = 1
to 9 lb.
translate them into
operating or 5 B BA BA
4 B B BXA X
engineering goals. Technical evaluation 3 A
X
A X
(5 is best) 2 X
X A
1

Value Analysis/Value Engineering
• Achieve equivalent or better performance at a lower
cost while maintaining all functional requirements
defined by the customer
– Does the item have any design features that are not
necessary?
– Can two or more parts be combined into one?
– How can we cut down the weight?
– Are there nonstandard parts that can be
eliminated?
Design for Manufacturability
• Traditional Approach
– “We design it, you build it” or “Over the wall”
• Concurrent Engineering
– “Let’s work together simultaneously”
Design for Manufacturing and Assembly
• Greatest improvements related to DFMA arise from
simplification of the product by reducing the
number of separate parts:
1. During the operation of the product, does the part
move relative to all other parts already assembled?
2. Must the part be of a different material or be
isolated from other parts already assembled?
3. Must the part be separate from all other parts to
allow the disassembly of the product for
adjustment or maintenance?
Measuring Product Development Performance
Performance Measures
Dimension •Freq. Of new products introduced
•Time to market introduction
•Number stated and number completed
Time-to-market •Actual versus plan
•Percentage of sales from new products
•Engineering hours per project

•Cost of materials and tooling per project
Productivity •Actual versus plan
•Conformance-reliability in use
Quality •Design-performance and customer satisfaction
•Yield-factory and field
End of Chapter 4
Technical Note 4
Learning Curves
OBJECTIVES
• Underlying Principles of Learning Curves
• Learning Curve Example
• Types of Learning
• From Learning Curves to Performance
Improvement
Underlying Principles of Learning Curves
1. Each time you perform a task it takes
less time than the last time you
performed the same task
2. The extent of task time decreases over
time
3. The reduction in time will follow a
predictable pattern
Example of a Learning Curve
Suppose you start a Term Time (in

paper Minutes)
term paper typing
business. You time 1 100
yourself on the first 2 90
paper, then the second, 3 84.62
and so on. 4 81.00
5 78.30
Note that only 90 of 100
minutes are used in the 6 76.16
second repetition. This is an
example of a 90% learning
curve.
Plotting the All learning curves have this
Learning downward sloping curve.
Curve
90 % Learning Curve
120
Time(Minutes)
100
Production
80
60
40
20
0
0 1000 2000 3000 4000 5000
Unit
Types of Learning
• Individual Learning
Improvement when individuals gain a skill or
efficiency by repetition of a job
• Organizational Learning
Improvement from the groups of individuals
from repetition and changes in
administration, equipment, and product
design
From Learning Curves to Performance Improvement
(Part 1)
• Proper selection of workers

• Proper training
• Motivation
• Work specialization
• Do one or very few jobs at a time
From Learning Curves to Performance
Improvement (Part 2)
• Use tools or equipment that assists or

supports performance
• Provide quick and easy access for help
• Allow workers to help redesign their
tasks
End of Technical
Note 4
Chapter 5
Process Analysis
OBJECTIVES
• Process Analysis
• Process Flowcharting
• Types of Processes
• Process Performance Metrics

Process Analysis Terms
• Process: Is any part of an organization that

takes inputs and transforms them into
outputs
• Cycle Time: Is the average successive time
between completions of successive units
• Utilization: Is the ratio of the time that a
resource is actually activated relative to the
time that it is available for use
Process Flowcharting
Defined
• Process flowcharting is the use of a diagram to
present the major elements of a process
• The basic elements can include tasks or
operations, flows of materials or customers,
decision points, and storage areas or queues
• It is an ideal methodology by which to begin
analyzing a process
Flowchart Symbols
Purpose and Examples
Tasks or operations Examples: Giving an
admission ticket to a
customer, installing a engine
in a car, etc.
Decision Points Examples: How much change

should be given to a
customer, which wrench
should be used, etc.
Flowchart Symbols
Purpose and Examples
Storage areas or Examples: Sheds, lines of
queues people waiting for a service,
etc.
Flows of materials or Examples: Customers moving

customers to a seat, mechanic getting a
tool, etc.
Example: Flowchart of Student Going to School
Go to Yes
Drive to Walk to
school
school class
today?
No
Goof
off
Types of Processes
Single-stage Process
Stage 1
Multi-stage Process
Stage 1 Stage 2 Stage 3

Types of Processes (Continued)
A buffer refers to a storage area between stages

where the output of a stage is placed prior to being
used in a downstream stage
Multi-stage Process with Buffer

Buffer
Stage 1 Stage 2
Other Process Terminology
• Blocking
– Occurs when the activities in a stage must stop because
there is no place to deposit the item just completed
– If there is no room for an employee to place a unit of work
down, the employee will hold on to it not able to continue
working on the next unit
• Starving
– Occurs when the activities in a stage must stop because
there is no work
– If an employee is waiting at a work station and no work is
coming to the employee to process, the employee will
remain idle until the next unit of work comes
Other Process Terminology (Continued)
• Bottleneck
– Occurs when the limited capacity of a process
causes work to pile up or become unevenly
distributed in the flow of a process
– If an employee works too slow in a multi-stage
process, work will begin to pile up in front of that
employee. In this is case the employee represents
the limited capacity causing the bottleneck.
• Pacing
– Refers to the fixed timing of the movement of
items through the process
Other Types of Processes
• Make-to-order
– Only activated in response to an actual order
– Both work-in-process and finished goods inventory
kept to a minimum
• Make-to-stock
– Process activated to meet expected or forecast
demand
– Customer orders are served from target stocking
level
Process Performance Metrics
• Operation time = Setup time + Run time
• Throughput time = Average time for a unit to

move through the
system
• Velocity = Throughput time

Value-added time
Process Performance Metrics (Continued)
• Cycle time = Average time between

completion of units
• Throughput rate = 1 .
Cycle time
• Efficiency = Actual output

Standard Output
Process Performance Metrics (Continued)
• Productivity = Output
Input
• Utilization = Time Activated

Time Available
Cycle Time Example
Suppose you had to produce 600 units in 80 hours to

meet the demand requirements of a product. What is
the cycle time to meet this demand requirement?
Answer: There are 4,800 minutes (60

minutes/hour x 80 hours) in 80 hours. So the
average time between completions would have
to be: Cycle time = 4,800/600 units = 8 minutes.
Process Throughput Time Reduction
• Perform activities in parallel
• Change the sequence of activities
• Reduce interruptions
End of Chapter 5
Technical Note 5
Job Design and Work

Measurement
OBJECTIVES
• Job Design Defined

• Job Design Decisions
• Trends in Job Design
• Work Measurement
• Basic Compensation Systems
• Financial Incentive Plans
What is Job Design?
Defined
• Job design is the function of specifying
the work activities of an individual or
group in an organizational setting
• The objective of job design is to develop
jobs that meet the requirements of the
organization and its technology and that
satisfy the jobholder’s personal and
individual requirements
Job Design Decisions
Who What Where When Why How
Organizational
Mental and Geographic
Time of day; rationale for Method of
physical locale of the
Tasks to be time of the job; object- performance
characteristics organization;
performed occurrence in ives and mot- and
of the location of
the work flow ivation of the motivation
work force work areas
worker
Ultimate
Job
Structure
Trends in Job Design
• Quality control as part of the worker's job
• Cross-training workers to perform multi

skilled jobs
• Employee involvement and team

approaches
to designing and organizing work
• "Informating" ordinary workers through

e-mail and the Internet
Trends in Job Design (Continued)
• Extensive use of temporary workers
• Automation of heavy manual work
•Creating alternative workplaces
• Organizational commitment to providing

meaningful and rewarding jobs for all
employees
Behavioral Considerations in Job Design
Balancing the specialization in a job and its

content through enrichment can give us….
Degree of Ultimate Job Job Enrichment

Structure
Specialization (vs. Enlargement)
Sociotechnical Systems
Focuses on the interaction between technology and the work group
by looking at….
Task Variety
Process Skill Variety
Feedback Worker/Group
Technology
Task Identity Needs
Needs
Task Autonomy
Physical Considerations in Job Design
• Work physiology sets work-rest cycles

according to the energy expended in various
parts of the job. The harder the work, the
more the need for rest periods.
• Ergonomics is a term used to describe the
study of the physical arrangement of the work
space together with tools used to perform a
task. Fit the work to the body rather than
forcing the body to conform to the work.
Work Methods
A Production
Process
Ultimate
Ultimate
Job Design
Workers Interacting Job Worker at a Fixed
with Other Workers Workplace
Design
Worker Interacting
with Equipment
Work Measurement
Defined
• Work measurement is a process of
analyzing jobs for the purpose of
setting time standards
• Why use it?
– Schedule work and allocate capacity
– Motivate and measure work
performance
– Evaluate performance
– Provide benchmarks
Time Study Normal Time Formulas
• Normal time(NT)=Observed performance time per unit
x (Performance rating)*
*The Performance Rating is usually expressed in

decimal form in these formulas. So a person working
10% faster than normal would have a Performance
Rating of 1.10 or 110% of normal time. Working 10%
slower, 0.90 or 90% of normal.
• NT= Time worked _ x (Performance rating)*

Number of units produced
Time Study Standard Time Formulas
• Standard time = Normal time
+ (Allowances x Normal times)
• Standard time = NT(1 + Allowances)
• Standard time = NT .
1 - Allowances
Time Study Example Problem
• You want to determine the standard time for a job.
The employee selected for the time study has
produced 20 units of product in an 8 hour day. Your
observations made the employee nervous and you
estimate that the employee worked about 10 percent
faster than what is a normal pace for the job.
Allowances for the job represent 25 percent of the
normal time.
• Question: What are the normal and standard times

for this job?
Time Study Example Solution
Normal time = Time worked x (Perf. rating)

Number of units produced
= (480 minutes/20) x (1.10)
= 26.4 minutes
Standard time = NT .
1 – Allowances
= (26.4)/(1-0.25)
= 35.2 minutes
Work Sampling
• Use inference to make statements about

work activity based on a sample of the
activity
• Ratio Delay
– Activity time percentage for workers or
equipment
• Performance Measurement
– Relates work time to output (performance
index)
• Time Standards
– Standard task times
Advantage of Work Sampling over Time Study
• Several work sampling studies may be conducted
simultaneously by one observer
• The observer need not be a trained analyst unless
the purpose of the study is to determine a time
standard
• No timing devices are required
• Work of a long cycle time may be studied with
fewer observer hours
Advantage of Work Sampling over Time Study
(Continued)
• The duration of the study is longer, which minimizes
effects of short-period variations
• The study may be temporarily delayed at any time
with little effect
• Because work sampling needs only instantaneous
observations (made over a longer period), the
operator has less chance to influence the findings
by changing work method
Basic Compensation Systems
• Hourly Pay
• Straight Salary
• Piece Rate
• Commissions
Financial Incentive Plans
• Individual and Small-Group Plans
– Output measures
– Quality measures
– Pay for knowledge
• Organization-wide Plans
– Profit-sharing
– Gain-sharing
• Bonus based on controllable costs or units of output
• Involve participative management
Scanlon Plan
Basic Elements Total labor cost
Ratio =
Sales value of production
• The ratio
– Standard for judging business performance
• The bonus
– Depends on reduction in costs below the
preset ratio
• The production committee
• The screening committee

End of Technical
Note 5
Chapter 6
Manufacturing and
Process Selection
Design
Types of Processes
• Conversion (ex. Iron to steel)
• Fabrication (ex. Cloth to clothes)
• Assembly (ex. Parts to components)
• Testing (ex. For quality of products)

Process Flow Structures
• Job shop (ex. Copy center making a single copy of a

student term paper)
• Batch shop (ex. Copy center making 10,000 copies of

an ad piece for a business)
• Assembly Line (ex. Automobile manufacturer)
• Continuous Flow (ex. Petroleum manufacturer)

Exhibit
Few High
Low Multiple Major Volume,
6.10
Volume, Products, Products, High
One of a Low Higher Standard-
Kind Volume Volume ization
I. Commercial Flexibility (High)
Job Printer Unit Cost (High)
Shop French These are
Restaurant the major
II. Heavy stages of
Batch Equipment product
and
III.
Automobile process
Assembly
Assembly life cycles
Line Burger King
IV.
Sugar
Continuous Refinery
Flexibility (Low)
Flow Unit Cost (Low)
Break-Even Analysis
• A standard approach to choosing among
alternative processes or equipment
• Model seeks to determine the point in units
produced (and sold) where we will start
making profit on the process or equipment
• Model seeks to determine the point in units
produced (and sold) where total revenue and
total cost are equal
Break-Even Analysis (Continued)
Break-even Demand=
Purchase cost of process or equipment

Price per unit - Cost per unit
or
Total fixed costs of process or equipment
Unit price to customer - Variable costs per unit
This formula can be used to find any of its

components algebraically if the other
parameters are known
Break-Even Analysis (Continued)
• Example: Suppose you want to purchase a new computer that
will cost $5,000. It will be used to process written orders from
customers who will pay $25 each for the service. The cost of
labor, electricity and the form used to place the order is $5 per
customer. How many customers will we need to serve to
permit the total revenue to break-even with our costs?
• Break-even Demand:
= Total fixed costs of process or equip.
Unit price to customer – Variable costs
=5,000/(25-5)
=250 customers
Manufacturing Process Flow Design
• A process flow design can be defined as a

mapping of the specific processes that raw
materials, parts, and subassemblies follow as
they move through a plant
• The most common tools to conduct a process

flow design include assembly drawings,
assembly charts, and operation and route
sheets
Example: Assembly Chart (Gozinto)
From Exhibit 5.14

Lockring
4
Spacer, detent spring
5
SA-2 A-2
Rivets (2)
6
Spring-detent
7
A-5
Component/Assy Operation
Inspection
Example: Process Flow Chart
No,
Material Inspect Continue…
Received
Material for
from
Supplier Defects Defects
found?
Yes
Return to
Supplier for
Credit
End of Chapter 6
Technical Note 6
Facility Layout
OBJECTIVES
• Facility Layout and Basic Formats
• Process Layout
• Layout Planning
• Assembly Line balancing
• Service Layout
Facility Layout
Defined
Facility layout can be defined as the process by which the placement
of departments, workgroups within departments, workstations,
machines, and stock-holding points within a facility are
determined
This process requires the following inputs:
– Specification of objectives of the system in terms of output and
flexibility
– Estimation of product or service demand on the system
– Processing requirements in terms of number of operations and
amount of flow between departments and work centers
– Space requirements for the elements in the layout
– Space availability within the facility itself
Basic Production Layout Formats
• Process Layout (also called job-shop or

functional layout)
• Product Layout (also called flow-shop layout)
• Group Technology (Cellular) Layout
• Fixed-Position Layout
Process Layout: Interdepartmental Flow
• Given
– The flow (number of moves) to and from all
departments
– The cost of moving from one department to
another
– The existing or planned physical layout of the
plant
• Determine
– The “best” locations for each department, where
best means maximizing flow, which minimizing
costs
Process Layout: CRAFT Approach
• It is a heuristic program; it uses a simple rule of
thumb in making evaluations:
– "Compare two departments at a time and
exchange them if it reduces the total cost of the
layout."
• It does not guarantee an optimal solution
• CRAFT assumes the existence of variable path

material handling equipment such as forklift
trucks
Process Layout: Systematic Layout Planning
• Numerical flow of items between departments
– Can be impractical to obtain
– Does not account for the qualitative factors that
may be crucial to the placement decision
• Systematic Layout Planning
– Accounts for the importance of having each
department located next to every other
department
– Is also guided by trial and error
• Switching departments then checking the results of the
“closeness” score
Example of Systematic Layout Planning: Reasons
for Closeness
Code Reason
1 Type of customer
2 Ease of supervision
3 Common personnel
4 Contact necessary
5 Share same price
6 Psychology
Example of Systematic Layout Planning:
Importance of Closeness
Line Numerical
Value Closeness
code weights
A Absolutely necessary 16
E Especially important 8
I Important 4
O Ordinary closeness OK 2
U Unimportant 0
X Undesirable 80
Example of Systematic Layout Planning: Relating Reasons
and Importance
Area
From To
2 3 4 5 (sq. ft.)
I U A U
1. Credit department 100
6 -- 4 --
U I A
2. Toy department 400
-- 1 1,6
Note here that the
(1) Credit Dept. U X
3. Wine department 300
and (2) Toy Dept. -- 1
Note here that the (2)
are given a high X
Toy Dept. and the (5)
4. Camera department rating of 6. Candy Dept. are 100
given a
1
high rating of 6.
5. Candy department 100
Closeness rating Letter

Reason for rating Number
Initial Relationship Diagram
E The number of lines here

1 3
represent paths required to be
taken in transactions between
I U U the departments. The more
4 lines, the more the interaction
between departments.
2 5
A
Note here again, Depts. (1) and (2) are
linked together, and Depts. (2) and (5) are
linked together by multiple lines or
required transactions.
Initial and Final Layouts
5 2 4 2
3 20 ft
3 1 5 1 4
Note in the Final
Layout that
50 ft Depts. (1) and (5)
are not both
Initial Layout Final Layout placed directly
next to Dept. (2).
Ignoring space and Adjusted by square
building constraints footage and building
size
Assembly Lines Balancing Concepts
Question: Suppose you load work into the three work

stations below such that each will take the corresponding
number of minutes as shown. What is the cycle time of
this line?
Station 1 Station 2 Station 3

Minutes
per Unit
6 7 3
Answer: The cycle time of the line is always determined by the work
station taking the longest time. In this problem, the cycle time of the line
is 7 minutes. There is also going to be idle time at the other two work
stations.
Example of Line Balancing
• You’ve just been assigned the job a setting up an

electric fan assembly line with the following tasks:
Task Time (Mins) Description Predecessors

A 2 Assemble frame None
B 1 Mount switch A
C 3.25 Assemble motor housing None
D 1.2 Mount motor housing in frame A, C
E 0.5 Attach blade D
F 1 Assemble and attach safety grill E
G 1 Attach cord B
H 1.4 Test F, G
Example of Line Balancing:
Structuring the Precedence Diagram
Task Predecessors Task Predecessors
A None E D
B A F E
C None G B
D A, C H E, G
A B G
C D E F
Example of Line Balancing: Precedence Diagram
Question: Which process step defines the maximum rate of
production?
2 1 1
1.4
A B G
H
C D E F
3.25 1.2 .5 1
Answer: Task C is the cycle time of the line and therefore, the
maximum rate of production.
Example of Line Balancing: Determine Cycle Time
Question: Suppose we want to assemble 100
fans per day. What would our cycle time
have to be?
Answer:
Production time per period

Required Cycle Time, C =
Required output per period
420 mins / day

C= = 4.2 mins / unit
100 units / day
Example of Line Balancing: Determine Theoretical
Minimum Number of Workstations
Question: What is the theoretical minimum number of
workstations for this problem?
Answer: Theoretical Min. Number of Workstations, N t
Sum of task times (T)

Nt =
Cycle time (C)
11.35 mins / unit

Nt = = 2.702, or 3
4.2 mins / unit
Example of Line Balancing: Rules To Follow for Loading
Workstations
• Assign tasks to station 1, then 2, etc. in sequence. Keep assigning
to a workstation ensuring that precedence is maintained and
total work is less than or equal to the cycle time. Use the
following rules to select tasks for assignment.
• Primary: Assign tasks in order of the largest number of following

tasks
• Secondary (tie-breaking): Assign tasks in order of the longest

operating time
Task Followers Time (Mins)
A 6 2
2 1 1
1.4 C 4 3.25
A B G
H D 3 1.2
B 2 1
E 2 0.5
C D E F
F 1 1
3.25 1.2 .5 1
G 1 1
H 0 1.4

A 6 2
2 1 1
1.4 C 4 3.25
A B G
H D 3 1.2
B 2 1
E 2 0.5
C D E F
F 1 1
3.25 1.2 .5 1
G 1 1
H 0 1.4

A (4.2-2=2.2)
A 6 2
2 1 1
1.4 C 4 3.25
A B G
H D 3 1.2
B 2 1
E 2 0.5
C D E F
F 1 1
3.25 1.2 .5 1
G 1 1
H 0 1.4

A (4.2-2=2.2)
B (2.2-1=1.2)
A 6 2
2 1 1
1.4 C 4 3.25
A B G
H D 3 1.2
B 2 1
E 2 0.5
C D E F
F 1 1
3.25 1.2 .5 1
G 1 1
H 0 1.4

A (4.2-2=2.2)
B (2.2-1=1.2)
G (1.2-1= .2)
Idle= .2
A 6 2
2 1 1
1.4 C 4 3.25
A B G
H D 3 1.2
B 2 1
E 2 0.5
C D E F
F 1 1
3.25 1.2 .5 1
G 1 1
H 0 1.4

A (4.2-2=2.2) C (4.2-3.25)=.95
B (2.2-1=1.2)
G (1.2-1= .2)
Idle= .2
A 6 2
2 1 1
1.4 C 4 3.25
A B G
H D 3 1.2
B 2 1
E 2 0.5
C D E F
F 1 1
3.25 1.2 .5 1
G 1 1
H 0 1.4

A (4.2-2=2.2) C (4.2-3.25)=.95
B (2.2-1=1.2)
G (1.2-1= .2)
Idle= .2 Idle = .95

A 6 2
2 1 1
1.4 C 4 3.25
A B G
H D 3 1.2
B 2 1
E 2 0.5
C D E F
F 1 1
3.25 1.2 .5 1
G 1 1
H 0 1.4

A (4.2-2=2.2) C (4.2-3.25)=.95 D (4.2-1.2)=3
B (2.2-1=1.2)
G (1.2-1= .2)
Idle= .2 Idle = .95

A 6 2
2 1 1
1.4 C 4 3.25
A B G
H D 3 1.2
B 2 1
E 2 0.5
C D E F
F 1 1
3.25 1.2 .5 1
G 1 1
H 0 1.4

A (4.2-2=2.2) C (4.2-3.25)=.95 D (4.2-1.2)=3
B (2.2-1=1.2) E (3-.5)=2.5
G (1.2-1= .2)
Idle= .2 Idle = .95

A 6 2
2 1 1
1.4 C 4 3.25
A B G
H D 3 1.2
B 2 1
E 2 0.5
C D E F
F 1 1
3.25 1.2 .5 1
G 1 1
H 0 1.4

A (4.2-2=2.2) C (4.2-3.25)=.95 D (4.2-1.2)=3
B (2.2-1=1.2) E (3-.5)=2.5
G (1.2-1= .2) F (2.5-1)=1.5
Idle= .2 Idle = .95

A 6 2
2 1 1
1.4 C 4 3.25
A B G
H D 3 1.2
B 2 1
E 2 0.5
C D E F
F 1 1
3.25 1.2 .5 1
G 1 1
H 0 1.4

A (4.2-2=2.2) C (4.2-3.25)=.95 D (4.2-1.2)=3
B (2.2-1=1.2) E (3-.5)=2.5
G (1.2-1= .2) F (2.5-1)=1.5
H (1.5-1.4)=.1
Idle= .2 Idle = .95 Idle = .1
Which station is the bottleneck? What is the effective cycle time?
Example of Line Balancing: Determine the Efficiency of the
Assembly Line
Sum of task times (T)
Efficiency =
Actual number of workstations (Na) x Cycle time (C)
11.35 mins / unit

Efficiency = =.901
(3)(4.2mins / unit)
Group Technology:
Benefits
1. Better human relations
2. Improved operator expertise
3. Less in-process inventory and material

handling
4. Faster production setup

Group Technology:
Transition from Process Layout
1. Grouping parts into families that follow a
common sequence of steps
2. Identifying dominant flow patterns of
parts families as a basis for location or
relocation of processes
3. Physically grouping machines and
processes into cells
Fixed Position Layout
Question: What are our primary considerations

for a fixed position layout?
Answer: Arranging materials and equipment

concentrically around the production point in
their order of use.
Retail Service Layout
• Goal--maximize net profit per square foot
of floor space
• Servicescapes
– Ambient Conditions
– Spatial Layout and Functionality
– Signs, Symbols, and Artifacts
Chapter 7
Service Process
Selection and Design
OBJECTIVES
• The Nature of Services
• Service Strategy: Focus & Advantage
• Service-System Design Matrix
• Service Blueprinting
• Service Fail-safing
• Characteristics of a Well-Designed
Service Delivery System
The Nature of Services
1. Everyone is an expert on services
2. Services are idiosyncratic
3. Quality of work is not quality of service
4. Most services contain a mix of tangible

and intangible attributes
Service Generalizations (Continued)
5. High-contact services are experienced,
whereas goods are consumed
6. Effective management of services requires an
understanding of marketing and personnel,
as well as operations
7. Services often take the form of cycles of
encounters involving face-to-face, phone,
Internet, electromechanical, and/or mail
interactions
Service Businesses
A service business is the management of

organizations whose primary business
requires interaction with the customer to
produce the service
• Facilities-based services: Where the customer must go
to the service facility
• Field-based services: Where the production and

consumption of the service takes place in the
customer’s environment
Internal Internal services is the management of
Services services required to support the activities
of the larger organization. Services
Defined including data processing, accounting, etc
Internal Supplier
Internal
Customer
External
Customer
Internal Supplier
Exhibit 7.1
The Customer Centered View

A philosophical view that suggests
the organization exists to serve the The Service
customer, and the systems and the
Strategy
employees exist to facilitate the
process of service.
The
Customer
The The
Systems People
Service Strategy: Focus and Advantage
Performance Priorities
• Treatment of the customer
• Speed and convenience of service delivery
• Price
• Variety
• Quality of the tangible goods
• Unique skills that constitute the service offering
Service-System Design Matrix
Exhibit 7.6
Degree of customer/server contact
Buffered Permeable Reactive
High core (none) system (some) system (much) Low
Face-to-face
total
customization
Face-to-face
Sales loose specs Production
Opportunity Face-to-face Efficiency
tight specs
Phone
Internet & Contact
on-site
Mail contacttechnology
Low High
Example of Service Blueprinting
Standard Brush Apply Collect
execution time Buff
shoes polish payment
2 minutes
30 30 45 15
secs secs secs secs
Total acceptable
execution time
Wrong
5 minutes
color wax
Clean Fail
shoes point Materials
Seen by
(e.g., polish, cloth)
customer 45
secs
Line of Not seen by

visibility customer but Select and
necessary to purchase
performance supplies
Service Fail-safing
Poka-Yokes (A Proactive Approach)
• Keeping a
mistake from Task
becoming a
service defect
Treatment Tangibles
• How can we fail-
safe the three Ts?
Have we
compromised
one of the
3 Ts?
1. Task
2. Treatment
3. Tangible
Three Contrasting Service Designs
• The production line approach (ex. McDonald’s)
• The self-service approach (ex. automatic teller

machines)
• The personal attention approach (ex. Ritz-

Carlton Hotel Company)
Characteristics of a Well-Designed Service
System
1. Each element of the service system is
consistent with the operating focus of the
firm
2. It is user-friendly
3. It is robust
4. It is structured so that consistent

performance by its people and systems is
easily maintained
Characteristics of a Well-Designed Service
System (Continued)
5. It provides effective links between the back
office and the front office so that nothing
falls between the cracks
6. It manages the evidence of service quality in

such a way that customers see the value of
the service provided
7. It is cost-effective
Applying Behavioral Science to Service Encounters
1. The front-end and back-end of the encounter
are not created equal
2. Segment the pleasure, combine the pain
3. Let the customer control the process
4. Pay attention to norms and rituals
5. People are easier to blame than systems
6. Let the punishment fit the crime in service
recovery
Service Guarantees as Design Drivers
• Recent research suggests:

– Any guarantee is better than no guarantee
– Involve the customer as well as employees in the
design
– Avoid complexity or legalistic language
– Do not quibble or wriggle when a customer
invokes a guarantee
– Make it clear that you are happy for customers to
invoke the guarantee
End of Chapter 7
253
Technical Note 7
Waiting Line
Management

OBJECTIVES
• Waiting Line Characteristics
• Suggestions for Managing Queues
• Examples (Models 1, 2, 3, and 4)
Components of the Queuing System
Servicing System
Servers
Queue or
Customer Waiting Line
Arrivals Exit
Customer Service Population Sources
Population Source
Finite Infinite
Example: Number Example: The
of machines number of people
needing repair who could wait in
when a company a line for
only has three gasoline.
machines.
Service Pattern
Service
Pattern
Constant Variable
Example: Items Example: People
coming down an spending time
automated shopping.
assembly line.
The Queuing System
Length
Queuing
Number of Lines &
Queue Discipline System
Line Structures
Service Time
Distribution
Examples of Line Structures
Single
Multiphase
Phase
One-person
Single Channel Car wash
barber shop
Bank tellers’ Hospital

Multichannel windows admissions
Degree of Patience
No Way! No Way!
BALK RENEG
Suggestions for Managing Queues
1. Determine an acceptable waiting time for

your customers
2. Try to divert your customer’s attention
when waiting
3. Inform your customers of what to expect
4. Keep employees not serving the customers
out of sight
5. Segment customers
Suggestions for Managing Queues (Continued)
6. Train your servers to be friendly
7. Encourage customers to come during the
slack periods
8. Take a long-term perspective toward
getting rid of the queues
Waiting Line Models
Source
Model Layout Population Service Pattern
1 Single channel Infinite Exponential
2 Single channel Infinite Constant
3 Multichannel Infinite Exponential
4 Single or Multi Finite Exponential
These four models share the following characteristics:

• Single phase
• Poisson arrival
• FCFS
• Unlimited queue length
Notation: Infinite Queuing: Models 1-3
l = Arrival rate
µ = Service rate
1
= Average service time
µ
1
= Average time between arrivals
l
l
r = = Ratio of total arrival rate to sevice rate
µ
for a single server
Lq = Average number waiting in line
Infinite Queuing Models 1-3 (Continued)
Ls = Average number in system
(including those being served)
Wq = Average time waiting in line
Ws = Average total time in system
(including time to be served)
n = Number of units in the system
S = Number of identical service channels
Pn = Probability of exactly n units in system
Pw = Probability of waiting in line
Example: Model 1
Assume a drive-up window at a fast food restaurant.
Customers arrive at the rate of 25 per hour.
The employee can serve one customer every two
minutes.
Assume Poisson arrival and exponential service
rates.
Determine:
A) What is the average utilization of the employee?
B) What is the average number of customers in line?
C) What is the average number of customers in the
system?
D) What is the average waiting time in line?
E) What is the average waiting time in the system?
F) What is the probability that exactly two cars will be
in the system?
Example: Model 1
A) What is the average utilization of the

employee?
l = 25 cust / hr
1 customer
µ = = 30 cust / hr
2 mins (1hr / 60 mins)
l 25 cust / hr
r = = = .8333
µ 30 cust / hr
Example: Model 1
B) What is the average number of customers in

line?
l 2
(25) 2
Lq = = = 4.167
µ ( µ - l ) 30(30 - 25)
C) What is the average number of customers in the
system?
l 25
Ls = = =5
µ - l (30 - 25)
Example: Model 1
D) What is the average waiting time in line?
Lq
Wq = = .1667 hrs = 10 mins
l
E) What is the average waiting time in the system?
Ls
Ws = = .2 hrs = 12 mins
l
Example: Model 1
F) What is the probability that exactly two cars

will be in the system (one being served and the
other waiting in line)?
l l n
pn = (1 - )( )
µ µ
25 25 2
p 2 = (1- )( ) = .1157
30 30
Example: Model 2
An automated pizza vending machine
heats and
dispenses a slice of pizza in 4 minutes.
Customers arrive at a rate of one every 6

minutes with the arrival rate exhibiting a
Poisson distribution.
Determine:
A) The average number of customers in line.

B) The average total waiting time in the system.
Example: Model 2
A) The average number of customers in line.
l 2
(10) 2
Lq = = = .6667
2µ ( µ - l ) (2)(15)(15 - 10)
B) The average total waiting time in the system.
Lq .6667
Wq = = = .06667 hrs = 4 mins
l 10
1 1
Ws = Wq + = .06667 hrs + = .1333 hrs = 8 mins
µ 15/hr
Example: Model 3
Recall the Model 1 example:
Drive-up window at a fast food restaurant.
Customers arrive at the rate of 25 per hour.
The employee can serve one customer
every two minutes.
Assume Poisson arrival and exponential
service rates.
If an identical window (and an identically trained

server) were added, what would the effects be on
the average number of cars in the system and the
total time customers wait before being served?
Example: Model 3
Average number of cars in the system
Lq = 0.176
(Exhibit TN7.11 - -using linear interpolation)
l 25
Ls = Lq + = .176 + = 1.009
µ 30
Total time customers wait before being served
Lq .176 customers
Wq = = = .007 mins ( No Wait! )
l 25 customers/min
Notation: Finite Queuing: Model 4
D = Probability that an arrival must wait in line
F = Efficiency factor, a measure of the effect of
having to wait in line
H = Average number of units being served
J = Population source less those in queuing
system ( N - n)
L = Average number of units in line
S = Number of service channels
Finite Queuing: Model 4 (Continued)
n = Average number of units in queuing system
(including the one being served)
N = Number of units in population source
Pn = Probability of exactly n units in queuing system
T = Average time to perform the service
U = Average time between customer service requirements
W = Average waiting time in line
X = Service factor, or proportion of service time required
Example: Model 4
The copy center of an electronics firm has four copy

machines that are all serviced by a single technician.
Every two hours, on average, the machines require

adjustment. The technician spends an average of 10
minutes per machine when adjustment is required.
Assuming Poisson arrivals and exponential service,

how many machines are “down” (on average)?
Example: Model 4
N, the number of machines in the population = 4
M, the number of repair people = 1
T, the time required to service a machine = 10 minutes
U, the average time between service = 2 hours
T 10 m in
X = = = .077
T+ U 10 m in + 120 m in
From Table TN7.11, F = .980 (Interpolation)
L, the number of machines waiting to be

serviced = N(1-F) = 4(1-.980) = .08 machines
H, the number of machines being

serviced = FNX = .980(4)(.077) = .302 machines
Number of machines down = L + H = .382 machines

Queuing Approximation
• This approximation is quick way to analyze a queuing situation. Now,
both interarrival time and service time distributions are allowed to be
general.
• In general, average performance measures (waiting time in queue,
number in queue, etc) can be very well approximated by mean and
variance of the distribution (distribution shape not very important).
• This is very good news for managers: all you need is mean and standard
deviation, to compute average waiting time
Define:
Standard deviation of X
Cx = coefficient of variation for r.v. X =
Mean of X
Variance
Cx2 = squared coefficient of variation (scv) = (Cx ) =
2
mean2
Queue Approximation
Inputs: S, l, µ, Ca2 ,Cs2

(Alternatively: S, l, µ, variances of interarrival and service time distributions)
l
Compute r =
Sµ
2( S +1)
r Ca2 + Cs2 Lq
Lq = × Ls
1- r 2 as before, Wq = , and Ws =
l l
Ls = Lq + S r
Approximation Example
• Consider a manufacturing process (for example making plastic
parts) consisting of a single stage with five machines.
Processing times have a mean of 5.4 days and standard
deviation of 4 days. The firm operates make-to-order.
Management has collected date on customer orders, and
verified that the time between orders has a mean of 1.2 days
and variance of 0.72 days. What is the average time that an
order waits before being worked on?
Using our “Waiting Line Approximation” spreadsheet we get:

Lq = 3.154 Expected number of orders waiting to be completed.
Wq = 3.78 Expected number of days order waits.
Ρ = 0.9 Expected machine utilization.
282

Chapter 8
Quality Management
OBJECTIVES
• Total Quality Management Defined

• Quality Specifications and Costs
• Six Sigma Quality and Tools
• External Benchmarking
• ISO 9000
• Service Quality Measurement
Total Quality Management (TQM)
• Total quality management is defined as

managing the entire organization so
that it excels on all dimensions of
products and services that are
important to the customer
Quality Specifications
• Design quality: Inherent value of the product

in the marketplace
– Dimensions include: Performance, Features,

Reliability/Durability, Serviceability, Aesthetics,
and Perceived Quality.
• Conformance quality: Degree to which the

product or service design specifications are
met
Costs of Quality
Appraisal Costs
Costs of
External Failure
Quality Prevention Costs
Costs
Internal Failure
Costs
Six Sigma Quality
• A philosophy and set

ofmethods companies use to
eliminate defects in their
products and processes
• Seeks to reduce variation in
the processes that lead to
product defects
• The name, “six sigma” refers
to the variation that exists
within plus or minus three
standard deviations of the
process outputs
Six Sigma Quality
Six Sigma Quality (Continued)
• Six Sigma allows managers to readily describe
process performance using a common metric:
Defects Per Million Opportunities (DPMO)
Number of defects
DPMO = x 1,000,000
é Number of ù
ê opportunities ú
ê for error per ú x No. of units
ê unit ú
ë û
Batch size
Six Sigma Quality (Continued)
Example of Defects Per Million So, for every one
million letters
Opportunities (DPMO) calculation. delivered this
Suppose we observe 200 letters delivered city’s postal
incorrectly to the wrong addresses in a managers can
expect to have
small city during a single day when a 1,000 letters
total of 200,000 letters were delivered. incorrectly sent to
What is the DPMO in this situation? the wrong
address.
200
DPMO = x 1,000,000 = 1, 000
[ 1 ] x 200,000
Cost of Quality: What might that DPMO mean in terms
of over-time employment to correct the errors?
Six Sigma Quality: DMAIC Cycle
• Define, Measure, Analyze, Improve, and
Control (DMAIC)
• Developed by General Electric as a means of
focusing effort on quality using a
methodological approach
• Overall focus of the methodology is to
understand and achieve what the customer
wants
• A 6-sigma program seeks to reduce the
variation in the processes that lead to these
defects
• DMAIC consists of five steps….
Six Sigma Quality: DMAIC Cycle (Continued)
1. Define (D) Customers and their priorities
2. Measure (M) Process and its performance
3. Analyze (A) Causes of defects
4. Improve (I) Remove causes of defects
5. Control (C) Maintain quality

Example to illustrate the process…
• We are the maker of a cereal.

• Consumer/customer reports has just
published an article that shows that we
frequently have less than 15 ounces of
cereal in a box.
• What should we do?
Step 1 - Define
• What is the critical-to-quality

characteristic?
• The CTQ (critical-to-quality) characteristic

in this case is the weight of the cereal in
the box.
2 - Measure
• How would we measure to evaluate the

extent of the problem?
• What are acceptable limits on this

measure?
2 – Measure (continued)
• Let’s assume that the government says
that we must be within ± 5 percent of
the weight advertised on the box.
• Upper Tolerance Limit = 16 + .05(16) =

16.8 ounces
• Lower Tolerance Limit = 16 – .05(16) =

15.2 ounces
2. Measure (continued)
• We go out and buy 1,000 boxes of cereal
and find that they weight an average of
15.875 ounces with a standard deviation
of .529 ounces.
• What percentage of boxes are outside

the tolerance limits?
Process
Lower Tolerance Mean = 15.875 Upper Tolerance
= 15.2 Std. Dev. = .529 = 16.8
What percentage of boxes are defective (i.e. less than 15.2 oz)?
Z = (x – Mean)/Std. Dev. = (15.2 – 15.875)/.529 = -1.276
NORMSDIST(Z) = NORMSDIST(-1.276) = .100978
Approximately, 10 percent of the boxes have less than 15.2

Ounces of cereal in them!
Step 3 - Analyze - How can we improve
the capability of our cereal box filling
process?
–Decrease Variation
–Center Process
–Increase Specifications
Step 4 – Improve – How good is good enough?
Motorola’s “Six Sigma”
– 6s minimum from process center to

nearest spec
12s
6s
3 2 1 0 1 2 3
Motorola’s “Six Sigma”
• Implies 2 ppB “bad” with no process shift

• With 1.5s shift in either direction from center (process will
move), implies 3.4 ppm “bad”.
12s
3 2 1 0 1 2 3
Step 5 – Control
• Statistical Process Control (SPC)
– Use data from the actual process
– Estimate distributions
– Look at capability - is good quality
possible
– Statistically monitor the process over
time
Analytical Tools for Six Sigma and Continuous
Improvement: Flow Chart

Material No,
Received Continue…
from Supplier Inspect
Material for Defects
Defects found?
Yes
Can be used to
find quality Return to
problems Supplier for
Credit
Improvement: Run Chart
Can be used to identify
when equipment or
processes are not
behaving according to
Diameter
specifications
0.58
0.56
0.54
0.52
0.5
0.48
0.46
0.44
1 2 3 4 5 6 7 8 9 10 11 12
Time (Hours)
Analytical Tools for Six Sigma and Continuous Improvement:
Pareto Analysis
Can be used 80%
to find when
80% of the
problems
may be Frequency
attributed to
20% of the
causes
Design Assy. Purch. Training

Instruct.
Improvement: Checksheet
Can be used to keep track of

defects or used to make sure
people collect data in a
Monday correct manner
Billing Errors
Wrong Account
Wrong Amount
A/R Errors
Wrong Account
Wrong Amount
Improvement: Histogram
Can be used to identify the frequency of quality
Number of Lots
defect occurrence and display quality

performance
0 1 2 3 4 Defects
Data Ranges in lot
Improvement: Cause & Effect Diagram
Possible causes: The results

or effect
Machine Man
Environment Effect
Method Material
Can be used to systematically track backwards to

find a possible cause of a quality problem (or
effect)
Improvement: Control Charts
Can be used to monitor ongoing production process

quality and quality conformance to stated standards of
quality
1020
1010
UCL
1000
990
980 LCL
970
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Other Six Sigma Tools
• Failure Mode and Effect Analysis

(DMEA) is a structured approach to
identify, estimate, prioritize, and
evaluate risk of possible failures at each
stage in the process
• Design of Experiments (DOE) a
statistical test to determine cause-and-
effect relationships between process
variables and output
Six Sigma Roles and Responsibilities
1. Executive leaders must champion the

process of improvement
2. Corporation-wide training in Six Sigma
concepts and tools
3. Setting stretch objectives for
improvement
4. Continuous reinforcement and
rewards
The Shingo System: Fail-Safe Design
• Shingo’s argument:
– SQC methods do not prevent defects
– Defects arise when people make errors
– Defects can be prevented by providing workers with
feedback on errors
• Poka-Yoke includes:
– Checklists
– Special tooling that prevents workers from making
errors
ISO 9000
• Series of standards agreed upon by the

International Organization for
Standardization (ISO)
• Adopted in 1987
• More than 100 countries
• A prerequisite for global competition?
• ISO 9000 directs you to "document what you
do and then do as you documented"
Three Forms of ISO Certification
1. First party: A firm audits itself against ISO 9000

standards
2. Second party: A customer audits its supplier
3. Third party: A "qualified" national or

international standards or certifying agency
serves as auditor
External Benchmarking Steps
1. Identify those processes needing

improvement
2. Identify a firm that is the world leader in
performing the process
3. Contact the managers of that company and
make a personal visit to interview managers
and workers
4. Analyze data
Service Quality Measurement:Servqual
• A perceived service quality questionnaire
survey methodology
• Examines “Dimensions of Service Quality”

including: Reliability, Responsiveness,
Assurance, Empathy, and Tangibles (e.g.,
appearance of physical facilities, equipment,
etc.)
Service Quality Measurement: Servqual
(Continued)
• New version of this methodology is called “e-

Service Quality” dealing service on the
Internet
• Dimensions of Service Quality on the e-
Service methodology include: Reliability,
Responsiveness, Access, Flexibility, Ease of
Navigation, Efficiency, Assurance/Trust,
Security/Privacy, Price Knowledge, Site
Aesthetics, and
Customization/Personalization
End of Chapter 8
320
Technical Note 8
Process Capability and
Statistical Quality Control

OBJECTIVES
• Process Variation
• Process Capability
• Process Control Procedures
– Variable data
– Attribute data
• Acceptance Sampling
– Operating Characteristic Curve
Basic Forms of Variation
Assignable variation is
caused by factors thatExample: A poorly trained employee
can be clearly that creates variation in finished
product output.
identified and
possibly managed
Common variation is Example: A molding process that

inherent in the always leaves “burrs” or flaws on a
production process molded item.
Taguchi’s View of Variation
Traditional view is that quality within the LS and US is good and that the cost of quality
outside this range is constant, where Taguchi views costs as increasing as variability
increases, so seek to achieve zero defects and that will truly minimize quality costs.
High High
Incremental Incremental
Cost of Cost of
Variability Variability
Zero Zero
Lower Target Upper Exhibits Lower Target Upper

Spec Spec Spec TN8.1 & Spec Spec Spec
TN8.2
Traditional View Taguchi’s View
Process Capability
• Process limits
• Specification limits
• How do the limits relate to one another?

Process Capability Index, Cpk
Capability Index shows how well
parts being produced fit into æ X - LTL UTL - X ö
design limit specifications. C pk ç
= min ç or ÷
3 s 3s ÷
è ø
As a production process
produces items small
shifts in equipment or
systems can cause
differences in
production performance
from differing samples.
Shifts in Process Mean

Process Capability – A Standard Measure of How
Good a Process Is.
A simple ratio:
Specification Width
_________________________________________________________
Actual “Process Width”

Generally, the bigger the better.
Process Capability
ì X - LTL UTL - X ü
C pk = Miní ; ý
î 3s 3s þ
This is a “one-sided” Capability Index

Concentration on the side which is closest to the
specification - closest to being “bad”
The Cereal Box Example
• We are the maker of this cereal. Consumer reports has just

published an article that shows that we frequently have less than
15 ounces of cereal in a box.
• Let’s assume that the government says that we must be within ± 5
percent of the weight advertised on the box.
• Upper Tolerance Limit = 16 + .05(16) = 16.8 ounces
• Lower Tolerance Limit = 16 – .05(16) = 15.2 ounces
• We go out and buy 1,000 boxes of cereal and find that they weight
an average of 15.875 ounces with a standard deviation of .529
ounces.
Cereal Box Process Capability
• Specification or Tolerance
Limits
– Upper Spec = 16.8 oz ì X - LTL UTL - X ü
– Lower Spec = 15.2 oz C pk = Miní ; ý
• Observed Weight î 3s 3s þ
– Mean = 15.875 oz ì15.875 - 15.2 16.8 - 15.875 ü
– Std Dev = .529 oz
C pk = Miní ; ý
î 3(.529) 3(.529) þ
C pk = Min{.4253; .5829}
C pk = .4253
What does a Cpk of .4253 mean?
• An index that shows how well the units

being produced fit within the specification
limits.
• This is a process that will produce a
relatively high number of defects.
• Many companies look for a Cpk of 1.3 or
better… 6-Sigma company wants 2.0!
Types of Statistical Sampling
• Attribute (Go or no-go information)
– Defectives refers to the acceptability of product
across a range of characteristics.
– Defects refers to the number of defects per unit
which may be higher than the number of
defectives.
– p-chart application
• Variable (Continuous)
– Usually measured by the mean and the standard
deviation.
– X-bar and R chart applications
Statistical UCL
Process Normal Behavior

Control
(SPC) Charts
LCL
1 2 3 4 5 6 Samples
over time
UCL
Possible problem, investigate
LCL
1 2 3 4 5 6 Samples
over time
UCL
Possible problem, investigate
LCL
1 2 3 4 5 6 Samples
over time
Control Limits are based on the Normal
Curve
x
µ
z
-3 -2 -1 0 1 2 3
Standard
deviation units or
“z” units.
Control Limits
We establish the Upper Control Limits (UCL) and the
Lower Control Limits (LCL) with plus or minus 3
standard deviations from some x-bar or mean value.
Based on this we can expect 99.7% of our sample
observations to fall within these limits.
99.7%
x
LCL UCL
Example of Constructing a p-Chart:
Required Data
Sample No. of Number of
defects found
No. Samples in each sample
1 100 4
2 100 2
3 100 5
4 100 3
5 100 6
6 100 4
7 100 3
8 100 7
9 100 1
10 100 2
11 100 3
12 100 2
13 100 2
14 100 8
15 100 3
Statistical Process Control Formulas:
Attribute Measurements (p-Chart)
Given: T o ta l N u m b e r o f D e fe c tiv e s
p =
T o ta l N u m b e r o f O b s e rv a tio n s
p (1 - p)
sp =
n
Compute control limits:
UCL = p + z sp
LCL = p - z sp
Example of Constructing a p-chart: Step 1
Sample n Defectives p
1. Calculate the 1 100 4 0.04
sample proportions, 2 100 2 0.02
3 100 5 0.05
p (these are what 4 100 3 0.03
can be plotted on the 5 100 6 0.06
p-chart) for each 6 100 4 0.04
7 100 3 0.03
sample
8 100 7 0.07
9 100 1 0.01
10 100 2 0.02
11 100 3 0.03
12 100 2 0.02
13 100 2 0.02
14 100 8 0.08
15 100 3 0.03
Example of Constructing a p-chart: Steps 2&3
2. Calculate the average of the sample proportions
55
p = = 0.036
1500
3. Calculate the standard deviation of the
sample proportion
p (1 - p) .036(1- .036)
sp = = = .0188
n 100
Example of Constructing a p-chart: Step 4
4. Calculate the control limits
UCL = p + z sp
LCL = p - z sp
.036 ± 3(.0188)
UCL = 0.0924
LCL = -0.0204 (or 0)
Example of Constructing a p-Chart: Step 5
5. Plot the individual sample proportions, the average

of the proportions, and the control limits
0.16
0.14
0.12
0.1 UCL
p 0.08
0.06
0.04
0.02
0 LCL
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Observation
Example of x-bar and R Charts:
Required Data
Sample Obs 1 Obs 2 Obs 3 Obs 4 Obs 5
1 10.68 10.689 10.776 10.798 10.714
2 10.79 10.86 10.601 10.746 10.779
3 10.78 10.667 10.838 10.785 10.723
4 10.59 10.727 10.812 10.775 10.73
5 10.69 10.708 10.79 10.758 10.671
6 10.75 10.714 10.738 10.719 10.606
7 10.79 10.713 10.689 10.877 10.603
8 10.74 10.779 10.11 10.737 10.75
9 10.77 10.773 10.641 10.644 10.725
10 10.72 10.671 10.708 10.85 10.712
11 10.79 10.821 10.764 10.658 10.708
12 10.62 10.802 10.818 10.872 10.727
13 10.66 10.822 10.893 10.544 10.75
14 10.81 10.749 10.859 10.801 10.701
15 10.66 10.681 10.644 10.747 10.728
Example of x-bar and R charts: Step 1. Calculate sample
means, sample ranges, mean of means, and mean of
ranges.
Sample Obs 1 Obs 2 Obs 3 Obs 4 Obs 5 Avg Range
1 10.68 10.689 10.776 10.798 10.714 10.732 0.116
2 10.79 10.86 10.601 10.746 10.779 10.755 0.259
3 10.78 10.667 10.838 10.785 10.723 10.759 0.171
4 10.59 10.727 10.812 10.775 10.73 10.727 0.221
5 10.69 10.708 10.79 10.758 10.671 10.724 0.119
6 10.75 10.714 10.738 10.719 10.606 10.705 0.143
7 10.79 10.713 10.689 10.877 10.603 10.735 0.274
8 10.74 10.779 10.11 10.737 10.75 10.624 0.669
9 10.77 10.773 10.641 10.644 10.725 10.710 0.132
10 10.72 10.671 10.708 10.85 10.712 10.732 0.179
11 10.79 10.821 10.764 10.658 10.708 10.748 0.163
12 10.62 10.802 10.818 10.872 10.727 10.768 0.250
13 10.66 10.822 10.893 10.544 10.75 10.733 0.349
14 10.81 10.749 10.859 10.801 10.701 10.783 0.158
15 10.66 10.681 10.644 10.747 10.728 10.692 0.103
Averages 10.728 0.220400

Example of x-bar and R charts: Step 2. Determine Control
Limit Formulas and Necessary Tabled Values
x Chart Control Limits From Exhibit TN8.7
n A2 D3 D4
UCL = x + A 2 R 2 1.88 0 3.27
3 1.02 0 2.57
LCL = x - A 2 R 4 0.73 0 2.28
5 0.58 0 2.11
6 0.48 0 2.00
R Chart Control Limits 7 0.42 0.08 1.92
8 0.37 0.14 1.86
UCL = D 4 R 9 0.34 0.18 1.82
10 0.31 0.22 1.78
LCL = D 3 R 11 0.29 0.26 1.74
Example of x-bar and R charts: Steps 3&4. Calculate x-bar
Chart and Plot Values
UCL = x + A 2 R = 10.728 - .58(0.2204 ) = 10.856

LCL = x - A 2 R = 10.728 - .58(0.2204 ) = 10.601
1 0 .9 0 0
1 0 .8 5 0 UCL
1 0 .8 0 0
1 0 .7 5 0
M eans
1 0 .7 0 0
1 0 .6 5 0
1 0 .6 0 0
LCL
1 0 .5 5 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Sam ple
Example of x-bar and R charts: Steps 5&6. Calculate R-chart
and Plot Values
UCL = D 4 R = ( 2.11)( 0.2204 ) = 0.46504
LCL = D 3 R = (0)( 0.2204 ) = 0
0 .8 0 0
0 .7 0 0
0 .6 0 0
0 .5 0 0
UCL
R 0 .4 0 0
0 .3 0 0
0 .2 0 0
0 .1 0 0
0 .0 0 0
LCL
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
S a m p le
Basic Forms of Statistical Sampling for Quality
Control
• Acceptance Sampling is sampling to

accept or reject the immediate lot of
product at hand
• Statistical Process Control is sampling to
determine if the process is within
acceptable limits
Acceptance Sampling
• Purposes
– Determine quality level
– Ensure quality is within predetermined level
• Advantages
– Economy
– Less handling damage
– Fewer inspectors
– Upgrading of the inspection job
– Applicability to destructive testing
– Entire lot rejection (motivation for improvement)
Acceptance Sampling (Continued)
• Disadvantages
– Risks of accepting “bad” lots and rejecting
“good” lots
– Added planning and documentation
– Sample provides less information than 100-
percent inspection
Acceptance Sampling:
Single Sampling Plan
A simple goal
Determine (1) how many units, n, to

sample from a lot, and (2) the
maximum number of defective items,
c, that can be found in the sample
before the lot is rejected
Risk
• Acceptable Quality Level (AQL)
– Max. acceptable percentage of defectives defined
by producer
• The a (Producer’s risk)
– The probability of rejecting a good lot
• Lot Tolerance Percent Defective (LTPD)
– Percentage of defectives that defines consumer’s
rejection point
• The b (Consumer’s risk)
– The probability of accepting a bad lot
Operating Characteristic Curve
The OCC brings the concepts of producer’s risk, consumer’s risk, sample size, and
maximum defects allowed together
1 The shape or
0.9 a = .05 (producer’s risk) slope of the
0.8 curve is
0.7 dependent on a
n = 99 particular
Probability of acceptance
0.6 c=4 combination of

0.5 the four
0.4 parameters
0.3 b =.10
0.2 (consumer’s risk)
0.1
0
1 2 3 4 5 6 7 8 9 10 11 12
AQL LTPD
Percent defective
Example: Acceptance Sampling Problem
Zypercom, a manufacturer of video interfaces,
purchases printed wiring boards from an outside
vender, Procard. Procard has set an acceptable quality
level of 1% and accepts a 5% risk of rejecting lots at or
below this level. Zypercom considers lots with 3%
defectives to be unacceptable and will assume a 10%
risk of accepting a defective lot.
Develop a sampling plan for Zypercom and determine a

rule to be followed by the receiving inspection
personnel.
Example: Step 1. What is given and what is not?
In this problem, AQL is given to be 0.01 and LTDP

is given to be 0.03. We are also given an alpha of
0.05 and a beta of 0.10.
What you need to determine is your sampling

plan is “c” and “n.”
Example: Step 2. Determine “c”
LTPD .03
= = 3
First divide LTPD by AQL. AQL .01
Then find the value for “c” by selecting the value in the
TN7.10 “n(AQL)”column that is equal to or just greater than
the ratio above.
Exhibit TN 8.10 So, c = 6.
c LTPD/AQL n AQL c LTPD/AQL n AQL

0 44.890 0.052 5 3.549 2.613
1 10.946 0.355 6 3.206 3.286
2 6.509 0.818 7 2.957 3.981
3 4.890 1.366 8 2.768 4.695
4 4.057 1.970 9 2.618 5.426
Example: Step 3. Determine Sample Size
Now given the information below, compute the sample size in units to
generate your sampling plan
c = 6, from Table
n (AQL) = 3.286, from Table
AQL = .01, given in problem
n(AQL/AQL) = 3.286/.01 = 328.6, or 329 (always round up)
Sampling Plan:
Take a random sample of 329 units from a lot.
Reject the lot if more than 6 units are defective.
356

Chapter 9
Operations Consulting
and Reengineering
OBJECTIVES
• Operations Consulting Defined
• Operations Consulting and the 5 P’s
• Hierarchy Within a Consulting Organization
• Stages of Operations Consulting
• Operations Consulting Tool Kit
• Reengineering
Operations Consulting
• Operations consulting involves assisting

clients in developing operations strategies
(i.e., product leadership, operational
excellence, customer intimacy, etc.) and in
improving production (and service delivery)
processes.
Operations Consulting & the 5 Ps
• Plants
– Adding and locating new plants
– Expanding, contracting, or refocusing facilities
• Parts
– Make or buy decisions
– Vendor selection decisions
• Processes
– Technology evaluation
– Process improvement and reengineering
Operations Consulting & the 5 Ps (Continued)
• People
– Quality improvement
– Setting/revising work standards
– Learning curve analysis
• Planning and Control Systems
– Supply chain management
– MRP
– Shop floor control
– Warehousing and distribution
Hierarchy within Consulting Firms
A way of looking at the typical consulting
firm’s organization
Finders
Who find new business
Partners
Who manage the business

Minders
Managers
Who actually do Grinders

the work
Consultants
Economics of Consulting Firms
• David H. Maister’s article on consulting draws

an analogy between the consulting firm and a
job shop operation. Three types of jobs:
• 1. Brain Surgery: Requiring innovation and
creativity
• 2. Gray Hair: Requiring a great deal of
experience (little innovation)
• 3. Procedures: Requiring activities similar to
other existing projects (little innovation or
experience)
When are Operations Consultants Needed
• When faced with major investment

decision(s)
• When management believes it is not getting

the maximum effectiveness from the
organization’s productive capability
Stages in Operations Consulting Process
1. Sales and proposal development
2. Analyze problem
3. Design, develop and test alternative
solutions
4. Develop systematic performance measures
5. Present final report
6. Implement changes
7. Assure client satisfaction
8. Assemble learnings from the study
Operations Consulting Tool Kit:
Category 1 In this scheme we have five
categories of activities, starting
with Problem Definition, that
consultants perform and the
supporting tools used to aid the
Problem Definition
consultant in performing that
category
Issue trees
Customer surveys
Gap analysis
Employee surveys
Five forces model

Operations Consulting Tool Kit: Category 2
Data Gathering
Plant tours/audits
Work sampling
Flow charts
Organizational charts
Data Analysis and

Solution Development
Problem analysis (SPC tools)
Bottleneck analysis
Computer simulation
Statistical tools
Cost Impact and

Payoff Analysis
Decision trees
Balanced scorecard
Stakeholder analysis
Implementation
Responsibility charts
Project management techniques

Reengineering
• Reengineering is defined as the fundamental

rethinking and radical redesign of business processes
to achieve dramatic improvements in critical,
contemporary measures of performance such as
cost, quality, service, and speed. As a engineering
discipline, reengineering can be applied to any
process in manufacturing and service businesses,
education, and the government.
• Business process reengineering (BPR) is focused on
reengineering business processes.
Key Words in the
Reengineering Definition
• Fundamental
– Why do we do what we do
– Ignore what is and concentrate on what
should be
• Radical
– Business reinvention vs. business
improvement
Key Words in the Reengineering Definition
(Continued)
• Dramatic
– Reengineering should be brought in “when a need
exits for heavy blasting”
• Companies in deep trouble
• Companies that see trouble coming
• Companies that are in peak condition
• Business Process
– a collection of activities that takes one or more
kinds of inputs and creates an output that is of
value to a customer
Principles of Reengineering
• Organize around outcomes, not tasks
• Have those who use the output of the process

perform the process
• Merge information-processing work into the

real work that produces the information
• Treat geographically dispersed resources as

though they were centralized
Principles of Reengineering (Continued)
• Link parallel activities instead of integrating
their results
• Put the decision point where the work is

performed, and build control into the process
• Capture information once and at the source

End of Chapter 9
377
Chapter 10
Supply Chain Strategy

OBJECTIVES
• Supply-Chain Management
• Measuring Supply-Chain Performance
• Bullwhip Effect
• Outsourcing
• Value Density
• Mass Customization
• Supply-chain is a term that describes how
organizations (suppliers, manufacturers,
distributors, and customers) are linked
together
Suppliers Service support Local service Customers

Services operations providers
Inputs Localization
Transformation Output
Supply networks
Suppliers Distribution
Manufacturing Manufacturing Customers
What is Supply Chain Management?
• Supply-chain management is a total

system approach to managing the
entire flow of information, materials,
and services from raw-material
suppliers through factories and
warehouses to the end customer
Formulas for Measuring Supply-Chain
Performance
• One of the most commonly used measures in all of
operations management is “Inventory Turnover”
Cost of goods sold

• In situations where distribution inventory is
dominant, “Weeks of Supply” is preferred and
measures how many weeks’ worth of inventory is in
the system at a particular time
æ Average aggregate inventory value ö

Weeks of supply = çç ÷÷ 52 weeks
è Cost of goods sold ø
Example of Measuring Supply-Chain
Performance
Suppose a company’s new annual report claims
their costs of goods sold for the year is $160
million and their total average inventory
(production materials + work-in-process) is
worth $35 million. This company normally
has an inventory turn ratio of 10. What is this
year’s Inventory Turnover ratio? What does
it mean?
Example of Measuring Supply-Chain Performance
(Continued)
Cost of goods sold
= $160/$35
= 4.57
Since the company’s normal inventory turnover ration is 10, a

drop to 4.57 means that the inventory is not turning over as
quickly as it had in the past. Without knowing the industry
average of turns for this company it is not possible to
comment on how they are competitively doing in the
industry, but they now have more inventory relative to their
cost of goods sold than before.
Bullwhip Effect
The magnification of variability in orders in the supply-chain
Retailer’s Orders Wholesaler’s Orders Manufacturer’s Orders

Quantity
Quantity
Quantity
Order
Order
Order
Time Time Time
A lot of …can lead to …can lead to

retailers each greater variability even greater
with little for a fewer number variability for a
variability in of wholesalers, single
their orders…. and… manufacturer.
Hau Lee’s Concepts of Supply Chain Management
• Hau Lee’s approach to supply chain (SC) is one of aligning SC’s
with the uncertainties revolving around the supply process side
of the SC
• A stable supply process has mature technologies and an evolving
supply process has rapidly changing technologies
• Types of SC’s
– Efficient SC’s
– Risk-Hedging SC’s
– Responsive SC’s
– Agile SC’s
Hau Lee’s SC Uncertainty Framework
Demand Uncertainty
Low (Functional High (Innovative

products) products)
Low Efficient SC Responsive SC

(Stable
Supply Ex.: Grocery Ex.: Computers
Process)
Uncertainty Risk-Hedging SC Agile SC

High
(Evolving Ex.: Hydro-electric Ex.: Telecom
Process) power
What is Outsourcing?
Outsourcing is defined as the act of

moving a firm’s internal activities and
decision responsibility to outside
providers
Reasons to Outsource
• Organizationally-driven
• Improvement-driven
• Financially-driven
• Revenue-driven
• Cost-driven
• Employee-driven
Value Density
• Value density is defined as the value of

an item per pound of weight
• It is used as an important measure

when deciding where items should be
stocked geographically and how they
should be shipped
Mass Customization
• Mass customization is a term used to describe

the ability of a company to deliver highly
customized products and services to different
customers
• The key to mass customization is effectively

postponing the tasks of differentiating a
product for a specific customer until the latest
possible point in the supply-chain network
End of Chapter 10
392
Chapter 11
Strategic Capacity
Management

OBJECTIVES
• Strategic Capacity Planning Defined
• Capacity Utilization & Best Operating Level
• Economies & Diseconomies of Scale
• The Experience Curve
• Capacity Focus, Flexibility & Planning
• Determining Capacity Requirements
• Decision Trees
• Capacity Utilization & Service Quality
Strategic Capacity Planning
• Capacity can be defined as the ability to hold,

receive, store, or accommodate
• Strategic capacity planning is an approach for

determining the overall capacity level of
capital intensive resources, including facilities,
equipment, and overall labor force size
Capacity Utilization
Capacity used
Capacity utilization rate =
Best operating level
• Where
• Capacity used
– rate of output actually achieved
• Best operating level
– capacity for which the process was designed
Best Operating Level
Example: Engineers design engines and assembly lines to operate at an ideal or “best
operating level” to maximize output and minimize ware
Average
unit cost
of output
Underutilization Overutilization
Best Operating
Level
Volume
Example of Capacity Utilization
• During one week of production, a plant

produced 83 units of a product. Its historic
highest or best utilization recorded was 120
units per week. What is this plant’s capacity
utilization rate?
• Answer:
Capacity utilization rate = Capacity used .
Best operating level
= 83/120
=0.69 or 69%
Economies & Diseconomies of Scale
Economies of Scale and the Experience Curve working
100-unit
Average plant
unit cost 200-unit
of output plant 400-unit
300-unit
plant
plant
Diseconomies of Scale start working
Volume
As plants produce more products, they
The Experience gain experience in the best production
methods and reduce their costs per unit
Curve
Yesterday
Cost or Today
price Tomorrow
per unit
Total accumulated production of units

Capacity Focus
• The concept of the focused factory holds
that production facilities work best when
they focus on a fairly limited set of
production objectives
• Plants Within Plants (PWP)

– Extend focus concept to operating level
Capacity Flexibility
• Flexible plants
• Flexible processes
• Flexible workers
Capacity Planning: Balance
Unbalanced stages of production
Units
per
month
6,000 7,000 5,000
Maintaining System Balance: Output of one stage is the
exact input requirements for the next stage
Balanced stages of production
Units
per
month
6,000 6,000 6,000
Capacity Planning
• Frequency of Capacity Additions
• External Sources of Capacity

Determining Capacity Requirements
• 1. Forecast sales within each individual

product line
• 2. Calculate equipment and labor

requirements to meet the forecasts
• 3. Project equipment and labor

availability over the planning horizon
Example of Capacity Requirements
A manufacturer produces two lines of mustard, FancyFine and
Generic line. Each is sold in small and family-size plastic
bottles.
The following table shows forecast demand for the next four
years.
Year: 1 2 3 4
FancyFine
Small (000s) 50 60 80 100
Family (000s) 35 50 70 90
Generic
Small (000s) 100 110 120 140
Family (000s) 80 90 100 110
Example of Capacity Requirements (Continued): Product from a
Capacity Viewpoint
• Question: Are we really producing two different

types of mustards from the standpoint of
capacity requirements?
• Answer: No, it’s the same product just packaged
differently.
Example of Capacity Requirements (Continued) :
Equipment and Labor Requirements
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200
•Three 100,000 units-per-year machines are available for small-bottle
production. Two operators required per machine.
•Two 120,000 units-per-year machines are available for family-sized-bottle

production. Three operators required per machine.
408
Question: What are the Year 1 values for capacity, machine,

and labor?
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200
Small Mach. Cap. 300,000 Labor 6

Family-size Mach. Cap. 240,000 Labor 6
150,000/300,000=50%
At 1 machine for 100,000, it takes 1.5
Small machines for 150,000
Percent capacity used 50.00%
Machine requirement 1.50
Labor requirement 3.00 At 2 operators for 100,000, it
takes 3 operators for 150,000
Family-size
Percent capacity used 47.92%
Machine requirement 0.96
Labor requirement 2.88 ©The McGraw-Hill Companies, Inc., 2004
409
Question: What are the values for columns 2, 3 and 4 in the table below?
Year: 1 2 3 4
Small (000s) 150 170 200 240
Family (000s) 115 140 170 200
Small Mach. Cap. 300,000 Labor 6

Family-size Mach. Cap. 240,000 Labor 6
Small
Percent capacity used 50.00% 56.67% 66.67% 80.00%
1.70 2.00 2.40
Machine requirement 1.50 3.40 4.00 4.80
Labor requirement 3.00
Family-size
Percent capacity used 47.92% 58.33% 70.83% 83.33%
1.17 1.42 1.67
Machine requirement 0.96 3.50 4.25 5.00
Labor requirement 2.88
Example of a Decision Tree Problem
A glass factory specializing in crystal is experiencing a

substantial backlog, and the firm's management is
considering three courses of action:
A) Arrange for subcontracting

B) Construct new facilities
C) Do nothing (no change)
The correct choice depends largely upon demand, which

may be low, medium, or high. By consensus, management
estimates the respective demand probabilities as 0.1, 0.5,
and 0.4.
Example of a Decision Tree Problem (Continued): The
Payoff Table
The management also estimates the profits
when choosing from the three alternatives (A,
B, and C) under the differing probable levels of
demand. These profits, in thousands of dollars
are presented in the table below:
0.1 0.5 0.4

Low Medium High
A 10 50 90
B -120 25 200
C 20 40 60
Example of a Decision Tree Problem (Continued): Step 1. We start by
drawing the three decisions
C
Example of Decision Tree Problem (Continued):
Step 2. Add our possible states of nature,
probabilities, and payoffs
High demand (0.4) $90k
Medium demand (0.5) $50k
Low demand (0.1) $10k
A High demand (0.4) $200k

B Medium demand (0.5) $25k
Low demand (0.1) -$120k

C

Example of Decision Tree Problem (Continued): Step 3. Determine
the expected value of each decision

$62k Low demand (0.1) $10k
EVA=0.4(90)+0.5(50)+0.1(10)=$62k
Example of Decision Tree Problem (Continued): Step 4.
Make decision

$62k Low demand (0.1) $10k
A High demand (0.4) $200k

$80.5k $25k
B Medium demand (0.5)
Low demand (0.1) -$120k
C
$40k
$46k Medium demand (0.5)
Alternative B generates the greatest expected profit, so

our choice is B or to construct a new facility
Planning Service Capacity vs. Manufacturing
Capacity
• Time: Goods can not be stored for later use and
capacity must be available to provide a service
when it is needed
• Location: Service goods must be at the
customer demand point and capacity must be
located near the customer
• Volatility of Demand: Much greater than in
manufacturing
Capacity Utilization &
Service Quality
• Best operating point is near 70% of capacity
• From 70% to 100% of service capacity, what do

you think happens to service quality?
418
End of Chapter 11

419
Technical Note 11
Facility Location

OBJECTIVES
• Issues in Facility Location
• Various Plant Location Methods

Competitive Imperatives Impacting Location
• The need to produce close to the
customer due to time-based
competition, trade agreements, and
shipping costs
• The need to locate near the appropriate

labor pool to take advantage of low
wage costs and/or high technical skills
Issues in Facility Location
• Proximity to Customers
• Business Climate
• Total Costs
• Infrastructure
• Quality of Labor
• Suppliers
• Other Facilities
Issues in Facility Location
• Free Trade Zones
• Political Risk
• Government Barriers
• Trading Blocs
• Environmental Regulation
• Host Community
• Competitive Advantage
Plant Location Methodology: Factor Rating
Method Example
Two refineries sites (A and B) are assigned the
following range of point values and respective points,
where the more points the better for the site location.
Sites
Major factors for site location Pt. Range A B
Fuels in region 0 to 330 123 156
150 100
Power availability and reliability 0 to 200 54 63
Labor climate 0 to 100 24 96
Living conditions 0 to 100 45 50
4 5
Transportation 0 to 50 8 4
Water supply 0 to 10 5 50
Climate 0 to 50 5 20
Supplies 0 to 60
Best Site is
Tax policies and laws 0 to 20
B
Total pts. 418 544
Plant Location Methodology: Transportation Method of
Linear Programming
• Transportation method of linear

programming seeks to minimize costs of
shipping n units to m destinations or its
seeks to maximize profit of shipping n
units to m destinations
Plant Location Methodology: Centroid Method
• The centroid method is used for locating
single facilities that considers existing
facilities, the distances between them, and
the volumes of goods to be shipped between
them
• This methodology involves formulas used to
compute the coordinates of the two-
dimensional point that meets the distance
and volume criteria stated above
Plant Location Methodology: Centroid
Method Formulas
Cx =
åd V ix i
Cy =
åd V iy i
åV i åV i
Where:
Cx = X coordinate of centroid
Cy = X coordinate of centroid
dix = X coordinate of the ith location
diy = Y coordinate of the ith location
Vi = volume of goods moved to or from ith
location
Plant Location Methodology: Example of
Centroid Method
• Centroid method example
– Several automobile showrooms are located according to
the following grid which represents coordinate locations for
each showroom
Y S ho wro o m No o f Z-Mo b ile s
Q s o ld p e r mo nth
(790,900)
D A 1250
(250,580)
A
D 1900
(100,200)
Q 2300
(0,0) X
Question: What is the best location for a new Z-Mobile

warehouse/temporary storage facility considering only
distances and quantities sold per month?
Plant Location Methodology: Example of Centroid Method
(Continued): Determining Existing Facility Coordinates
Y
To begin, you must identify the Q
existing facilities on a two- (790,900)
dimensional plane or grid and D

(250,580)
determine their coordinates.
A
(100,200)
(0,0) X
S ho wro o m No o f Z-Mo b ile s

You must also have the s o ld p e r mo nth
volume information on the
business activity at the A 1250
existing facilities.
D 1900
Q 2300
Plant Location Methodology: Example of Centroid Method
(Continued): Determining the Coordinates of the New Facility
You then compute the new coordinates using the formulas:
100(1250) + 250(1900) + 790(2300) 2,417,000
Cx = = = 443.49
1250 + 1900 + 2300 5,450
200(1250) + 580(1900) + 900(2300) 3,422,000

Cy = = = 627.89
1250 + 1900 + 2300 5,450
You then take the coordinates and place them on the map:
Y
New location S ho wro o m No o f Z-Mo b ile s
Q
(790,900) of facility Z s o ld p e r mo nth
Z about
D
(250,580) (443,627) A 1250
A D 1900
(100,200)
(0,0) X Q 2300
431

432
Chapter 12
Lean Production

OBJECTIVES
• Lean Production Defined
• The Toyota Production System
• Lean Implementation Requirements
• Lean Services
Lean Production
• Lean Production can be defined as an integrated
set of activities designed to achieve high-
volume production using minimal inventories
(raw materials, work in process, and finished
goods)
• Lean Production also involves the elimination of
waste in production effort
• Lean Production also involves the timing of
production resources (i.e., parts arrive at the
next workstation “just in time”)
Here the customer starts the
process, pulling an inventory item
from Final Assembly…
Pull System
Then sub-assembly work

is pulled forward by that Fab Vendor
demand…
Sub
Fab Vendor
Final
Customers Assembly
The process continues throughout Sub Fab Vendor

the entire production process and
supply chain
Fab Vendor
Features of Lean Production
WHAT IT IS WHAT IT DOES
• Management philosophy • Attacks waste

• Exposes problems and bottlenecks
• “Pull” system though the plant
• Achieves streamlined production
WHAT IT REQUIRES WHAT IT ASSUMES
• Employee participation
• Industrial engineering/basics • Stable environment
• Continuing improvement
• Total quality control
• Small lot sizes
The Toyota Production System
• Based on two philosophies:

– 1. Elimination of waste
– 2. Respect for people

Elimination of Waste
1. Focused factory networks

2. Group technology
3. Quality at the source
4. JIT production
5. Uniform plant loading
6. Kanban production control system
7. Minimized setup times
These are small specialized plants that
Minimizing Waste: limit the range of products produced
(sometimes only one type of product
Focused Factory for an entire facility)
Networks
Some plants in Japan

have as few as 30 and
as many as 1000
Coordination employees
System Integration
Minimizing Waste: Group Technology (Part 1)
Note how the flow lines are going back and forth
• Using Departmental Specialization for plant layout can cause a lot of

unnecessary material movement
Saw Saw Saw Grinder Grinder
Heat Treat
Lathe Lathe Lathe Press Press Press

Minimizing Waste:
Group Technology (Part 2)
• Revising by using Group Technology Cells can reduce movement and improve
product flow
Grinder 1 2
Saw Lathe Lathe Press
Heat Treat
Grinder
Saw Lathe A B Lathe Press
Minimizing Waste:
Uniform Plant Loading (heijunka)
Suppose we operate a production plant that produces a single
product. The schedule of production for this product could be
accomplished using either of the two plant loading schedules
below.
Not uniform Jan. UnitsFeb. Units Mar. Units Total

1,200 3,500 4,300 9,000
or
Uniform Jan. UnitsFeb. Units Mar. Units Total

3,000 3,000 3,000 9,000
How does the uniform loading help save labor costs?

Minimizing Waste: Inventory
Hides Problems
Example: By
identifying defective
Machine
downtime
items from a vendor
early in the
Scrap Vendor production process
Work in delinquencies Change the downstream work
orders
process is saved
queues Engineering design Design
(banks) redundancies backlogs
Example: By
Paperwork Inspection Decision identifying defective
backlog backlogs backlogs work by employees
upstream, the
downstream work is
saved
Minimizing Waste: Kanban Production Control
ThisSystems
puts the
system back
Once the Production kanban is
Withdrawal were it was
received, the Machine Center kanban before the item
produces a unit to replace the
was pulled
one taken by the Assembly Line
people in the first place
Storage Storage
Machine Part A Part A Assembly
Center
Line
Production kanban
Material Flow
The process begins by the Assembly Line
people pulling Part A from Storage Card (signal) Flow
Determining the Number of Kanbans
Needed
• Setting up a kanban system requires
determining the number of kanbans cards (or
containers) needed
• Each container represents the minimum
production lot size
• An accurate estimate of the lead time
required to produce a container is key to
determining how many kanbans are required
The Number of Kanban Card Sets
Expected demand during lead time + Safety stock
k=
Size of the container
DL(1 + S )
=
C
k = Number of kanban card sets (a set is a card)
D = Average number of units demanded over some time
period
L = lead time to replenish an order (same units of time as
demand)
S = Safety stock expressed as a percentage of demand
during leadtime
C = Container size
Example of Kanban Card Determination: Problem
Data
• A switch assembly is assembled in batches of 4 units
from an “upstream” assembly area and delivered in
a special container to a “downstream” control-panel
assembly operation
• The control-panel assembly area requires 5 switch
assemblies per hour
• The switch assembly area can produce a container of
switch assemblies in 2 hours
• Safety stock has been set at 10% of needed
inventory
Example of Kanban Card Determination:
Calculations
Expected demand during lead time + Safety stock

k =
Size of the container
DL (1+ S ) 5(2)(1.1)
= = = 2.75, or 3
C 4
Always round up!

Respect for People
• Level payrolls
• Cooperative employee unions
• Subcontractor networks
• Bottom-round management style
• Quality circles (Small Group Involvement

Activities or SGIA’s)
Toyota Production System’s Four Rules
1. All work shall be highly specified as to content,
sequence, timing, and outcome
2. Every customer-supplier connection must be direct,

and there must be an unambiguous yes-or-no way
to send requests and receive responses
3. The pathway for every product and service must be

simple and direct
4. Any improvement must be made in accordance with

the scientific method, under the guidance of a
teacher, at the lowest possible level in the
organization
Lean Implementation Requirements: Design
Flow Process
• Link operations
• Balance workstation capacities
• Redesign layout for flow
• Emphasize preventive maintenance
• Reduce lot sizes
• Reduce setup/changeover time
Lean Implementation Requirements: Total
Quality Control
• Worker responsibility
• Measure SQC
• Enforce compliance
• Fail-safe methods
• Automatic inspection
Lean Implementation Requirements: Stabilize
Schedule
• Level schedule
• Underutilize capacity
• Establish freeze windows

Lean Implementation Requirements: Kanban-
Pull
• Demand pull
• Backflush
• Reduce lot sizes

Lean Implementation Requirements: Work with
Vendors
• Reduce lead times
• Frequent deliveries
• Project usage requirements
• Quality expectations
Lean Implementation Requirements: Reduce
Inventory More
• Look for other areas
• Stores
• Transit
• Carousels
• Conveyors
Lean Implementation Requirements: Improve
Product Design
• Standard product configuration
• Standardize and reduce number of parts
• Process design with product design
• Quality expectations
Lean Implementation Requirements: Concurrently
Solve Problems
• Root cause
• Solve permanently
• Team approach
• Line and specialist responsibility
• Continual education
Lean Implementation Requirements: Measure
Performance
• Emphasize improvement
• Track trends
Lean in Services (Examples)
• Organize Problem-Solving Groups
• Upgrade Housekeeping
• Upgrade Quality
• Clarify Process Flows
• Revise Equipment and Process Technologies

Lean in Services (Examples)
• Level the Facility Load
• Eliminate Unnecessary Activities
• Reorganize Physical Configuration
• Introduce Demand-Pull Scheduling
• Develop Supplier Networks

462
End of Chapter 12

463
Managerial Briefing 13
Enterprise Resource
Planning Systems

OBJECTIVES
• Enterprise Resource Planning Defined

• R/3 System Components
• Reasons for Implementing R/3
Enterprise Resource Planning
(ERP) Systems
• Enterprise Resource Planning Systems is a
computer system that integrates application
programs in accounting, sales,
manufacturing, and other functions in the
firm
• This integration is accomplished through a
database shared by all the application
programs
SAP AG’S R/3
• SAP AG, A German firm, is a world leader in
ERP software.
-Designed to operate in
a three-tier client/server
configuration
-Applications are fully
integrated so that data
are shared between all
applications
R/3 System Functional Components
Financial
Accounting
R/3 System
Sales & Distribution Functional Human Resources
Components
Manufacturing
& Logistics
Financial Accounting
• Financials
• Controlling
• Asset management
Human Resources
• Payroll
• Benefits administration
• Applicant data administration
• Personnel development planning
• Workforce planning
• Schedule & shift planning
• Time management
• Travel expense accounting
Manufacturing & Logistics
• Materials management
• Plant maintenance
• Quality management
• Production planning & control
• Project management system

Sales and Distribution
• Prospect & customer management
• Sales order management
• Configuration management
• Distribution
• Export controls
• Shipping and transportation management
• Billing, invoicing, and rebate processing
Reasons for Implementing SAP R/3
• Desire to standardize and improve

processes
• To improve the level of systems integration
• To improve information quality
473
End of Managerial Briefing 13

474
Chapter 13
Demand Management

OBJECTIVES
• Demand Management
• Qualitative Forecasting Methods
• Simple & Weighted Moving Average
Forecasts
• Exponential Smoothing
• Simple Linear Regression
• Web-Based Forecasting
Demand Management
Independent Demand:
Finished Goods
A Dependent Demand:
Raw Materials,
Component parts,
B(4) C(2) Sub-assemblies, etc.
D(2) E(1) D(3) F(2)

Independent Demand:
What a firm can do to manage it?
• Can take an active role to influence demand
• Can take a passive role and simply respond

to demand
Types of Forecasts
• Qualitative (Judgmental)
• Quantitative
– Time Series Analysis
– Causal Relationships
– Simulation
Components of Demand
• Average demand for a period of time

• Trend
• Seasonal element
• Cyclical elements
• Random variation
• Autocorrelation
Finding Components of Demand
Seasonal variation
x
x x Linear
x x
x x Trend
x x
Sales
x x x
x
x
xx
x xx x x
x
x
x x x x x x
x x xxx x
x x x
x x x x xx
x
x x
1 2 3 4
Year
Qualitative Methods
Executive Judgment Grass Roots
Qualitative Market Research

Historical analogy
Methods
Delphi Method Panel Consensus

Delphi Method
l. Choose the experts to participate representing a
variety of knowledgeable people in different areas
2. Through a questionnaire (or E-mail), obtain forecasts
(and any premises or qualifications for the
forecasts) from all participants
3. Summarize the results and redistribute them to the
participants along with appropriate new questions
4. Summarize again, refining forecasts and conditions,
and again develop new questions
5. Repeat Step 4 as necessary and distribute the final
results to all participants
Time Series Analysis
• Time series forecasting models try to predict
the future based on past data
• You can pick models based on:
1. Time horizon to forecast
2. Data availability
3. Accuracy required
4. Size of forecasting budget
5. Availability of qualified personnel
Simple Moving Average Formula
• The simple moving average model assumes an
average is a good estimator of future behavior
• The formula for the simple moving average is:
A t-1 + A t-2 + A t-3 +...+A t- n

Ft =
n
Ft = Forecast for the coming period

N = Number of periods to be averaged
A t-1 = Actual occurrence in the past period for up to “n” periods
Simple Moving Average Problem (1)
A t-1 + A t-2 + A t-3 +...+A t- n

Ft =
Week Demand n
1 650 Question: What are the 3-week
2 678 and 6-week moving average
3 720 forecasts for demand?
4 785
5 859 Assume you only have 3 weeks
6 920 and 6 weeks of actual demand
7 850 data for the respective
8 758 forecasts
9 892
10 920
11 789
12 844
486
Calculating the moving averages gives us:
Week Demand 3-Week 6-Week

1 650 F4=(650+678+720)/3
2 678 =682.67
3 720 F7=(650+678+720
+785+859+920)/6
4 785 682.67
=768.67
5 859 727.67
6 920 788.00
7 850 854.67 768.67
8 758 876.33 802.00
9 892 842.67 815.33
10 920 833.33 844.00
11 789 856.67 866.50
12 844 867.00 854.83
Plotting the moving averages and comparing them shows how
the lines smooth out to reveal the overall upward trend in this
example
950
900
850
d 800 Demand
n
a 750
m 700 3-Week
e
D 650 6-Week
600
550 Note how the 3-
500 Week is smoother
1 2 3 4 5 6 7 8 9 10 11 12 than the Demand,
Week and 6-Week is even
smoother
Simple Moving Average Problem (2) Data
Question: What is the 3

week moving average
forecast for this data?
Week Demand Assume you only have 3
1 820 weeks and 5 weeks of
2 775 actual demand data for
3 680 the respective forecasts
4 655
5 620
6 600
7 575
Simple Moving Average Problem (2) Solution
Week Demand 3-Week 5-Week
1 820 F4=(820+775+680)/3
=758.33
2 775
F6=(820+775+680
3 680 +655+620)/5
=710.00
4 655 758.33
5 620 703.33
6 600 651.67 710.00
7 575 625.00 666.00
Weighted Moving Average Formula
While the moving average formula implies an equal
weight being placed on each value that is being averaged,
the weighted moving average permits an unequal
weighting on prior time periods
The formula for the moving average is:
Ft = w 1 A t -1 + w 2 A t - 2 + w 3 A t -3 + ...+ w n A t - n
n
wt = weight given to time period “t”
occurrence (weights must add to one)
åw
i=1
i =1
Weighted Moving Average Problem (1) Data
Question: Given the weekly demand and weights, what is the forecast for the 4th
period or Week 4?
Week Demand Weights:

1 650
2 678 t-1 .5
3 720 t-2 .3
4 t-3 .2
Note that the weights place more emphasis on the most recent data,
that is time period “t-1”
Weighted Moving Average Problem (1) Solution
Week Demand Forecast

1 650
2 678
3 720
4 693.4
F4 = 0.5(720)+0.3(678)+0.2(650)=693.4
Weighted Moving Average Problem (2) Data
Question: Given the weekly demand information and weights, what is the
weighted moving average forecast of the 5th period or week?
Week Demand Weights:

1 820 t-1 .7
2 775 t-2 .2
3 680
t-3 .1
4 655
Weighted Moving Average Problem (2) Solution
Week Demand Forecast

1 820
2 775
3 680
4 655
5 672
F5 = (0.1)(755)+(0.2)(680)+(0.7)(655)= 672
Exponential Smoothing Model
Ft = Ft-1 + a(At-1 - Ft-1)

Where :
Ft = Forcast value for the coming t time period
Ft - 1 = Forecast value in 1 past time period
At - 1 = Actual occurance in the past t time period
a = Alpha smoothing constant
• Premise: The most recent observations might have the
highest predictive value
• Therefore, we should give more weight to the more
recent time periods when forecasting
Exponential Smoothing Problem (1) Data
Question: Given the weekly
demand data, what are the
Week Demand exponential smoothing
1 820 forecasts for periods 2-10
2 775 using a=0.10 and a=0.60?
3 680
Assume F1=D1
4 655
5 750
6 802
7 798
8 689
9 775
10
Answer: The respective alphas columns denote the forecast values. Note that
you can only forecast one time period into the future.
Week Demand 0.1 0.6

1 820 820.00 820.00
2 775 820.00 820.00
3 680 815.50 793.00
4 655 801.95 725.20
5 750 787.26 683.08
6 802 783.53 723.23
7 798 785.38 770.49
8 689 786.64 787.00
9 775 776.88 728.20
10 776.69 756.28
Exponential Smoothing Problem (1) Plotting
Note how that the smaller alpha results in a smoother line in this example
850
800
d 750 Demand
n
a 700 0,1
m 650
e
D 600 0,6
550
500
1 2 3 4 5 6 7 8 9 10
Week
Exponential Smoothing Problem (2) Data
Question: What are the

Week Demand
exponential smoothing
1 820 forecasts for periods 2-5
2 775 using a =0.5?
3 680
4 655
5 Assume F1=D1
Exponential Smoothing Problem (2) Solution
F1=820+(0.5)(820-820)=820 F3=820+(0.5)(775-820)=797.75
Week Demand 0.5

1 820 820.00
2 775 820.00
3 680 797.50
4 655 738.75
5 696.88
The MAD Statistic to Determine Forecasting
Error
n
1 MAD » 0.8 standard deviation
åA
t=1
t - Ft
1 standard deviation » 1.25 MAD
MAD =
n
• The ideal MAD is zero which would mean there

is no forecasting error
• The larger the MAD, the less the accurate the

resulting model
MAD Problem Data
Question: What is the MAD value given

the forecast values in the table below?
Month Sales Forecast

1 220 n/a
2 250 255
3 210 205
4 300 320
5 325 315
MAD Problem Solution
Month Sales Forecast Abs Error

1 220 n/a
2 250 255 5
3 210 205 5
4 300 320 20
5 325 315 10
40
n
Note that by itself, the MAD
åA
t=1
t - Ft
40 only lets us know the mean
MAD = = = 10 error in a set of forecasts
n 4
Tracking Signal Formula
• The Tracking Signal or TS is a measure that indicates
whether the forecast average is keeping pace with
any genuine upward or downward changes in
demand.
• Depending on the number of MAD’s selected, the TS
can be used like a quality control chart indicating
when the model is generating too much error in its
forecasts.
• The TS formula is:
RSFE Running sum of forecast errors

TS = =
MAD Mean absolute deviation
Simple Linear Regression Model
The simple linear regression Y
model seeks to fit a line
through various data over time a
0 1 2 3 4 5 x (Time)
Yt = a + bx Is the linear regression model
Yt is the regressed forecast value or dependent variable in the model, a is

the intercept value of the the regression line, and b is similar to the slope
of the regression line. However, since it is calculated with the variability of
the data in mind, its formulation is not as straight forward as our usual
notion of slope.
Simple Linear Regression Formulas for Calculating
“a” and “b”
a = y - bx
å xy - n(y)(x)
b= 2 2
å x - n(x )
Simple Linear Regression Problem Data
Question: Given the data below, what is the simple linear regression model that can be
used to predict sales in future weeks?
Week Sales
1 150
2 157
3 162
4 166
5 177
508
Answer: First, using the linear regression formulas, we can compute “a”
and “b”
Week Week*Week Sales Week*Sales

1 1 150 150
2 4 157 314
3 9 162 486
4 16 166 664
5 25 177 885
3 55 162.4 2499
Average Sum Average Sum
b=
å xy - n( y)(x) 2499 - 5(162.4)(3) 63
= = = 6.3
å x - n(x )
2 2
55 - 5(9 ) 10
a = y - bx = 162.4 - (6.3)(3) = 143.5

509
The resulting regression model

is: Yt = 143.5 + 6.3x
Now if we plot the regression generated forecasts against the actual sales we obtain
the following chart:
180
175
170
165
160 Sales
Sales
155 Forecast
150
145
140
135
1 2 3 4 5
Period
Web-Based Forecasting: CPFR
• Collaborative Planning, Forecasting, and
Replenishment (CPFR) a Web-based tool used to
coordinate demand forecasting, production and
purchase planning, and inventory replenishment
between supply chain trading partners.
• Used to integrate the multi-tier or n-Tier supply chain,
including manufacturers, distributors and retailers.
• CPFR’s objective is to exchange selected internal
information to provide for a reliable, longer term
future views of demand in the supply chain.
• CPFR uses a cyclic and iterative approach to derive
consensus forecasts.
Web-Based Forecasting:
Steps in CPFR
• 1. Creation of a front-end partnership agreement

• 2. Joint business planning
• 3. Development of demand forecasts
• 4. Sharing forecasts
• 5. Inventory replenishment
512
End of Chapter 13

Chapter 14
Aggregate Sales and Operations
Planning
OBJECTIVES
• Sales and Operations Planning
• The Aggregate Operations Plan
• Examples: Chase and Level strategies

Exhibit 14.1 Process planning
Long
range
Strategic capacity planning
Intermediate Forecasting
range & demand Sales and operations (aggregate) planning
managemen
t Sales plan Aggregate operations plan
Manufacturing
Services
Master scheduling
Material requirements planning
Weekly workforce and

Order scheduling customer scheduling
Short
range
Daily workforce and customer scheduling
Sales and Operations Planning Activities
• Long-range planning
– Greater than one year planning horizon
– Usually performed in annual increments
• Medium-range planning
– Six to eighteen months
– Usually with weekly, monthly or quarterly increments
• Short-range planning
– One day to less than six months
– Usually with weekly or daily increments
The Aggregate Operations Plan
• Main purpose: Specify the optimal
combination of
– production rate (units completed per unit
of time)
– workforce level (number of workers)
– inventory on hand (inventory carried from
previous period)
• Product group or broad category
(Aggregation)
• This planning is done over an intermediate-
range planning period of 3 to18 months
Balancing Aggregate Demand
and Aggregate Production Capacity
10000
Suppose the figure to 10000
8000
the right represents 8000 7000
6000
forecast demand in 6000 5500
4500
units
4000
Now suppose this 2000

lower figure represents 0
the aggregate capacity Jan Feb Mar Apr May Jun
of the company to
meet demand 10000 9000
8000
8000
What we want to do is 6000
6000
4500 4000
balance out the 4000
4000
production rate,
workforce levels, and 2000
inventory to make 0
these figures match up Jan Feb Mar Apr May Jun
Required Inputs to the Production Planning System
Competitors’behavi Raw material Market
or availability demand
External to
firm
External Economic
capacity Planning for
conditions
production
Current Current Inventory Activities Internal to

physical workforce levels required for firm
capacity production
Key Strategies for Meeting Demand
• Chase
• Level
• Some combination of the two

Aggregate Planning Examples: Unit Demand and Cost Data
Suppose we have the following unit
demand and cost information:
Demand/mo Jan Feb Mar Apr May Jun
4500 5500 7000 10000 8000 6000
Materials $5/unit
Holding costs $1/unit per mo.
Marginal cost of stockout $1.25/unit per mo.
Hiring and training cost $200/worker
Layoff costs $250/worker
Labor hours required .15 hrs/unit
Straight time labor cost $8/hour
Beginning inventory 250 units
Productive hours/worker/day 7.25
Paid straight hrs/day 8
Cut-and-Try Example: Determining
Straight Labor Costs and Output
Given the demand and cost information below, what
are the aggregate hours/worker/month, units/worker, and
dollars/worker?
Demand/mo Jan Feb Mar Apr May
Jun
7.25x22
4500 5500 7000 10000 8000
6000
Productive hours/worker/day 7.25
Paid straight hrs/day 8 7.25x0.15=48.33 &
84.33x22=1063.33
22x8hrsx$8=$1408
Jan Feb Mar Apr May Jun
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1063.33 918.33 1015 1015 1063.33 966.67
$/worker $1,408 1,216 1,344 1,344 1,408 1,280
Chase Strategy
(Hiring & Firing to meet demand)
Lets assume our current workforce is 7
Jan workers.
Days/m o 22
Hrs/wo rker/m o 1 5 9 .5 First, calculate net requirements for
Units/wo rker 1 ,0 6 3 .3 3 production, or 4500-250=4250 units
$ /wo rker $ 1 ,4 0 8
Then, calculate number of workers

Jan needed to produce the net
Dem and 4 ,5 0 0
requirements, or
Beg. inv. 250
4250/1063.33=3.997 or 4 workers
Net req. 4 ,2 5 0
Req. wo rkers 3 .9 9 7
Finally, determine the number of
Hired
workers to hire/fire. In this case we
Fired 3
W o rkfo rce 4
only need 4 workers, we have 7, so
Ending invento ry 0 3 can be fired.
Below are the complete calculations for the remaining
months in the six month planning horizon
Days/mo 22 19 21 21 22 20
Hrs/worker/mo 159.5 137.75 152.25 152.25 159.5 145
Units/worker 1,063 918 1,015 1,015 1,063 967
$/worker $1,408 1,216 1,344 1,344 1,408 1,280

Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
Workforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0
Below are the complete calculations for the remaining months in
the six month planning horizon with the other costs included
Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250
Net req. 4,250 5,500 7,000 10,000 8,000 6,000
Req. workers 3.997 5.989 6.897 9.852 7.524 6.207
Hired 2 1 3
Fired 3 2 1
W orkforce 4 6 7 10 8 7
Ending inventory 0 0 0 0 0 0
Jan Feb Mar Apr May Jun Costs

Material $21,250.00 $27,500.00 $35,000.00 $50,000.00 $40,000.00 $30,000.00 203,750.00
Labor 5,627.59 7,282.76 9,268.97 13,241.38 10,593.10 7,944.83 53,958.62
Hiring cost 400.00 200.00 600.00 1,200.00
Firing cost 750.00 500.00 250.00 1,500.00
$260,408.62
Level Workforce Strategy (Surplus and Shortage
Allowed)
Lets take the same problem as
before but this time use the
Level Workforce strategy Jan
Demand 4,500
This time we will seek to use
a workforce level of 6 workers Beg. inv. 250
Net req. 4,250
W orkers 6
P roduction 6,380
Ending inventory 2,130
Surplus 2,130
Shortage
Below are the complete calculations for the remaining months in the six
month planning horizon

Demand 4,500 5,500 7,000 10,000 8,000 6,000
Beg. inv. 250 2,130 2,140 1,230 -2,680 -1,300
Net req. 4,250 3,370 4,860 8,770 10,680 7,300
Workers 6 6 6 6 6 6
Production 6,380 5,510 6,090 6,090 6,380 5,800
Ending inventory 2,130 2,140 1,230 -2,680 -1,300 -1,500
Surplus 2,130 2,140 1,230
Shortage 2,680 1,300 1,500
Note, if we recalculate this sheet with 7 workers

we would have a surplus
Below are the complete calculations for the
remaining months in the six month planning
horizon with the other costs included
4,500 5,500 7,000 10,000 8,000 6,000 Note, total costs
250 2,130 10 -910 -3,910 -1,620 under this strategy
4,250 3,370 4,860 8,770 10,680 7,300 are less than
6 6 6 6 6 6 Chase at
6,380 5,510 6,090 6,090 6,380 5,800 $260.408.62
2,130 2,140 1,230 -2,680 -1,300 -1,500
2,130 2,140 1,230
2,680 1,300 1,500

$8,448 $7,296 $8,064 $8,064 $8,448 $7,680 $48,000.00 Labor
31,900 27,550 30,450 30,450 31,900 29,000 181,250.00 Material
2,130 2,140 1,230 5,500.00 Storage
3,350 1,625 1,875 6,850.00 Stockout
$241,600.00
End of Chapter 14
Chapter 15
Inventory Control
OBJECTIVES
• Inventory System Defined
• Inventory Costs
• Independent vs. Dependent Demand
• Single-Period Inventory Model
• Multi-Period Inventory Models: Basic Fixed-
Order Quantity Models
• Multi-Period Inventory Models: Basic Fixed-Time
Period Model
• Miscellaneous Systems and Issues
Inventory System
• Inventory is the stock of any item or resource
used in an organization and can include: raw
materials, finished products, component
parts, supplies, and work-in-process
• An inventory system is the set of policies and
controls that monitor levels of inventory and
determines what levels should be maintained,
when stock should be replenished, and how
large orders should be
Purposes of Inventory
1. To maintain independence of operations
2. To meet variation in product demand
3. To allow flexibility in production scheduling
4. To provide a safeguard for variation in raw
material delivery time
5. To take advantage of economic purchase-
order size
Inventory Costs
• Holding (or carrying) costs
– Costs for storage, handling, insurance, etc
• Setup (or production change) costs
– Costs for arranging specific equipment
setups, etc
• Ordering costs
– Costs of someone placing an order, etc
• Shortage costs
– Costs of canceling an order, etc
Independent vs. Dependent Demand
Independent Demand (Demand for the final end-

product or demand not related to other items)
Finished
product
Dependent
Demand
(Derived demand
items for
E(1) component
parts,
subassemblies,
Component parts raw materials,
etc)
Inventory Systems
• Single-Period Inventory Model
– One time purchasing decision (Example: vendor selling
t-shirts at a football game)
– Seeks to balance the costs of inventory overstock and
under stock
• Multi-Period Inventory Models
– Fixed-Order Quantity Models
• Event triggered (Example: running out of stock)
– Fixed-Time Period Models
• Time triggered (Example: Monthly sales call by
sales representative)
Single-Period Inventory Model
This model states that we should
Nous ne pouvons pas afficher l’image. continue to increase the size of the
Cu inventory so long as the probability of
P£
selling the last unit added is equal to or
greater than the ratio of: Cu/Co+Cu
Co + Cu
Where :
Co = Cost per unit of demand over estimated
Cu = Cost per unit of demand under estimated
P = Probability that the unit will be sold
Single Period Model Example
• Our college basketball team is playing in a tournament

game this weekend. Based on our past experience we
sell on average 2,400 shirts with a standard deviation of
350. We make $10 on every shirt we sell at the game,
but lose $5 on every shirt not sold. How many shirts
should we make for the game?
Cu = $10 and Co = $5; P ≤ $10 / ($10 + $5) = .667
Z.667 = .432 (use NORMSDIST(.667) or Appendix E)

therefore we need 2,400 + .432(350) = 2,551 shirts
Multi-Period Models:
Fixed-Order Quantity Model Model
Assumptions (Part 1)
• Demand for the product is constant and

uniform throughout the period
• Lead time (time from ordering to receipt) is

constant
• Price per unit of product is constant

Multi-Period Models:
Fixed-Order Quantity Model Model Assumptions (Part 2)
• Inventory holding cost is based on average

inventory
• Ordering or setup costs are constant
• All demands for the product will be satisfied

(No back orders are allowed)
Basic Fixed-Order Quantity Model and Reorder Point
Behavior
1. You receive an order quantity Q. 4. The cycle then repeats.
Number
of units
on hand Q Q Q
R
2. Your start using them L L
up over time. 3. When you reach down to a level
Time of inventory of R, you place your
R = Reorder point next Q sized order.
Q = Economic order quantity
L = Lead time
Cost Minimization Goal
By adding the item, holding, and ordering costs
together, we determine the total cost curve, which in
turn is used to find the Qopt inventory order point that
minimizes total costs
Total Cost
C
O
S
T Holding
Costs
Annual Cost of
Items (DC)
Ordering Costs
QOPT
Order Quantity (Q)
Basic Fixed-Order Quantity (EOQ) Model TC=Total annual
cost
Formula
D =Demand
Total Annual Annual Annual C =Cost per unit
Annual = Purchase + Ordering + Holding Q =Order quantity
Cost Cost Cost Cost S =Cost of placing
an order or setup
cost
R =Reorder point
L =Lead time
H=Annual holding
D Q and storage cost
TC = DC + S + H per unit of inventory
Q 2
Deriving the EOQ
Using calculus, we take the first derivative of the
total cost function with respect to Q, and set the
derivative (slope) equal to zero, solving for the
optimized (cost minimized) value of Qopt
2DS 2(Annual Dem and)(Order or Setup Cost)

Q OPT = =
H Annual Holding Cost
_
We also need a
reorder point to tell us R eorder p oint, R = d L
when to place an _
order d = average daily demand (constant)
L = Lead time (constant)
EOQ Example (1) Problem Data
Given the information below, what are the EOQ and reorder point?
Annual Demand = 1,000 units

Days per year considered in average
daily demand = 365
Cost to place an order = $10
Holding cost per unit per year = $2.50
Lead time = 7 days
Cost per unit = $15
EOQ Example (1) Solution
2D S 2(1,000 )(10)
Q O PT = = = 89.443 units or 90 units
H 2.50
1,000 units / year

d = = 2.74 units / day
365 days / year
_
R eorder p oint, R = d L = 2.74units / day (7days) = 19.18 or 20 u n its
In summary, you place an optimal order of 90 units. In

the course of using the units to meet demand, when
you only have 20 units left, place the next order of 90
units.
EOQ Example (2) Problem Data
Determine the economic order quantity
and the reorder point given the following…
Annual Demand = 10,000 units

Days per year considered in average daily
demand = 365
Cost to place an order = $10
Holding cost per unit per year = 10% of cost
per unit
Lead time = 10 days
Cost per unit = $15
EOQ Example (2) Solution
2D S 2 (1 0 ,0 0 0 )(1 0 )
Q OPT = = = 3 6 5 .1 4 8 u n its, o r 3 6 6 u n its
H 1 .5 0
10,000 units / year

d= = 27.397 units / day
365 days / year
_
R = d L = 2 7 .3 9 7 u n its / d ay (1 0 d ays) = 2 7 3 .9 7 o r 2 7 4 u n its
Place an order for 366 units. When in the course of using the
inventory you are left with only 274 units, place the next order of 366
units.
Fixed-Time Period Model with Safety Stock Formula
q = Average demand + Safety stock – Inventory currently on hand
q = d(T + L) + Z s T + L - I
Where :
q = quantitiy to be ordered
T = the number of days between reviews
L = lead time in days
d = forecast average daily demand
z = the number of standard deviations for a specified service probability
s T + L = standard deviation of demand over the review and lead time
I = current inventory level (includes items on order)
Multi-Period Models: Fixed-Time Period Model:
Determining the Value of s T+L
å (s )
T+ L 2
s T+ L = di
i =1
Since each day is independent and s d is constant,

s T+ L = (T + L)s d 2
• The standard deviation of a sequence of

random events equals the square root of the
sum of the variances
Example of the Fixed-Time Period Model
Given the information below, how many units
should be ordered?
Average daily demand for a product is 20

units. The review period is 30 days, and
lead time is 10 days. Management has set
a policy of satisfying 96 percent of
demand from items in stock. At the
beginning of the review period there are
200 units in inventory. The daily demand
standard deviation is 4 units.
Example of the Fixed-Time Period Model:
Solution (Part 1)
s T+ L = (T + L)s d = 2
( 30 + 10 )( 4 ) 2 = 25.298
The value for “z” is found by using the Excel
NORMSINV function, or as we will do here, using
Appendix D. By adding 0.5 to all the values in
Appendix D and finding the value in the table that
comes closest to the service probability, the “z” value
can be read by adding the column heading label to
the row label.
So, by adding 0.5 to the value from Appendix D of 0.4599, we have a probability of
0.9599, which is given by a z = 1.75
Example of the Fixed-Time Period Model:
Solution (Part 2)
q = d(T + L) + Z s T + L - I
q = 20(30 + 10) + (1.75)(25.298) - 200
q = 800 + 44.272 - 200 = 644.272, or 645 units
So, to satisfy 96 percent of the demand,

you should place an order of 645 units at
this review period
Price-Break Model Formula
Based on the same assumptions as the EOQ model, the price-break
model has a similar Qopt formula:
2DS 2(Annual Demand)(Order or Setup Cost)

Q OPT = =
iC Annual Holding Cost
i = percentage of unit cost attributed to carrying inventory

C = cost per unit
Since “C” changes for each price-break, the formula

above will have to be used with each price-break cost
value
Price-Break Example Problem Data
(Part 1)
A company has a chance to reduce their inventory
ordering costs by placing larger quantity orders using
the price-break order quantity schedule below. What
should their optimal order quantity be if this company
purchases this single inventory item with an e-mail
ordering cost of $4, a carrying cost rate of 2% of the
inventory cost of the item, and an annual demand of
10,000 units?
Order Quantity(units) Price/unit($)
0 to 2,499 $1.20
2,500 to 3,999 1.00
4,000 or more .98
Price-Break Example Solution (Part 2)
First, plug data into formula for each price-break value of “C”
Annual Demand (D)= 10,000 units Carrying cost % of total cost (i)= 2%
Cost to place an order (S)= $4 Cost per unit (C) = $1.20, $1.00, $0.98
Next, determine if the computed Qopt values are feasible or not
Interval from 0 to 2499, the 2DS 2(10,000)(4)

Qopt value is feasible Q OPT = = = 1,826 units
iC 0.02(1.20)
Interval from 2500-3999, the 2DS 2(10,000)(4)
Qopt value is not feasible Q OPT = = = 2,000 units
iC 0.02(1.00)
Interval from 4000 & more, the 2DS 2(10,000)(4)
Qopt value is not feasible Q OPT = = = 2,020 units
iC 0.02(0.98)
Since the feasible solution occurred in the first price-break, it means that
all the other true Qopt values occur at the beginnings of each price-break
interval. Why?
Because the total annual cost function is a “u” shaped

function
Total
annual
costs So the candidates for
the price-breaks are
1826, 2500, and 4000
units
0 1826 2500 4000 Order Quantity

Next, we plug the true Qopt values into the total cost annual cost function to
determine the total cost under each price-break
D Q
TC = DC + S+ iC
Q 2
TC(0-2499)=(10000*1.20)+(10000/1826)*4+(1826/2)(0.02*1.20)
= $12,043.82
TC(2500-3999)= $10,041
TC(4000&more)= $9,949.20
Finally, we select the least costly Qopt, which is this problem occurs in the
4000 & more interval. In summary, our optimal order quantity is 4000 units
Miscellaneous Systems:
Optional Replenishment System
Maximum Inventory Level, M
q=M-I
Actual Inventory Level, I

M
Q = minimum acceptable order quantity
If q > Q, order q, otherwise do not order any.

Miscellaneous Systems:
Bin Systems
Two-Bin System
Order One Bin of

Inventory
Full Empty
One-Bin System
Order Enough to
Refill Bin
Periodic Check
ABC Classification System
• Items kept in inventory are not of equal
importance in terms of:
60
– dollars invested % of
– profit potential
$ Value 30 A
0 B
– sales or usage volume % of 30 C
Use 60
– stock-out penalties
So, identify inventory items based on percentage of total dollar value, where
“A” items are roughly top 15 %, “B” items as next 35 %, and the lower 65%
are the “C” items
Inventory Accuracy and Cycle Counting
• Inventory accuracy refers to how well the

inventory records agree with physical
count
• Cycle Counting is a physical inventory-
taking technique in which inventory is
counted on a frequent basis rather than
once or twice a year
End of Chapter 15
564
Chapter 16
Materials
Requirements
Planning
OBJECTIVES
• Material Requirements Planning (MRP)
• MRP Logic and Product Structure Trees
• Time Fences
• MRP Example
• MRP II and Lot Sizing
Material Requirements Planning
• Materials requirements planning (MRP) is a
means for determining the number of parts,
components, and materials needed to
produce a product
• MRP provides time scheduling information
specifying when each of the materials, parts,
and components should be ordered or
produced
• Dependent demand drives MRP
• MRP is a software system
Example of MRP Logic and Product Structure
Tree
Given the product structure tree for “A” and the lead time and demand information
below, provide a materials requirements plan that defines the number of units of each
component and when they will be needed
Product Structure Tree for Assembly A Lead Times

A 1 day
A B 2 days
C 1 day
D 3 days
E 4 days
B(4) C(2) F 1 day
Total Unit Demand

Day 10 50 A
D(2) E(1) D(3) F(2) Day 8 20 B (Spares)
Day 6 15 D (Spares)
First, the number of units of “A” are scheduled
backwards to allow for their lead time. So, in the
materials requirement plan below, we have to place
an order for 50 units of “A” on the 9th day to receive
them on day 10.
Day: 1 2 3 4 5 6 7 8 9 10
A Required 50
Order Placement 50
LT = 1 day
Next, we need to start scheduling the components that make up “A”. In the case of
component “B” we need 4 B’s for each A. Since we need 50 A’s, that means 200 B’s.
And again, we back the schedule up for the necessary 2 days of lead time.
D ay : 1 2 3 4 5 6 7 8 9 10
A R equired 50
O rder P lac em ent 50
B R equired 20 200
O rder P lac em ent 20 200
LT = 2
Spares
A 4x50=200
B(4) C(2)
D(2) E(1) D(3) F(2)

570
Finally, repeating the process for all components, we have the final materials
requirements plan:
Day: 1 2 3 4 5 6 7 8 9 10
A Required 50
LT=1 Order Placement 50
B Required 20 200
LT=2 Order Placement 20 200
C Required 100
D Required 55 400 300
LT=3 Order Placement 55 400 300
E Required 20 200
LT=4 Order Placement 20 200
F Required 200
A
Part D: Day 6
B(4) C(2) 40 + 15 spares
D(2) E(1) D(3) F(2)

Master Production Schedule (MPS)
• Time-phased plan specifying how many and

when the firm plans to build each end item
Aggregate Plan
(Product Groups)
MPS
(Specific End Items)
Types of Time Fences
• Frozen
– No schedule changes allowed within this
window
• Moderately Firm
– Specific changes allowed within product
groups as long as parts are available
• Flexible
– Significant variation allowed as long as
overall capacity requirements remain at
the same levels
Exhibit 15.5
Example of Time Fences
Moderately
Frozen Firm Flexible
Capacity
Forecast and available
capacity
Firm Customer Orders
8 15 26
Weeks
Material Requirements Planning System
• Based on a master production schedule, a material

requirements planning system:
– Creates schedules identifying the specific parts
and materials required to produce end items
– Determines exact unit numbers needed
– Determines the dates when orders for those

materials should be released, based on lead
times
575
Aggregate Forecasts
Firm orders product of demand
from known plan from random
customers
customers
Engineering Master production

Schedule (MPS) Inventory
design
transactions
changes
Material From Exhibit 15.6

planning
Bill of (MRP Inventory
material computer record file
file program)
Secondary reports
Primary reports
Exception reports
Planned order schedule for Planning reports
inventory and production Reports for performance
control control
Bill of Materials (BOM) File
A Complete Product Description
• Materials
• Parts
• Components
• Production sequence
• Modular BOM
– Subassemblies
• Super BOM
– Fractional options
Inventory Records File
• Each inventory item carried as a separate
file
– Status according to “time buckets”
• Pegging
– Identify each parent item that created demand
Primary MRP Reports
• Planned orders to be released at a future time
• Order release notices to execute the planned
orders
• Changes in due dates of open orders due to
rescheduling
• Cancellations or suspensions of open orders
due to cancellation or suspension of orders on
the master production schedule
• Inventory status data
Secondary MRP Reports
• Planning reports, for example,
forecasting inventory requirements
over a period of time
• Performance reports used to determine
agreement between actual and
programmed usage and costs
• Exception reports used to point out
serious discrepancies, such as late or
overdue orders
Additional MRP Scheduling Terminology
• Gross Requirements
• Scheduled receipts
• Projected available balance
• Net requirements
• Planned order receipt
• Planned order release

MRP Example
Item On-Hand Lead Time (Weeks)

X X 50 2
A 75 3
B 25 1
A(2) B(1) C 10 2
D 20 2
C(3) C(2) D(5)
Requirements include 95 units (80 firm orders and 15 forecast) of X

in week 10
Day: 1 2 3 4 5 6 7 8 9 10
X Gross requirements 95
X LT=2 Scheduled receipts
Proj. avail. balance 50 50 50 50 50 50 50 50 50 50
On- Net requirements 45
hand Planned order receipt 45
50 Planner order release 45
A Gross requirements 90
A(2) LT=3 Scheduled receipts
Proj. avail. balance 75 75 75 75 75 75 75 75
B Gross requirements 45
It takes 2 LT=1 Scheduled receipts
A’s for each On-
Proj. avail. balance
Net requirements
25 25 25 25 25 25 25 25
20
X hand Planned order receipt 20
C Gross requirements 45 40
LT=2 Scheduled receipts
Proj. avail. balance 10 10 10 10 10
On- Net requirements 35 40
hand Planned order receipt 35 40
10 Planner order release 35 40
D Gross requirements 100
Proj. avail. balance 20 20 20 20 20 20 20
Day: 1 2 3 4 5 6 7 8 9 10
A(2) B(1) LT=3 Scheduled receipts
B Gross requirements 45
It takes 1 B LT=1 Scheduled receipts
for each X On- Net requirements 20
C Gross requirements 45 40
Proj. avail. balance 10 10 10 10 10
Day: 1 2 3 4 5 6 7 8 9 10
C(3) B Gross requirements 45
It takes 3 C’s C Gross requirements 45 40
for each A Proj. avail. balance 10 10 10 10 10
Day: 1 2 3 4 5 6 7 8 9 10
C(3) C(2) B Gross requirements 45
It takes 2 C’s C Gross requirements 45 40
for each B Proj. avail. balance 10 10 10 10 10
Day: 1 2 3 4 5 6 7 8 9 10
C(3) C(2) D(5) B Gross requirements 45
It takes 5 D’s for C Gross requirements 45 40
each B Proj. avail. balance 10 10 10 10 10
Closed Loop MRP
Production Planning
Master Production Scheduling
Material Requirements Planning
Capacity Requirements Planning
No
Realistic? Feedback
Feedback
Yes
Execute:
Capacity Plans
Material Plans
Manufacturing Resource Planning
(MRP II)
• Goal: Plan and monitor all resources of a

manufacturing firm (closed loop):
– manufacturing
– marketing
– finance
– engineering
• Simulate the manufacturing system
Lot Sizing in MRP Programs
• Lot-for-lot (L4L)
• Economic order quantity (EOQ)
• Least total cost (LTC)
• Least unit cost (LUC)
• Which one to use?
– The one that is least costly!
590
End of Chapter 16

591
Chapter 17
Operations
Scheduling

OBJECTIVES
• Work Center Defined
• Typical Scheduling and Control
Functions
• Job-shop Scheduling
• Examples of Scheduling Rules
• Shop-floor Control
• Principles of Work Center Scheduling
• Issues in Scheduling Service Personnel
Work Center
• A work center is an area in a business

in which productive resources are
organized and work is completed
• Can be a single machine, a group of
machines, or an area where a
particular type of work is done
Capacity and Scheduling
• Infinite loading (Example: MRP)
• Finite loading
• Forward scheduling
• Backward scheduling (Example: MRP)
Types of Manufacturing Scheduling Processes and
Scheduling Approaches
Type of Process Typical Scheduling Approach
Continuous Finite forward of process, machine

process limited
High-volume Finite forward of line, machined limited

manufacturing
Med-volume Infinite forward of process, labor and

manufacturing machined limited
Low-volume Infinite forward of jobs, labor and some

manufacturing machine limited
Typical Scheduling and Control Functions
• Allocating orders, equipment, and

personnel
• Determining the sequence of order
performance
• Initiating performance of the
scheduled work
• Shop-floor control
Work-Center Scheduling Objectives
• Meet due dates
• Minimize lead time
• Minimize setup time or cost
• Minimize work-in-process inventory
• Maximize machine utilization

Priority Rules for Job Sequencing
1. First-come, first-served (FCFS)
2. Shortest operating time (SOT)
3. Earliest due date first (DDate)
4. Slack time remaining (STR) first
5. Slack time remaining per operation (STR/OP)

Priority Rules for Job Sequencing
(Continued)
6. Critical ratio (CR)
(Due date - Current date)

CR =
Number of days remaining
7. Last come, first served (LCFS)
8. Random order or whim
Example of Job Sequencing: First-Come First-
Served
Jobs (in order Processing Due Date
Suppose you have the four of arrival) Time (days) (days hence)
jobs to the right arrive for A 4 5
processing on one machine B 7 10
C 3 6
D 1 4
What is the FCFS schedule?
Do all the jobs get done on time?
Answer: FCFS Schedule No, Jobs B, C,

and D are
Jobs (in order Processing Due Date Flow Time
going to be late
of arrival) Time (days) (days hence) (days)
A 4 5 4
B 7 10 11
C 3 6 14
D 1 4 15
Example of Job Sequencing: Shortest
Operating Time
C 3 6
D 1 4
What is the SOT schedule? Do all the jobs get done on time?
Answer: Shortest Operating Time Schedule

No, Jobs A
of arrival) Time (days) (days hence) (days)
and B are
D 1 4 1 going to be
C 3 6 4 late
A 4 5 8
B 7 10 15
Example of Job Sequencing: Earliest Due Date
First
C 3 6
D 1 4
What is the earliest due date
first schedule? Do all the jobs get done on time?
Answer: Earliest Due Date First

Jobs (in order Processing Due Date Flow Time No, Jobs C
of arrival) Time (days) (days hence) (days) and B are
D 1 4 1 going to be
A 4 5 5 late
C 3 6 8
B 7 10 15
Example of Job Sequencing: Critical Ratio Method
C 3 6
D 1 4
What is the CR schedule? Do all the jobs get done on time?
In order to do this schedule the CR’s have be calculated No, but since
for each job. If we let today be Day 1 and allow a total of there is three-
15 days to do the work. The resulting CR’s and order way tie, only
schedule are: the first job or
CR(A)=(5-4)/15=0.06 (Do this job last) two will be on
CR(B)=(10-7)/15=0.20 (Do this job first, tied with C and D) time
CR(C)=(6-3)/15=0.20 (Do this job first, tied with B and D)
CR(D)=(4-1)/15=0.20 (Do this job first, tied with B and C)
Example of Job Sequencing:
Last-Come First-Served
C 3 6
D 1 4
What is the LCFS schedule? Do all the jobs get done on time?
Answer: Last-Come First-Served Schedule

of arrival) Time (days) (days hence) (days) No, Jobs B
D 1 4 1 and A are
C 3 6 4 going to be
B 7 10 11 late
A 4 5 15
Example of Job Sequencing: Johnson’s Rule (Part
1)
Suppose you have the following five jobs with time requirements in two
stages of production. What is the job sequence using Johnson’s Rule?
Time in Hours
Jobs Stage 1 Stage 2
A 1.50 1.25
B 2.00 3.00
C 2.50 2.00
D 1.00 2.00
Example of Job Sequencing: Johnson’s Rule (Part 2)
First, select the job with the
Time in Hours
smallest time in either stage.
Jobs Stage 1 Stage 2
That is Job D with the smallest A 1.50 1.25
time in the first stage. Place that B 2.00 3.00
job as early as possible in the C 2.50 2.00
unfilled job sequence below. D 1.00 2.00
Drop D out, select the next smallest time (Job A), and place it 4th in the job
sequence.
Drop A out, select the next smallest time. There is a tie in two stages for
two different jobs. In this case, place the job with the smallest time in the
first stage as early as possible in the unfilled job sequence.
Then place the job with the smallest time in the second stage as late as
possible in the unfilled sequence.
Job Sequence 1 2 3 4
Job Assigned D B C A
Shop-Floor Control:
Major Functions
1. Assigning priority of each shop order
2. Maintaining work-in-process quantity

information
3. Conveying shop-order status

information to the office
Shop-Floor Control:
Major Functions (Continued)
4. Providing actual output data for capacity
control purposes
5. Providing quantity by location by shop order

for WIP inventory and accounting purposes
6. Providing measurement of efficiency,

utilization, and productivity of manpower
and machines
Input/Output Control
Work
Input Output
Center
• Planned input should never exceed planned

output
• Focuses attention on bottleneck work

centers
Principles of Work Center Scheduling
1. There is a direct equivalence between work
flow and cash flow
2. The effectiveness of any job shop should be
measured by speed of flow through the
shop
3. Schedule jobs as a string, with process
steps back-to-back
4. A job once started should not be
interrupted
Principles of Job Shop Scheduling
(Continued)
5. Speed of flow is most efficiently achieved by
focusing on bottleneck work centers and jobs
6. Reschedule every day
7. Obtain feedback each day on jobs that are not
completed at each work center
8. Match work center input information to what the
worker can actually do
Principles of Job Shop Scheduling (Continued)
9. When seeking improvement in output,

look for incompatibility between
engineering design and process
execution
10. Certainty of standards, routings, and so

forth is not possible in a job shop, but
always work towards achieving it
Personnel Scheduling in Services
• Scheduling consecutive days off
• Scheduling daily work times
• Scheduling hourly work times

614
End of Chapter 17

615
Technical Note 17
Simulation

OBJECTIVES
• Definition of Simulation
• Simulation Methodology
• Proposing a New Experiment
• Considerations When Using Computer
Models
• Types of Simulations
• Desirable Features of Simulation Software
• Advantages & Disadvantages of Simulation
Simulation-Defined
• A simulation is a computer-based model

used to run experiments on a real
system
– Typically done on a computer
– Determines reactions to different
operating rules or change in structure
– Can be used in conjunction with traditional
statistical and management science
techniques
Start
Major Phases in a
Define Problem Simulation Study
Construct Simulation Model
Lets look at each of
these steps in turn…
Specify values of variables and parameters
Run the simulation
Evaluate results
Validation
Propose new experiment
Stop From Exhibit TN17.1

Simulation Methodology:Problem Definition
• Specifying the objectives
• Identifying the relevant controllable

and uncontrollable variables of the
system to be studied
Constructing a Simulation Model
• Specification of Variables and Parameters
• Specification of Decision Rules
• Specification of Probability Distributions
• Specification of Time-Incrementing
Procedure
Data Collection & Random No. Interval Example
Suppose you timed 20 athletes running the 100-yard dash
and tallied the information into the four time intervals below
You then count the tallies and make a frequency distribution
Then convert the frequencies into percentages
You then can add the frequencies into a cumulative distribution
Finally, use the percentages to develop the random number intervals
Seconds Tallies Frequency % Accum. % RN Intervals

0-5.99 4 20 20 00-19
6-6.99 10 50 70 20-69
7-7.99 4 20 90 70-89
8 or more 2 10 100 90-99
Specify Values of Variables and
Parameters
• Determination of starting conditions
• Determination of run length

Run the Simulation
• By computer
• Manually
Evaluate Results
• Conclusions depend on
– the degree to which the model reflects the real
system
– design of the simulation (in a statistical sense)
• The only true test of a simulation is how well

the real system performs after the results of
the study have been implemented
Validation
• Refers to testing the computer program

to ensure that the simulation is correct
• To insure that the model results are

representative of the real world system
they seek to model
Proposing a New Experiment
• Consider changing many of the factors:
– parameters
– variables
– decision rules
– starting conditions
– run length
• If the initial rules led to poor results or if
these runs yielded new insights into the
problem, then a new decision rule may
be worth trying
Considerations When Using Computer Models
• Computer language selection
• Flowcharting
• Coding
• Data generation
• Output reports
• Validation
Types of Simulation Models
• Continuous
– Based on mathematical equations
– Used for simulating continuous values for
all points in time
– Example: The amount of time a person
spends in a queue
• Discrete
– Used for simulating specific values or
specific points
– Example: Number of people in a queue
Desirable Features of Simulation Software
• Be capable of being used interactively as well as allowing
complete runs
• Be user-friendly and easy to understand
• Allow modules to be built and then connected
• Allow users to write and incorporate their own routines
• Have building blocks that contain built-in commands
• Have macro capability, such as the ability to develop
machining cells
Desirable Features of Simulation Software
• Have material-flow capability
• Output standard statistics such as cycle times,
utilization, and wait times
• Allow a variety of data analysis alternatives for both
input and output data
• Have animation capabilities to display graphically
the product flow through the system
• Permit interactive debugging
Advantages of Simulation
• Often leads to a better understanding of the
real system
• Years of experience in the real system can
be compressed into seconds or minutes
• Simulation does not disrupt ongoing
activities of the real system
• Simulation is far more general than
mathematical models
• Simulation can be used as a game for
training experience
Advantages of Simulation (Continued)
• Simulation provides a more realistic replication of
a system than mathematical analysis
• Simulation can be used to analyze transient
conditions, whereas mathematical techniques
usually cannot
• Many standard packaged models, covering a wide

range of topics, are available commercially
• Simulation answers what-if questions

Disadvantages of Simulation
• There is no guarantee that the model will, in fact, provide

good answers
• There is no way to prove reliability
• Building a simulation model can take a great deal of time
• Simulation may be less accurate than mathematical
analysis because it is randomly based
• A significant amount of computer time may be needed to
run complex models
• The technique of simulation still lacks a standardized
approach
634

635
Chapter 18
Synchronous Manufacturing
and
Theory of Constraints

OBJECTIVES
• Goldratt’s Rules
• Goldratt’s Goal of the Firm
• Performance Measurement
• Capacity and Flow issues
• Synchronous Manufacturing
Goldratt’s Rules of Production Scheduling
• Do not balance capacity balance the flow
• The level utilization of a nonbottleneck resource
is not determined by its own potential but by
some other constraint in the system
• Utilization and activation of a resource are not
the same
• An hour lost at a bottleneck is an hour lost for the
entire system
• An hour saved at a nonbottleneck is a mirage
Goldratt’s Rules of Production Scheduling
(Continued)
• Bottlenecks govern both throughput and
inventory in the system
• Transfer batch may not and many times
should not be equal to the process batch
• A process batch should be variable both
along its route and in time
• Priorities can be set only by examining the
system’s constraints and lead time is a
derivative of the schedule
Goldratt’s Theory of Constraints (TOC)
• Identify the system constraints
• Decide how to exploit the system
constraints
• Subordinate everything else to that decision
• Elevate the system constraints
• If, in the previous steps, the constraints
have been broken, go back to Step 1, but do
not let inertia become the system constraint
Goldratt’s Goal of the Firm
The goal of a firm is to make

money
Performance Measurement:
Financial
• Net profit
– an absolute measurement in dollars
• Return on investment
– a relative measure based on investment
• Cash flow
– a survival measurement
Performance Measurement:
Operational
• 1. Throughput
– the rate at which money is generated by the
system through sales
• 2. Inventory
– all the money that the system has invested in
purchasing things it intends to sell
• 3. Operating expenses
– all the money that the system spends to turn
inventory into throughput
Productivity
• Does not guarantee profitability

– Has throughput increased?
– Has inventory decreased?
– Have operational expenses
decreased?
Unbalanced Capacity
• In earlier chapters, we discussed balancing
assembly lines
– The goal was a constant cycle time across all
stations
• Synchronous manufacturing views constant

workstation capacity as a bad decision
The Statistics of Dependent Events
(Variable) (Constant) When one
process
Process Time (A) Process Time (B) takes
longer than
the
average,
6 8 10 12 14 10 the time
can not be
made up
(Constant) (Variable)
Process Time (B) Process Time (A)
10
6 8 10 12 14
• Rather than balancing capacities, the flow of product through

the system should be balanced
Capacity Related Terminology
• Capacity is the available time for
production
• Bottleneck is what happens if capacity is
less than demand placed on resource
• Nonbottleneck is what happens when
capacity is greater than demand placed on
resource
• Capacity-constrained resource (CCR) is a
resource where the capacity is close to
demand placed on the resource
Capacity Example Situation 1
There is some idle production in this set up. How
much?
Case A 25% in Y
X Y Market
X Y
Bottleneck Nonbottleneck
Demand/month 200 units 200 units
Process time/unit 1 hour 45 mins
Avail. time/month 200 hours 200 hours
Is there is going to be a build up of unnecessary production
in Y?
Yes, 25% in Y
Case B
Y X Market
X Y
Case C
Is there going Market Yes, 25% in Y
to be a build up
in unnecessary
Assembly
production in
Y?
X Y
X Y
If we run both X and Yes, 25% in Y
Y for the same time,
will we produce any
unneeded Case D
production?
Market Market
X Y
X Y
Time Components of Production Cycle
• Setup time is the time that a part spends
waiting for a resource to be set up to work
on this same part
• Process time is the time that the part is being
processed
• Queue time is the time that a part waits for a
resource while the resource is busy with
something else
Time Components of Production Cycle (Continued)
• Wait time is the time that a part waits
not for a resource but for another part
so that they can be assembled together
• Idle time is the unused time that

represents the cycle time less the sum
of the setup time, processing time,
queue time, and wait time
Saving Time
What are the consequences of saving time at each
process?
• Rule: Bottlenecks govern both

throughput and inventory in the system.
• Rule: An hour lost at a bottleneck is an
hour lost for the entire system.
• Rule: An hour saved at a nonbottleneck
is a mirage.
Exhibit 18.9
Drum, Buffer, Rope
Bottleneck (Drum)
A B C D E F Market
Inventory
buffer
Communication
(time buffer)
(rope)
Quality Implications
• More tolerant than JIT systems
– Excess capacity throughout system
• Except for the bottleneck

– Quality control needed before bottleneck
Batch Sizes
• What is the batch size?
• One?
• Infinity?
Bottlenecks and CCRs:
Flow-Control Situations
• A bottleneck
– (1) with no setup required when changing from
one product to another
– (2) with setup times required to change from one
product to another
• A capacity constrained resource (CCR)
– (3) with no setup required to change from one
product to another
– (4) with setup time required when changing from
one product to another
Inventory Cost Measurement:
Dollar Days
• Dollar Days is a measurement of the
value of inventory and the time it stays
within an area
Value of inventory
Dollar Days =
Number of days within a department
Benefits from Dollar Day Measurement
• Marketing
– Discourages holding large amounts of finished
goods inventory
• Purchasing
– Discourages placing large purchase orders that
on the surface appear to take advantage of
quantity discounts
• Manufacturing
– Discourage large work in process and producing
earlier than needed
Comparing Synchronous Manufacturing to MRP
• MRP uses backward scheduling
• Synchronous manufacturing uses

forward scheduling
Comparing Synchronous Manufacturing to JIT
• JIT is limited to repetitive manufacturing
• JIT requires a stable production level
• JIT does not allow very much flexibility in the

products produced
Comparing Synchronous Manufacturing to
JIT (Continued)
• JIT still requires work in process when
used with kanban so that there is
“something to pull”
• Vendors need to be located nearby

because the system depends on
smaller, more frequent deliveries
Relationship with Other Functional Areas
• Accounting’s influence
• Marketing and production

664
End of Chapter 18

665
Supplement A
Financial Analysis

OBJECTIVES
• Cost Definitions
• Expected Value
• Depreciation
• Activity-Based Costing
• Investment Categories
• Cost of Capital
• Interest Rate Effects
• Methods of Ranking Investments
Cost Definitions
• Fixed costs are any expenses that remains
constant regardless of the level of output
• Variable costs are expenses that fluctuate
directly with changes in the level of output
• Sunk costs are past expenses or investments
that have no salvage value and therefore
should not be taken into account in
considering investment alternatives
Cost Definitions (Continued)
• Opportunity cost is the benefit forgone,
or advantage lost, that results from
choosing one action over the best
alternative course of action
• Avoidable costs include any expense
that is not incurred if an investment is
made but must be incurred if the
investment is not made
Expected Value
• This analysis is used to include risk factors

(probabilities) with payoff values for
decision making
• Basic premise:
Expected value = Expected outcome x
Probability of outcome occuring
Expected Value Problem
Suppose you have to choose between one of three
processes (A, B, or C) with the following monthly profit
and respective probabilities of those profits being
realized. Compute expected values and choose a
process.
Process Payoffs Probabilities Pay x Prob. EV
A $6,000 90% 6,000x0.90 = $5,400
B $8,000 75% 8,000x0.75 = $6,000
C $9,000 65% 9,000x0.65 = $5,850
Expected value = Expected outcome x Select

Process
Probability of outcome occuring B
Economic Life and Obsolescence
• Economic life of a machine is the

period time over which it provides the
best method for performing its task
• Obsolescence occurs when a machine
is worn out
Depreciation
• Depreciation is a method for allocating
costs of capital investment, including
buildings, machinery, etc
• Depreciation procedures may not
reflect an asset’s true value because
obsolescence may at any time cause a
large difference between the true value
and book value
Depreciation Methods
• Straight-Line Method
• Sum-of-the-Years’-Digits (SYD) Method
• Declining-Balance Method
• Double-Declining-Balance Method
• Depreciation-by-Use Method
Traditional and Activity-Based Costing
Traditional Costing Activity-Based Costing
Total overhead Total overhead
Labor-hour Pooled
allocation based
on activities
End product cost Cost pools
Cost-driver
allocation
End product cost

Choosing Among Investment Proposals:
Investment Decision Categories
• Purchase of new equipment and/or facilities
• Replacement of existing equipment or facilities
• Make-or-buy decisions
• Lease-or-buy decisions
• Temporary shutdowns or plant-abandonment
decisions
• Addition or elimination of a product or product
line
Cost of Capital
• The cost of capital is calculated from a
weighted average of debt and equity
security costs
• Short-term debt
• Long-term debt
Interest Rate Effects
• Compound value of a single amount
• Compound value of an annuity
• Present value of a future single payment
• Present value of an annuity
• Discounted cash flow

Methods of Ranking Investments
• Net present value
• Payback period
• Internal rate of return
• Ranking investments with uneven lives

679
End of Supplement A

680
Supplement B
Operations
Technology

OBJECTIVES
• Hardware Systems
• Software Systems
• Formula for Evaluating Robots
• Computer Integrated Manufacturing
• Technologies in Services
• Benefits
• Risks
Hardware Systems
• Numerically controlled (NC) machines
• Machining centers
• Industrial robots
• Automated material handling (AMH) systems

– Automated Storage and Retrieval Systems (AS/AR)
– Automate Guided Vehicle (AGV)
• Flexible manufacturing systems (FMS)

Formula for Evaluating a Robot Investment
The payback formula for an investment in robots is:
I
P=
L - E + q(L + Z)
Where
P = Payback period in years
I = Total capital investment required in robot and accessories
L = Annual labor costs replaced by the robot (wage and
benefit costs per worker times the number of shifts per day)
E = Annual maintenance cost for the robot
Z = Annual depreciation
q = Fractional speedup (or slowdown) factor (in decimals).
Example: If robot produces 150 % of what the normal worker is
capable of doing, the fractional speedup factor is 1.5.
Example of Evaluating a Robot Investment
Suppose a company wants to buy a robot. The bank

wants to know what the payback period is before they will
lend them the $120,000 the robot will cost. You have
determined that the robot will replace one worker per shift,
for a one shift operation. The annual savings per worker is
$35,000. The annual maintenance cost for the robot is
estimated at $5,000, with an annual depreciation of
$12,000. The estimated productivity of the robot over the
typical worker is 110%. What is the payback period of this
robot?
P= I = 120,000 =1.47years
L–E+q(L + Z) 35,000–5,000+1.1(35,000+12,000)
Software Systems
• Computer-aided-design (CAD)
– Computer-aided engineering (CAE)
– Computer-aided process planning (CAPP)
• Automated manufacturing planning and

control systems (MP & CS)
Computer Integrated Manufacturing
(CIM)
• Product and process design
• Planning and control
• The manufacturing process

Cost Reduction Benefits from Adopting New
Technologies
• Labor costs
• Material costs
• Inventory costs
• Transportation or distribution costs
• Quality costs
• Other costs
Other Benefits….
• Increased product variety
• Improved product features and

quality
• Shorter cycle times

Risks
• Technological risks
• Organizational risks
• Environmental risks
• Market risks
690
End of Supplement B

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Supply Chain Management

The Full spectrum Mastering the

Professor: Mr. Ian JC Corns

President, SFDS Holdings & meta-campus.ai (based Paris, France)

Introduction to the Field

• Supply-chain management is a total

• -> Supply Chain includes the 7 dimensions of the

Development Purchasing Production Distribution Shop

• Maximize overall value created

• FYI: The notion of Maximization or

Supply Chain Surplus

• Sources of cost : include flows of information,

• Effective supply chain management is the

• Supply chain strategy or design

• Supply chain processes discussed in the two

• Integration among the above three macro

Cost of goods sold

æ Average aggregate inventory value ö

Since the company’s normal inventory turnover ration is 10, a

Operations management (OM) is defined

Business Education Operations Career Opportunities

A transformation process is defined as a

• “If you drop it on your foot, it won’t hurt

• “Services never include goods and goods

Finance Operations Marketing

Plant Operations Director

Manufacturing, Production control,

Core services are basic things

Price (or cost

Operations Sales Support

• Synergies must exist with other

• Manufacturing Strategy Paradigm

• Service Quality and Productivity

• Total Quality Management and Quality

• Supply Chain Management

• Optimizing global supplier, production, and

• Increased co-production of goods and

• Raising the awareness of operations as a

©The McGraw-Hill Companies, Inc., 2006

Customer Needs More Product

Corporate Strategy Increase Org. Size

Operations Strategy Increase Production Capacity

For example, if we improve

•Order winners are the criteria that

• A brand name car

•Repair services can be “order

Customer Perspective Customer Value Proposition

Internal Perspective Build-Increase-Achieve

Learning and Growth Perspective A Motivated and Prepared

1. Improve cost structure: Lower direct and

1. Build the franchise: Develop new sources of

New product : Old product

Quality, Dependability, Speed, Flexibility, and Price

• 1. Segment the market according to the product

Productivity is a common measure on

• Partial measures of productivity =

• Output or Output or Output or Output

Optimizing the Use

©The McGraw-Hill Companies, Inc., 2006

• Aggregate sales and operations planning

• Cj is a constant that describes the rate

• Z is the total cost or profit from the