OM Study Guide Lessons 1-12

Study Guide

Study Guide

OPERATIONS MANAGEMENT Content This module deals with the use of operations strategy to build value chains and competitive advantage. It provides participants with frameworks to address both the design and the management of operations. The designing framework covers forecasting, the design of goods and services, managing quality, process strategy, capacity planning, and location and layout. The managing operations framework covers supply-chain management, inventory management, materials requirements planning and ERP, project management, JIT and lean systems, and maintenance and reliability.

Module Aims The aims of this module are to: 1.

Understand the principles of production, operations and supply chain management in organizations.

2.

Recognize the practical concerns in managing operations processes and value chain activities.

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Learning Outcomes On completion of this module, a participant will typically be able to: 1.

Show a detailed knowledge and understanding of:

i) ii) iii) iv)

The link between strategy and production/operations systems. The principles of process design and operations. The positioning of the supply chain model. The response to capacity strategies: demand variation, resource planning and project management.

2.

Demonstrate module specific skills with respect to:

i) ii) iii)

Using a planned approach to the design of production/operations. Mapping and modeling basic production systems. Assessing basic problems on TQM (total quality management) where possible solutions take into account the competitive organizational context. Using, in broad terms, MRP (Materials Resource Planning) and project management tools for operations management.

iv)

3.

Show cognitive skills with respect to:

i) ii)

Adopting lean thinking and supporting waste-free operations. Supporting quality development thinking and use of problem-solving and information technology tools. Understanding difficulties organizations face during the implementation of operations management strategies.

iii)

4.

Demonstrate transferable skills in:

i) ii) iii) iv) v) vi)

Conceptual mapping of processes. Analytical reasoning. Communication. Operations management at work. Problem formulation and decision making. Working with others.

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Delivery of Module and Lesson Plan Session

Topics

Session Learning Outcomes

At the completion of this participants will be able to:

session,

Prescribed Text, Readings and/or Activities

1.

Operations as an Instrument of Competition

1. Describe operations management in terms of inputs, processes, outputs, information flows, suppliers, and customers. 2. Explain how a pattern of decisions about processes and supply chains helps develop the capabilities to achieve competitive priorities. 3. Identify the global trends and challenges facing operations and value chains.

Heizer and Render, Chapters 1 and 2

2.

Forecasting

1. Outline the steps that are used to develop a forecasting system for operations management. 2. Outline the qualitative method of forecasting. 3. Outline the time-series method and causal method of forecasting.

Heizer and Render,

1. Outline the product development system and identify the stakeholders of this process. 2. Explain the main techniques that are important to product development. 3. Explain the process of defining a product. 4. Identify the documents that are used to assist production personnel to manufacture the defined product.

Heizer and Render,

1. Define the major costs of quality. 2. Explain the basic principles and methods of TQM (Total Quality Management). 3. Describe the tools of TQM including the House of Quality, Pareto charts, process charts cause-and effect diagrams and statistical process control. 4. Describe how to determine whether a process is capable of producing a service or product to specifications.

Heizer and Render,

3.

4.

Design of Goods and Services

Managing Quality

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Chapter 4

Chapter 5

Chapter 6

Study Guide

5.

6.

7.

8.

Process Strategy and Capacity Planning

Location and Layout Strategies

Supply Chain Management

Inventory Management

1. Discuss the major process decisions and position each process on a volume-variety product-process matrix. 2. Configure operations into work flows and layouts. 3. Define process reengineering and process improvement. 4. Distinguish between design capacity, effective capacity and efficiency. 5. Identify a systematic approach to capacity planning.

Heizer and Render,

1. Understand how goods-producing and service location decisions differ. 2. Explain how to apply the factor-rating method, locational break-even analysis, center of gravity, and transportation model methods. 3. Distinguish between the various types of layout, including fixed-position, process-orientated, office, retail, warehouse and process-orientated layouts.

Heizer and Render,

1. Explain the strategic importance of supply chains for service providers, as well as for manufacturers. 2. Define the key design strategies associated with supply chain processes. 3. Explain the process of outsourcing and vendor selection. 4. Explain the process of managing the complete cycle of materials as they move from suppliers to production, warehousing, distribution and to the customer.

Heizer and Render,

1. Determine the items deserving most attention and tightest inventory control. 2. Calculate the economic order quantity and apply it to various situations. 3. Determine the order quantity and reorder point for a continuous review inventory control system. 4. Determine the review interval and target inventory level for a periodic review inventory control system. 5. Define the key factors that determine the appropriate choice of an inventory system.

Heizer and Render,

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Chapter 7

Chapters 8 and 9

Chapter 11

Chapter 12

Study Guide

9.

10.

11.

12.

Materials Requirements Planning and ERP

1. Explain how the concept of dependent demand is fundamental to resource planning. 2. Describe a master production schedule (MPS) and the information it provides. 3. Discuss the logic of a material requirements planning (MRP) system. 4. Identify production and purchase orders needed for dependent demand items. 5. Explain how enterprise resource planning (ERP) systems can foster better resource planning.

Heizer and Render,

Project Management

1. Discuss the business case for a project. 2. Describe a project in terms of a work breakdown structure. 3. Understand the three time estimates a PERT approach would require. 4. Understand the use of Gantt charts in project management.

Heizer and Render,

1. Identify the characteristics and strategic advantages of JIT (just-intime) and lean systems. 2. Describe how lean systems can facilitate the continuous improvement of processes. 3. Understand kanban systems for creating a production schedule in a lean system. 4. Explain the implementation issues associated with the application of lean systems.

Heizer and Render,

1. Explain the strategic importance of maintenance and reliability. 2. Understand the concept of reliability. 3. Understand preventive and breakdown maintenance. 4. Outline the techniques for establishing maintenance policies.

Heizer and Render,

JIT and Lean Systems

Maintenance and Reliability

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Chapter 14

Chapter 3

Chapter 16

Chapter 17

Study Guide

Teaching and Learning Methods Participants will learn through a combination of lectures and practical activities. Participants will be expected to learn independently by carrying out reading and directed study beyond that available within taught classes. Indicative Readings Textbooks required

Heizer J. and Render B. 2009, Principles of Operations Management, Pearson Education, NJ.

Supplementary reading

Krajewski, L. J., Ritzman, L. P. and Malhotra M. K. 2007, Operations Management: Process and Value Chains, Pearson Education, NJ.

Online Journals

Use of online databases like EBSCO and references to: Journal of Operations Management, International Journal of Operations and Production Management, International Journal of Quality and Reliability Management, International Journal of Physical Distribution Logistics Management, etc.

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Assessment/coursework All assessments will comply with the SIM Rules and Regulations. To satisfy module requirements students must: 1. Satisfactorily complete and present on due dates their assignment work. Failure to present assignments, written, oral or otherwise, on the scheduled time will normally attract a deduction of 10% of total assignment marks per day. 2. In order to pass the module, all assignments and the final examination must be completed in a satisfactory manner. 3. All cases of plagiarism in regard to module assessment will be dealt with severely as outlined in SIM’s policy on plagiarism. 4. 100 or more hours (including class attendance and assignments) should be spent on the module. Specific for this module are the following requirements: Weighting between components A and B - A: 70% B: 30% Element Description

Element Type

% of Component

% of Assessment

Summative

70%

70%

Component A (Controlled Conditions)

Examination (180 minutes)

Component B (Assignment & Quiz)

1. Group Assignment

Formative

20%

20%

2. Individual Online Quiz Total

Formative

10%

10% 100%

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Lesson 1 : Operations as an instrument of competition Learning Outcomes: At the end of this lesson, students should be able to: 1. Describe operations management in terms of inputs, processes, outputs, information flows, suppliers, and customers. 2. Identify the global trends and challenges facing operations and value chains. 3. Explain how a pattern of decisions about processes and supply chains help to develop the capabilities to achieve competitive priorities

1.1 What is Operations Management (OM)? Hi students, welcome to the first lesson on Operations Management. (OM) In this course, you will learn the activities of the operations function. Operation is an exciting area of management that has a profound effect on the productivity of both manufacturing and service industries. This course serves to equip you with a broad understanding to the field of operations in a realistic and practical manner. Even if you are not planning on a career in the operations areas, you will likely to be working with people who are. Therefore, a solid understanding of the role of operations in an organization is of substantial benefits to you. Let us begin by defining what Operations Management is.

Operations Management (OM) It is the set of activities that creates value in the form of goods and services by transforming inputs into outputs.

OM is the management of that part of an organisation that is responsible for producing goods. There are examples of goods all around us. Every book we read, every hand-phone we purchase, every meal we consume, and every vehicle that we see on the road involves the operations functions of one or more organisations. So does every thing we wear, eat, travel in and sit on.

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1.2 Organising to produce Goods and Services To produce goods and services, all organisations perform three functions. These functions are the necessary ingredients not only for production but also for an organisation survival. They are:

Department

Responsible for

1. Marketing

Generating the demand, or at least takes the order for a product or service (nothing happens until there is a sale)

2. Operations

Creating the product or service

3. Finance

Tracking how well the organisation is doing, pays the bills, and collects the money.

The figure 1.1 below shows how a manufacturing firm organise themselves to perform these functions.

Manufacturing

Marketing

Finance/

Operations

Accounting

Manufacturing

Production

Quality

Control

Control

Purchasing

Figure 1.1 The three major functional areas of a manufacturing firm From the above chart, we can see that the manufacturing plant has these departments under the Operations: (1) Manufacturing – The supervisors and operators who are responsible for the conversion of inputs into outputs accordingly to the operations goals. (2) Production Control – The planning department that manages the loading, movement and delivery of the inventory.

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(3) Quality Control – The department that ensure that the quality of the outputs meet the requirements of the customers. (4) Purchasing – The department that ensure timely purchase of various materials and inventories for the smooth flow of operations.

Having seen a manufacturing firm, next, let us look at an airliner, a service organization.

Airline

Marketing

Operations

Finance/ Accounting

Flight

Ground

Facility

Operations

Support

Maintenance

Catering

Figure 1.2 The three major functional areas of an airliner The airliner can organise its operations into four main areas: (1) Flight operations (eg. scheduling of the pilots and cabin crews) (2) Ground support (eg. luggage handler) (3) Facilities maintenance (eg. regular servicing of the aircrafts) (4) Catering (eg. ensure in-flight meals are provided)

1.3 The Transformation Process It is the core of most business organisations, the Operations function is responsible for creating finished good or services with inputs, using one or more transformation processes (see figure 1.3). The creation of goods involves transforming or converting inputs into outputs. Various inputs such as capital, labour, and information are used to create goods using one or more transformation processes (eg. storing, cutting, transporting). To ensure that the desired outputs are obtained, measurement are taken at various points in the transformation process (feedback) and then compared with previously established standards to determine whether corrective action is needed (control).

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Inputs Land, Labor, Capital, Management

Process The economic system transforms inputs to outputs

Output s Goods and Services

Feedback loop Figure 1.3 The Transformation Process Value-added : A term used to describe the difference between the cost of inputs and the value or price of outputs. The essence of Operations function is to add value during the transformation process. As such, businesses attempt to become more productive by critical examination of the operations performed by workers to see whether they add value. Eliminating or improving operations that do not add value decreases the cost of inputs or processing, thereby increasing the value-added. The money generated by valueadded are used for Research and Development (R&D), investment in new facilities and equipment, salaries and wages, and profits. Money so used will in turn generate a greater amount of funds available for these purposes.

1.4 Why Study Operations Management? (1) OM is the core activity of all business organizations. (2) OM and related areas provide 50% or more career opportunities. (3) OM is inter-related with activities of other functions like Finance, Accounting, Human Resources, Logistics, Management Information System (MIS), Marketing and Purchasing. (4) OM is the production function that creates the products and services for consumers. It is essential to have a basic understanding of OM as business processes involve systems that extends across functional boundaries, such as:  

Finance and Operations People in the Finance department not only need to understand inventory management but, also, must be able to : Pg 11 of 122

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   

Forecast financial needs and cash flow Understand the rationale for make-or-buy decisions Understand the need for updating equipment, investing in new technology, upgrading employee skills Provide funds for expansion or relocation

1.5 Ten Critical Decisions of Operations Management Ten (10) Decision Areas

Issues

1. Service and product design

What good or service should we offer? How should we design the product?

2. Quality management

Who is responsible for quality? How do we define quality?

3. Process and capacity design

What process and what capacity will these products require? What equipment and technology is necessary for these processes?

4. Location

Where should we put the facility? On what criteria should we base the location decision?

5. Layout design

How should we arrange the facility? How large should the facility be to meet our plan?

6. Human resources and job design

How do we provide a reasonable work environment? How much can we expect our employees to produce?

7. Supply Chain Management (SCM)

Should we make or buy this component? Who are our suppliers and who can integrate into our e-commerce program?

8. Inventory, Material Requirement Planning (MRP) and Just-in-time (JIT) 9. Intermediate and short term scheduling

How much inventory of each item should we have? When do we reorder?

10. Maintenance

Who is responsible for maintenance? When do we do maintenance?

Are we better off keeping people on the payroll during slowdowns? Which job do we perform next?

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1.6 Operations in the Service Sector

Services Those economic activities that typically produce an intangible product (such as education, entertainment, lodging, government, financial and health services)

We shall look at the characteristics of the service operations, using the example of dental service to illustrate. Characteristics of services

Dental clinic example

(1) Services are usually intangible.

The patients cannot own the clinic or the equipments after the dental treatments

(2) Services are often produced and consumed simultaneously

The dental treatment performed by the dentist is received by the patient at the same time

(3) Services are often unique.

Different patient asks for different dental treatment

(4) Services have high customer interaction

The dentist and the patient interact closely through diagnostics question and answer

(5) Services have inconsistent product definition

The same dental treatment (eg, tooth extraction) is performed differently for different patients.

(6) Services are often knowledge-based.

The dentists are qualified professional with recognized medical certificates.

(7) Services are frequently dispersed.

The dental clinics are located at different part of the city or country for the convenience of the patients

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1.7 Differences between Goods and Services The following table shows additional differences between goods and services that impact OM decisions Attributes of Goods (Tangible product) 1. Product can be resold

Attribute of Services (Intangible product) 1. Reselling a service is unusual

2. Product can be inventoried

2. Many services cannot be inventoried.

3. Some aspects of quality are measurable 3. Many aspects of quality are difficult to measure 4. Selling is distinct from production 4. Selling is often part of the service 5. Product is transportable 6. Site of facility is important for cost 7. Often easy to automate

5. Provider, not product, is often transportable 6. Site of facility is important for customer contact 7. Service is often difficult to automate

8. Revenue is generated primarily from 8. Revenue is generated primarily from the tangible product the intangible services.

1.8 Exciting New Trends in Production and Operations Management One of the reasons OM is such an exciting discipline is that the operations manager is confronted with an ever-changing word. These dynamics are the result of a variety of forces, from globalisation of world trade to the transfer of ideas, products, and money at electronics speeds. Let us take a look at some of the challenges:

Trend

Contributing Factors

Global focus

 Rapid decline in communication and transportation costs  Countries throughout the world vying for economic growth and industrialization

Just-in-time performance

 Commitment of vast financial resources to inventory, making it costly  Impediment by inventory to respond to rapid changes in the market-place

Supply-chain partnering

Since suppliers supply more than half of the value of products, more participation is required with :  Shorter product life-cycles  Rapid changes in material and process technology

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Rapid product development

Shortening of life-span of products by rapid international communication of news, entertainment, and life-styles.

Mass customization

 Cultural differences  Individual differences  Increasing awareness of options

Empowered employees

More competence at the workplace required by :  Knowledge explosion  More technical workplace

Environmentally sensitive production

Need for :  Bio-degradable products  Re-usable or can be re-cycled automobile components  More efficient packing

1.9 Achieving competitive advantage through operations An effective operations management effort must have a mission so it knows where it is going and a strategy so it knows how to get there. Firms achieve missions in three conceptual ways: (1) differentiation (2) cost leadership (3) response This means operations manager are called on to deliver goods and services that are (1) better, or at least different (2) cheaper (3) more responsive. Each of the three strategies provides an opportunity for operations managers to achieve competitive advantage. Competitive advantage implies the creation of a system that has a unique advantage over competitors. The idea is to create customer value in an efficient and sustainable way. Pure forms of these strategies may exist, but operations managers will more likely be called on to implement some combination of them. Let us look at how managers achieve competitive advantage through differentiation, low cost and response.

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Competing on Differentiation

Differentiation Distinguishing the offerings of an organization in a way that the customer perceives as adding value. When Apple first launched the iPhone, it’s touch screen function was totally differentiated from other competitors’ products with keypads. Differentiation is concerned with providing uniqueness. A firm’s opportunities for creating uniqueness are not located within a particular function or activity but can arise in virtually everything the firm does. Moreover, because most products include some service, and most services include some product, the opportunities for creating this uniqueness are unlimited. In the service sector, one option for extending product differentiation is through an experience. The idea of experience differentiation is to engage the customer – to use people’s five senses so they become immersed, or even an active participant, in the product. Examples: (1) Disney does this with the Magic Kingdom. (2) Hard Rock Café differentiates by engaging the customer with classic rock music, big screen rock videos.

Competing on Cost

Low-cost leadership Achieving maximum value as perceived by the customer.

Tiger Airways has been doing well in business since its started operations while other airliners have lost significant amount of money. Incorporated in September 2003, it is currently the largest low-cost airline operating out of Singapore in terms of passengers carried. Tiger Airways has done this by fulfilling a need for low-cost and short trip flights. It operations strategy has included use a Budget Terminal at Singapore Changi Airport to achieve operating-cost savings. Other cost-saving strategies include online ticketing, few fare options, smaller crew flying more hours, snack-only or no-meal flights.

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Sheng Siong Supermarket also utilizes low-cost strategy. It sources the supplies in bulk and rent business space with low monthly rental, thus enjoying substantial savings. The savings are then in turn passed on to the customers. Such a strategy has helped the company grow into a supermarket chain with many stores across Singapore and headcount of over 2,000.

Competing on Response

Response A set of values related to rapid, flexible and reliable performance

The third strategy option is response. Response is often thought as flexible response, but it also refers to reliable and quick response. Indeed, we define response as including the entire range of values related to timely product development and delivery, as well as reliable scheduling and flexible performance. Hewlett-Packard is an exceptional example of a firm that has demonstrated flexibility in both design and volume changes in the volatile world of personal computers. HP’s products often have a life cycle of months, and volume and cost changes during the brief life cycle are dramatic. However, HP has been successful at institutionalizing the ability to change products and volume to respond to dramatic changes in product design and costs – thus building a sustainable competitive advantage.

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Review Questions 1. Define operations management. Will your definition accommodate both manufacturing and service operations? 2. Identify the three (3) major functional areas of business organizations and briefly describe how they interrelate. 3. Suppose your company is manufacturing canned vegetables. Explain the “Transformation” process with the help of a diagram. 4.

List & explain briefly five (5) major differences between goods and services.

5. The creation of a unique advantage over competitors is called a ____________. 6. Competitive advantage in operations can be achieved by __________, ____________, and/or ________. 7. How can global operations improve the supply chain?

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Lesson 2 : Forecasting in Operations Management Learning Outcomes: At the end of this lesson, students should be able to: 1. Outline the steps that are used to develop a forecasting system for operations management. 2. Outline the qualitative method of forecasting. 3. Outline the time-series method and causal method of forecasting 2.1

What is forecasting?

Everyday, managers are making decisions without knowing what will happen in the future. Making good estimates is the main purpose of forecasting. In this lesson, we will discuss the business sales forecasting and describe how to prepare, monitor, and judge the accuracy of a forecast. Good forecasts are an essential part of efficient service and manufacturing operations. Forecast The art and science of predicting the future. Forecasting is the art and science of predicting future events. Forecasting may involve taking historical data and projecting them into the future with the help of mathematical model. It may be a subjective or intuitive prediction. Or it may involve a combination of these – that is, a mathematical model adjusted by a manager’s good judgement. Forecasting Time Horizons A forecast is usually classified by the future time horizons that it covers. Time horizons fall into three categories: Short-range forecast

This forecast has a time span of up to 1 year but is generally less than 3 months. It is used for planning purchasing, job scheduling, workforce levels, job assignment and production levels.

Medium-range forecast

It generally spans from 3 months to 3 years. It is useful in sales planning, production planning, budgeting and analysis of various operating plans.

Long-range forecast

Generally 3 years or more in time span. Long-range forecasts are used in planning for new products, capital expenditures, facility location or expansion, and research and development

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2.2

Types of Forecasts

Three major types of forecasts are used in organisations for the planning of future operations. However, both Economic and Technological forecasting are specialised techniques that may not come into operations manager’s scope. Demand forecast Also called Forecasts of Demand or Sales Forecasts, they project the demand for a company’s products or services that drives the company’s production, capacity and scheduling system, which in turn, serve as inputs to financial, marketing and personnel planning. Economic forecasts These forecasts are used to predict inflation rates, money supplies and other planning indicators to address the business cycle. Technological forecasts They are concerned with rates of technological progress and inventions of exciting new products which would require new plants and equipment.

2.3

The 7 Steps Forecasting Process

Step (1) Determine the use of the forecast

Disney’s example Disney uses park attendance forecasts to drive staffing, opening times, ride availability, and food supplies.

(2) Select the items to be forecasted

For Disney World, there are a few main parks. A forecast of daily attendance at each park is the main number that determines labor, maintenance and scheduling.

(3) Determine the time horizon of the forecast

Is it short, medium, or long term? Disney develops daily, weekly, monthly, annually and 5-year forecast.

(4) Select the forecasting model(s)

Disney uses a variety of statistical models such as moving averages, regression analysis. It also employs judgmental, or qualitative models.

(5) Gather the data needed to make the forecast (6) Make the forecast

Disney’s forecasting team employs 35 analysts and 70 field personnel to survey 1 million people/business every year.

(7) Validate and implement the results

At Disney, forecasts are reviewed daily at the highest levels to make sure that the model, assumptions, and data are valid. Error measures are applied; then forecasts are used to schedule personnel down to 15-minute intervals.

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2.4 Qualitative Forecast

Qualitative Forecast: Forecasts that incorporate such factors as the decision maker’s intuition, emotions, personal experiences and value system. Subjective factors include decision-maker’s opinions, intuitions and personal experiences. This is a forecast based on the judgment and opinions of executives, consumer surveys, sales staff and experts in situations when: 

A quick forecast is needed and there is insufficient time to gather and analyse quantitative data



Available data may be obsolete due to changing political and economic conditions.



There is an absence of historical data for the introduction of new products or the redesign of existing products or packaging

We shall discuss four qualitative forecasting techniques: 1. 2. 3. 4.

Jury of executive opinions Delphi method Sales force composite Consumer market survey

2.4.1 Jury of executive opinions Often used as part of long range planning (eg. New product development), it involves the pooling of opinions of upper-level managers in combination with statistical models to arrive at a group estimate of demand 2.4.2 Delphi method It is used to predict when a certain event will occur. A series of questionnaires is circulated among knowledgeable personnel who are able to contribute significantly. This involves the gathering of opinions and keeping responses anonymous, to encourage honest responses and reduce the prevailing of any person’s opinions. The responses are then used to develop the next questionnaire, to enlarge the scope of information for participants to base their judgments. 2.4.3 Sales force composite Direct contact with consumers makes sales staff or customer service staff aware of the consumer’s plans for the future and therefore, a good source of information. However, there are disadvantages to this approach: Pg 21 of 122

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

The inability to distinguish between what consumers would like to do and actually will do



Being overly influence by recent experiences, the estimates from the staff may be pessimistic or optimistic due to periods of low sales or high sales

2.4.4 Consumer market survey Consumers ultimately determine demand and information can be tapped through consumer survey to sample consumer opinions. However, the drawbacks to this approach would be: 

Time consuming and expensive as there are either too many customers or impossibility to identify all potential ones.



The considerable amount of knowledge and skill required for the construction, administration and correct interpretation for valid information from a survey



The possibility of the irrational behavior patterns from the consumers.

2.5 Quantitative Forecast Quantitative methods involve historical data that attempt to use causal variables to forecast demand. They avoid personal biases which are difficult (or impossible) to quantify.

Quantitative Forecast: Forecasts that employ one or more mathematical models that rely on historical data and/or causal variables to forecast demand.

Time Series Models A time series is a time-ordered sequence of observations taken at regular intervals (eg, hourly, daily, weekly, monthly, quarterly, annually). The data may be measurements of demand, earning, profits, shipments, accidents, output, productivity etc. Forecast techniques based on time series data are made on the assumption that future values of the series can be estimated from past values. There are a few methods grouped under time series models: 1. Naïve approach 2. Moving averages 3. Exponential smoothing

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2.5.1 Naïve approach This is the most cost-effective and efficient objective forecasting model. It assumes that the demand in the next period will be the same as the most recent period actual demand. Ft = At-1 where Ft = Current forecast At-1 = Previous period actual demand For example, if a tyre workshop sold 400 tyres last month, how many tyres should be forecasted for sales this month? Using Naïve approach, the forecast should be 400 tyres. Likewise, if the actual demand for canned abalone was 20,000 cans during the previous Chinese New Year, then the sales forecast for this Chinese New Year should be 20,000 cans.

2.5.2 Moving averages

Moving averages A forecasting method that uses an average of the ‘n’ most recent periods of data to forecast the next period. ‘n’ – a positive whole number

This approach is useful of the market demands can be assumed to stay fairly steady over time, and uses a number of the most recent actual data values to generate a forecast. For example, a 5-month moving average is found by simply summing the demand during the past 5 months and dividing by 5.

Mathematically, the moving average is expressed as MAn = ∑ Demand in previous n periods / n where MAn = Moving Average for n periods n = number of periods in the moving average

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Here is an example that shows how the 3-month moving averages are being calculated. Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Actual Sales 10 12 13 16 19 23 26 30 28 18 16 14

3-Month Moving Average

(10+12+13) / 3 = 11⅔ (12+13+16) / 3 = 13⅔ (13+16+19) / 3 = 16 (16+19+23) / 3 = 19⅓ (19+23+26) / 3 = 22⅔ (23+26+30) / 3 = 26⅓ (26+30+28) / 3 = 28 (30+28+18) / 3 = 25⅓ (28+18+16) / 3 = 20⅔

(Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 112)

The moving average method is effective in smoothing out sudden fluctuations in the demand pattern to provide stable estimates. However, moving average has three problems: 1. Increasing the size of n (the number of periods averaged) does smooth out fluctuations better, but it makes the method less sensitive to real changes in the data. 2. Moving averages cannot pick up trend very well. Because they are averages, they will always stay within past levels and will not predict changes to either higher or lower levels. That is, they lag the actual values. 3. Moving averages require extensive records of past data.

2.5.3 Exponential smoothing This method involves very little record keeping of past data. It bases its new forecast on the previous forecast plus a percentage of the difference between that forecast and the actual value of the series at that point. Exponential Smoothing Formula Ft = Ft-1 +  (At-1 – Ft-l) where

Ft = new forecast Ft-1 = previous period’s forecast At-1 = previous period’s actual demand  = smoothing constant (0 ≤  ≤ 1)

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Example In October, a car dealer predicted November demand for 500 Toyota Corolla Altis. Actual November demand was 550 cars. Using a smoothing constant of 0.4, the dealer wants to forecast December demand using the exponential smoothing method.

New forecast (for December demand)

= FNov +  (ANov – FNov) = 500 + 0.4 (550 – 500) = 500 + 20 = 520 cars

Selecting the Smoothing Constant The smoothing constant, , is generally range from 0.05 to 0.5 for business applications. It can be changed to give more weight to recent data (when  is high) or more weight to past data (when  is low). Therefore, the choice of  can make the difference between an accurate forecast and an inaccurate forecast.

2.6 Accuracy and Control of Forecasts Accuracy and control of forecasts is a vital aspect of forecasting. The complex nature of most real world variables makes it almost impossible to correctly predict future values of those variables on a regular basis Most decision-makers will want to include accuracy as a factor when choosing among different techniques, along with cost. Accurate forecasts are necessary for the success of daily activities of every business organisation.

2.6.1 Measuring Forecast Error The overall accuracy of any forecasting model – moving average, exponential smoothing, or other – can be determined by comparing the forecasted values with the actual or observed values. The forecast error (or deviation) is defined as: Forecast error = Actual demand – Forecast value = At – Ft Several measures are used in practice to calculate the overall forecast error. These measures can be used to compare different forecasting models, as well as to monitor forecasts to ensure they are performing well. The most popular measures are Mean Absolute Deviation (MAD) and Mean Square Error (MSE).

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2.6.2 Mean Absolute Deviation (MAD) The first measure of the overall forecast error for a model is the Mean Absolute Deviation (MAD). This value is computed by taking the sum of the absolute values of the individual forecast errors and dividing by the number of period of data (n):  Actual - Forecast ------------------------n

MAD =

The example below applies MAD & MSE, as a measure of overall forecast error, by testing two values of . Quarter 1 2 3 4 5 6 7 8 9

Actual 180 168 159 175 190 205 180 182 ?

Qtr

Actual

1 2 3 4 5 6 7 8

180 168 159 175 190 205 180 182

Forecast with  = 0.10 175 175.50 = 175.00 + 0.10(180  175) 174.75 = 175.50 + 0.10(168  175.50) 173.18 = 174.75 + 0.10(159 – 174.75) 173.36 = 173.18 + 0.10(175 – 173.18) 175.02 = 173.36 + 0.10(190 – 173.36) 178.02 = 175.02 + 0.10(205 – 175.02) 178.22 = 178.02 + 0.10(180 – 178.02) 178.59 = 178.22 + 0.10(182 – 178.22)

Forecast Absolute with  = 0.10 Deviation for  = 0.10 175 5.00 175.50 7.50 174.75 15.75 173.18 1.82 173.36 16.64 175.02 29.98 178.02 1.98 178.22 3.78  Deviation 82.45 MAD 10.31

Forecast with  = 0.50 175 177.50 172.75 165.88 170.44 180.22 192.61 186.30 184.15

Forecast Absolute with  = 0.50 Deviation for  = 0.50 175 5.00 177.50 9.50 172.75 13.75 165.88 9.12 170.44 19.56 180.22 24.78 192.61 12.61 186.30 4.30  Deviation 98.62 MAD 12.33

(Source: Principles of Operations Management, Jay Heizer & Barry Render, 7 th ed, pg 116)

On the basis of this comparison of the two MADs, a smoothing constant of  = 0.10 is preferred to  = 0.50 because its MAD is smaller.

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2.6.3 Mean Square Error (MSE) The Mean Square Error (MSE) is a second way of measuring overall forecast error. MSE is the average of the squared differences between the forecasted and actual values. Its formula is:

MSE =

Quarter 1 2 3 4 5 6 7 8

Actual 180 168 159 175 190 205 180 182

(Actual – Forecast)2 ------------------------n Forecast with  = 0.10 175 175.50 174.75 173.18 173.36 175.02 178.02 178.22  (Actual - Forecast)2 MSE

(Actual - Forecast)2 (5)2 = 25 (-7.5)2 = 56.25 (-15.75)2 = 248.06 (1.82)2 = 3.33 (16.64)2 = 276.89 (29.98)2 = 898.70 (1.98)2 = 3.92 (3.78)2 = 14.31 1526.46 190.8

(Source: Principles of Operations Management, Jay Heizer & Barry Render, 7 th ed, pg 117)

Is this MSE = 190.8 good or bad ? It all depends on the MSEs for other forecasting approaches. A low MSE is better because we want to minimize MSE. A drawback of using MSE is that it tends to accentuate large deviations due to the squared term.

2.7 Choosing a forecasting technique Many different kinds of forecasting techniques are available, and no single technique works best in every situation. When selecting a technique for a given situation, the manager or analyst must take a number of factors into consideration. The two most important factors are cost and accuracy. How much money is budgeted for generating the forecast? What are the possible costs of errors, and what are the benefits that might accrue from an accurate forecast? Generally speaking, the higher the accuracy, the higher the cost, so it is important to weigh cost-accuracy trade-offs carefully. The best forecast is not the necessarily the most accurate or least costly; rather, it is some combination of accuracy and cost deemed best by management.

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Review Questions 1.

Describe the three forecasting time horizons and their use.

2.

Identify the seven steps involved in forecasting.

3.

What are the differences between quantitative and qualitative forecasting methods?

4.

Name and discuss three qualitative forecasting methods.

5.

Identify four quantitative forecasting methods.

6.

Distinguish between a moving average model and an exponential smoothing model.

7.

Describe two popular measures of forecast accuracy.

8.

Given the following data, calculate the three-year moving averages for years 4 through 10. Year 1 2 3 4 5 6 7 8 9

9.

Demand 74 90 59 91 140 98 110 123 99

Weekly sales of copy paper at Cubicle Suppliers are in the table below. Compute a three-period moving average and a four-period moving average for weeks 5, 6, and 7. Compute MAD for each forecast. Which model is more accurate? Forecast week 8 with the more accurate method. Week 1 2 3 4 5 6 7

Sales (cases) 17 21 27 31 19 17 21

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10.

Jim's department at a local department store has tracked the sales of a product over the last ten weeks. Forecast demand using exponential smoothing with an alpha of 0.4, and an initial forecast of 28.0. Calculate MAD. Period 1 2 3 4 5 6 7 8 9 10

Demand 24 23 26 36 26 30 32 26 25 28

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Lesson 3: Product Design and Development Learning Outcomes: At the end of this lesson, students should be able to: 1. Outline the product development system and identify the stakeholders of this process. 2. Explain the main techniques that are important to product development. 3. Explain the process of defining a product. 4. Identify the documents that are used to assist production personnel to manufacture the defined product

3.1 Objectives of Product Design The main focus of product design is customer satisfaction. Hence, it is essential for designers to understand what the customer wants and design with that in mind. Marketing is the primary source for this information. Secondary focuses in product design relate to function, cost and potential profit, quality, appearance, forecasted volume, ease of production, ease of assembly, and ease of maintenance or service. It is crucial for designers to take into account the operations capabilities of the organisation in order to achieve designs that fit with those capabilities. This is sometimes referred to as designed for operations. Failure to take this into consideration can result in reduced productivity, reduced quality, and increased costs. For these reasons, it is wise for design to solicit input from operations people throughout the design process to reduce the risk of achieving design that looks good on paper but doesn’t work in real world.

3.2 Product Life Cycles Products are born. They live and they die. They are cast aside by a changing society. It may be helpful to think of a product’s life as divided into four phases. Those phases are introduction, growth, maturity and decline. Product life cycles may be a matter of a few hours (a newspaper), months (seasonal fashions), years, or decades (Volkswagen Beetle). Regardless of the length of the cycle, the task of the operations manager is the same: to design a system that helps introduce new products successfully. If the operations function cannot perform effectively at this stage, the firm may be saddled with losers – products that cannot be produced efficiently and perhaps not at all. Figure 3.1 shows the four life cycle stages and the relationship of product sales, cash flow, and profit over the life cycle of a product. Note that typically a firm has negative cash flow while it develops a product. When the product is successful, those

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losses may be recovered. Eventually, the successful product may yield a profit prior to its decline.

Sales, cost, and cash flow

Cost of development and production

Sales revenue

Net revenue (profit)

Cash flow Negative cash flow

Introduction

Loss

Growth Maturity

Decline

Figure 3.1: Product Life Cycle, Sales, Cost and Profit. (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 159)

3.3 Generating New Products New Product Opportunities Aggressive new product development requires the organisations build structures internally that have open communication with customers, innovative organisational cultures, aggressive Research & Development (R&D), strong leadership, formal incentives, and training. Only then can a firm profitably and energetically focus on specific opportunities such as the following: The change

Impact

Economic change

Brings increasing levels of affluence in the long run but economic cycles and price changes in the short run. For example, in the long run, more people can afford automobiles, but in the short, a recession may weaken the demand for automobiles.

Social and Demographic change

They may appear in such factors as decreasing family size. This trend alters the size preference for homes, apartments, and automobiles

Technological change

It makes the creation of many products possible. Examples: laptops, cellular phones, artificial hearts.

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3.4 Product Development Product Development System An effective product strategy links product decisions with cash flow, market dynamics, product life cycle, and the organisation’s capabilities. A firm must have the cash for product development, understand the changes constantly taking place in the marketplace, and have the necessary talents and resources available. The product development system may well determine not only product success but also the firm’s future. Figure 3.2 shows the stages of product development. In this system, product concepts are developed from a variety of sources, both external and internal to the firm. Concepts that survive the product idea stage progress through various stages, with nearly constant review, feedback, and evaluation in a highly participative environment to minimise failure. Ideas Ability Customer Requirements Functional Specifications

Scope of product development team

Product Specifications

Scope for design and engineering teams

Design Review Test Market Introduction

Evaluation

Figure 3.2 Product Development Stages (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 163)

3.5 Issues for Product Design In addition to developing an effective system and organisation structure for product development, several techniques are important to the design of a product. We will now review five of them:

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(1) Robust Design (2) Modular Design (3) Computer Aided Design (CAD) (4) Computer Aided Manufacturing (CAM) (5) Environmentally Friendly Design

3.5.1 Robust Design Robust design means that the product is designed so that small variations in production or assembly do not adversely affect the product.

3.5.2 Modular Design Products designed in easily segmented components are known as modular designs. Modular designs offer flexibility to both production and marketing. The production department typically finds modularity helpful because it makes product development, production, and subsequent changes easier. Moreover, marketing may like modularity because it adds flexibility to the ways customers can be satisfied.

The customisation provided by modularity allows customers to mix and match to their own taste. This is also the approach taken by Harley-Davidson, where relatively few different engines, chassis, gas tanks, and suspension systems are mixed to produce a huge variety of motorcycles. It has been estimated that many automobile manufacturers can, by mixing the available modules, never make two cars alike. This same concept of modularity is carried over to many industries, from airframe manufacturers to fast food restaurants. Airbus uses the same wing modules on several planes, just as McDonald’s and Burger King use relatively few modules (cheese, lettuce, buns, sauces, pickles, meat patties, French fries etc.) to make a variety of meals.

3.5.3 Computer-Aided Design (CAD)

Computer-aided design (CAD) is the use of computers, to interactively design products and prepare engineering documents. Although the use and variety of CAD software is extensive, most of it is still used for drafting and three-dimensional (3D) drawings. However, its use is rapidly expanding.

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CAD software allows designers to save time and money by shortening development cycles for virtually all products. The speed and ease with which sophisticated designs can be manipulated, analysed, and modified with CAD makes review of numerous options possible before final commitments are made. Faster development, better products, and accurate flow of information to other departments – all contribute to a tremendous payoff for CAD. The payoff is particularly significant because most product costs are determined at the design stage. One extension to CAD is the design for manufacture and assembly (DFMA) software, that allows designers to look at the effect of design on manufacturing of the product. A second CAD extension is 3-D object modelling that builds small prototypes.

3.5.4 Computer-Aided Manufacturing (CAM) Computer-aided Manufacturing (CAM), a form of automation computers communicate work instructions directly to the manufacturing machinery. The technology evolved from the numerically controlled machines of the 1950s, which were directed by a set of coded instructions contained in a punched paper tape. Today a single computer can control banks of robotic milling machines, lathes, welding machines, and other tools, moving the product from machine to machine as each step in the manufacturing process is completed. Such systems allow easy, fast reprogramming from the computer, permitting quick implementation of design changes. The most advanced systems, which are often integrated with CAD systems, can also manage such tasks as parts ordering, scheduling, and tool replacement. In essence, Computer aided Manufacturing (CAM) refers to the use of specialised computer programs to direct and control manufacturing equipment. When computer aided design (CAD) information is translated into instructions for computer-aided manufacturing (CAM), the result of these two technologies is CAD/CAM.

The benefits of CAD and CAM include:

1. Improved product quality. CAD permits the designer to investigate more alternatives, potential problem and dangers. 2. Shorter design time. A shorter design phase lowers cost and allows a more rapid response to the market. 3. Production cost reductions. Reduced inventory, more efficient use of personnel through improved scheduling, and faster implementation of design changes lower costs.

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3.5.5 Environmentally Friendly Design – Green Manufacturing The concept of green manufacturing – that is, making environmentally sound products through efficient processes. Companies can show their sensitivity to green manufacturing in product and process design in several ways: 1. Make products recyclable. Germany, a leader in the “green movement”, has passed a packaging ordinance requiring beer brewers to use refillable bottles. 2. Use recycled materials. Scotch-Brite soap pads at 3M are designed to use recycled plastics. 3. Use less harmful ingredients. Standard Register, like most of the printing industry, has replaced environmentally dangerous inks with soybean-based inks that reduce air and water pollution. 4. Use lighter components. The auto industry continues to expand the use of aluminium and plastic components to reduce weight. This change in material, while expensive, makes autos more environmentally friendly by improving mileage. 5. Use less energy. While the auto industry is redesigning autos to improve mileage, General Electric is redesigning a new generation of refrigerators that require substantially less electricity during their life time. 6. Use less material. Most companies waste material – in the plant and in the packaging. An employee team at Sony semiconductor plant achieved a 50% reduction in the amount of chemical used in the silicon wafer etching process. BMW uses part made of recycled plastics and parts that can be recycled. “Green manufacturing” means companies can reuse, refurbish, or dispose of a product’s components safely and reduce total life cycle product costs. Green manufacturing is appreciated by the public, and it can save money, material, and the environment we live in. These are the kind of win-win situations that operations managers seek.

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3.6 Defining a Product Once new goods or services are selected for introduction, they must be defined. First, a good or service is defined in terms of its functions – that is, what it is to do. The product is then designed, and the firm determines how the functions are to be achieved. Management typically has a variety of options as to how a product should achieve its functional purpose. For example, when a handphone is produced, aspects of design such as the colour, size, layout of the button pads may make substantial difference in ease of manufacture, quality, and market acceptance. Most manufactured items as well as their components are defined by a drawing, usually referred to as an engineering drawing. An engineering drawing shows the dimensions, tolerances, materials, and finishes of a component. An example of the engineering drawing is shown in figure 3.5.

Figure 3.4: An example of Engineering Drawings showing the dimensions, tolerances, materials and finishes. (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 175)

The engineering drawing will be an item on a bill of material (BOM). BOM lists the components, their description, and the quantity of each required to make one unit of a product.

3.7 Documents for Production Once a product id selected, designed, and ready for production, production is assisted by a variety of documents. Let us look at a few of them: (1) Assembly drawing

An exploded view of the product, usually via a 3-D or isometric drawing.

(2) Assembly chart

A graphic means of identifying how components flow into subassemblies and ultimately into a final product.

(3) Route sheet

A listing of the operations steps necessary to

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produce a component with the material specified in the bill of material. An instruction to make a given quantity of a particular item, usually to a given schedule.

(4) Work order

(5) Engineering (ECN)

Change

Notice A correction or modification of engineering drawing or bill of material.

Figure 3.5 Assembly drawing (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 177)

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Review Questions:

1. What is the objective of the product decision? 2. Is it possible for a product's life cycle stage to affect its product strategy? In particular, describe how one product in growth and another in maturity might have different product strategies.

3. Identify the specific guidelines that can help an operations manager achieve environmentally friendly designs. 4. Identify the general benefits derived from CAD.

5. Discuss the advisability of using modular assemblies in manufacturing. (What are the advantages and disadvantages?) 6. If a design can be produced to requirements even when the production process has unfavorable conditions, the design is said to be _________. 7. Products or services designed in easily segmented components are known as ___________. 8. A drawing that shows the dimensions, tolerances, materials, and finishes of a component is a(n) ____________. 9. A listing of the components, their description, and the quantity of each required to make one unit of product is the __________________. 10. An exploded view of the product is a(n) ____________.

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Lesson 4 : Managing Quality Learning Outcomes: At the end of this lesson, students should be able to: 1. Define the major costs of quality. 2. Explain the basic principles and methods of TQM (Total Quality Management). 3. Describe the tools of TQM including the pareto charts, process charts cause-and effect diagrams and statistical process control. 4. Describe how to determine whether a process is capable of producing a service or product to specifications

4.1 The Meaning of Quality Quality has becomes a major factor in a customer’s choice of product and service. If the customer feels that he is getting what he paid for, he will tend to be satisfied with the Quality of the product. However, in order to maintain customer loyalty in today’s highly competitive markets, customer satisfaction alone is insufficient; customer “delight” is required for customer retention. To retain the customers, goods must provide the highest quality.

4.2 Cost of Quality (COQ) Cost of Quality (COQ) is an industry-standard technique for evaluating trends in the full cost of ensuring that each end-product and service conforms to or exceeds the requirements as defined by the customer. The Cost of Quality category codes are the following: Prevention Costs

Prevention costs are investments made ahead of time in an effort to ensure conformance to requirements. Examples include activities such as orientation of team members, training, and the development of project standards and procedures.

Appraisal Costs

Appraisal costs are costs incurred to identify defects after the fact. Examples include activities such as walk-through and testing.

Internal Error Costs

Internal error costs are the costs of rework and repair before delivery to a customer. An example is fixing faults detected during internal testing.

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External Error Costs

External error costs are the costs of rework and repair after delivery to a customer. One example would be rework and repair resulting from acceptance testing. Another example would be the actual costs incurred during warranty support.

4.3 Total Quality Management (TQM) Total Quality Management (TQM) refers to a quality emphasis that encompasses the entire organisation, from supplier to customer. TQM stresses a commitment by management to have a continuous company wide drive toward excellence in all aspects of products and services that are important to the customer. TQM is important because quality decisions influence the decisions made by operations managers. The decisions deal with the various aspects of identifying and meeting customer expectations. Meeting those expectations requires an emphasis on TQM if a firm is to compete as a leader in world markets. Quality expert W. Edwards Deming used 14 points to indicate how he implemented TQM: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)

Create consistency of purpose Lead to promote change Build quality into the products Build long term relationships Continuously improve product, quality, and service Start training Emphasize leadership Drive out fear Break down barriers between departments Stop haranguing workers Support, help, improve Remove barriers to pride in work Institute a vigorous program of education and self-improvement Put everybody in the company to work on the transformation

These 14 points were developed into these concepts for an effective TQM management: (1) (2) (3) (4) (5) (6)

Continuous improvement Six Sigma Employee empowerment Benchmarking Just-in-time (JIT) Knowledge of TQM Tools

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4.3.1

Continuous Improvement

TQM requires a never-ending process of continuous improvement that covers people, equipment, suppliers, materials and procedures. The basis of the philosophy is that ever aspect of an operation can be improved. The end goal is perfection, which is never achieved but always sought. Walter Sherwhart, a pioneer in quality management, developed a circular model known as PDCA (Plan, Do, Check, Act) as his version of continuous improvement. Deming later took this concept to Japan during his work there after World War II.

Figure 4.1 The Plan-Do-Check-Act (PDCA) Cycle (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 199)

The PDCA cycle is shown above as a circle to stress the continuous nature of the improvement process. Phase

Description

Plan

Begin by studying the current process. Document that process. Then collect data on the process or problem. Next, analyze the data and develop a plan for improvement. Specify measures for evaluating the plan.

Do

Implement the plan, on a small scale if possible. Document any changes made during this phase. Collect data systematically for evaluation.

Check

Evaluate the data collection during the “Do” phase. Check how closely the results match the original goals of the “Plan” phase.

Act

If the results are successful, standardize the new method and communicate the new method to all people associated with the process. Implementing training for the new method. If the results are unsuccessful, revise the plan and repeat the process or cease the project.

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Kaizen The Japanese use the word kaizen to describe this ongoing process of unending improvement – the setting and achieving of ever-higher goals. In the U.S., TQM and zero defects are also used to describe continuous improvement efforts. Whether it’s PDCA, kaizen, or zero defects, the operations manager is a key player in building a work culture that endorses continuous improvement.

4.3.2 Six Sigma Today's competitive environment leaves no room for error. Companies must delight their customers and relentlessly look for new ways to exceed their expectations. This is why Six Sigma Quality has become a part of today’s business culture. Just what is Six Sigma? Six Sigma is a reference to the level of quality produced in a manufacturing process. Most traditional companies believe that 99.9% good quality is a terrific achievement. However, in today’s standard, 99.9% is not so good, after all. World class companies ship products to their customers with 99.99966% good quality. From a statistical point of view, this means that they are shipping Six Sigma quality-no more than 3.4 parts per million defects. This is nearly zero. Six Sigma is a highly disciplined process that helps companies to focus on developing and delivering near-perfect products and services. Why "Sigma"? The word is a statistical term that measures how far a given process deviates from perfection. The central idea behind Six Sigma is that if you can measure how many "defects" you have in a process, you can systematically figure out how to eliminate them and get as close to "zero defects" as possible. The table below shows the comparison between 2, 3, 4, 5 & 6 sigma: Sigma 2 3 4 5 6

Defects per million chances/opportunities 308,537 67,000 6,200 233 3.4

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Six Sigma DMAIC Methodology The methodology consists of the following five (5) steps: Define the process improvement goals that are consistent with customer demands and enterprise strategy. Measure the current process and collect relevant data for future comparison. Analyze to verify relationship and causality of factors. Determine what the relationship is, and attempt to ensure that all factors have been considered. Improve or optimize the process based upon the analysis using techniques like Design of Experiments. Control is to ensure that any variances are corrected before they result in defects. Set up pilot runs to establish process capability, transition to production and thereafter continuously measure the process and institute control mechanisms.

4.3.3 Employee Empowerment Employee empowerment means involve employees in every step of the production process. Consistently, business literature suggests that some 85% of quality problems have to do with materials and processes, not with employee performance. Therefore, the task is to design equipment and processes that produce the desired quality. This is best done with a high degree of involvement, by those who understand the shortcomings of the system. Those dealing with the system on a daily basis understand it better than anyone else. One study indicated that TQM program that delegate responsibility for quality to shop-floor employees tend to be twice as likely to succeed as those implemented with “top-down” directives. Techniques for building employee empowerment include: (1) building communication networks that include employees (2) developing open, supportive supervisors (3) moving responsibility from both managers and staff to production employees (4) building high morale organisations (5) creating such formal organisation structures as teams and quality circles

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4.3.4 Benchmarking Benchmarking is another ingredient in an organisation’s TQM program. Benchmarking involves selecting a demonstrated standard of products, services, costs or practices that represent the very best performance for processes or activities very similar to your own. The idea is to develop a target at which to shoot and then develop a standard or benchmark against which to compare your performance. The steps for developing benchmarks are:     

Determine what to benchmark Form a benchmark team Identify benchmarking partners Collect and analyse benchmarking information Take action to match or exceed the benchmark

In ideal situation, you find one or more similar organisations that are leaders in the particular areas you want to study. Then you compare yourself (benchmark yourself) against them.

4.3.5 Just-in-Time (JIT) The philosophy behind just-in-time (JIT) is one of continuous improvement and enforced problem solving. JIT systems are designed to produce or deliver goods just as they are needed. JIT is related to quality in three (3) ways: (1)

JIT cuts the cost of quality

This occurs because scrap, rework, inventory investment and damage costs are directly related to inventory on hand. Because there is less inventory on hand with JIT, costs are lower. Additionally, inventory hides bad quality whereas JIT immediately exposes bad quality. (2)

JIT improves quality

As JIT shrinks lead time, it keeps evidence of errors fresh and limits the number of potential sources of error. JIT creates, in effect, an early warning system for quality problems, both within the firm and with vendors. (3)

Better quality means less inventory and a better, easier-to-employ JIT system

Often the purpose of keeping inventory is to protect against poor production performance resulting from unreliable quality. If consistent quality exists, JIT allows firms to reduce all the costs associated with inventory.

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4.4 Quality Control Seven (7) Tools There are a number of tools that an organisation can use for problem solving and process improvement. The tools aid in data collection an interpretation, and provide the basis for decision making. The following tools are known as seven basic quality tools: Tool

Application

1. Check sheets

Tool for Generating Ideas

2. Scatter diagrams


3. Cause and effect diagrams


4. Pareto diagrams

Tool for Organising Data

5. Flowcharts

Tool for Organising Data

6. Histograms

Tool for Identifying Problems

7. Statistical Process Control (SPC) charts.

Tool for Identifying Problems

Figure 4.2 The 7 Tools of Quality Control (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 204)

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The concept behind the seven basic tools came from Kaoru Ishikawa (left), a renowned quality expert from Japan. According to Ishikawa, 95% of quality-related problems can be resolved with these basic tools. The key to successful problem resolution is the ability to identify the problem, use the appropriate tools based on the nature of the problem, and communicate the solution quickly to others. Inexperienced personnel might do best by starting with the Pareto chart and the cause and effect diagram before tackling the use of the other tools. Those two tools are used most widely by quality improvement

4.4.1 Check Sheet

Check sheets help organize data by category. They show how many times each particular value occurs, and their information is increasingly helpful as more data are collected. More than 50 observations should be available to be charted for this tool to be really useful. Check sheets minimize clerical work since the operator merely adds a mark to the tally on the prepared sheet rather than writing out a figure (below). By showing the frequency of a particular defect (e.g., in a molded part) and how often it occurs in a specific location, check sheets help operators spot problems.

4.4.2 Scatter Diagrams

A scatter diagram shows how two variables are related and is thus used to test for cause and effect relationships. It cannot prove that one variable causes the change in the other, only that a relationship exists and how strong it is. In a scatter diagram, the horizontal (x) axis represents the measurement values of one variable, and the vertical (y) axis represents the measurements of the second variable.

4.4.3 Cause-and-Effect Diagram

The cause and effect diagram is sometimes called an Ishikawa diagram after its inventor. It is also known as a fish bone diagram because of its shape. A cause and effect diagram describes a relationship between variables. The undesirable outcome is shown as effect, and related causes are shown as leading to, or potentially leading to, the said effect. This popular tool has one severe limitation, however, in that users can overlook important, complex interactions between causes. Thus, if a problem is caused by a combination of factors, it is difficult to use this tool to depict and solve it. A fish bone diagram displays all contributing factors and their relationships to the outcome to identify areas where data should be collected and analyzed. The major areas of potential causes are shown as the main bones, e.g., Materials, Methods, Operators and Machines (above). Later, the sub-areas are depicted. Thorough analysis of each cause can eliminate causes one by one, and the most probable root cause can

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be selected for corrective action. Quantitative information can also be used to prioritize means for improvement, whether it is for machine, design, or operator.

Figure 4.3 The Cause and Effect Diagram (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 205)

4.4.4 Pareto Analysis Pareto analysis is a technique for focusing attention on the most important areas. The Pareto concept, named after the 19th century Italian economist Vilfredo Pareto, is that a relatively few factors generally account for a large percentage of the total cases (eg. complaints, defects, problems). The ideas is to classify the cases according to degree of importance, and focus on resolving the most important, leaving the less important. Often referred to as the 80-20 rule, the Pareto concept states the approximately 80% of the problems come from 20% of the items. For instance, 80% of machine breakdowns come from 20% of the machines, and 80% of the product defects come from 20% of the causes of defects.

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Figure 4.4 The Pareto Chart (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 206)

4.4.5 Flowcharts

Flowcharts describe a process in as much detail as possible by graphically displaying the steps in proper sequence. A good flowchart should show all process steps under analysis by the quality improvement team, identify critical process points for control, suggest areas for further improvement, and help explain and solve a problem. By breaking down the process into a series of steps, the flowchart simplifies the analysis and gives some indication as to what event may be adversely impacting the process. 4.4.6 Histogram The histogram plots data in a frequency distribution table. What distinguishes the histogram from a check sheet is that its data are grouped into rows so that the identity of individual values is lost. Commonly used to present quality improvement data, histograms work best with small amounts of data that vary considerably. When used in process capability studies, histograms can display specification limits to show what portion of the data does not meet the specifications. After the raw data are collected, they are grouped in value and frequency and plotted in a graphical form (left). A histogram's shape shows the nature of the distribution of the data, as well as central tendency (average) and variability. Specification limits can be used to display the capability of the process.

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4.4.7 Statistical Process Control (SPC) Charts A control chart displays statistically determined upper and lower limits drawn on either side of a process average. This chart shows if the collected data are within upper and lower limits previously determined through statistical calculations of raw data from earlier trials. The construction of a control chart is based on statistical principles and statistical distributions, particularly the normal distribution. When used in conjunction with a manufacturing process, such charts can indicate trends and signal when a process is out of control. The center line of a control chart represents an estimate of the process mean; the upper and lower critical limits are also indicated. The process results are monitored over time and should remain within the control limits; if they do not, an investigation is conducted for the causes and corrective action taken. A control chart helps determine variability so it can be reduced as much as is economically justifiable. In preparing a control chart, the mean upper control limit (UCL) and lower control limit (LCL) of an approved process and its data are calculated. A blank control chart with mean UCL and LCL with no data points is created; data points are added as they are statistically calculated from the raw data.

Figure 4.5 The Statistical Process Control (SPC) Chart (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 208)

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Review Questions 1. Quality has at least three categories of definitions; identify them. Provide a brief explanation of each. 2. Identify the four costs of quality. Which one is hardest to evaluate? Explain. 3. Identify the major concepts of TQM. 4. How is source inspection related to employee empowerment? 5. What steps can be taken to develop benchmarks? 6. Explain how just-in-time processes relate to the quality of an organization's outputs. 7. Identify the five steps of DMAIC. 8. _________ is the Japanese word for the ongoing process of incremental improvement. 9. Explain how a Pareto chart can identify the most important causes of errors in a process. 10. Perform a Pareto analysis on the following information: Reason for unsatisfying stay at hotel Unfriendly staff Room not clean Room not ready at check-in No towels at pool No blanket for pull-out sofa Pool water too cold Breakfast of poor quality Elevator too slow or not working Took too long to register Bill incorrect Total

Frequency 6 2 3 33 4 3 16 23 7 3 100

11. Construct a cause-and-effect diagram showing why a student might be dissatisfied with the cafeteria. 12. ________ are graphical presentations of data over time that show upper and lower control limits for processes we want to control.

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Lesson 5 : Process Strategy and Capacity Planning Learning Outcomes: At the end of this lesson, students should be able to: 1. Discuss the major process decisions and position each process on a volumevariety product-process matrix. 2. Configure operations into work flows and layouts. 3. Define process reengineering and process improvement. 4. Distinguish between design capacity, effective capacity and efficiency. 5. Identify a systematic approach to capacity planning. 5.1 Process Strategy A process strategy (or transformation) strategy is an organisation’s approach to transforming resources into goods and services. The objective of a process strategy is to build a production process that meets customer requirements and product specifications within cost and other managerial constraints. The process selected will have a long-term effect on the efficiency and flexibility of production, as well as on cost and quality of the goods produced. Therefore, much of a firm’s operations strategy is determined at the time of this process decision. Volume Repetitive Process

Low Volume

High Volume

High Variety one or few units per run, high variety (allows customization)

Process Focus

Mass Customization

projects, job shops (machine, print, carpentry) Standard Register

(difficult to achieve, but huge rewards) Dell Computer

Changes in Modules modest runs, standardized modules

Repetitive (autos, motorcycles) Harley-Davidson

Low Variety Changes in Attributes (such as grade, quality, size, thickness, etc.) long runs only

Poor Strategy (Both fixed and variable costs are hi gh)

Product Focus (commercial baked goods, steel, glass) Nucor Steel

Figure 5.1 : Process selected must fit with Volume and Variety (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 256)

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5.2 Four Process Strategies    

Process focus Repetitive focus Product focus Mass customization

5.2.1 Process Focus Many inputs

Many departments and many routings

The vast majority of global production is devoted to make low volume, high variety products in places called “job shops”. Such facilities are organized around specific activities or processes. In a factory, these processes might be departments devoted to drilling, cutting, and painting. In a restaurant, they might be the kitchen, bakery and grill. Such facilities are processed focused in terms of equipment, layout and supervision. They provide a high degree of product flexibility as products move intermittently between processes. Each process is designed to perform a wide variety of activities and handle frequent changes. Consequently, they are also called intermittent processes.

Many variety of outputs

Figure 5.2 : Job shop focuses on Processes. (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 257)

Process focus A production facility organized around processes to facilitate low-volume, highvariety production The process focused firm has the following characteristics:     

Facilities are organized around specific activities or processes General purpose equipment and skilled personnel High degree of product flexibility Typically high costs and low equipment utilization Product flows may vary considerably making planning and scheduling a challenge

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5.2.2 Repetitive Focus

A repetitive process falls between the product and process focuses. Repetitive processes use modules. Modules are parts or components previously prepared, often in a continuous process.

Modules combined for many output options

Raw materials and module inputs

Few modules

Figure 5.3 : Repetitive process (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 258)

Repetitive process A product-oriented production process that uses modules. The repetitive process line is the classic assembly line. Widely used in the assembly of virtually all automobiles (eg. Honda, Toyota, BMW) and household appliances (eg. TV, freezer, iron, vacuum cleaner etc), it has more structure and consequently less flexible than a process-focused facility. Fast-food firms (eg. McDonald) are an example of a repetitive process using modules. (such as meat, cheese, sauce, tomatoes, onions etc). The repetitive process firm obtains both the economic advantage of the continuous model (where many of the modules are prepared) and custom advantage of the low volume, high variety model. In summary, the characteristics of the repetitive focused firm are:    

Facilities often organized as assembly lines Characterized by modules with parts and assemblies made previously Modules may be combined for many output options Less flexibility than process-focused facilities but more efficient

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5.2.3 Product Focus High-volume, low-variety processes are product focused. The facilities are organized around products. They are called continuous processes, because they have very long, continuous production runs. Products such as glass, paper, light bulbs, tin sheets, beer, soft drinks, metal rods are made via a continuous process. Some products such as lightbulbs are discrete; others, such as rolls of paper, are non-discrete.

Output variations in size, shape, and packaging

Few inputs

Figure 5.4 : Product focus process (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 259)

Product focus A facility organized around products; a product-oriented, high-volume, low-variety process. It is only with standardization and effective quality control that firms established product-focused facilities. An organisation producing the same lightbulbs or hot dog bun day after day can organize around a product. Such organization has an inherent ability to set standards and maintain a given quality, as opposed to an organization that is producing unique products everyday, such as a photocopying shop or general purpose clinic. A product-focused facility produced high volume and low variety. The specialized nature of the facility requires high fixed cost, but low variable costs reward high facility utilization. In summary, the product focused process has the following characteristics:     

Facilities are organized by product High volume but low variety of products Long, continuous production runs enable efficient processes Typically high fixed cost but low variable cost Generally less skilled labor

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5.2.4 Mass Customisation Our increasingly wealthy and sophisticated world demands individualized goods and services. The explosion of variety has taken place in automobiles, personal computers, hand-phones, and thousand of other areas. In spite of this proliferation of products, operations managers have improved quality while reducing costs. Consequently, the variety of products continues to grow. Operations managers use mass customization to produce this vast array of goods and services. Mass customization is the rapid, low-cost production of goods and services that fulfill increasingly unique customer desires. But mass customization is not just about variety; it is about making precisely what the customer wants when the customer wants it economically. Mass Customisation Rapid, low-cost production that caters to constantly changing unique customer desires. Mass customization brings us the variety of products traditionally provided by lowvolume manufacture (a process focus) at the cost of standardized high-volume (product-focused) production. However, achieving mass customization is a challenge that requires sophisticated operation capabilities. Repetitive Focus Flexible people and equipment Supportive supply chains

Modular techniques

Mass Customization Effective scheduling techniques

Rapid throughput techniques

Process-Focused

Product-Focused

High variety, low volume Low utilization (5% to 25%) General-purpose equipment

Low variety, high volume High utilization (70% to 90%) Specialized equipment

Figure 5.5 : Requirements to achieve Mass Customisation (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 261)

Mass customization suggests a system in which product are built-to-order. Build-toOrder (BTO) means producing to customer orders, not to forecasts. A good example of BTO production model is Dell computers. Dell installs both requested software and hardware modules at final assembly. The individual modules are made to forecast but assembled on a “mix and match” basis to meet mass customization demands.

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In summary, the main characteristics of Mass Customisation are:  The rapid, low-cost production of goods and service to satisfy increasingly unique customer desires  Combines the flexibility of a process focus with the efficiency of a product focus 5.3

Importance of Capacity Planning

An organization determines its long-term capabilities through capacity planning. Capacity planning is done with respect to: o Demand of the products or services o Technology of equipment and processes to make and deliver those products and services o The competitive environment Invariably, the plans are to deliver the products or services on time, at the right price and the right quality. Capacity is expressed in two ways:

 Design capacity – maximum output rate designed  Effective capacity – what is actually used is the effective capacity – this is determined by real demand minus allowances, like planned maintenance.

The lack of capacity results in loss of customers while overcapacity is wasteful. How does one find the balance? A systematic approach to plan capacity to find the balance is important, and it must be recognized early that this not a pure science. It must be done continuously, through some hard decisions to expand and contract, in order that a firm will be able to have the intended capacity to serve its customers’ needs. One needs to start from three basic questions, namely, 1. What type of capacity is needed? 2. How much capacity is needed? 3. When must the capacity be made available?

If one can get answers to the questions, the next phase is to take steps to plan the capacity.

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Steps of Capacity Planning Process:        

estimate the level of future capacity needs evaluate the present capacity and facilities and identify the gaps identify the alternatives to close the gaps carry out financial analysis of each alternative assess the qualitative factors of each alternative select the best alternative at the least cost and optimal utilization of resources that meets the firm’s goals implement the choice monitor results

5.4 Capacity planning for a service firm The questions the service firm must ask itself and the steps that follow subsequently may not be any different from what has been described so far. However, the nature of the products makes capacity planning for a factory more finite than that for a service firm. Services being intangible and perishable pose difficulties to capacity planning, like how near should the premises be located to potential customers? Other considerations will be whether the capacity is for the peak period and if that is done, what to do with excess capacity during the lull period? For example how many cash register queues ought to be planned to service a supermarket’s potential customers, in order to keep the waiting time reasonable. What happens to the 10 a.m. to 12 noon or 3 p.m. to 6 p.m. periods when few people visit the supermarkets? Would re-assigning the jobs to cash registers’ attendants to the stores be acceptable to them? Otherwise, what can be done to this idle capacity? Capacity planning here focuses on speed of delivery and reduction of customer waiting time. Managing demand may need to be part of the capacity management strategy.

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Review Questions 1. Name the four basic process strategies; describe them in a complete sentence or two each. 2. Why is equipment utilization in process-focused service industries often low? 3. Compare an intermittent process to a continuous process on the basis of variety, volume, equipment utilization, and inventory. 4. How are modules useful in manufacturing processes? 5. What is mass customization? 6. What is Dell Computer's source of competitive advantage? In a short paragraph, explain some of the steps Dell has taken to develop this advantage. 7. What is the fundamental distinction between design capacity and effective capacity? Provide a brief example. 8. Why is the capacity decision important? 9. A good capacity decision requires that it be tightly integrated with the organization's strategy and investments. But there are other "considerations" to making a good capacity decision. Name them. Describe each in a sentence or two.

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Lesson 6 : Location and Layout Strategies Learning Outcomes: At the end of this lesson, students should be able to: 1. Understand how goods-producing and service location decisions differ. 2. Explain how to apply the factor-rating method, locational break-even analysis, center of gravity, and transportation model methods. 3. Distinguish between the various types of layout, including fixed-position, processorientated, office, retail, warehouse and process-orientated layouts. 6.1

General procedure

Location decision plays a key part in the strategic planning process of the production systems design. It is usually based on profit potential – for minimizing costs or maximizing revenue – or a combination of cost and speed of delivery, and is, generally, to maximize the benefit of the location to the organization. Depending on size and nature or scope of its operations, an organization may adopt either an informal or formal approach to location decision. The formal approach is adopted by large established companies which already operate in more than one location and would generally consist of the following steps :

6.2



What are the evaluation criteria – is it for increased revenues or community service ?



What are the important factors – market locations or raw materials ?



What other alternatives of location ? o Identify the general region for a location o Identify a small number of community alternatives o Identify site alternatives among the community alternatives



Evaluate the alternatives and make a selection

Factors that affect location decisions

Depending on the type of business, and whether manufacturing or service, certain factors may rank in importance over others. Some of the factors that affect location decisions can be classified into three levels : 1. Regional Factors 2. Community Consideration 3. Site-related Factors

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6.2.1 Regional Factors The primary regional factors involve:  Location of raw materials or supplies Firms locate near / at source of raw materials out of necessity, perishability of materials, and to reduce transportation costs.  Location of markets Beside climate, tax and monetary incentives proximity to markets serve as part of firms’ competitive strategies to reduce distribution costs and increase convenience to consumers.  Labour factors For labour-intensive organizations, availability of labour is very important. Skills and worker attitudes of potential employees are factors that impact upon labour costs.  Climate and Taxes Climate and taxes also affect location decision-making, beside low-cost energy or labour. Weather conditions can cause delayed deliveries and work disruptions due to inability of employees to get to work, and policies on business and personal income taxes are major factors that either attract or reduce attractiveness to companies.

6.2.2 Community Considerations Although new businesses may mean sources of future tax revenues and new job opportunities, firms whose activities that will pollute the environment or lessen the quality of life are generally unwelcome by communities. Firms, on the other hand, determine the desirability of a community by : 

Size of the community



Attitude of the community toward them



Availability of facilities for its workers and managers to live in, such as : o Facilities for education, shopping, religious worship, and recreation o Transportation o Quality of police, fire and medical services



Cost



Availability of utilities



Environmental regulations



Governmental incentives

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6.2.3 Site-related Factors Sites are long-term commitments. Primary considerations are site-related factors, land costs aside, such as: Suitability for type of business, especially for heavy manufacturing or erection of large buildings – soil conditions, load factors, drainage rates Size, architectural features and regulations governing room for future expansion, current utility, sewer capacities Parking facilities for employees, customers, access roads for trucks, or rail spurs Zoning restrictions – industrial parks for light manufacturing or assembly, warehouse operations, customer service facilities Proximity to, and size of airport / rail stations for firms whose executives are required to travel frequently 6.3 Methods of evaluating location alternatives There are four major methods in location alternatives evaluation:    

Factor-Rating Method Centre-of-Gravity Method Locational Cost-Profit-Volume Analysis Transportation Model

We shall consider only Factor-Rating Method and Centre-of-Gravity Method here. 6.3.1 The Factor-Rating Method Also known as Factor-Weighting Method, Factor Rating Method is widely used because of its easy-to-understand format. It provides a mechanism for combining diverse factors by assigning a range of point values to major factors affecting a set of possible sites. The factors of each site are then rated and given a point value from its assigned range. The site with the highest total points would be selected. To develop a factor rating, the following procedure is used : 1. Develop a list of relevant factors called critical success factors 2. Assign a weight to each factor 3. Develop a scale for each factor 4. Score each location for each factor 5. Multiply score by weights for each factor for each location 6. Recommend the location with the highest point score

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Alternatively, managers may prefer to establish minimum thresholds for composite scores, that is, alternatives can be rejected without further consideration if they fail to meet that minimum. However, should none of the alternatives meet the minimum, either additional alternatives must be identified and evaluated or the minimum threshold must be re-evaluated. 6.3.2 Centre of Gravity Method The Centre of Gravity method is often used to locate intermediate or distribution warehouses. This technique locates single facilities by considering existing facilities, the distances between them, and the volumes of goods to be shipped. By using a map that is accurately drawn to scale with the locations of existing facilities indicated, a coordinate is then overlaid on the map to determine relative locations. Once the coordinate system is in place, the coordinates of each destination can be determined. In a simple calculation, inbound and outbound transportation costs are assumed equal and special shipping costs for less than full loads are excluded. 6.3.3 Locational Break-Even Analysis This method of cost-volume analysis is used for industrial locations Three steps in the method 1. Determine fixed and variable costs for each location 2. Plot the cost for each location 3. Select location with lowest total cost for expected production volume 6.4

Facilities Layout

Layout refers to the configuration of departments, work centres, and equipment that facilitates the movement of work, be it customers or materials, through the system. In Manufacturing / Service, layout refers to that part of the process design involving the physical layout, or arrangement, of all machines, equipment, and work-stations used in the operating environment for delivering tangible products or services to customers. In supply chain, layout refers to that part of the process design that facilitates flow of materials, or information for timely delivery of the goods or services to the client. Layout planning is needed both in design of new facilities and redesign of existing facilities to improve situations due to :     

inefficient operations – high cost, bottlenecks accidents or safety hazards changes in design of products / services introduction of new products / services changes in environmental or other legal requirements

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 

morale problems – lack of face-to-face contact changing markets, needs or new technology

Layout decisions are important as they 

have a significant impact on the cost and efficiency of operations – poor layout design can adversely affect system performance



involve long-term commitments – hence mistakes are difficult to overcome



require substantial investments of money and effort – already costly in itself both in terms of labour, materials, and time, facility layout becomes doubly costly in re-organizing an existing arrangement as it would entail o direct cost of re-organization o expense of curtailing operations during the changeover

6.4.1 Product-oriented layout Product layouts are arranged to correspond to the technological processing requirements of products that are highly standardized. As each item follows the same sequence and move quickly from operation to operation, product layouts achieve a smooth and rapid flow of large volumes of goods or customers through a system, hence the term, “production line”. 6.4.2 Process-oriented layout Process layouts feature departments that group item-processing or service-provision by similar operations to handle discontinuous workflow (referred to as intermittent processing). As process layouts are designed to handle varied processing requirements, equipment are arranged by type rather than by processing sequence. Use of general-purpose equipment can also provide the flexibility to handle a wide range of processing requirements. Machine shops and hospitals are examples of process layouts in manufacturing and service environments, respectively. 6.4.3 Fixed-Position layout Fixed-position layouts arise out of necessity, due to the nature of the project (such as building a house), weight, size or bulk that make movement of the product undesirable or extremely difficult. In such an arrangement, workers, materials and equipment are moved about as needed while keeping the items that are being worked on stationary.

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6.4.4 Cellular Layout Cellular layouts group workstations into “cells”, determined by operations that are needed to be performed for a set of similar items or part families with similar processing requirements. Since all parts follow the same route, machines are arranged to handle all of the operations necessary for a “family” of similar parts, with minor variations allowed. 6.4.5

Warehouse and Storage layout

Objective is to optimize trade-offs between handling costs and costs associated with warehouse space Maximize the total “cube” of the warehouse – utilize its full volume while maintaining low material handling costs They require important considerations of :     

Frequency of order Correlations between items Number and widths of aisles Height of storage racks, rail and / or truck loading / unloading Need for periodic physical count of stored items

6.4.6 Service or Retail layout Allocates shelf space and responds to customer behavior Such as department stores, supermarkets, specialty stores – take into account:  Presence of customers  Opportunity to influence sales volume and customer attitudes  Traffic patterns and traffic flow 6.4.7 Office layout It consists of grouping of workers, their equipment, and spaces to provide comfort, safety, and movement of information. Two trends are influencing the transformations of office layouts:  Increasing use of electronic communications – replacing flow of paperwork  Open-concept to create an image of openness with use of low-rise partition.

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Review Questions 1. State the fundamental objective of a firm's location strategy. How is this basic objective carried out by industrial or goods-producing firms; how does that differ for service firms? 2. Identify five factors that affect location decisions at the site level. 3. "Proximity" or closeness implies that a firm should locate "close" to something. What are the three kinds of proximity described in the text? What are the basic conditions under which each is appropriate? What kinds of firms are likely to use each of these? 4. Identify the four major quantitative methods for solving location problems. 5. What kinds of location decisions are appropriate for use of center-of-gravity analysis? What variable is being optimized in this analysis? 6. Using the factor ratings shown below, determine which location alternative should be chosen on the basis of maximum composite score.

Factor Easy access Parking facilities Display area Shopper (walking) traffic Neighborhood wealth Neighborhood safety

Weight 0.15 0.20 0.18 0.21 0.16 0.10

Location B 72 77 90 86 89 85

A 86 72 86 94 99 96

C 90 91 90 80 81 75

7. A telecommunications firm is planning to lay fiber optic cable from several community college distance learning sites to a central studio, in such a way that the miles of cable are minimized. Some locations require more than one set of cables (these are the loads). Where should the studio be located to accomplish the objective? College A B C D E F G

Map Coordinate (x, y) (2,10) (6,8) (4,9) (9,5) (8,1) (3,2) (2,6)

Load 3 2 4 1 3 2 1

8. Identify the seven fundamental layout strategies. Describe the use of each one very briefly. 9. What are the advantages and disadvantages of product layouts?

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Lesson 7 : Supply Chain Management Learning Outcomes: At the end of this lesson, students should be able to: 1. Explain the strategic importance of supply chains for service providers, as well as for manufacturers. 2. Define the key design strategies associated with supply chain processes. 3. Explain the process of outsourcing and vendor selection. 4. Explain the process of managing the complete cycle of materials as they move from suppliers to production, warehousing, distribution and to the customer. 7.1 The Supply Chain’s Strategic Importance Many firms spend a huge portion of their sales dollars on purchases. Because such a high percentage of an organisation’s costs are determined purchasing, relationships with suppliers are increasingly integrated and long term. Joint efforts that improve innovation, speed design, and reduce costs are common. Such efforts, when part of a corporate-wide strategy, can significantly improve both partners’ competitiveness. This integrated focus places added emphasis on procurement and supplier relationships which must be managed. The discipline that manages these relationships is known as supply chain management. Supply chain management is the integration of the activities that procure materials and services, transform them into intermediate goods and the final product, and deliver them to customers Important activities include determining 1. 2. 3. 4. 5. 6. 7. 8.

Transportation vendors Credit and cash transfers Suppliers Distributors Accounts payable and receivable Warehousing and inventory Order fulfillment Sharing customer, forecasting, and production information

As firms strive to increase their competitiveness via product customization, high quality, cost reductions, and speed to market, added emphasis is placed on the supply chain. Effective supply chain management makes suppliers “partners” in the firm’s strategy to satisfy an ever-changing marketplace. A competitive advantage may depend on a close long–term strategic relationship with a few suppliers.

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Figure 7.1 : A Supply Chain for Beer. (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 434)

Supply Chain Management Management of activities that procure materials and services, transforming them into intermediate goods and final products, and delivering the products through a distribution system

In the figure 7.1 above, the supply chain for beer includes all the interactions among suppliers, manufacturers, distributors, and customers. The chain includes transportation, scheduling information, cash and credit transfers, as well as ideas, designs, and material transfer. Even can and bottle manufacturers have their own tiers of suppliers providing components such as glass, lids, labels, packing containers, etc.

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7.2 How Supply Chain Decision Affect Strategy To ensure that the supply chain supports the firm’s strategy, managers need to consider the supply chain issues shown in the below table. Low-Cost Strategy Response Strategy

Differentiation Strategy

Supplier’s goal

Supply demand at Respond quickly to Share market research; lowest possible cost changing jointly develop requirements and products and options demand to minimize stockouts

Primary selection criteria

Select primarily for Select primarily for Select primarily for cost capacity, speed, and product development flexibility skills

Process characteristics

Maintain high Invest in excess Modular processes that average utilization capacity and flexible lend themselves to processes mass customization

Inventory characteristics

Minimize inventory Develop responsive Minimize inventory in throughout the chain system with buffer the chain to avoid to hold down cost stocks positioned to obsolescence ensure supply

Lead-time characteristics

Shorten lead time as Invest aggressively to Invest aggressively to long as it does not reduce production reduce development increase costs lead time lead time

Product-design characteristics

Maximize performance minimize costs

Use product designs and that lead to low setup time and rapid production ramp-up

Use modular design to postpone product differentiation as long as possible

7.3 Outsourcing Outsourcing transfers some of what are traditional internal activities and resources of a firm to outside vendors. Outsourcing is part of continuing trend towards utilizing the efficiency that comes with specialization. The vendor performing the outsourced service is a n expert in that particular specialty. This leaves the outsourcing firm to focus on its critical success factors, that is, its core competencies that yield a competitive advantage. In recent years, many firms typically outsource areas such as information technology, accounting, legal, logistics, and production to external vendors.

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7.4 Supply Chain Strategies For goods and services to be obtained from outside sources, the firm must decide on a supply chain strategy. We will cover three such strategies:    7.4.1    

Many Suppliers Few Suppliers Vertical Integration Many Suppliers Commonly used for commodity products Purchasing is typically based on price Suppliers compete with one another Supplier is responsible for technology, expertise, forecasting, cost, quality, and delivery

7.4.2   

Few Suppliers Buyer forms longer term relationships with fewer suppliers Create value through economies of scale and learning curve improvements Suppliers more willing to participate in JIT programs and contribute design and technological expertise  Cost of changing suppliers is huge

7.4.3 Vertical Integration Vertical integration is to develop the ability to produce goods or services previously purchased or actually buying from a supplier or distributor. Vertical Integration Raw material (suppliers) Backward integration

Examples of Vertical Integration Iron ore

Silicon

Farming

Flour milling

Steel

Current transformation

Automobiles

Integrated circuits

Forward integration

Distribution systems

Circuit boards

Dealers

Computers Watches Calculators

Finished goods (customers)

Baked goods

Figure 7.2 : Vertical Integration can be forward or backward. (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 440)

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7.5 Vendor Selection For those goods and services a firm buys, vendors must be selected. Vendor selection considers numerous factors, such as strategic fit, vendor competence, delivery, and quality performance. Because a firm may have some competence in all areas and may have exceptional competence in only a few, selection can be challenging. Procurement policies also need to be established. Those might address issues such as percent of business done with any one supplier or with minority businesses. We now examine vendor selection as a three-stage process   

Vendor evaluation Vendor Development Negotiations

7.5.1 Vendor evaluation The first stage of vendor selection, vendor evaluation, involves finding potential vendors and determining the likelihood of them becoming good suppliers. This phase requires the development of evaluation criteria such as those criteria shown in figure 7.2. However, both the criteria and the weights selected vary depending on the supply chain strategy being implemented.

Weights

Scores (1(1-5)

Weight x Score

Engineering/research/innovation skills

.20

5

1.0

Production process capability (flexibility/technical assistance)

.15

4

.6

Distribution/delivery capability

.05

4

.2

Quality systems and performance

.10

2

.2

Facilities/location

.05

2

.1

Financial and managerial strength (stability and cost structure)

.15

4

.6

Information systems capability (e(eprocurement, ERP)

.10

2

.2

Integrity (environmental compliance/ ethics)

.20

5

1.0

Criteria

Total

1.00

3.9

Figure 7.3 : Weighted Approach to Vendor Selection (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 447)

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The selection of competent suppliers is critical. If good suppliers are not selected, then all other supply-chain efforts are wasted. As firms move towards using fewer long-term suppliers, the issues of financial strength, quality management, research, technical ability, and potential for a close long-term relationship play an increasingly important role. These attributes should be noted in the evaluation process.

7.5.2 Vendor Development The second stage of vendor selection is vendor development. Assuming that a firm wants to proceed with a particular vendor, how does it integrate this supplier into its system? The buyer makes sure the vendor has an appreciation of quality requirements, product specifications, schedules and delivery, the purchaser’s payment system, and procurement policies. Vendor development may include everything from training, to engineering and production help, to procedures for information transfer.

7.5.3 Negotiations Regardless of the supply chain strategy adopted, negotiations regarding the critical elements of the contractual relationship must take place. These negotiations often focus on quality, delivery, payment, and cost. We will look at three types of negotiation strategies:

(a) Cost-Based Price Model The supplier opens books to the purchaser. The contract price is then based on time and materials or on a fixed cost with an escalation clause to accommodate changes in the vendor’s labor and materials costs. (b) Market-Based Price Model The price is based on a published, auction, or indexed price. Many commodities (agriculture products, paper, metal, etc) are priced this way. (c) Competitive Bidding – When suppliers are not willing to discuss costs, competitive bidding is often appropriate. It is used for infrequent purchases and may make establishing long-term relationships difficult.

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7.6 Logistics Management Procurement activities may be combined with various shipping, warehousing, and inventory activities to form a logistics system. The objective of logistics management is to obtain efficient operations through the integration of all material acquisition, movement, and storage activities. When transportation and inventory costs are substantial on both the input and output sides of the production process, an emphasis on logistics may be appropriate. When logistics issues are significant or expensive, many firms opt for outsourcing the logistics function. Logistics companies often have the tracking technology that reduces transportation losses and support delivery schedules that adhere to precise delivery time windows. This allows competitive advantage to be gained through reduced costs and improved customer service

7.6.1 Distribution Systems Trucking  Moves the vast majority of manufactured goods  Chief advantage is flexibility Railroads  Capable of carrying large loads  Little flexibility though containers and piggybacking have helped with this Airfreight  Fast and flexible for light loads  May be expensive Waterways  Typically used for bulky, low-value cargo  Used when shipping cost is more important than speed Pipelines  Used for transporting oil, gas, and other chemical products

7.6.2 Third-Party Logistics Supply chain managers may find that outsourcing logistics is advantageous in driving down inventory investment and costs while improving delivery schedule and speed through the use of third part logistics (3PL) companies. Specialised logistics firms support this goal by coordinating the supplier’s inventory system with the service capability of the delivery firm. Examples of 3PL are FedEx, DHL & UPS.

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Review Questions 1. _______________ is the management of activities that procure raw materials, transform those materials into intermediate goods and final products, and deliver the products through a distribution system. 2. The supply chain strategy of ____________ increases the willingness to participate in JIT. 3. ___________ is developing the ability to produce goods or services previously purchased or actually buying a supplier or a distributor. 4. As the firm strategies vary from low-cost to response to differentiation, how does this impact the criteria used for selection of a supply chain strategy? 5. Transferring to external vendors a firm’s activities that have traditionally been internal is known as _________. 6. Of the three stages of vendor selection, the stage at which criteria, weights, and scores allow a numeric comparison is ______________. 7. A company is about to select a vendor for the outsourcing of all of its engineering, environmental, and CAD requirements. It has identified four criteria critical to the selection. These criteria, and their importance weights, appear below. Three firms, A, C, and E, have indicated that they are interested in this position. The company has scored each of the three candidates on these criteria, using a 1-10 scale, where 10 is best. Candidate A scored 7, 7, 7, and 5 on the four criteria. Candidate C scored 9, 4, 8, and 6. Candidate E scored 5, 10, 10, and 7. Which vendor has the highest composite score?

Criterion Engineering expertise Financial and managerial strength Integrity Staff experience and qualifications

Weight .40 .20 .15 .25

8. What are the three negotiation strategies? Briefly describe each of them. 9. _____________ is an approach that seeks efficiency of operations through the integration of all material acquisition, movement, and storage activities. 10. What advantages may result from effectively outsourcing the logistics function to a third party?

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Lesson 8 : Inventory Management Learning Outcomes: At the end of this lesson, students should be able to: 1. Determine the items deserving most attention and tightest inventory control. 2. Calculate the economic order quantity and apply it to various situations. 3. Determine the order quantity and reorder point for a continuous review inventory control system. 4. Determine the review interval and target inventory level for a periodic review inventory control system. 5. Define the key factors that determine the appropriate choice of an inventory system.

8.1

Importance of Inventory Management

Inventory management is among the most important operations management functions because inventory requires a great deal of capital and affects the delivery of goods to customers. Inventory management has an impact on all business functions, particularly operations, marketing and finance. Inventories provide customer service, which is of vital interest to marketing. Finance is concerned with the overall financial picture of the organisation, including funds allocated to inventory. And operations need inventories to assure smooth and efficient production. There are, however, conflicting inventory objectives within the firm. The finance function generally prefers to keep the level of inventories low to conserve capital, marketing prefers high levels of inventories to enhance sales, while operations prefers adequate inventories for efficient production and smooth employment levels. Inventory management must balance these conflicting objectives and manage inventory levels in the best interests of the firm as a whole. 8.2

Reasons for holding inventory

8.2.1 To meet anticipated customer demand A customer can be a person who walks in off the street to buy a new laptop, handphone. These inventories are referred to as anticipation stocks because they held to satisfy expected (i.e. average) demand. 8.2.2 To smooth production requirement Firms that experience seasonal pattern in demand often build up inventories during preseason periods to meet overly high requirement during seasonal periods. These inventories are aptly named as seasonal inventories

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8.2.3 To decouple operations Historically, manufacturing firms have used inventories as buffers between successive operations to maintain continuity of production that would otherwise be disrupted by events such as breakdowns of equipment and accidents that cause a portion of the operation to shut down temporarily. The buffers permit other operations to continue temporarily while the problem is being solved. Similarly, firms have used buffers of raw materials to insulate production from disruptions in deliveries from suppliers, and finished goods inventory to buffer sales operations from manufacturing disruptions. 8.2.4 To prevent against stockouts Delayed deliveries and unexpected increases in demand increase the risk of shortages. Delay can occur because of weather conditions, supplier stock-outs, deliveries of wrong materials, quality problems, and so on. The risk of shortages can be reduced by holding safety stocks, which are stocks in excess of average demand to compensate for variabilities in demand and lead time. 8.2.5 To take advantage of order cycles To minimise purchasing and inventory costs, a firm often buys in quantities that exceed immediate requirements. This necessitates storing some or all of the purchased amount for later use. Similarly, it is usually economical to produce in large rather small quantities. Again, the excess output must be stored for later use. Thus, inventory storage enables a form to buy and produce in economic lot sizes without having to try to match purchases or production with demand requirement in the short run. This results in periodic orders, order cycles. The resulting stock is known as cycle stock. 8.2.6 To hedge against price increases Occasionally a firm will suspect that a substantial price increase is about to occur and purchase larger-than-normal amounts to beat the increase. The ability to store extra goods also allows a firm to take advantages of price discounts for larger orders. 8.2.7 To permit operations The fact that production operations take a certain amount of time (i.e. they are not instantaneous) means that there will generally be some work-in-process (WIP) inventory. In addition, intermediate stocking of goods – including raw materials, semi-finished items and finished goods at production sites, as well as goods stored in warehouses – leads to pipeline inventories throughout a production-distribution system. 8.2.8 To take advantage of quantity discount Suppliers may give discounts on large orders.

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8.3

Relationship between cost and inventory

Three basic costs are associated with inventories : holding, ordering and shortage costs. 8.3.1 Holding or carrying cost Cost to carry an item in inventory for a length of time, usually a year. This cost is related to store the items physically. Costs includes interest, insurance, taxes, depreciation, obsolescence, deterioration, spoilage, breakage, pilferage (stealing) and warehousing costs (heat, light, rent, security). They also include opportunity costs associated with having funds that could be used elsewhere tied up in inventory. Holding costs are stated in either of two ways : as a percentage of unit price or as a dollar amount per unit. Typical annual holding costs range from 20-40% of the value of an item. In other words, to hold a $100 item in inventory for one year could cost from $20 to $40. 8.3.2 Ordering cost Cost of ordering and receiving inventory. They are the costs that vary with the actual placement of an order. Besides shipping costs, they include determining how much is needed, preparing invoices, shipping costs, inspecting goods upon arrival for quality and quantity, and moving the goods to temporary storage. Ordering costs are generally expressed as a fixed dollar amount per order, regardless of order size. When a firm produces it own inventory instead of ordering it from a supplier, the costs of machine setup (eg. preparing equipment for the job by adjusting the machine, changing cutting tools) are analogous to ordering costs. That is, they are expressed as a fixed charge per production run, regardless of the size of the run 8.3.3 Shortage cost The shortage cost result when demand exceeds the supply of inventory on hand. These costs can include the opportunity cost of not making a sale, loss of customer goodwill, late charges, and similar costs. Furthermore, if the shortage occurs in an item carried for internal use (eg. to supply an assembly line), the cost of lost production or downtime is considered a shortage cost. Such costs can easily run into hundreds of dollars a minute or more. Shortage costs are sometimes difficult to measure, and they may be subjectively estimated.

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8.4 ABC Classification System In inventories, a few items usually account for most of the inventory value as measured by dollar usage. Thus, one can manage these few items intensively and control most of the inventory value. In inventory work, the items are usually divided into these three classes : A, B and C. Class A typically contains about 20% of the items and 80% of the dollar usage. It therefore represents the most significant few. At the other extreme, class C contains 50% of the items and only 5% of the dollar usage. These items contribute very little of the dollar value of inventory. In the middle is class B, with 30% of the items and 15% of the dollar usage. The classification of inventory in this way is often called ABC analysis or the 80-20 rule (Pareto rule) The table 8.1 is an example of an inventory with 10 items. In this case, items 3 and 6 account for a great deal of the dollar usage (73.2%). On the other hand, items 1, 5, 7, 8 and 10 are low in dollar usage (10.5%)

Table 8.1 Annual usage of items by dollar value : Item

Annual Demand

Unit Cost

Annual $ usage

% of $ usage

1 2 3 4 5 6 7 8 9 10 Total

5,000 1,500 10,000 6,000 7,500 6,000 5,000 4,500 7,000 3,000

$1.50 $8.00 $10.50 $2.00 $0.50 $13.60 $0.75 $1.25 $2.50 $2.00

$7,500 $12,000 $105,000 $12,000 $3,750 $81,600 $3,750 $5,625 $17,500 $6,000 $254,725

2.9 4.7 41.2 4.7 1.5 32.0 1.5 2.2 6.9 2.4 100.0

The ABC principle, therefore, applies to this small example. category are summarised in Table 8.2

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The percentages in each

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Table 8.2 ABC Classification Class

Item Numbers

% of total items

% of total $ usage

A

3, 6

20

73.2

B

2, 4, 9

30

16.3

C

1, 5, 7, 8, 10

50

10.5

100

100.0

Total

The designation of three classes is arbitrary; there could be any number of classes. Also, the exact percentage of items in each class will vary from one inventory to the next. The important factors are the two extremes: a few items which are significant and a large number of items which are relatively insignificant. Most of the dollar usage in inventory (80%) can be controlled by closely monitoring the A items (20%). For these items, a tight control system including continuous review of stock levels, less safety stock, and close attention to record accuracy might be used. On the other hand, looser control might be used for C items. A periodic review system could be used to consolidate orders from the same supplier, and less record accuracy might be sufficient. The B items require an intermediate level of attention and management control. With computerised systems, a uniform level of control is sometimes used for all items. Nevertheless, the management of inventories still requires the setting of priorities, and the ABC concept is often useful in doing this. 8.5 Economic Order Quantity (EOQ) Model The question of how much to order is frequently determined by using an Economic Order Quantity (EOQ) model. EOQ model is used to identify a fixed order size that will minimise the sum of the annual cost of holding inventory and ordering inventory. Assumptions for the EOQ model : 1) Only one product is involved 2) Annual demand requirements are known 3) Demand is spread evenly throughout the year so that the demand rate is reasonably constant 4) Lead time does not vary 5) Each order is received in a single delivery 6) There are no quantity discount

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Quantity on hand

Usage rate = 100 units/day

Order Size, Q = 700 units Usage rate = 100 units/day Lead time = 2 days Re-order point = 200 units (2 day’s supply)

Q=700 units

Reorder point =200 units

Day Receiv e order

Place order

Receiv e order

Place order

Receiv e order

Lead time = 2 days

Figure 8.1 Economic Order Quantity (EOQ) Model Annual carry cost is computed by multiplying the average amount of inventory on hand by the cost to carry one unit for one year, even though any given unit would not necessarily be held for a year. The average inventory is simply half of the order quantity. The amount on hand decreases steadily from Q units to 0, for average of (Q+0)/2, or Q/2. Using the symbol H to represent the average annual carrying cost per unit, the total annual carrying cost is Annual carrying cost = (Q/2) x H Where

Q = Order quantity in units H = Holding (carrying) cost per unit

Annual ordering cost is a function of the number of orders per year and the ordering cost per order : Annual ordering cost = (D/Q) x S Where

D = Demand, usually in units per year S = Ordering cost

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Annual Cost

(Q/2)H A. Carrying costs linearly related to order size

Order Quantity Annual Cost

(D/Q)S B. Ordering costs are inversely and nonlinearly related to order size

Order Quantity Annual Cost

TC = (Q/2)H + (D/Q)S C. The total cost curve is U-shaped.

Order Quantity

Figure 8.2 Cost Components of Economic Order Quantity (EOQ) Model The total annual cost associated with carrying and ordering inventory when Q units are ordered each time is Total Cost = Annual carrying cost + Annual ordering cost TC = (Q/2)H + (D/Q)S The total cost curve is U-shaped and it reaches its minimum at the quantity where carrying and ordering costs are equal. An expression for the optimal order quantity, Q o can be obtained using calculus. The result is the formula : Differentiate TC with respect to Q d TC / d Q = d (QH/2) + d (D/Q) S = H/2 – DS/Q2 Setting the result equal to zero, and solving for Q 0 = H/2 – DS/Q2

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Q2 = (2DS)/H Q = √ (2DS/H) The minimum total cost is then found by substituting Qo for Q, thus Qo = √ (2DS/H) Example : A telecommunication manufacturing plant uses approximately 64,000 integrated circuit (IC) chips every year. Annual holding cost is $6 per chip and ordering cost is $120. Determine the optimal order quantity. Answer : Demand, D = 64,000 chips per year Ordering cost, S = $120 Holding cost, H = $6 per unit per year Optimal order quantity, Qo = √ (2DS/H) = √ (2 x 64000 x 120) / 6 = 1600 chips

8.6 Fixed Order Quantity System & Fixed Order Period System The fixed order period model is used when orders must be placed at fixed time interval (weekly, twice a month, etc) : The timing of order is set. The question, them at each order point is, how much to order? Fixed period ordering systems are widely used by retail businesses. If demand is variable, the order size will tend to vary from cycle to cycle. This is quite different from an EOQ approach in which the order size generally remains fixed from cycle to cycle, while the length of the cycle varies (shorter if demand is above average, and longer if demand is below average).

Reasons for using the Fixed Order Period Model In some cases, a supplier’s policy might encourage orders at fixed intervals. Even when that is not the case, grouping orders for items from the same supplier can produce savings in shipping costs. Furthermore, some situations do not readily lend themselves to continuous monitoring of inventory levels. Many retail operations (eg. small grocery stores) fall into this category. The alternative for them is to use fixed period ordering, which requires only periodic checks of inventory level.

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Determining the amount to order Figures 8.3 and 8.4 provide a comparison of the fixed quantity and fixed period systems. In the fixed quantity arrangement, orders are triggered by a quantity (ROP), while in the fixed period arrangement orders are triggered by a time. Therefore, the fixed period system must have stock-out protection for lead time plus the next order cycle, but the fixed quantity system needs protection only during lead time because additional orders can be placed at any time and will be received shortly thereafter. Consequently, there is greater need for safety stock in the fixed period model than in fixed quantity model. Both models are sensitive to demand experience just prior to reordering, but in somewhat different ways. In the fixed quantity model, a higher-than-normal demand causes a shorter time between orders, whereas in the fixed period model, the result is a larger order size.

Order quantity Quantity on hand

Safety Stock

Time

Place order

Receive order

Place order

Figure 8.3 Fixed Period Order Model

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Receive order

Place order

Receive order

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Another difference is that the fixed quantity model requires close monitoring of inventory levels in order to know when the amount on hand has reached the reorder point. The fixed period model requires only a periodic review (i.e. physical count) of inventory levels just prior to placing an order to determine how much is needed. To summarise, good inventory management is often the mark of a well-run organisation. Inventory levels must be planned carefully, in order to balance the cost of holding inventory and the cost of providing reasonable level of customer service. Successful inventory management requires a system to keep track of inventory transactions, accurate information about demand and lead times, realistic estimates of certain inventory-related costs, and a priority system for classifying the items in inventory and allocating control efforts.

Order quantity

Quantity on hand

Reorder point (ROP)

Safety Stock

Time

Place order

Place order

Receive order

Figure 8.4 Fixed Quantity Order Model

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Receive order

Place order

Receive order

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Review Questions

1. What are the main reasons that an organization has inventory?

2. Describe ABC inventory analysis in one sentence. What are some policies that may be based upon the results of an ABC analysis? 3. Your company has compiled the following data on the small set of products that comprise the specialty repair parts division. Perform ABC analysis on the data. Which products do you suggest the firm keep the tightest control over? Explain. SKU R11 S22 T33 U44 V55

Annual Demand 250 75 20 150 100

Unit Cost $250 $90 $60 $150 $75

4. What are the assumptions of the EOQ model?

5. List the typical components that constitute inventory holding or carrying costs.

6. List the typical cost components that constitute ordering costs in inventory systems. 7. Given the following data: D=65,000 units per year, S = $120 per setup, P = $5 per unit, and I = 25% per year, calculate the EOQ and calculate annual costs following EOQ behavior. 8. What is a reorder point?

9. Lead time for one of Montegut Manufacturing's fastest moving products is 4 days. Demand during this period averages 100 units per day. What would be an appropriate re-order point?

10. Describe the difference between a fixed-quantity and a fixed-period inventory system?

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Lesson 9 : Materials Requirements Planning and ERP Learning Outcomes: At the end of this lesson, students should be able to: 1. Explain how the concept of dependent demand is fundamental to resource planning. 2. Describe a master production schedule (MPS) and the information it provides. 3. Discuss the logic of a material requirements planning (MRP) system. 4. Identify production and purchase orders needed for dependent demand items. 5. Explain how enterprise resource planning (ERP) systems can foster better resource planning.

9.1

Independent versus Dependent Demand

A crucial distinction in inventory management is whether demand is independent or dependent. Independent demand is influenced by market conditions outside the control of operations. Eg. Finished goods inventories and spare parts for replacement usually have independent demand. Dependent demand is related to the demand for items that are subassemblies or components parts to be used in the production of finished goods. Therefore, once management receives an order or make a forecast of the demand for the final product (independent demand), quantities required for all components can be computed, because all components are dependent items. 9.2

An Overview of MRP

The Material Requirement Planning (MRP) is a dependent demand technique that uses a bill-of-material (BOM), inventory, expected receipts, and a master production schedule (MPS) to determine material requirements. The MRP system is used by many companies and has the following benefits: 1. Better response to customer orders and market changes wins orders and market share; 2. Improved utilization of facilities and labor yields higher productivity and return of investment; 3. Reduced inventory levels free up capital and floor space for others use.

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Material Requirement Planning (MRP) is a computer-based information system that translates the finished product requirements of the master schedule into time-phased requirements for subassemblies, component parts, and raw materials, working backward from the due date using lead times and other information to determine when and how much to order. MRP is designed to answer three questions :   

What is needed ? How much is needed ? When is it needed ?

9.2.1 MRP Requirements The effective use of MRP requires that the operations manager know the following: 1. Master production schedule (what is be made and when) 2. Specifications or bill of material (materials and parts required to make the product) 3. Inventory availability (what is in stock) 4. Purchase orders outstanding (what is on order, also called expected receipts) 5. Lead times (how long it takes to get various components)

9.2.2 Master Production Schedule (MPS) The Master Production Schedule (MPS) states which end items to be produced, when they are needed, and in what quantities. The quantities in a master schedule come from a number of different sources, including customer orders, forecasts, and orders from warehouses to build up for seasonal inventories. Months Aggregate Production Plan (Shows the total quantity of amplifiers) Weeks Master Production Schedule (Shows the specific type and quantity of amplifier to be produced 240-watt amplifier 150-watt amplifier 75-watt amplifier

January 1,500

1

2

100

3

February 1,200

4

100 500

6

100 500

300

5

7

8

100 450

450 100

Figure 9.1 : Master Production Schedule (MPS) (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 564)

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9.2.3 Bill of Materials A Bill of Materials (BOM) contains a listing of all of the assemblies, subassemblies, parts, and raw materials that are needed to produce one unit of finished product. Thus, each finished product has its own bill of materials. The listing in the bill of materials is hierarchical; it shows the quantity of each item needed to complete one unit of the following level of assembly. The nature of this aspect of a bill of materials is clear when we consider a product structure tree, which provides a visual depiction of the subassemblies and components needed to assemble a product. The example below shows how to develop the product structure and “explode” it to reveal the requirements for each component. A bill of material for item A consists of items B and C. Items above any level are called parents; items below any level are called children. By convention, the top level in a BOM is the “0” level Level

Product structure for “Awesome” Awesome” (A)

0

A

2

3

12” 12” Speaker kit w/ C(3) Std. ampamp-booster

B(2) Std. 12” 12” Speaker kit

1

E(2)

D(2)

12” Speaker F(2) Std. 12”

E(2) Packing box and installation kit of wire, bolts, and screws

booster assembly

G(1)

D(2)

AmpAmp-booster 12” 12” Speaker

12” 12” Speaker

Figure 9.2 : Bill of Materials and Product Structure Tree (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 565)

Based on the above product structure tree, assuming the demand for “A” is 50 units, we can “explode” the requirements for the components parts as follow: Part B: 2 x number of As Part C:3 x number of As Part D: 2 x number of Bs + 2 x number of Fs Part E:2 x number of Bs + 2 x number of Cs Part F:2 x number of Cs Part G:1 x number of Fs

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= (2)(50) = (3)(50) = (2)(100) + (2)(300) = (2)(100) + (2)(150) = (2)(150) = (1)(300)

= 100 = 150 = 800 = 500 = 300 = 300

Study Guide

9.2.4 Accurate Inventory Records  Accurate inventory records are absolutely required for MRP (or any dependent demand system) to operate correctly  Generally MRP systems require 99% accuracy  Outstanding purchase orders must accurately reflect quantities and scheduled receipts

9.2.5 Lead Time for components  The time required to purchase, produce, or assemble an item  For production – the sum of the order, wait, move, setup, store, and run times  For purchased items – the time between the recognition of a need and the availability of the item for production Using the example in figure 9.2, when the BOM is modified by adding lead time for each component, we then have a time-phased product structure. Time is this structure is shown on the horizontal axis. Must have D and E completed here so production can begin on B

Start production of D

1 week

D

2 weeks to produce

B 2 weeks

E A 2 weeks

1 week

E

1 week

2 weeks

G

C 3 weeks

F 1 week

D |

|

|

1

2

3

|

|

4 5 Time in weeks

|

|

|

6

7

8

Figure 9.3 : Time-phased product structure (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 568)

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9.3 MRP Structure Although most MRP systems are computerized, the MRP procedure is straightforward and can be done manually by hand. A master production schedule (MPS), a bill of materials (BOM), inventory and purchase records, and lead times for each item are the ingredients of a material requirement planning (MRP) system.

Data Files BOM

Output Reports Master production schedule

MRP by period report

MRP by date report

Lead times Planned order report

(Item master file)

Inventory data

Purchasing data

Material requirement planning programs (computer and software)

Purchase advice

Exception reports Order early or late or not needed Order quantity too small or too large

Figure 9.4 : Structure of the MRP system (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 568)

Once these ingredients are available and accurate, the next step is to construct a gross material requirements plan. The gross material requirement plan is a schedule shown in figure 9.5. It combines a master product schedule (that requires 50 units of final product “A” in week 8) and the time-phased schedule. It shows when an item must be ordered from suppliers if there is no inventory on hand or when the production of an item must be started to satisfy demand for the finished product by a particular date.

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1 A. B. C. E. F. D. G.

2

3

Week 4 5

6

7

Required date Order release date

50 50


1 week

100 100


2 weeks 150 150


200


300

200

1 week

300

300

2 weeks 300

Required date Order release date Required date Order release date

8 Lead Time

3 weeks

600 600

200 200

1 week

300 300

2 weeks

Figure 9.5 : Gross material requirements plan for 50 units of final product “A” (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 569)

The procedures to work out the gross materials requirements are: 1. Starts with a production schedule for the end item – 50 units of Item A in week 8 2. Using the lead time for the item, determine the week in which the order should be released – a 1 week lead time means the order for 50 units should be released in week 7 3. This step is often called “lead time offset” or “time phasing” 4. From the BOM, every Item A requires 2 Item Bs – 100 Item Bs are required in week 7 to satisfy the order release for Item A 5. The lead time for the Item B is 2 weeks – release an order for 100 units of Item B in week 5 6. The timing and quantity for component requirements are determined by the order release of the parent(s) 7. The process continues through the entire BOM one level at a time – often called “explosion” 8. By processing the BOM by level, items with multiple parents are only processed once, saving time and resources and reducing confusion 9. Low-level coding ensures that each item appears at only one level in the BOM

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9.4 Material Requirement Planning II (MRP II) Once an MRP system is in place, inventory data can be augmented by other useful information:    

Labor hours Material costs Capital costs Virtually any resource

This system is generally called MRP II or Material Resource Planning

9.5 Enterprise Resource Planning (ERP) The enterprise resource planning (ERP) is an extension of the MRP system to tie in customers and suppliers, it: 1. allows automation and integration of many business processes 2. shares common data bases and business practices 3. display produces information in real time The ERP also coordinates business from supplier evaluation to customer invoicing The ERP modules include:     

Basic MRP Finance Human resources Supply chain management (SCM) Customer relationship management (CRM)

ERP can be highly customized to meet specific business requirements. The Enterprise application integration software (EAI) allows ERP systems to be integrated with:    

Warehouse management Logistics Electronic catalogs Quality management

ERP systems have the potential to:  Reduce transaction costs  Increase the speed and accuracy of information

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Figure 9.6 : MRP and ERP information flows, showing customer relationship management (CRM), supply chain management (SCM) and finance/accounting. (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 582)

9.5.1 Advantages of ERP Systems 1. 2. 3. 4. 5. 6.

Provides integration of the supply chain, production, and administration Creates commonality of databases Can incorporate improved best processes Increases communication and collaboration between business units and sites Has an off-the-shelf software database May provide a strategic advantage

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9.5.2 Disadvantages of ERP Systems 1. 2. 3. 4. 5.

Is very expensive to purchase and even more so to customize Implementation may require major changes in the company and its processes Is so complex that many companies cannot adjust to it Involves an ongoing, possibly never completed, process for implementation Expertise is limited with ongoing staffing problems

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Review Questions:

1. ______________ is a dependent demand technique that uses a bill of material, inventory, expected receipts, and a master production schedule to determine material requirements. 2. What is MRP? Identify four benefits from its use. 3. A(n) ____________ is a timetable that specifies what is to be made and when. 4. What information is necessary for an operations manager to make effective use of a dependent inventory demand model? 5. A(n) ____________ is a listing of the components, their description, and the quantity of each required to make one unit of a product. 6. If the explosion of the bill of material tells MRP how much of each part is needed, how does MRP learn when each of these parts is needed?

7. Consider the following bill of material. Fifty units of Product A are needed. Assuming no on-hand inventory, and no scheduled receipts, explode the bill of material. A

B(2)

D

C(3)

D

E(2)

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8. Consider the following bill of material. Fifty units of Product A are needed. Assuming no on-hand inventory, explode the bill of material.

9. Each X requires 2 of component Y and 1 of part W. Each Y requires 10 of Z. Each W requires 3 of Q and 2 of R. Lead times are X = 1 week, Y = 1 week, W = 2 weeks, R = 1 week, Z = 3 weeks, and Q = 3 weeks. a. Construct the time-phased product structure. b. Construct the bill of material. 10. Describe how MRP II differs from MRP.

11. What does enterprise resource planning (ERP) allow an organization to do? 12. What are the advantages of enterprise resource planning (ERP)? 13. What are the disadvantages of enterprise resource planning (ERP)?

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Lesson 10 : Project Management Learning Outcomes: At the end of this lesson, students should be able to: 5. Discuss the business case for a project. 6. Describe a project in terms of a work breakdown structure. 7. Understand the CPM & PERT approaches 8. Understand the use of Gantt charts in project management.

10.1 The importance of Project Management

Project Management is the discipline of organizing and managing resources (e.g. people) in such a way that the project is completed within defined scope, quality, time and cost constraints. A project is a temporary and one-time endeavor undertaken to create a unique product or service, which brings about beneficial change or added value. This property of being a temporary and one-time undertaking contrasts with processes, or operations, which are permanent or semi-permanent ongoing functional work to create the same product or service over and over again. The management of these two systems is often very different and requires varying technical skills and philosophy, hence requiring the development of project management. The first challenge of project management is to ensure that a project is delivered within defined constraints. The second, more ambitious challenge is the optimized allocation and integration of inputs needed to meet pre-defined objectives. A project is a carefully defined set of activities that use resources (money, people, materials, energy, space, provisions, communication, quality, risk, etc.) to meet the pre-defined objectives. The management of projects involves three phases: 1. Planning : This phase include goal setting, defining the project, and team organisation. 2. Scheduling : This phases related people, money, and suppliers to specific activities and relates activities to each other. 3. Controlling : Here the firm monitors resources, costs, quality, and budgets. It also revises or changes plans and shifts resources to meet time and cost demands.

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Figure 10.1 Project planning, scheduling and controlling (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 58) Pg 97 of 122

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10.2

Project Planning

Projects can be defined as a series of related tasks directed toward a major output. In some firms a project organisation is developed to make sure existing programs continue to run smoothly on a day-to-day basis while new projects are successfully completed. The project organisation works best when: 1. 2. 3. 4. 5.

Work can be defined with a specific goal and deadline The job is unique or somewhat unfamiliar to the existing organization The work contains complex interrelated tasks requiring specialized skills The project is temporary but critical to the organization The project cuts across organizational lines

President

Human Resources

Finance

Marketing

Project 1

Project 2

Design

Quality Mgt

Production

Mechanical Engineer

Test Engineer

Technician

Electrical Engineer

Computer Engineer

Technician

Project Manager

Project Manager

Figure 10.2 A sample project organisation (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 59)

10.2.1 The Project Manager Project management is quite often the province and responsibility of the project manager (PM). The PM participates directly in the activities that produce the end result, but rather strives to maintain the progress and productive mutual interaction of various parties in such a way that overall risk of failure is reduced. A project manager is often a client representative and has to determine and implement the exact needs of the client, based on knowledge of the firm he/she is representing. The ability to adapt to the various internal procedures of the contracting party, and to

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form close links with the nominated representatives, is essential in ensuring that the key issues of cost, time, quality, and above all, client satisfaction, can be realized. In whatever field, a successful project manager must be able to envisage the entire project from start to finish and to have the ability to ensure that this vision is realized. Any type of product or service —buildings, vehicles, electronics, computer software, financial services, etc.— may have its implementation overseen by a project manager and its operations by a product manager.

10.2.2 Work Breakdown Structure The project management team begins its task well in advance of project execution so that a plan can be developed. One of first steps is to carefully establish the project’s objectives, then break the project down into manageable parts. This WBS defines the project by dividing it into its major subcomponents (or tasks), which are then subdivided into more detailed components, and finally into a set of activities and their related costs. The division of the project into smaller and smaller tasks can be difficult, but is critical to managing the project and to scheduling success. Gross requirements for people, supplies, and equipment are also estimated in this planning phase. The WBS typically decreases in size from top to bottom and is indented like this: Level 1. Project 2. Major tasks in the project 3. Subtasks in the major tasks 4. Activities (or work packages) to be completed Example: Development of the Microsoft’s operating system Windows Vista. Level ID Level Number 1 1.0 2 1.1 2 1.2 3 3 3 4

1.21 1.22 1.23 1.231

Activity Develop/launch Windows Vista OS Develop of GUIs Ensure compatibility with earlier Windows versions Compatibility with Windows ME Compatibility with Windows XP Compatibility with Windows 2000 Ensure ability to import files

Figure 10.3 : Work Breakdown Structure (WBS) (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 60)

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10.3 Project Scheduling Project scheduling involves sequencing and allocating time to all project activities. At this stage, managers decide how long each activity will take and compute how many people and materials will be needed at each stage of production. Gantt Chart A Gantt chart is a popular type of bar chart that illustrates a project schedule. Gantt Charts are low cost means of helping managers make sure that: 1. 2. 3. 4.

all activities are planned for their order of performance is accounted for the activity time estimates are recorded the overall project time is developed

Gantt charts illustrate the start and finish dates of the terminal elements and summary elements of a project. Terminal elements and summary elements comprise the work breakdown structure of the project. Some Gantt charts also show the dependency (i.e., precedence network) relationships between activities.

J

F

M

Time A M J

J

A

S

Design Prototype Test Revise Production The project scheduling serves several purposes: 1. 2. 3. 4.

Shows the relationship of each activity to others and to the whole project Identifies the precedence relationships among activities Encourages the setting of realistic time and cost estimates for each activity Helps make better use of people, money, and material resources by identifying critical bottlenecks in the project

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10.4

Project Management Techniques : PERT & CPM

Program Evaluation and Review Technique (PERT) and the Critical Path Method (CPM) were both developed in the 1950s to help manager schedule, monitor and control large and complex projects.

10.4.1 The framework of PERT and CPM Six Steps PERT and CPM: 1. Define the project and prepare the work breakdown structure 2. Develop relationships among the activities - decide which activities must precede and which must follow others 3. Draw the network connecting all of the activities 4. Assign time and/or cost estimates to each activity 5. Compute the longest time path through the network – this is called the critical path 6. Use the network to help plan, schedule, monitor, and control the project

Questions PERT & CPM can answer: 1. 2. 3. 4. 5. 6. 7. 8.

When will the entire project be completed? What are the critical activities or tasks in the project? Which are the noncritical activities? What is the probability the project will be completed by a specific date? Is the project on schedule, behind schedule, or ahead of schedule? Is the money spent equal to, less than, or greater than the budget? Are there enough resources available to finish the project on time? If the project must be finished in a shorter time, what is the way to accomplish this at least cost?

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10.4.2 Network diagrams The first step in a PERT or CPM network is to divide the entire project into significant activities in accordance with the work breakdown structure (WBS). In this course, we will introduce the Activity-On-Node (AON) diagram. Under the AON convention, nodes designate activities. The table below shows six common activity relationship in networks: Common Activity 1

Common Activity 2

A A

C

C

B

B A comes before B, which comes before C

A and B must both be completed before C can start

Common Activity 3

Common Activity 4

B

A

C

B

D

A C

C and D cannot begin until both A and B are completed

B and C cannot begin until A is completed Common Activity 5

A

C

B

D

Common Activity 6

A

B

D

C

C cannot begin until both A and B are completed; D cannot begin until B is completed.

B and C cannot begin until A is completed. D cannot begin until both B and C are completed.

(Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 64)

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Example : Activity-on-Node at Milwaukee Paper

Activity Description A Build internal components

Immediate Predecessors —

B

Modify roof and floor

—

C

Construct collection stack

A

D

Pour concrete and install frame

A, B

E

Build high-temperature burner

C

F

Install pollution control system

C

G

Install air pollution device

D, E

H

Inspect and test

F, G

Table 10.1 : Milwaukee paper Manufacturing’s Activities and Predecessors. (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 65)

F A

C E

Start

H B

D

G

Figure 10.4 Complete AON Network for Milwaukee Paper (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 67)

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10.5 Determining the Project Schedule Once the project network has been drawn to show all the activities and their precedence relationships, the next step is to determine the project schedule. That is, we need to identify the planned starting and ending time for each activity. To find out how long the project will take, we perform the critical path analysis for the network. It is necessary to bear in mind that:    

The critical path is the longest path through the network The critical path is the shortest time in which the project can be completed Any delay in critical path activities delays the project Critical path activities have no slack time

Forward Pass Earliest start (ES) = earliest time at which an activity can start, assuming all predecessors have been completed Earliest finish (EF) = earliest time at which an activity can be finished

Activity Name or Symbol Earliest Start

A ES

EF

Earliest Finish

2 Activity Duration Figure 10.5 Notation used in Nodes for Forward Pass (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 69)

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Begin at starting event and work forward Earliest Start Time Rule:  If an activity has only a single immediate predecessor, its ES equals the EF of the predecessor  If an activity has multiple immediate predecessors, its ES is the maximum of all the EF values of its predecessors ES = Max {EF of all immediate predecessors}

Earliest Finish Time Rule:  The earliest finish time (EF) of an activity is the sum of its earliest start time (ES) and its activity time EF = ES + Activity time

0

A

2

2

2 0

Start

C

4

4

2

F

7

3

0

4

0

E

1 3

8

4 0

B

3

3

3

D

7

4

H

1 5

2 G 8

1 3 5

Figure 10.6 Earliest Start and Earliest Finish Time for Milwaukee Paper (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 70)

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Review Questions 1. What are the three phases of a project? Describe each in a sentence or two. 2. Identify the responsibilities of project managers. 3. _______________ divides a project into more and more detailed components. 4. What is a project organization?

5. Identify and describe briefly each of the purposes of project scheduling. 6. What is the objective of critical path analysis?

7. Explain why the critical path is the longest, not the shortest, path through a network. 8. Briefly discuss what is meant by critical path analysis. What are critical path activities and why are they important? 9. A network consists of the activities in the following list. Times are given in weeks. Activity A B C D E F

Preceding --A A, B C D

Time 8 3 7 3 4 6

a. Draw the network diagram. b. Calculate the ES and EF for each activity. c. What is project completion time? 10. Describe the differences between a Gantt chart and a PERT/CPM network.

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Lesson 11 : JIT and Lean Systems Learning Outcomes: At the end of this lesson, students should be able to: 1. Identify the characteristics and strategic advantages of JIT (just-in-time) and lean systems. 2. Describe how lean systems can facilitate the continuous improvement of processes. 3. Understand kanban systems for creating a production schedule in a lean system. 4. Explain the implementation issues associated with the application of lean systems.

11.1 Just-in-Time, The Toyota Production System and Lean Operations In this lesson, we will discuss JIT, TPS, and lean operations as approaches to continuing improvement that drive out waste and lead to world class organizations. 

Just-In-Time (JIT) is a philosophy of continuous and forced problem solving via a focus on throughput and reduced inventory.



The Toyota Production System (TPS) emphasizes continuous improvement, respect for people, and standard work practices.



Lean production supplies the customer with their exact wants when the customer wants it without waste. Lean productions are driven by workflow initiated by the “pull” of the customer’s order.

When implemented as a comprehensive manufacturing strategy, JIT, TPS, and lean systems can sustain competitive advantage and result in increased overall returns.

If there is any distinction between JIT, TPS & lean operations, it is that:  JIT emphasizes forced problem solving;  TPS emphasizes employee learning and empowerment in an assembly-line environment;  Lean operations emphasize understanding the customer.

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11.1.1 Eliminate Waste Waste is anything that does not add value from the customer point of view, examples are storage, inspection, delay, waiting in queues, and defective products do not add value and are 100% waste. Taiichi Ohno, noted for his work on the Toyota Production System (TPS), identified seven categories of wastes: 1

Overproduction

2

Queues

3

Transportation

4

Inventory

5

Motion

6

Over-processing

7

Defective products

producing more than the customer orders or producing early idle time, storage and waiting are wastes moving material between plants or work centres and handling more than once is waste. unnecessary raw material, work-in-process (WIP), finished goods, and excess operating supplies that add no value is waste movement of equipment or people that adds no value is waste extra work performed on the product that adds no value is waste. returns, warranty claims, rework and scrap are wastes.

For over a long period of time, managers have used “housekeeping” for a neat, orderly, and efficient workplace and as a mean of reducing waste. Operations managers have included a 5Ss checklist as part of the housekeeping efforts. The 5 Ss are: 1 Sort/segregate

2

Simplify/straighten

3

Shine/sweep

4

Standardize

5

Sustain/self-discipline

keep what is needed, identify non-value item and remove them. Getting rid of the non-value items makes spaces available and usually improves work flow. label and display for easy use clean daily, eliminate all of dirt, contaminations and clutter. remove variations from processes by developing standard operating procedures and checklists. review work periodically to recognize efforts and motivate to sustain progress

US managers often add two additional Ss that contribute to establishing and maintaining a lean workplace:  Safety – build in good safety practices into the above five activities.  Support/maintenance – reduce variability and unplanned downtime and costs. Integrate daily shine tasks with preventive maintenance.

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11.1.2 Remove Variability JIT systems require managers to reduce variability caused by both internal and external factors. Variability is any deviation from the optimum process that delivers perfect production time, every time. The less variability in a system, results in less waste in the system. Most variability is created by tolerating waste or by poor management. Among the sources of variability are: 1. Incomplete or inaccurate drawings or specifications 2. Poor production processes resulting in incorrect quantities, late, or nonconforming units 3. Unknown customer demands Both JIT and inventory reduction are effective tools in identifying causes of variability

11.1.3 Improve Throughput Throughput is a measure (in units or time) that it takes to move an order from receipt to delivery. The time between the arrival of raw materials and the shipping of the finished order is called manufacturing cycle time. A technique to increase throughput is a pull system. A pull system pulls a unit to where it is needed as it is needed. Pull system are a standard tool of JIT systems. Pull systems use signals to request production and delivery from supplying stations to stations that have production capacity available. The pull system concept is used both within the immediate production process and with suppliers. By pulling material in small lots, inventory cushions are removed, exposing problems and emphasizing continual improvement, at the same time, the manufacturing cycle time is reduced. On the other hand, a push system dumps orders on the downstream stations regardless of the need.

11.2 Just-In-Time (JIT) With its forced problem solving via a focus on rapid throughput and reduced inventory, JIT provides a powerful strategy for improving operations. With JIT, materials arrive where they are needed when they are needed. When good units do not arrive just as needed, a “problem” has been identified. By driving out waste and delay in this manner, JIT reduces costs associated with excess inventory, cuts variability and waste, and improves throughput. JIT is a key ingredient of lean operations and is particularly helpful in supporting strategies of rapid response and low cost. Effective JIT requires a meaningful buyer-supplier relationship

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Figure 11.1 JIT contribute to Competitive Advantage. (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 645)

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11.2.1 JIT Partnerships A JIT partnership exists when a supplier and purchaser work together with open communication and a goal to remove waste and drive down costs. Close relationships and trust are critical to the success of JIT. Four goals of JIT partnerships are:    

Removal of unnecessary activities Removal of in-plant inventory Removal of in-transit inventory Improved quality and reliability

Figure 11.2 Characteristic of JIT Partnerships (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 646)

11.2.2 Concerns of Suppliers Successful JIT partnerships require that supplier concerns be addressed. These concerns include: 1. Diversification – Suppliers may not want to tie themselves to long-term contracts with one customer. The suppliers’ perception is that they reduce their risk if they a variety of customers. 2. Scheduling – Many suppliers have little faith in the purchaser’s ability to produce orders to a smooth, coordinated schedule.

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3. Changes – Engineering or specification changes can create havoc with JIT because of inadequate lead times for suppliers to implement the necessary changes. 4. Quality – Capital budgets, processes, or technology may limit quality. 5. Lot sizes – Suppliers may see frequent delivery in small lot sizes as a way to transfer buyer’s holding costs to suppliers.

11.3 JIT Layout JIT layout reduces waste due to movement. The movement of material on a factory floor does not add value. Consequently, managers want flexible layouts that reduce the movement of both people and material. JIT layouts place material directly in the location when needed. For instance, an assembly line should be designed with delivery points next to the line so material need not be delivered first to a receiving department and then moved again. When a layout reduces distance, firms often save labor and space and may have the added bonus of eliminating potential areas of accumulation of unwanted inventory. The following are a few layout tactics: 11.3.1 Distance Reduction  Large lots and long production lines with single-purpose machinery are being replaced by smaller flexible cells  Often U-shaped for shorter paths and improved communication  Often using group technology concepts 11.3.2 Increased Flexibility  Cells designed to be rearranged as volume or designs change  Applicable in office environments as well as production settings  Facilitates both product and process improvement 11.3.3 Impact on Employees  Employees are cross trained for flexibility and efficiency  Improved communications facilitate the passing on of important information about the process  With little or no inventory buffer, getting it right the first time is critical 11.3.4 Reduced Space and Inventory  With reduced space, inventory must be in very small lots  Units are always moving because there is no storage

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11.4

Kanban

One way to achieve small lot sizes is to move inventory through the shop only as needed rather than pushing it on to the next workstation whether or not the personnel there are ready for it. As noted earlier, when inventory is moved only as needed, it is referred to as a pull system, and the ideal lot size is one. The Japanese call this system kanban. Kanbans allow arrivals at a work centre to match (or nearly match) the processing time. Kanban is the Japanese word for card. In their efforts to reduce inventory, the Japanese use systems that ‘pull’ inventory through work centres. They often use a ‘card’ to signal the need for another container of material – hence the name kanban. The card is an authorization for the next container of material to be produced. Typically, a kanban signal exists for each container of items to be obtained. An order for the container is then initiated by each kanban and ‘pulled’ from the producing department or supplier. A sequence of kanbans “pulls” the material through the plant.

Finished goods

Kanban

Customer order

Work cell Ship Raw Material Supplier

Kanban

Final assembly Kanban

Kanban Purchased Parts Supplier

Kanban

Kanban

SubSubassembly

Figure 11.3 Kanban Signals “Pull” Material Through the Production Process. (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 653)

In figure 11.3, as a customer “pulls” an order from finished goods, a signal (card) is sent to the final assembly. The final assembly area produces and re-supplies finished goods. When final assembly needs components, it sends a signal to its suppliers, a subassembly area and a work cell. These areas supply final assembly. The work cell, in turn, sends a signal to the raw material supplier, and the subassembly area notifies the work cell and purchased parts supplier of a requirement.

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11.5 Toyota Production System Toyota Motor’s Eiji Toyoda and Taiichi Ohno are given credit for the Toyota Production System (TPS). The three core components of TPS are continuous improvement, respect for people, and standard work practice.

11.5.1 Continuous improvement  Build an organizational culture and value system that stresses improvement of all processes  It is part of everyone’s job 11.5.2 Respect for people  People are treated as knowledge workers  Engage mental and physical capabilities  Empower employees 11.5.3 Standard work practice  Work shall be completely specified as to content, sequence, timing, and outcome  Internal and external customer-supplier connection are direct  Product and service flows must be simple and direct  Any improvement must be made in accordance with the scientific method at the lowest possible level of the organization

11.6 Lean Operations Lean production can be thought of as the end result of a well-run OM function. While JIT and TPS tend to have an internal focus, lean production begins externally with a focus on the customer. Understanding what the customer wants and ensuring customer input and feedback are starting points for lean production. Lean productions means identifying customer value by analyzing all the activities required to produce the product and then optimizing the entire process from the customer’s perspective.

11.6.1 Building a Lean Organization The transition to a lean system can be difficult. Building an organizational culture where learning, empowerment, and continuous improvement are the norm is a challenge. However, organisations that focus on JIT, quality, and employee empowerment are often lean producers. Such firms drive out activities that do not add value in the eyes of the customer.

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Lean systems tend to have the following attributes:  Use JIT techniques to eliminate virtually all inventory.  Build systems that help employees produce a perfect part every time.  Reduce space requirements by minimizing travel distance.  Develop partnerships with suppliers, helping them to understand the needs of the ultimate customer.  Educate suppliers to accept responsibility for satisfying end customer needs.  Eliminate all but value-added activities. Material handling, inspection, inventory, and rework are the likely targets because they do not add value to the product.  Develop employees by constantly improving job design, training, employee commitment, teamwork, and empowerment.  Make jobs challenging, pushing responsibility to the lowest level possible.  Build worker flexibility through cross-training and reducing job classifications. Success requires the full commitment and involvement of managers, employees, and suppliers. The rewards that lean producers reap are spectacular. Lean producers often become benchmark performers.

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Review Questions

1. What three things does the Toyota Production System (TPS) emphasize? 2. Identify Ohno's Seven Wastes. Which one of these deals most directly with distance reductions? 3. What are the 5S's? Why does the list of the 5S's sometimes have seven elements? 4. Define variability within the context of JIT. 5. Identify sources of variability. 6. Differentiate between a push and a pull system. 7. Define manufacturing cycle time in the context of JIT systems. 8. Identify the layout tactics appropriate for a JIT environment. 9. What are the goals of JIT partnerships? 10. What is a kanban?

11. Identify some of the signals that kanban systems use. 12. How are lean operations and the Toyota Production System (TPS) alike? How are they different? 13. What are the five reasons given by suppliers for their reluctance to enter into JIT systems? Elaborate on one of these, of your choosing.

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Lesson 12: Maintenance and Reliability Learning Outcomes: At the end of this lesson, students should be able to: 1. Explain the strategic importance of maintenance and reliability. 2. Understand the concept of reliability. 3. Understand preventive and breakdown maintenance. 4. Outline the techniques for establishing maintenance policies.

12.1 The Strategic Importance of Maintenance and Reliability Operations Managers must avoid the undesirable result of equipment failure, because it can be disruptive, inconvenient and wasteful. Machine and product failures can have far-reaching effects on an organisation’s operations, reputation, and profitability. The objective of maintenance and reliability is to maintain the capability of the system while controlling costs. Good maintenance system removes variability. Systems must be designed and maintained to reach expected performance and quality standards. The interdependency of operator, machine, and mechanic is a hallmark of successful maintenance and reliability. This is illustrated in figure 12.1.

Employee Involvement Information sharing Skill training Reward system Employee empowerment

Maintenance and Reliability Procedures

Result s Reduced inventory Improved quality Improved capacity Reputation for quality Continuous improvement Reduced variability

Clean and lubricate Monitor and adjust Make minor repair Keep computerized records

Figure 12.1 Good maintenance and reliability strategy requires employee involvement and good procedures. (Source: Principles of Operations Management, Jay Heizer & Barry Render, 7th ed, pg 670)

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12.2

Reliability

Reliability is the probability that a machine part or product will function properly for a given length of time. It is the ability to continue to be fit for the purpose or function that the product or service has been designed.

Reliability is the probability that a machine will function properly for a specified time

Reliability is as important as quality since it is a key factor in many purchasing decisions. Unfortunately, the testing of a design to assess its reliability is difficult and sometimes impossible. Improving Individual Components Because failures do occur in real world, understanding their occurrence is an important reliability concept. The method of computing system reliability (Rs) is simple. It consists of finding the products of the individual reliability as follows: Rs = R1  R2  R3  ……..  Rn Where R1 = Reliability of component 1 R2 = Reliability of component 2 and so on. Example :

R1

R2

R3

.90

.80

.99

Rs

Reliability of the process is Rs = R1 x R2 x R3 = .90 x .80 x .99 = .713 or 71.3% The basic unit of measure for reliability is the product Failure Rate (FR).

Number of failures FR(%) = Number of units tested x 100% FR(N) =

Number of failures Number of unit-hours of operating time

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There is another common measure of failure, namely, Mean Time Between Failure (MTBF). It measures average time from one failure to the next. Thus, the longer the MTBF, the more reliable is the product. The formula is:

MTBF =

1 F R( N)

Failure Rate Example 20 air conditioning units designed for use in NASA space shuttles operated for 1,000 hours. One failed after 200 hours and one after 600 hours

2 FR(%) = (100%) = 10% 20

2 FR(N) = = .000106 failure/unit 20,000 - 1,200 hr MTBF =

1 = 9,434 hrs .000106

12.3 Maintenance Maintenance of facilities and equipment is essential to achieve specified levels of efficiency, quality and reliability. The cost of breakdown in the system can be very high in financial terms, poor staff morale and bad relations with customers. Maintenance is all activities involved in keeping a system’s equipment in working order.

Therefore, the objectives of good maintenance are: a)

To enable product or service quality and customer satisfaction to be achieved through correctly adjusted, serviced and operated equipment.

b)

To maximize the useful life of the equipment.

c)

To keep equipment safe and prevent the development of safety hazards.

d)

To minimize the total production or operating costs directly attributable to equipment service and repair.

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e)

To minimize the frequency and severity of interruptions to operating processes.

f)

To maximize production and operation capacity from the given equipment resources.

12.4

Types of Maintenance Policy

There are two main types of maintenance policy. Namely: 12.4.1 Breakdown Maintenance This is an emergency based policy whereby equipment or component parts will operate till they fail before repair is carried out. The scheduling is therefore on emergency or priority basis. The intention is to maximize the life span of the equipment or component parts and thereby, saving cost. However, the application is only limited to equipment or component parts where failure has little or no critical impact on operations.

12.4.2 Preventive Maintenance This involves performing routine inspections and servicing. The intention is to build a system that will find potential failures and make changes or repairs that will prevent failure from occurring. Formal preventive maintenance may take four different forms. In practice, all four types of policies often operate together, overlap or coincide. The policies are: Time based – doing maintenance at regular intervals especially when usage cannot be easily measured. Work based – maintenance is determined by usage such as operating hours, volume of production, etc. Opportunity based – repair takes place when the equipment or system is not working to minimize production disruption Condition based – relies on periodic inspection to determine the condition of wear and tear.

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12.4.3 Improving Repair Capabilities The repair capabilities of maintenance department can be increased by:      

12.5

Well-trained personnel Adequate resources Ability to establish a repair plan and priorities Ability and authority to do material planning Ability to identify the cause of breakdowns Ability to design ways to extend the Mean Time Between Failure (MTBF)

Total Productive Maintenance (TPM)

In automated production environment, an equipment breakdown at one operation will quickly cause all other downstream operations to fail. Therefore, an extensive preventive maintenance programme is essential to reduce the frequency and severity of workflow interruption in these situations. One of the strategies is to combines total quality management with strategic view of maintenance from process and equipment design to preventive maintenance. This will reduce variability through employee involvement and excellent maintenance records. For such strategy to be successfully implemented, TPM should include: a)

Machines that are reliable, easy to operate and easy to maintain.

b)

Emphasis of total cost of ownership when purchasing machines so that service and maintenance are included in the cost.

c)

Appropriate trainings to workers so that they are able to detect, find and eliminate potential causes of trouble before system failure sets in.

d)

Delegating operatives the responsibility for preventing equipment failure by conducting checks, inspecting, lubricating and adjusting their own equipment.

e)

Preventive maintenance plans that utilize the best practices of operators, maintenance departments and depot service.

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Study Guide

Review Questions 1. What is the role of people, especially empowered employees, in an effective maintenance strategy? 2. Define reliability. 3. Increasing the number of parts or components in a product tends to reduce its reliability. Why is this true only when adding components in series? 4. A product is composed of a series connection of four components with the following reliabilities. What is the reliability of the system? Component Reliability

1 .90

2 .95

3 .97

4 .88

5. The diagram below identifies the elements of service as provided by a soft drink vending machine. Each element has an estimate of its own reliability, independent of the others. What is the reliability of the "system"? Took my money .85

Made wrong change .90

Dispensed wrong beverage .95

Dispensed warm beverage .98

Power failed

Out of stock

.995

.85

Couldn't make change

Wouldn't take my dollar bill

.98

.60

6. What is FR(N)? How is it calculated? How are FR(N) and MTBF related? 7. Ten high-intensity bulbs are tested for 100 hours each. One failed at 40 hours; another failed at 70 hours; all others completed the test. Calculate FR(%), FR(N), and MTBF. 8. Define maintenance. 9. What is breakdown maintenance? 10. What is the primary concept of total productive maintenance (TPM)? List the other elements of total productive maintenance.

~ End ~

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OM Study Guide Lessons 1-12

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