MGMT 6

PRODUCTION &/ or OPERATIONS MANAGEMENT Page 1
Sai n t Lou i s U n i ver si t y

SCHOOL OF ACCOUNTANCY AND BUSI NESS MANAGEMENT
Department of Entrepreneurship, Human Resources Development and Management, and Marketing Management
Bagu i o Ci t y

SYLLABUS

MGMT 6
PRODUCTION &/or OPERATIONS MANAGEMENT
(3 units, 3 hours/week)

PRE-REQUISITE:
College Algebra
Principles of Organization and Management

COURSE DESCRIPTION:
This course introduces the strategic and tactical decisions involved in production and
operations management. It focuses on the concepts and tools that are used in making
decisions related to the planning and design, operation, and control of production or
operations systems.

COURSE OBJECTIVE:
The course aims to:
1. To develop a comprehensive understanding of the production/operations function and
to appreciate its role as well as its interdependency with the other functions in the
organization, and
2. To equip with the key concepts and tools of production/operations management in
decision-making.
3. To apply the concepts and techniques to enhance organizational effectiveness and
competitiveness toward the dynamic industry changes and economic development

COURSE REQUIREMENTS:
1. Quizzes, seat works and class activities
2. Grade Recitations and role playing
3. Problem-solving exercises and assignments
4. Periodical examinations

TEACHING METHODOLOGIES:
1. Lecture
2. Class Discussion
3. Group Dynamics
4. Case Analysis and choreography

COURSE OUTLINE:

PRELIMS

A. Overview of Production and Operations Management (4hrs)
1. Introduction
2. Functions within the Business Organizations
3. Differentiating Features of P/O Systems
4. The Production/Operations Manager and Decision Making
5. System Design and Operations Decision in P/OM
6. Recent Trends in P/O Management
B. Productivity, Competitiveness, and Strategy (4hrs)
1. Productivity
a. Productivity Measures
b. Improving Productivity
2. Competitiveness
a. Keys to Competitiveness
3. Strategy
a. Operations Strategy
b. Strategy Formulations
C. Reliability and Availability (4hrs)
D. Planning and Design of P/O Systems Part1: Forecasting (5hrs)
1. Overview of Qualitative Forecasting Methods
2. Quantitative Forecasting Techniques
a. Nave, Moving Averages, Exponential Smoothing
b. Measuring Forecasting Accuracy

Preliminary Examination (1hr)

MIDTERMS

E. Planning and Design of P/O Systems Part 2: Facility Layout Design (7hrs)
1. Process Layout: Load-Distance Method
2. Process Layout: Assembly Line Balancing
F. Total Quality Management (4hrs)
1. Concepts
2. Methodologies
G. Operating and Controlling the P/O System Part 1: Inventory Management:
Independent Demand (6hrs)
1. Fixed-Order Quantity Model
2. Fixed-Order Interval Model
3. Single Period Model

Midterm Examination (1hr)

FINALS

H. Operating and Controlling the P/O System Part 2:
1. Inventory Management: Dependent Demand (7hrs)
a. Waiting Line Management
b. Material Requirement Planning
2. Project Management (10hrs)

Final Examination (1hr)

(N.B.: Topics may change, add, or modify as deemed necessary to address to the current
demands and developments in the industry as well as to the specific needs of the field of
specializations.)
SUMMARY
UNIT TOPICS HOUR/S

A
B
C
D

E
F
G

H
PRELIMS
Overview of Production and Operations Management
Productivity, Competitiveness, and Strategy
Reliability and Availability
Planning and Design of P/O Systems Part1: Forecasting
PRELIMINARY EXAMINATION
MIDTERMS
Planning and Design of P/O Systems Part 2: Facility Layout Design
Total Quality Management
Operating and Controlling the P/O System Part1
Inventory Management: Independent Demand
MIDTERM EXAMINATION
FINALS
Operating and Controlling the P/O System Part2
Inventory Management: Dependent Demand
Project Management
FINAL EXAMINATIONS

04
04
04
05
01

07
04

6
1

7
10
01
TOTAL 54

GRADING SYSTEM:
Prelims % Midterms % Finals %
CS
Exam
40
60
CS
Exam
50
50
CS
Exam
60
40
Total 100 Total 100 Total 100
N.B.: CS = Class Standing include quizzes(30%), seat works and class activities (20%),
problem solving (30%), graded recitation (10%), role playing (5%), and attendance (5%)

REFERENCE:
Stevenson, William J., Operations Management, 10
th
edition, New York, U.S.A., The
McGraw-Hill Companies, Inc. 2009

Jacobs, F. Roberts, Richard B. Chase, and Nicholas J. Aquilano, Operations and Supply
Management, New York, U.S.A., The McGraw-Hill Companies, Inc. 2009

Heizer, Jay and Barry Render, Principles of Operations Management, 5
th
edition, Upper
Saddle river, New Jersey, Pearson Educational, Inc., 2004

Napoleon I. Barnachea Jr. AY 2011-2012 (07 November 2011)
Email address: operationmgmt6@yahoo.com

A. Over vi ew of Pr odu ct i on an d/ or Oper at i on s M an agemen t ( 4h r s)

Introduction

Pr odu ct i on con j u r es u p i mages of f act or i es, machi n es, an d assembl y l i n es.
Pr odu ct i on / Oper at i on s M an agemen t , or mor e si mpl y, O per ati on s M an agemen t , i s t h e man agemen t of syst em
or pr ocesses t h at cr eat e goods an d/ or pr ovi de ser vi ce. Fu r t h er , .. . i n vol ve sch edu l i n g of
act i vi t i es, mot i vat i n g empl oyees, or der i n g an d man agi n g su ppl i es, sel ect i n g an d mai nt ai ni n g equ i pmen t s,
sat i sf yi n g qu al i t y st an dar ds, an d above al l . t h r ou gh sh or t - an d l on g- t er m pl ann i n g.

Functions within the Business Organizations

An or gan i zat i on i s a gr ou p of peopl e w or k i n g t oget h er t o ach i eve common obj ect i ves. Th i s basi c def i ni t i on
i mpl i es t h at at l east f or con di t i on s mu st ex i st t o have an or gan i zat i on :
a. Th er e mu st be a .. ... ( commu ni t y ) - t w o or mor e i n di vi du al s;
b. Th ese i n di vi du al s mu st h ave .. ( common obj ect i ves) ; i .e., t h ey al l agr ee on at l east on e
obj ect i ve t h at i s w or t h pu r sui n g an d ach i evi n g;
c. Each member of t h e gr ou p ( cooper at i on ) t o t h e best t h at h e or sh e can t o con t r i bu t e t ow ar ds t h e
ach i evemen t of t h ei r sh ar ed obj ect i ves; an d
d. Th e gr ou p member .. . ( coor di n at i on) , i .e., al l of t h ei r ef f or t s ar e i n t er r el at ed an d coor di n at ed,
al l ai med at t h e ach i evement of t h ei r common obj ect i ves.

Al l of t hese con di t i on s mu st be pr esent f or an or gan i zat i on t o ex i st . I f onl y on e or t w o or even t hr ee, but n ot
al l , of t h ese con di t i on s ex i st , t h e or gani zat i on , t h e or gan i zat i on , i n i t s t r u est sen se, does n ot ex i st .
Bu si n ess Or gan i zat i on i s f or med t o pu r sue goal s t h at ar e ach i eved mor e ef f i ci en t l y by con cer t ed ef f or t s of
gr ou p of peopl e t h an by i n di vi du al s w or ki n g al on e. Bu si n ess or gan i zat i on s ar e devot ed t o pr odu ci n g goods
an d/ or pr ovi di n g ser vi ces. Th ey may be f or - p r of i t or n on pr of i t or gan i zat i on . Th e pr i mar y act i vi t i es of
bu si ness ar e
1 . Commer ci al or bu si n ess engages i n t h e . an d .. of goods. I t s ear n i n gs ar e
pr i mar i l y der i ved f r om t h e mar k u p ( pr of i t mar gi n ) i t adds t o t h e cost of goods t h at i s sol d t o t h e
cu st omer s.
2 . M an u f act u r i n g bu si n ess con ver t s . i nt o f i n i sh ed goods t h at ar e t o be sol d f or bu si n ess or
per son al u sed.
3 . Ser vi ce bu si n ess per f or ms or del i ver s ser vi ce t o cl i en t s i n f or a f ee.
A t ypi cal bu si n ess or gan i zat i on h as t h r ee basi c f u n ct i on s: , .. an d .. I n addi t i on t o t h e
t h r ee pr i mar y f u n ct i on s, man y or gan i zat i on s h ave a n u mber of su ppor t i n g f u n ct i on s, su ch as per son n el ,
accou n t i n g, an d en gi n eer i n g.

Oper at i on s

Th e oper at i on s f u n ct i on con si st s of al l act i vi t i es di r ect l y r el at ed t o pr odu ci n g goods or pr ovi di n g ser vi ces. Th e
pr odu ct i on f u n ct i on s ex i st s n ot on l y i n man uf act u r i n g an d assembl y oper at i on s, w hi ch ar e good- or i en t ed,
bu t al so i n ar eas su ch as h eal t h car e, t r an spor t at i on , f ood h an dl i n g an d r et ai l i n g, w h i ch ar e pr i mar i l y
ser vi ce- or i en t ed
The oper at i ons f unct i on i nvol ves t he conver si on of i nput s i nt o out put s.

Val ue added i s t he t er m used t o descr i be t he di f f er ence bet w een t he cost of i nput s and t he val ue or pr i ce of out put
( val ue t o t he soci et y, pr i ce t hat cust omer s ar e w i l l i ng t o pay f or t hose goods or ser vi ces)

Examples of types of operations

Type of operations Examples
Good producing

Storage/Transportation

Exchange

Entertainment
Communication
Farming, mining, construction, manufacturing, power
generation
Warehousing, trucking, mail service, moving taxis, buses,
hotels, airlines
Retailing, wholesaling, banking, renting or leasing, library
loans
Films, radio and television, plays, concerts, recording
Newspapers, radio and TV newscasts, telephone, satellites

Fi nance

The f i nance f unct i on compr i ses act i vi t i es r el at ed t o secur i ng r esour ces at f avor abl e pr i ces and al l ocat i ng t hose
r esour ces t hr oughout t he or gani zat i on.
a. Budget i ng. Budget must be per i odi cal l y pr epar ed t o pl an f i nanci al r equi r ement s. Budget s must somet i mes be
adj ust ed, and per f or mance r el at i ve t o a budget must be eval uat ed.
b. Economi c anal ysi s of i nvest ment pr oposal s. Eval uat i on of al t er nat i ve i nvest ment i n pl ant and equ i pmen t r equi r es
i npu t s f r om bot h oper at i ons and f i nance peopl e.
c. Pr ovi si on of f unds. The necessar y f undi ng of oper at i on and t he amount and t i mi ng of f undi ng can be i mpor t ant and
even cr i t i cal w hen f unds ar e t i ght .

M ar k et i ng

M ar k et i ng consi st s of sel l i ng and/ or pr omot i ng t he goods or ser vi ces of an or gani zat i on. M ar k et i ng p eopl e mak e
adver t i si ng and pr i ci ng deci si ons. M ar k et i ng i s al so r esponsi bl e f or assessi ng cust omer w ant s and needs, and f or
communi cat i ng t hose t o oper at i ons peopl e ( shor t t er m) and t o desi gn peopl e ( l ong t er m) .
Lead t i me i s t he t i me necessar y t o del i ver an or der or per f or m a ser vi ce.
The f unct i onal ar eas ar e i nt er dependent w i t h P/ O as t he cor e f unct i ons

RESOURCES

Money
Manpower
CUSTOMERS

Needs
Want s
PRODUCTS

Goods
Ser vices
P/ O
Finance
Account ing
Maint enance
Mar ket ing
Per sonnel
Pur chasing
I ndust r ial
Engineer ing
MI S

THE P/ O M ANAGER AND THE M ANAGEM ENT PROCESS

The P/ O manager i s t he k ey f i gur e i n t he P/ O syst em: he or she has t he ul t i mat e r esponsi bi l i t y f or t he cr eat i on
of goods or t he pr ovi si on of ser vi ces. The P/ O manager s j ob i s essent i al l y M ANAGERI AL PROCESS: He or she must
coor di nat e t he use of r esour ces t hr ough t h e management pr ocess of pl ann i ng, or gani zi ng, di r ect i ng, st af f i ng, and
cont r ol l i ng. Ex ampl es of t he r esponsi bi l i t i es of a P/ O manager :
PLANNING
Capacity
Location
Products and services
Make or buy
Layout
Projects
Scheduling

DIRECTING
Incentive plans
Issuance of work orders
Job assignments

ORGANIZING
Degree of centralization
Subcontracting
STAFFING
Hiring/laying off
Use of temporary employee and/or overtime
work

CONTROLLING
Inventory control
Quality control

THE P/O MANAGER AND DECISION MAKING

The chi ef r ol e of a P/ O manager i s t hat of pl anner and deci si on mak er . The gener al appr oaches to deci si on mak i ng
i ncl udes t he use of quant i t at i ve met hods, anal ysi s of t r ade- of f s, and t he syst ems appr oach.

The Use of M odel s
M odel i s an abst r act i on of r eal i t y; t hat i s, a model pr esent s a
si mpl i f i ed ver si on of somet hi ng. ( e.g., chi l d s t oy car , w i nd
t unnel s, f or mul as, gr aphs and char t s, bal ance sheet and f i nanci al
st at ement s, and f i nanci al r at i os. Common st at i st i cal model s
i ncl ude descr i pt i ve st at i st i cs such as t he mean, medi an, mode,
r ange, and st andar d devi at i on, as w el l as r andom sampl i ng, t he
nor mal di st r i bu t i on, and r egr essi on equat i on. M odel s ar e
cl assi f i ed as f ol l ow s:
a. Physi cal model l ook s l i k e t hei r r eal - l i f e count er par t s. Ex ampl es i ncl ude mi ni at ur e car s, t r uck s, ai r pl anes, t oy
ani mal s and t r ai ns, and scal e- model s. The advant age of t hese model s i s t hei r vi sual cor r espondence w i t h r eal i t y.

b. Schemat i c model s ar e mor e abst r act t hat t hei r physi cal count er par t s; t hat i s, t hey have l ess r esembl ance t o t he
physi cal r eal i t y. Ex ampl es i ncl ude gr aphs and char t s, bl u epr i nt s, pi ct ur es, and dr aw i ngs. The advant age of
schemat i c model i s t hat t hey ar e of t en r el at i vel y si mpl e t o const r uct and change. M or eover , t hey have some degr ee
of vi sual cor r espondence.

Tips to Understand Models
a. try to learn the purpose;
b. how it is used to generate results;
c. how these results are interpreted and used;
and
d. what assumptions and limitations apply


c. M at hemat i cal model s ar e t he most abst r act ; t hey do not l ook at al l l i k e t hei r r eal - l i f e count er par t s. Ex ampl es
i ncl ude number s, f or mul as, and symbol s. These model s ar e usual l y t he easi est t o mani pu l at e, and t hey ar e
i mpor t ant f or ms of i nput s f or comput er s and cal cul ator s.

Ben ef i t s of u si n g model s Li mi t at i on s of u si n g model s
a. easy t o u se an d l ess ex pen si ve t h an deal i n g w i t h
t h e act u al si t u at i on s;
b. or gan i ze an d somet i mes qu ant i f y i nf or mat i on
an d, i n t h e pr ocess, of t en i n di cat e ar eas w h er e
addi t i on al i n f or mat i on i s n eeded;
c. pr ovi de syst emat i c appr oach t o pr obl em sol vi n g;
d. i n cr ease un der st an di n g of t he pr obl em;
e. en abl e man ager s t o an al yze w h at i f ? qu est i on s;
f . r equ i r e u ser s t o be ver y speci f i c abou t obj ect i ves;
g. ser ve as a con si st ent t ool f or eval u at i on ;
h . en abl e u ser s t o br i n g t h e pow er of mat h emat i cs t o
bear on a pr obl em;
i . pr ovi de a st an dar di zed f or mat f or an al yzi n g a
pr obl em
a. Qu an t i t at i ve i n f or mat i on may be emph asi zed at
t h e ex pen se of qu al i t at i ve i n f or mat i on ;
b. M odel s may be i n cor r ect l y appl i ed an d t h e
r esu l t s mi si nt er pr et ed. Th e w i despr ead u se of
compu t er i zed model s adds t o t hi s r i sk becau se
h i ghl y soph i st i cat ed model s may be pl ace i n t h e
h an ds of u ser s w h o ar e n ot su f f i ci ent l y gr oun ded
i n mat h emat i cs t o appr eci at ed t h e su bt l et i es of a
par t i cul ar model ; t h u s, t h ey ar e u n abl e t o f ul l y
compr eh en d t h e ci r cu mst an ces u n der w h i ch t h e
model can be su ccessf u l l y empl oyed

Q uanti tati ve Appr oaches
Quant i t at i ve appr oaches t o pr obl em sol vi ng of t en em body an at t empt
t o obt ai n mat hemat i cal l y opt i mum sol ut i ons t o manager i al pr obl ems.
a. Li near Pr ogr ammi ng and r el at ed mat hemat i cal t echni ques ar e
w i del y used f or opt i mum al l ocat i on of scar ce r esour ces.
b. Queui ng Techni ques, w hi ch or i gi nat ed ar ound 1920 i n t h e
t el ephone i ndust r y but r emai ned dor mant un t i l t h e 195 0s and
1960d, ar e usef ul f or anal yzi ng si t uat i ons i n w hi ch w ai t i ng l i nes
f or ms.
c. I nvent or y M odel , al so popul ar af t er some ear l y w or k , w ent
t hr ough l ong per i od of l ow i nt er est but ar e now w i del y used t o
cont r ol i nvent or i es.
d. Pr oj ect M odel s such as PERT ( pr ogr am eval uat i on and r evi ew
t echni que) and CPM ( cr i t i cal pat h met hod) ar e usef ul f or
pl anni ng, coor di nat i ng, and cont r ol l i ng l ar ge- scal e pr oj ect s.
e. For ecast i ng Techni ques ar e w i del y used i n pl anni ng and
schedul i ng.
f . St at i st i cal M odel s ar e cur r ent l y used i n many ar eas of deci si on
mak i ng.

Anal ysi s of Tr ade- O f f s
Oper at i ons manager s encount er deci si ons t hat can be descr i bed as t r ade- of f deci si ons. For ex ampl e, i n deci di ng on t he
amount of i nvent or y st ock , t he man ager must t ak e i nt o account t he t r ade- of f bet w een i ncr eased l evel of cust omer
ser vi ce t hat t he addi t i onal i nvent or y w oul d yi el d and t he i ncr eased cost r equi r ed t o st ock t hat i nvent or y. Si mi l ar l y, i n
sel ect i ng a pi ece of equ i pmen t , a manager must eval uat e t he mer i t s of ex t r a f eat u r es r el at i ve t o t he cost of t hose ex t r a
f eat ur es.


An al ysi s of t r ade- of f s P/ O man ager s of ten en cou nter deci si on s th at can be descr i bed as tr ade- of f
deci si on s. Ex ampl es:

Amount of inventory to stock

Equipment selection

Scheduling of overtime

A System Appr oach
A syst em can be def i ned as a set of i nt er r el at ed par t s t hat must w or k t oget her . I n a busi ness or gani zat i on, t he
or gani zat i on i s vi ew ed as a syst em composed of subsyst ems ( e.g. mar k et i ng subsyst em) , w hi ch i n t ur n ar e composed of
l ow er subsyst ems. The syst em appr oach emphasi zes i nt er r el at i onsh i ps among subsyst ems, but i t s mai n t hem e i s t hat t he
w hol e i s gr eat er t han t he sum of i t s i ndi vi dual par t s ( syner gy) . Hence, f r om a syst em vi ew poi nt , t he out put and
obj ect i ves of t he or gani zat i on as a w hol e t ak e pr ecedence over t hose of any one subsyst em and shoul d be opt i mi zed
even i f t hi s r equi r es a l ess- t han- opt i mum r esul t s i n one or mor e subsyst em.
Establ i shi ng Pr i or i t i es
Recogni t i on of pr i or i t i es i n pr obl em sol vi ng means sol vi ng mor e i mpor t ant pr obl ems f i r st . I t i s ax i omat i c t hat a
r el at i vel y f ew f act or s of t en account f or t he maj or shar e of a pr obl em so t hat deal i ng w i t h t hose f act or s w i l l gener al l y
have a di spr opor t i onat el y l ar ge i mpact on t he r esu l t s achi eved. Thi s i s r ef er r ed t o as t he par et o phenomenon, w hi ch
means t hat al l t hi ngs ar e not equal ; some t hi ngs ( a f ew ) w i l l be ver y i mpor t ant f or achi evi ng an obj ect i ve or sol vi ng a
pr obl em, and ot her t h i ngs ( many) w i l l not . The i mpl i cat i on i s t hat a manager shoul d ex ami ne t he si t uat i on, sear chi ng
f or t he f ew f act or s t hat w i l l cont r i but e t he most t o i mpr ovement , and concent r at e i n t hose; l i t t l e or not h i ng w i l l be
gai ned by f ocusi ng ef f or t s on ot her , l ess i mpor t ant f actor s.

Incr eased cust omer ser vi ce Incr eased cost s t o st ock i nvent or y
M er i t s of ext r a f eat ur es Cost of ext r a f eat ur es
Incr eased out put Hi gher cost s of over t i me
e.g., higher l abor cost s, l ow er pr oduct i vi t y, l ow er
qual i t y, gr eat er r i sk of acci dent s

Eth i cs P/ O man ager s h ave t h e r espon si bi l i t y t o mak e et h i cal deci si on s. Et hi cal i ssu es i n cl u de:

1 . W or ker saf ety
+ Pr ovi di n g adequ at e t r ai ni n g, mai n t ai n i n g equ i pmen t i n good w or k i n g con di t i on , mai nt ai ni n g a
saf e w or k i n g en vi r on ment
2 . H i r i n g an d fi r i n g w or ker s
+ Don t h i r e u n der f al se pr et en ses; e.g., pr omi si n g a l on g- t er m j ob w h en t h at i s n ot w h at i s i n t en ded
3 . W or ker s r i gh ts
+ Respect i n g w or k er s r i gh t s, deal i n g w i t h w or k er pr obl ems qui ck l y an d f ai r l y
4 . Pr odu ct saf ety
+ Pr ovi di n g pr odu ct s t h at mi ni mi ze t h e r i sk of i n j ur y t o u ser s or damage t o pr oper t y or t h e
en vi r on men t
5 . Q u al i ty
+ Hon or i n g w ar r an t i es, avoi di n g h i dden def ect s
6 . Th e en vi r on ment
+ Obeyi n g gover n men t r egul at i on s
7 . Th e commu n i ty
+ Bei n g a good n ei ghbor an d cor por at e ci t i zen
8 . Cl osi n g f aci l i ti es
+ Tak i n g i n t o accou n t t h e i mpact on a commu n i t y, an d h on or i n g commi t men t s t h at h ave been made

The i ndi vi dual most di r ect l y r esponsi bl e f or mak i ng an or gani zat i on s r esour ce pr oduct i ve, by sk i l l f ul l y gui di ng t he
oper at i on of pr oduct i ve syst ems, ar e manager s. Thr ee pr omi nent t heor i es devel oped t o ex pl ai n t he r ol e of manager s ar e:

a. Funct i onal i s t h e t r adi t i onal ( cl assi cal ) appr oach t hat hol ds t hat manager s pl an, or gani ze, di r ect , and cont r ol t h e
act i vi t i es of an or gani zat i on.
b. Behavi or al i s human r el at i ons appr oach t hat emphasi zes i nt er per sonal r el at i onshi ps and or gani zati onal behavi or .
Under i t , manager s w or k t hr ough ot her peopl e t o l ead t he act i vi t i es of an or gani zat i on.
c. D eci si on- mak i ng ( syst em) i s an appr oach t hat f ocuses upon t he use of dat a and quant i t at i ve t echn i ques f or mak i ng
deci si ons t hat f aci l i t at e syst em goal s. M anager s ar e pr i mar i l y deci si on mak er s w i t hi n an oper at i ng syst em.

M anager s must , of cour se, have a bl end of f unct i onal ( and t echni cal ) capabi l i t y, behavi or al compet ence t o w or k w i t h
peopl e i ndi vi dual l y and i n gr oups, and anal yt i cal sk i l l s t o assess t he si t uat i ons.

M anagement i s t he pr ocess of devel opi ng deci si ons and t ak i ng act i ons t o di r ect t he act i vi t i es peopl e w i t hi n an
or gani zat i on tow ar d common obj ect i ves.

System Design and Operations Decision in P/OM

D eci si on Ar ea Basi c Quest i on
Pl anni ng and D esi gn D eci si ons D eci si ons per t ai ni ng t o pl anni ng t he syst em
Oper at i ng and Cont r ol D eci si ons D eci si ons per t ai ni ng t o r unni ng t he syst em


D eci si on Ar eas i n Pr oduct i on/ Oper at i ons M anagement

Li st ed bel ow ar e some of t he maj or deci si on ar eas i n pr oduct i on/ oper at i ons management and t he pr i mar y concer n
addr essed i n each:

M aj or D eci si on Ar eas Pr i mar y Concer ns
Qual i t y M anagement

For ecast i ng

Pr oduct or Ser vi ce D esi gn
Pr ocess Sel ect i on and D esi gn

Capaci t y

Faci l i t y Locat i on
Faci l i t y Layout

D esi gn of W or k Syst em

I nvent or y M anagement

Schedul i ng

M ai nt enance

Pr oj ect M anagement
How do w e mak e sur e t hat our pr oduct s meet or ex ceed t he r equi r ement s of
our cust omer s?
How many uni t s of our pr oduct s w i l l be demanded by our cust omer s or how
many cust omer s may avai l of our ser vi ce i n some f ut ur e t i me?
W hat pr oduct s and pr oduct at t r i bu t es w oul d best sat i sf y our cust omer s?
W hat s t he most ef f ect i ve and ef f i ci en t w ay t o cr eat e our pr oduct s or pr ovi de
out ser vi ces?
How l ar ge shoul d our f aci l i t y be; i .e., how many uni t s of t he pr oduct shoul d i t
be abl e t o pr oduce or how many cust omer s shoul d i t be abl e t o accommodat e
at any gi ven t i me?
W her e do w e l ocat e our f aci l i t y: near suppl i er or near cust omer s?
How do w e ar r ange t he var i ous equi pment s, depar t ment s and w or k st at i ons i n
our f aci l i t y?
How do w e mak e a good f i t bet w een our w or k er s, t hei r w or k , and t he w or k
envi r onment t o mai nt ai n t hei r mot i vat i on and pr oduct i vi t y?
W hi ch of t he i nven t or y i t ems shoul d w e pr i or i t i ze an d cl osel y moni t or ? How
much of each w e stock? W hen do w e or der or mak e each i t em and how
much do w e or der ?
W hi ch w or k er , equi pment , or w or k st at i on w i l l per f or m w hi ch t ask , and
w hen or i n w hat sequence?
How do w e mai nt ai n our equi pment and f aci l i t i es i n good w or k i ng
condi t i on?
How do w e f i ni sh t he pr oj ect on t i me, at mi ni mum cost , and accor di ng t o t he
r equi r ement s of t he cl i ent w ho commi ssi oned i t ?

D esi gni ng and O per ati ng Pr oducti on Systems

System D esi gn i nvol ves deci si ons t hat r el at es t o syst em capaci t y, t he geogr aphi c l ocat i on of f aci l i t i es, ar r angement
of depar t ment s and pl acement s of equi pment s w i t hi n physi cal st r uct ur es, pr oduct and ser vi ce pl ann i ng, and
acqui si t i on of equi pment .

System O per ati ons i nvol ves management of per sonnel , i nvent or y pl ann i ng and cont r ol , schedul i ng, pr oj ect
management , and qual i t y assur ance

* Oper at i ons manager s has a vi t al st ak e i n syst em desi gn because syst em desi gn essent i al l y det er mi nes many of t he
par amet er s of syst em oper at i on

D i f f er ent i at i ng Feat ur es of P/ O Syst ems

a. D egr ee of St andar di zat i on
St andar di zed out put means t hat t her e i s a hi gh degr ee of uni f or mi t y i n goods or ser vi ces. St andar di zed goods
i ncl ude r adi os, t el ev i si ons, comput er s, new spaper s, canned f oods, aut omobi l es t i r es, pens, and pen ci l s.
St andar di zed ser vi ces i ncl ude aut omat i c car w ash, t el evi sed new scast s, t aped l ect ur es, and commer ci al ai r l i nes
ser vi ce.

Cust omi zed out put means t hat t he pr oduct or ser vi ce i s desi gned f or a speci f i c case or i ndi v i dual . Cust omi zed
goods ar e eyegl asses, cust om- f i t t ed cl ot hi ng, w i n dow gl ass ( cut t o or der ) , and cust omi zed dr aper i es.
Cust omi zed ser vi ces i ncl ude t ai l or i ng, t ax i r i des, and sur ger y.
b. Type of Oper at i ons
Pr oj ect i s a set of act i vi t i es di r ect ed t ow ar d a uni que goal , usual l y l ar ge scal e, w i t h a l i mi t ed t i me f r ame ( such as
const r uct i on of a hospi t al ) .
Job Shop i s an or gani zat i on t hat r ender s uni t or l ot pr oduct i on or ser vi ce w i t h var yi ng speci f i cat i ons, accor di ng
t o cust omer t he cust omer needs. ( r epai r w or k , heal t h car e, tool and di e shop)
Bat ch Pr ocessi ng i s a syst em used t o pr oduce moder at e vol umes of si mi l ar i t ems. ( f ood pr ocessi ng; bak er i es,
canner i es; Pai nt manuf act ur er s and pr i nt i ng pr ess)
Repet i t i ve Pr oduct i on i s a pr oduct i on syst em t hat r ender s one or a f ew hi ghl y st andar di zed pr oduct s or ser vi ces
( of t en l end t hemsel ves t o aut omat i on or ot her use of speci al i zed equi pment s)
Cont i nuous pr ocessi ng i s empl oyed w hen a hi ghl y uni f or m pr oduct s or ser vi ce i s pr oduce or r ender ed.
Pr ocessi ng of chemi cal s, photogr aphs f i l ms, new spr i nt , and oi l pr oduct s ar e al l ex ampl es of t hi s t ype of
oper at i ons.
c. M anuf act ur i ng ver sus Ser vi ce Oper at i ons
M anuf act ur i ng i mpl i es pr oduct i on of a t angi bl e ou t pu t , such as aut omobi l e, a cl ock r adi o, a gol f bal l , and a
r ef r i ger at or anyt hi ng t hat w e can see or t ouch. Ser vi ce, on t he ot her hand, gener al l y i mpl i es an act . Such as
gover nment , w hol esal e/ r et ai l , heal t h car e, per sonal ser vi ces, busi ness ser vi ces, and educat i on.
M anuf act ur i ng and ser vi ce or gani zat i ons di f f er ch i ef l y because manuf act ur i ng i s pr oduct - or i ent ed and ser vi ce
i s act - or i ent ed. The di f f er ence i nvol ves t he f ol l ow i ng:
1. Cust omer cont act
2. Uni f or mi t y of i nput
3. Labor cont ent of j obs
4. Uni f or mi t y of out put
5. M easur ement of pr oduct i vi t y
6. Qual i t y assur ance

D i f f er ences bet w een manuf act ur i ng and ser vi ce
Char acter i st i cs M anuf actur i ng Ser vi ce

Out put
Cust omer cont act
Uni f or mi t y of i nput
Labor cont ent
Uni f or mi t y of out put
M easur ement of pr oduct i vi t y
Oppor t uni t y t o cor r ect qual i t y pr obl ems bef or e
del i ver y t o customer

Tangi bl e
Low
Hi gh
Low
Hi gh
Easy

Hi gh

I nt angi bl e
Hi gh
Low
Hi gh
Low
D i f f i cul t

Low


Some examples of partial productivity measures

Labor Pr oduct i vi t y
Uni t s of out put per l abor hour
Uni t s of out put per shift
Val ued-added per l abor hour
Peso val ue of out put per labor hour
Machi ne Pr oduct i vi t y
Uni t s of out put per machi ne hour
Peso val ue of out put per machi ne hour
Capi t al Pr oduct ivi t y
Uni t s of out put per peso i nput
Peso val ue of out put per peso i nput
Ener gy Pr oducti vi t y
Uni t s of out put per ki l owat t -hour
Peso val ue of out put per ki l owat t -hour
Productivity Measure
Pr oductivity =
Output
(1)
Input

FACTORS THAT AFFECTS PRODUCTIVITY
1. Methods
2. Capital
3. Quality
4. Technology
5. Management
Module on Productivity
Productivity Measures
Product Yield
B. PRO D U CTI V I TY, CO M PETI TI V EN ESS, and STRATEGY

PRODUCTIVITY
Pr oduct i vi t y r el at es to how ef f ect i ve an or gan i zat i on i s i n t h e u se of i t s
r esou r ce
Pr oduct i vi t y i s an i n dex t h at measu r es ou t pu t ( goods an d ser vi ce) r el at i ve t o t h e i n pu t ( l abor , mat er i al s, en er gy, an d ot h er
r esou r ces) u sed t o pr odu ce t h em. I t i s u su al l y ex pr essed as th e r at i o of ou t pu t
t o i n pu t :
Pr odu ct i vi t y measur es can be based on si n gl e i n pu t ( par t i al pr odu ct i vi t y) , on
mor e t h an on e i n pu t ( mu l t i f act or pr odu ct i vi t y, on al l i n pu t s ( t otal
pr oduct i vi t y) . Some ex ampl es of di f f er en t types of measu r es of pr odu ct i vi t y
as sh ow n bel ow :
Par t i al
M easu r es
Ou t pu t Ou t pu t Ou t pu t Ou t pu t
Labor M ach i n e Capi t al En er gy

M u l t i f act or
M easu r es
Ou t pu t Ou t pu t
Labor +
M ach i n es
Labor + Capi t al + En er gy

Tot al
M easu r es
Good or ser vi ces pr odu ced
Al l i n pu t s u sed t o pr oduced t h em

D et er mi n e t h e pr odu ct i vi t y of t h ese cases:
a. Fou r w or k er s i n st al l ed 7 2 0 squar e yar ds of car pet i n g i n ei gh t h our s.
b. A mach i n e pr odu ced 6 8 u sabl e pi eces i n tw o h our s.

Cal cu l at i on s of mu l t i f actor pr oduct i vi t y measu r es i n pu t s and ou t pu t s u si n g a
common u n i t of measur emen t , su ch as cost or val u e. For i n st an ce, t h e measu r e
mi gh t u se cost of i n pu t s an d pr i ce of t h e ou t pu t s or u n i t s of ou t pu t and t i me of
ou t pu t :

Qu an t i t y of pr odu ct i on at st an dar d pr i ce
or
Qu an t i t y of pr odu ct i on
Labor cost + M at er i al cost + Over h ead Labor t i me + M ach i n e t i me

D et er mi n e t h e mu l t i f act or pr odu ct i vi t y f or t h e combi n ed i n pu t of l abor an d mach i n e t i me u si n g t h e f ol l ow i n g data: Out pu t 1 6 ,00 0
u n i t s I n pu t : Labor 6 5 h our s an d M ach i n e 1 5 hou r s.
M u l t i f act or
Pr oduct i vi t y
=
Ou t pu t
=
1 6 ,0 0 0 u
=
2 0 0
u n i t / h r
= = = = = = =
Labor + M ach i n e 6 5 h r + 1 5 hr

Solutions:
Pr oductivity =
Yar ds of car pet installed
=
720 squar e y ar ds
Labor hour s wor ked 4 wor ker s x 8 hour s/ wor ker s
=
720 y ar ds
=
22.5 yards/ hour
= = = = = = = = = = 32 hour s

Pr oductivity =
Usable pieces
=
68 pieces
=
34 pieces/ hour
= = = = = = = = = = Pr oduction time 2 hour s


Negat i ve I mpact s on Pr oduct i vi t y ( Theor i st s and r esear ches)
1. A l ow er pr opensi t y t o save and a hi gher pr opensi t y t o consume, w hi ch sl ow s capi t al f or mat i on and at t r act s f or ei gn
goods.
2. I ncr easi ng gover nment r egul at i ons add to t he admi ni st r at i ve ( and nonpr oduct i ve) bur den of many compani es.
3. Ther e i s i ncr easi ng demand f or ser vi ces, w hi ch ar e of t en l ess pr oduct i ve t han manuf act ur i ng oper at i ons. ( e.g.,
Busi ness Pr ocess Out sour ci ng Fi r ms)
4. An emphasi s on shor t - r un per f or mance ( e.g., annual pr of i t s and sal es) r educes t he i ncent i ves t o devel op l ong- t er m
sol ut i ons t o pr obl ems. I n addi t i on, i n per i ods of i nf l at i on and i ncr eased cost s of bor r ow ed money, manager s ar e
hesi t ant t o commi t f unds f or l ong per i ods of t i me because i t r educes t hei r f l ex i bi l i t y t o t ak e advant age of ot her
oppor t uni t i es t hat mi ght ar i se i n t he meant i me.

IMPROVING PRODUCTIVITY
A company or a depar t ment can t ak e a number of k ey st eps t ow ar d i mpr ovi ng pr oduct i vi t y
1. D evel op pr oduct i vi t y measur e f or al l oper at i ons: measur ement i s t h e f i r st st eps i n managi ng and
cont r ol l i ng an oper at i on.
2. The capaci t y of t he bot t l eneck oper at i ons i s l ess t han t he combi ned capaci t i es of t he oper at i ons
t hat pr ovi de i nput s, so uni t s queue u p w ai t i ng t o be pr ocessed. I mpr ovement i n t he bot t l eneck
oper at i ons w i l l l ead t o i ncr eased pr oduct i vi t y up t o t he poi nt w her e t he out pu t r at e of t he bot t l eneck equal s t he
out put of t he oper at i ons f eedi ng i t .
3. D evel op met hods f or achi evi ng pr oduct i vi t y i mpr ovement s, such as sol i ci t i ng i deas f r om w or k er s ( per haps
or gani zi ng t eams of w or k er s, engi neer s, and manager s) , st udyi ng how ot her f i r ms have i ncr eased pr oduct i v i t y, and
r eex ami ni ng t he w ay w or k i s done.
4. Est abl i sh r easonabl e goal s f or i mpr ovement
5. M ak e i t cl ear t hat management suppor t s and encour ages pr oduct i vi t y i mpr ovement . Consi der i ncent i ves t o r ew ar d
w or k er s f or cont r i but i ons.
6. M easur e i mpr ovement s and publ i ci ze t hem.
7. D on t conf use pr oduct i vi t y w i t h ef f i ci ency. Ef f i ci ency i s a nar r ow er concept t hat per t ai ns t o get t i ng t he most out of
a gi ven set of r esour ces; pr oduct i vi t y i s a br oader concept t hat per t ai ns t o ef f ect i ve use of over al l r esour ces. For
ex ampl e, an ef f i ci ency per spect i ve on mow i ng a l aw n gi ven a hand mow er w oul d f ocus on t he best w ay t o use t he
hand mow er ; a pr oduct i vi t y per spect i ve w oul d i ncl ude t he possi bi l i t y of usi ng a pow er mow er .

PRODUCTIVITY AND QUALITY
Qual i t y i mpact on pr oduct i vi t y: f ew er def ect s
i ncr ease out put and qual i t y i mpr ovement
r educes i nput .
M EASU RI NG PRO D U CT YI ELD AND
PRO D U CTI V I TY
Pr oduct yi el d i s a measur e of out put used as
an i ndi cat or of pr oduct i vi t y.
1. I t can be comput ed f or t he ent i r e
pr oduct i on pr ocess ( or f or one stage
i n t he pr ocess) .
2. M ay i ncl ude i n pr oduct
manuf act ur i ng cost
3. Pr oduct qual i t y w oul d be moni t or ed
t hr oughout t he pr oduct i on pr ocess at
var i ous stages.

PRODUCT YIELD AND PRODUCTIVITY
Yield =
(total input ) (% good units) +
(total input ) (1 - % good units)
(% r ewor ked)
Equation 1.1

Pr oduct cost =
(dir ect manuf actur ing cost per unit)
(input) + (r ewor k cost per unit)
(r ewor ked units)
Equation 1.2
y ield

Y =
input (good quality , wor k- in-
pr ocess product at stage i)
Equation 1.3

Y =
(I) (%g1 ) (%g2 ) (%g3 ) (%gn)
Equation 1.3a


THE QUALITY-PRODUCTIVITY RATIO (QPR)
QPR =
good- quality units
100
(input) (pr ocessing cost) +
(def ective units) (r ewor k cost)

TH E Q U ALI TY- PRO D U CTI V I TY RATI O ( Q PR)
Thi s measur e t he ef f ect of qual i t y on pr oduct i vi t y combi nes t he concept of qual i t y i ndex number and pr oduct yi el d. I t i s
a qual i t y i ndex number t hat i ncl udes pr oduct i vi t y and qual i t y cost s. QPR i ncr ease i f ei t her pr ocessi ng cost or r ew or k
cost s or bot h decr eases. I t i ncr eases i f mor e good- qual i t y uni t s ar e pr oduced r el at i ve t o t ot al pr oduct i nput .

Sampl e Pr obl ems
1. The NBJ mot or company st ar t s pr oduct i on f or a par t i cul ar t ype of mot or w i t h a st eel mot or housi ng. The
pr oduct i on pr ocess begi ns w i t h 100 mot or s each day. The per cent age of mot or s pr oduced each day aver age
80% and t he per cent age of poor - qual i t y mot or s t hat can be r ew or k ed i s 50%. The company w ant s t o k now t he
dai l y pr oduct yi el d and t he ef f ect on pr oduct i vi t y i f t he dai l y per cent age of good- qual i t y mot or s i s i ncr ease t o
90%. ( 90 mot or s, 95 mot or s, a 10 per cent age- poi nt i ncr ease r esul t s i n a 5.5% i ncr ease i n pr oduct i vi t y out put .)

2. The NBJ mot or company has di r ect manuf act ur i ng cost per uni t of $30, and mot or s t hat ar e of i nf er i or qual i t y
can be r ew or k ed f or $12 per uni t . Fr om ex ampl e i t em # 1. 100 mot or s ar e pr oduced dai l y, 80 % ( on aver age)
ar e good qual i t y and 20% ar e def ect i ve. Of t he def ect i ve mot or s, hal f can be r ew or k ed t o yi el d good- qual i t y
pr oduct s. Thr ough i t s qual i t y- management pr ogr am, t he company has di scover ed a pr obl em i n i t pr oduct i on
pr ocess t hat , w hen cor r ect ed ( at a mi ni mum cost ), w i l l i ncr ease t he good- qual i t y pr oduct s t o 90%. The
company w ant s t o assess t he i mpact on t he di r ect cost per uni t of i mpr ovement i n pr oduct qual i t y. ( $34.67 per
mot or , $32.21 per mot or , The i mpr ovement i n t he pr oduct i on pr ocess as a r esul t of t he qual i t y- management
pr ogr am w i l l r esul t i n a decr ease of $2.46 per un i t , or 7.1%, i n di r ect manuf act ur i ng cost per u ni t as w el l as a
5.5% i ncr ease i n pr oduct yi el d w i t h a mi ni mal i nvest ment i n l abor , pl ant , or equi pment)

3. At t he NBJ mot or company, mot or s ar e pr oduced i n f our - pr ocess. M otor s ar e i nspect ed f ol l ow i ng each stage,
w i t h per cent age yi el d ( on aver age) of good- qual i t y, w or k - i n- pr ocess uni t s as f ol l ow s.
St age
Aver age Per cent age
Good- Qual i t y
1
2
3
4
0.93
0.95
0.97
0.92

The company w ant s t o k now t he dai l y pr oduct yi el d f or pr oduct i npu t of 1 00 u ni t s per day. Fur t her mor e, i t
w oul d l i k e t o k now how many i nput un i t s i t w oul d h ave t o star t w i t h each day t o r esul t i n a f i nal dai l y yi el d of
100 good- qual i t y uni t .( 78.8 mot or s, t o achi eve out put of 100 good- qual i t y mot or s, t he pr oduct i on pr ocess
must st ar t w i t h appr ox i mat el y 127 motor .)

4. The NBJ motor company pr oduces smal l mot or s at a pr ocessi ng cost of $30 per uni t . D ef ect i ve mot or s can be
r ew or k ed at a cost of $12 each. The company pr oduces 100 mot or s per day and aver age 80% good- qual i t y
mot or s, r esul t i ng i n 20% def ect s, 50% of w hi ch can be r ew or k ed pr i or t o shi ppi ng t o cust omer s. The company
w ant s to ex ami ne t he ef f ect s of ( 1) i ncr easi ng t he pr oduct i on r at e t o 200 mot or s per day; ( 2) r educi ng t he
pr ocess cost t o $26 and r ew or k cost t o $10; ( 3) i ncr easi ng, t hr ough qual i t y i mpr ovement , t he pr oduct yi el d of
good- qual i t y pr oduct s t o 95%; and ( 4) t he combi nat i on of 2 and 3. ( 2.89; 1. I ncr ease i nput t o pr oduct i on
capaci t y of 200 uni t s has no ef f ect ; 2. Reduce pr ocessi ng cost t o $26 and r ew or k cost to $10, i ncr ease by 3.33;
3. I ncr ease i ni t i al good- qual i t y uni t s t o 95%, i ncr ease by 3.22; 4. D ecr ease cost s and i ncr ease i ni t i al good-
qual i t y uni t s, i ncr ease by 3.71)


Name: D at e:
Cou r se & Year : Sch edu l e:

Pr obl em Set s on Pr odu ct i vi t y an d Qual i t y
1 . A r i ce mi l l i n g company has pr ovi ded t h e f ol l ow i n g dat a. Compar e t h e l abor , r aw mat er i al s an d su ppl i es, an d tot al pr odu ct i vi t y
of 2 0 0 9 an d 2 0 1 0 .
2 0 0 9 2 0 1 0
Ou t pu t :
I n pu t :
Sal es val u e of pr odu ct i on
Labor
Raw mat er i al s an d su ppl i es
Capi t al equ i pmen t depr eci at i on
Ot h er
P 9 9 0 ,0 0 0
4 5 0 ,0 0 0
3 6 0 ,0 0 0
3 1 ,5 0 0
9 9 ,0 0 0
P1 ,5 7 5 ,0 0 0
6 7 5 ,0 0 0
5 6 2 ,5 0 0
5 4 ,0 0 0
2 1 6 ,0 0 0

W h i ch year di d t h e compan y has a good yi el d?

2 . Th e D r agon Fl y Sh oe Company man u f act u r es a n umber of di f f er en t st yl es of at h l et i c sh oes. I t s bi ggest sel l er i s t h e X- Pacer
r u n n i n g sh oe. I n 2 0 0 8 D r agon Fl y i mpl emen t ed a qu al i t y- managemen t pr ogr am. Th e compan y s sh oe pr odu ct i on f or t h e past
t h r ee year s an d man u f act ur i n g cost ar e as f ol l ow s:

On l y on e- quar t er of t h e def ect i ve
sh oes can be r ew or k ed at a cost of
P5 0 a pi ece. Compu t e t h e
man u f act u r i n g cost per good
pr oduct f or each of t h e t h r ee year s
an d i n di cat e t h e an n ual per cen t age
i n cr ease or decr ease r esu l t i n g f r om
t h e qu al i t y- man agemen t pr ogr am.

3 . Th e Or i en t al Her i t age Fur n i t u r e Compan y man u f act u r es f ou r - dr aw er oak f i l l i n g cabi n et s
i n si x st ages. I n t h e f i r st st at e, t h e boar ds f or mi n g t h e w al l of t h e cabi n et ar e cu t ; i n t h e
secon d st age, t h e f r on t dr aw er pan el s ar e w oodw or k ed; i n t h e t h i r d st age, t h e boar ds ar e
san ded an d f i n i sh ed; i n t h e f ou r t h st age, t h e boar ds ar e cl ean ed. St ai n ed, an d pai n t ed w i t h
a cl ear f i n i sh ; i n t h e f i f t h st age, t h e h ar dw ar e f or pu l l s, r u n n er s, an d f i t t i n g i s i n st al l ed;
an d i n t h e f i n al st age, t h e cabi n et s ar e assembl ed. I n spect i on occur s at each st age of t h e
pr ocess, an d t h e aver age per cen t age of good- qu al i t y u n i t s ar e as f ol l ow s.

Th e cabi n et s ar e pr odu ced i n w eek l y pr oduct i on r u n s w i t h a pr oduct i n pu t f or 3 0 0 u n i t s.

a. D et er mi n e t h e w eek l y pr odu ct yi el d of good- qual i t y cabi n et s.

b. W h at w ou l d w eek l y pr odu ct i n pu t h ave t o be i n or der to ach i eve a f i n al w eek l y pr odu ct yi el d of 3 0 0 cabi n et s?

4 . I n pr obl em i t em # 3 , t h e Or i en t al Her i t age Fur n i t u r e Company h as
i n vest i gat ed t h e man u f act u r i n g pr ocess to i den t i f y pot ent i al i mpr ovemen t s
t h at w ou l d i mpr ove t h e qu al i t y. Th e company h as i den t i f i ed f our al t er nat i ves,
each cost i n g to P7 5 0 , 0 0 0 , as f ol l ow s.

a. W h i ch al t er n at i ve w ou l d r esu l t i n t h e gr eat est i n cr ease i n pr oduct yi el d?

b. W h i ch al t er n at i ve w ou l d be t h e most cost ef f ect i ve?

Year
2 0 0 8 2 0 0 9 2 0 1 0
Un i t s pr odu ced/ i n pu t
M an u f act ur i n g cost
Per cen t age good qu al i t y
3 2 ,0 0 0
P1 3 ,9 0 0 ,0 0 0
7 8 %
3 4 ,6 0 0
P1 4 ,5 5 0 ,0 0 0
8 3 %
3 5 ,5 0 0
P1 5 ,2 7 5 ,0 0 0
9 0 %

Al t er n at i ve Qu al i t y I mpr ovemen t
1
2
3
4
St age 1 : 9 3 %
St age 2 : 9 6 %, St age 4 : 9 7 %
St age 5 : 9 7 %, St age 6 : 9 8 %
St age 2 : 9 7 %
St age
Aver age
Per cen t age
Good Qu al i t y
1
2
3
4
5
6
8 7 %
9 1 %
9 4 %
9 3 %
9 3 %
9 6 %


Name: D at e:
Cou r se & Year : Sch edu l e:

Pr oduct i vi t y, Lear ni ng Cur ve and Li near Pr ogr ammi ng
1. A f ur ni t ur e manuf act ur i ng company has pr ovi ded t he f ol l ow i ng dat a. Compar e t he l abor , r aw mat er i al s and
suppl i es, and t ot al pr oduct i vi t y of 2008 and 2009.
2 0 0 8 2 0 0 9
Ou t pu t :
I n pu t :
Sal es val u e of pr odu ct i on
Labor
Raw mat er i al s an d su ppl i es
Capi t al equ i pmen t depr eci at i on
Ot h er
P 9 9 0 ,0 0 0
4 5 0 ,0 0 0
3 6 0 ,0 0 0
3 1 ,5 0 0
9 9 ,0 0 0
P1 ,5 7 5 ,0 0 0
6 7 5 ,0 0 0
5 6 2 ,5 0 0
5 4 ,0 0 0
2 1 6 ,0 0 0

2. The Puck and Paw n Company manuf act ur e ar ni s st i cks and chess set s. Each ar ni s st i ck yi el ds an i ncr ement al
pr of i t of P90, and each chess set , P180. An ar ni s st i ck r equi r es 4 hour s of pr ocessi ng at machi ne cent er A and 2
hour s at machi ne cent er B. A chess set r equi r es 6 hour s at machi ne cent er A, 6 hour s at machi ne center B, and
1 hour at machi ne cent er C. M achi ne cent er A has a max i mum of 130 hour s of avai l abl e capaci t y per day,
machi ne cent er B has 72 hour s, and machi ne cent er C has 10 hour s. I f t he company w i shes t o max i mi ze pr of i t ,
how many ar ni s st i ck s and chess set s shoul d be pr oduced per day?

3. A j ob appl i cant i s bei ng t est ed f or an assembl y l i ne posi t i on. M anagement f eel s t hat st eady st at e t i mes have been
appr ox i mat el y r eached af t er 1,000 per f or mances. Regul ar assembl y- l i ne w or k er s ar e ex pect ed t o per f or m t he
t ask w i t hi n f our mi nut es.
a. I f t he j ob appl i cant per f or med t he f i r st t est oper at i on i n 10 mi nut es and t he second one i s 9 mi nut es,
shoul d t hi s appl i cant be hi r ed?

b. W hat i s t he ex pect ed t i me t hat t he j ob appl i cant w oul d t ak e to f i ni sh t he 10 uni t ?

c. W hat i s t he t otal ex pect ed t i me t hat t he appl i cant w oul d t ak e t o f i ni sh t he 15 uni t s?

d. W hat i s a si gni f i cant l i mi t at i on of t hi s anal ysi s?


CO M PETI TI V EN ESS
Compet i t i veness i s how ef f ect i vel y an or gani zat i on meet s t he needs of consumer s r el at i ve t o ot her t hat of f er si mi l ar
goods or ser vi ces. Busi ness or gani zat i ons compet e w i t h one anot her i n a var i et y of w ays. Key among t hem i s pr i ce,
qual i t y, pr oduct or ser vi ce di f f er ent i at i on, f l ex i bi l i t y, and t i me t o per f or m cer t ai n act i vi t i es.
1. Pr i ce i s t he amount a customer must pay f or t he pr oduct or ser vi ce. I f al l ot her f act or s ar e equal , customer w i l l
choose t he pr oduct or ser vi ce t hat has t he l ow er pr i ce. Or gani zat i on t hat compet e on pr i ce may set t l e f or l ow er
pr of i t mar gi ns, but most f ocus on l ow er pr of i t mar gi n, but most f ocus on l ow er i ng pr oduct i on cost s.
2. Qual i t y r ef er s t o mat er i al s and w or k manshi p as w el l as desi gn. Gener al l y, i t r el at es t o t he buyer s per cept i ons of
how w el l t he pr oduct or ser vi ce w i l l ser ve i t s pur pose.
3. Pr oduct di f f er ent i at i on r ef er s t o any speci al f eat ur es ( e.g., desi gn, cost , qual i t y, ease of use, conveni ent l ocat i on,
w ar r ant y) t hat cause a pr oduct or ser vi ce t o be per cei ved by t he buyer as mor e sui t abl e t han a compet i t or s pr oduct
or ser vi ce.
4. Fl ex i bi l i t y i s t he abi l i t y t o r espond t o change. The bet t er a company or depar t ment i s at r espondi ng t o change, t h e
gr eat er t h i s compet i t i ve advant ages over anot her company t hat i s not as r esponsi ve. The changes mi ght r el at e t o
i ncr ease or decr eases i n vol ume demanded, or to changes i n pr oduct mi x .
5. Ti me r ef er s t o a number of di f f er en t aspect s of an or gani zat i on s oper at i ons. One i s how qui ck l y a pr oduct or
ser vi ce i s del i ver ed t o a cust omer . Anot her i s how qui ck l y new pr oduct or ser vi ces ar e devel oped and br ought t o t he
mar k et . And anot her i s t he r at e at w hi ch i mpr ovement i n pr oduct s or pr ocesses ar e made.

STRATEGY
M i ssi on i s t he r eason f or ex i st ence of an or gani zat i on.
M i ssi on st at ement i s a cl ear st at ement of pur pose t hat ser ves as a gui de f or st r at egy and deci si on mak i ng. I t answ er s t he
quest i on, W hat busi ness ar e w e i n?
St r at egi es and Tact i cs
St r at egy i s a pl an f or achi evi ng or gani zat i onal goal s. St r at egi es pr ovi de f ocus f or deci si on mak i ng. Gener al l y speak i ng,
or gani zat i ons have over al l st r at egi es cal l ed or gani zat i on st r at egi es, w hi ch r el at e t o t he ent i r e or gani zat i on, and t hey
al so have f unct i onal st r at egi es, w hi ch r el at e t o each of t he f unct i onal ar eas of t he or gani zat i on. The f unct i onal
st r at egi es shoul d suppor t t he over al l st r at egi es of t he or gani zat i on, j ust as t he or gani zat i onal st r at egi es shoul d suppor t
t he goal s and mi ssi on of t he or gani zat i on.
Tact i cs i s t he met hods and act i ons t ak en t o accompl i sh st r at egi es. They ar e mor e speci f i c i n nat u r e t han st r at egi es, and
t hey pr ovi de gui dance and di r ect i on f or car r yi ng out act ual oper at i ons, w hi ch need t he most speci f i c and det ai l ed
pl an and deci si on mak i ng i n an or gani zat i on.
Fi gur e 2- 3
Pl anni ng and D eci si on M ak i ng
I s hi er ar chi cal i n or gani zat i ons

GOALS
MISSION
ORGANIZATIONAL
STRATEGY
FUNCTIONAL STRATEGIES
Finance Marketing Operations
Tactics
Production
Operations
Marketing
Operations
Finance
Operations

Oper at i ons St r at egy i s t he appr oach, consi st ent w i t h t he or gani zat i on st r at egy, w hi ch i s used t o gui de t he oper at i ons
f unct i ons. I t i s nar r ow er i n scope, deal i ng pr i mar y w i t h t he oper at i ons aspect of t he or gani zat i on.

M anagement
l evel
Ti me
H or i z on Scope
Level of
detai l Rel ates to
The O ver al l or gani z ati on
M i ssi on
St r at egy
Top
Seni or
Long
Long
Br oad
Br oad
Low
Low
Sur vi val , pr of i t abi l i t y
Gr ow t h r at e, mar k et shar e
Pr oducti on/ O per at i ons
Str ategi c

Tacti cal

O per ati onal
Seni or

M i ddl e

Low
M oder at e
t o l ong

M oder at e

Shor t
Br oad

M oder at e

Nar r ow
Low

M oder at e

Hi gh
Pr oduct desi gn, choi ce of
l ocat i on, choi ce of
t echnol ogy, new f aci l i t i es
Empl oyment l evel s, out put
l evel s, equi pmen t
sel ect i on, f aci l i t y l ayout
Schedul i ng per sonnel ,
adj ust i ng out put r at es,
i nvent or y management ,
pur chasi ng

STRATEGI C M AN AGEM EN T PRO CESS

STRATEGY FO RM U LATI O N
D i st i nct i ve compet enci es ar e t hose speci al at t r i bu t es possessed by an or gani zat i on t hat gi ves i t a compet i t i ve edge. I n
ef f ect , di st i nct i ve compet enci es r el at e t o t he w ay t he or gani zat i ons compet e. As not ed pr evi ousl y, t hese can i ncl ude
pr i ce ( based on some combi nat i on of l ow cost of r esour ces such as l abor and mat er i al s, l ow oper at i ng cost, and l ow
pr oduct i on cost ) ; qual i t y ( h i gh per f or mance or consi st ent qual i t y) ; t i me ( r api d del i ver y or on- t i me del i ver y) ;
f l ex i bi l i t y ( var i et y or vol ume) ; cust omer ser vi ce; and l ocat i on.
St rat egy Formulat ion St rat egy I mplement at ion Evaluat ion
& Cont rol
Ext er nal
I nt er nal
Pol icies
Obj ect ives
St r at egie
Vision -
Mission
Progr ams
Budget s
Procedures
Perf or mance
Act ivit ies
needed t o
accomplish a
plan
What
r esult s t o
accomplish
by when
Plan t o
achieve t he
mission and
obj ect ives
Br oad
guidelines
f or decision
making
Reason f or
exist ence
Cost of t he
pr ogr ams
Sequence of
st eps
needed t o do
t he j ob
Act ual
r esult s
Environment al
Scanning
STRATEGI C MANAGEMENT MODEL
St ruct ure:
Chain of Command

Cult ure:
Belief s, expect at ion, values

Resources:
Asset , Skills, compet encies,
knowledge
Societ al
Environment :
General Forces

Task Environment:
I ndust ry Analysis
Feedback

Envi r onment al scanni ng i s t he consi der i ng of event s and t r ends t hat pr esent ei t her t h r eat s or oppor t uni t i es f or t he
or gani zat i on. Gener al l y t hese i ncl ude compet i t or s acti vi t y; changi ng consumer needs; l egal , economi c, pol i t i cal , and
envi r onment al i ssues; t he pot ent i al mar k et s f or new mar k et s; and t he l i k e.

N EW STRATEGI ES

Tr adi t i onal st r at egi es of busi ness or gani zat i on have tended t o emphasi ze cost mi ni mi zat i on or pr oduct di f f er ent i at i on.
W hi l e not abandoni ng t hose st r at egi es, many or gani zat i ons ar e adopt i ng new st r at egi es t hat ar e based on qual i t y
and/ or t i me.
1. Qual i t y based st r at egi es f ocus on sat i sf yi ng cust omer by i nt egr at i ng qual i t y i nt o al l phases of t he or gani zat i on.
2. Ti me based st r at egi es f ocus on r educi ng t he t i me r equi r ed t o accompl i sh var i ous act i vi t i es ( e.g., devel op new
pr oduct or ser vi ce and mar k et t hem, r espond t o a ch ange i n cust omer demand, or del i ver a pr oduct or per f or m a
ser vi ce) . The r at i onal e i s t hat by r educi ng t i me, cost s ar e gener al l y l ess, pr oduct i vi t y i s hi gher , qual i t y t en ds t o be
hi gher , pr oduct i nnovat i on appear s on t he mar k et sooner , and customer ser vi ce i s i mpr oved.

TI M E- BASED STRATEGI ES

Or gani zat i ons have achi eved t i me r educt i on i n some of t he f ol l ow i ng:
1. Pl anni ng t i me. The t i me needed t o r eact t o a compet i t i ve t hr eat , t o devel op st r at egi es and sel ect t act i cs, t o appr ove
pr oposed change t o f aci l i t i es, t o adapt t o new t echnol ogi es and so on.
2. Pr oduct or ser vi ce desi gn t i me: The t i me needed devel op and mar k et new or r edesi gned pr oduct s or ser vi ces
3. Pr ocessi ng t i me: The t i me needed t o pr oduce goods or pr ovi de ser vi ces. Thi s can i nvol ve schedul i ng, r epai r i ng
equi pment , w ast ed ef f or t s, i nvent or i es, qual i t y, t r ai ni n g and t he l i k e.
4. Changeover t i me: The t i me needed t o change f r om pr oduci ng one t ype of pr oduct or ser vi ce t o anot her . M ay
i nvol ve new equi pment set t i ng and at t achment s, di f f er ent met hods, equi pment , schedul es, or mat er i al s.
5. D el i ver y t i me: The t i me needed t o f i l l or der s.
6. Response t i me f or compl ai nt s: These mi ght be cust omer compl ai nt about qual i t y, t i mi ng of del i ver i es, and i ncor r ect
shi pment s. These m i ght al so be compl ai nt s f r om empl oyees about w or k i ng condi t i ons ( e.g., saf et y, l i gh t i ng, heat or
col d) , equi pment pr obl ems, or qual i t y pr obl ems.

LEAN PRO D U CTI O N

Lean Pr oduct i on i s a new , t i me- based appr oach t o t he pr oduct i on of manuf act ur ed goods. I n t he ear l i est days of
manuf act ur i ng, goods w er e pr oduced usi ng cr af t pr oduct i on: a syst em i n w hi ch hi ghl y- sk i l l ed w or k er s use si mpl e,
f l ex i bl e t ool s t o pr oduce smal l quant i t i es of cust omi zed goods or accor di ng t o cust omer speci f i cat i on

All of these factors are external factors. The key factors are:
1. Economic conditions. These include the general health and
direction of the economy, inflation and deflation, interest
rates, tax laws, and tariffs.
2. Political conditions. These include favorable or unfavorable
attitudes towards business, political stability or instability,
and insurgencies.
3. Legal environment. This include antitrust laws, government
regulations, trade restrictions, minimum wage laws, product
liability law and recent court experience, labor laws, and
patents.
4. Technology. This can include the rate at which product
innovations are occurring, current and future process
technology (equipment, materials handling), and design
technology.
5. Competition. This includes the number and strength of
competitors, the basis of competition (price, quality, special
features), and the ease of market entry.
6. Markets. This includes size, location, brand loyalties, ease of
entry, and potential for growth, long-term stability, and
demographics.
The organization must also take into account various internal factors that relate to
possible strengths and weaknesses. Among the key internal factors are;
1. Human Resources. These includes the skills and abilities of managers and
workers; special talents (creativity, designing, problem solving); loyalty to
the organization; expertise; dedication; and experience.
2. Facilities and equipment. Capacities, location, age, and cost to maintain or
replace can have significant impact on operations.
3. Financial resources. Cash flow, access to additional funding, existing debt
burden, and cost of capital are important considerations.
4. Customers. Loyalty, existing relationship, and understanding of wants and
needs are important.
5. Products and services. These include existing product and services, and the
potential for new products and services
6. Technology. This includes existing technology, the ability to integrate new
technology, and the probable impact of technology on current and future
operations.
7. Suppliers. Supplier relationships, dependability of suppliers, quality,
flexibility, and service are typical considerations.
8. Other. Other factors include patent, labor relations, company or product
image, distribution channels, relationships with distributors, maintenance of
facilities and equipment, access to resources, and access to market.

Module on Learning Curve
Learning Curve
Apply ing Learning Curve
Strateg ic Implication of Learning Curve
Cust omi zed goods w er e r el at i vel y ex pensi ve t o pr oduce and di d not l end t hemsel ves t o hi gh- vol ume pr oduct i on.
Over t i me, t hose met hods w er e r epl aced by mass pr oduct i on: a syst em i n w hi ch l ow er - sk i l l ed or semi - sk i l l ed w or k er s
use speci al i zed machi ner y t o pr oduce hi gh vol ume of st andar di zed goods. Such syst ems ar e i nt ol er ant t o di sr upt i on,
w hi ch gr eat l y i ncr ease t he cost of oper at i on. Consequent l y, buf f er s ar e bui l t i nt o t hese syst ems t o of f set such di sr upt i on.

Lean pr oduct i on syst em ar e so named because t hey use much l ess of cer t ai n r esour ces t han mass pr oduct i on syst em
use l ess space, l ess i nvent or y, and f ew er w or k er st o pr oduce compar abl e amount of out put . Lean pr oduct i on i s a
syst em t hat uses mi ni mal amount of r esour ces t o pr oduce a hi gh vol ume of hi gh- qual i t y goods w i t h some var i et y. Lean
pr oduct i on syst em uses a hi ghl y sk i l l ed w or k f or ce and f l ex i bl e equ i pmen t . I n ef f ect , t hey i ncor por at e advant age of bot h
mass pr oduct i on ( hi gh vol ume, l ow uni t cost ) and cr af t pr oduct i on ( var i et y and f l ex i bi l i t y) . And qual i t y i s hi gher i n
mass pr oduct i on.

Sou r ce: W i l l i am J. St ev en son , Pr odu ct i on / Oper at i on s M an agem en t , 5
t h
edi t i on , I r w i n M cGr aw - Hi l l , Bost on , M assach u set t s, 1 9 9 6 , Ch apt er 2 , pp. 3 8 - 5 9 .

LEARN I N G CU RV E

LEARN I N G CU RV E
Lear ni ng cur ves ar e based on t he pr emi se t hat peopl e and
or gani zat i ons become bet t er at t hei r t ask s as t h e t ask s ar e
r epeat ed. A l ear ni ng cur ve gr aph di spl ays l abor - hour s per uni t
ver sus t he number of u ni t s pr oduced. Fr om i t w e see t hat t he t i m e
needed t o pr oduce a uni t decr eases, usual l y f ol l ow i ng a negat i ve
ex ponent i al cur ve, as t he per son or company pr oduces mor e
uni t s. I n ot her w or ds, i t t ak es l ess t i me t o compl et e each addi t i onal uni t a f i r m pr oduces. How ever , w e al so see t hat t he
t i me savi ng i n compl et i ng each subsequent uni t decr eases. These ar e t he maj or at t r i but es of t he l ear ni ng cur ves.

Lear ni ng cur ves w er e f i r st appl i ed t o i ndust r y i n a r epor t by T. P.
W r i ght of Cur t i s- W r i ght Cor por at i on i n 1 936. W r i ght descr i bed
how di r ect l abor cost of mak i ng a par t i cul ar ai r pl ane decr eased
w i t h l ear ni ng, a t heor y si nce conf i r med by other ai r cr af t
manuf act ur er s. Regar dl ess of t he t i me needed t o pr oduce t he f i r st
pl ane, l ear n i ng cur ves ar e f ound t o appl y var i ous cat egor i es of
ai r f r ames ( e.g., j et f i ght er s ver sus passenger pl anes ver sus
bomber s) . Lear ni ng cur ves have si nce been appl i ed not onl y t o
l abor bur al so t o a w i de var i et y of ot her cost s, i ncl udi ng mat er i al
and pur chased component s. The pow er of t he l ear ni n g cur ve i s so
si gni f i cant t hat i t pl ays a maj or r ol e i n many st r at egi c r el at ed t o
empl oyment l evel s, cost s, capaci t y, and pr i ci ng.
The l ear ni ng cur ve i s based on t he doubl i ng of pr oduct i on. That
i s, w hen pr oduci ng doubl es, t he decr ease i n t i me per uni t af f ect s
t he r at e of l ear ni ng cur ve. So, i f t he l ear ni ng cur ve i s an 80% r at e,
t he second uni t t ak es 80% of t he t i me of t he f i r st uni t , t he f our t h un i t t ak es 80% of t he second uni t , t he ei gh t uni t t ak es
80% of t he f our t h uni t , and so f or t h. Thi s pr i nci pl e i s show n as:

Ti me r equi r ed f or t he nt h uni t = T x L
n
( E- 1)

w her e T =
L =
n
=
uni t cost or uni t t i me of t he f i r st uni t
l ear ni ng cur ve r at e
number of t i mes T i s doubl ed
C
o
s
t

/
t
i
m
e

p
e
r

r
e
p
e
t
i
t
i
o
n

0 Number of repetitions (volume)


If the first unit of a particular product to 10 labor-hours, and if a 70% learning curve is present, the hours the fourth unit
will take require doubling twicefrom 1 to 2 to 4. Therefore, the formula is

Hours required for unit 4 = 10 x (.7)
2
= 4.9 hours

APPLYI NG TH E LEARN I NG CU RV E

Ar i thmet i c Appr oach

The ar i t hmet i c appr oach i s t he si mpl est appr oach of l ear ni ng cur ve pr obl ems. As w e not ed at t he begi n ni ng of t hi s
modul e, each t i me t hat pr oduct i on doubl es, l abor per uni t decl i nes by a const ant f act or , k now n as t he l ear n i ng r at e. So,
i f w e k now t hat t he l ear ni ng r at e i s 80% and t hat t h e f i r st uni t pr oduced t ook 100 hour s, t he hour s r equi r ed t he 2
n d
,
4
t h
, 8
t h
and 16
t h
un i t s ar e as f ol l ow s

N t h U ni t Pr oduced H our s f or N th U ni t
1
2
4
8
16
100.0
80.0 = ( .8 x 100)
64.0 = ( .8 x 80)
51.2 = ( .8 x 64)
41.0 = ( .8 x 51.2)

As l ong as w e w i sh t o f i nd t he hour s r equi r ed t o pr oduce N uni t s and N i s one of t he doubl ed val ues, t hen t hi s appr oach
w or k s. Ar i t hmet i c anal ysi s does not t el l us how many hour s w i l l be needed t o pr oduce ot her uni t s. For t hi s f l ex i bi l i t y,
w e must t ur n t o t he l ogar i t hmi c appr oach.

Logar i t hmi c Appr oach

The l ogar i t hmi c appr oach al l ow s us to det er mi ne l abor f or any uni t , TN , by t he f or mul a:
TN = T1 ( N
b
) ( E- 2)

w her e TN =
T1 =
N =

b
=
t i me f or t he Nt h uni t
hour s t o pr oduce t he f i r st uni t
Nt h uni t
( l og of t he l ear ni ng r at e) / ( l og 2) = sl ope of t he l ear ni ng cur ve

The l ogar i t hmi c appr oach al l ow s us t o det er mi ne t h e hour s r equi r ed f or any uni t pr oduced, bu t t her e i s a si mpl er
met hod

Lear ni ng- Cu r ve Coef f i ci en t Appr oach

The l ear ni ng- cur ve coef f i ci ent t echni que i s embodi ed i n Lear ni ng Cur ve Coef f i ci ent t abl e and t he f ol l ow i ng equat i on:
TN = T1 C ( E- 3)

w her e
TN =
T1 =
C =
number of l abor - hour s r equi r ed t o pr oduce t he Nt h uni t
number of l abor - hour s r equi r ed t o pr oduce t he f i r st uni t
l ear ni ng- cur ve coef f i ci ent , w her e Coef f i ci ent , C = N
( l og of l ear n i n g
r at e/ l og2 )

The l ear ni ng- cur ve coef f i ci en t , C, depends on bot h t h e l ear ni ng r at e ( 70%, 7 5%, 80%, and so on) and t he u ni t n umber
of i nt er est .

STRATEGI C I M PLI CATI O NS O F LEARN I N G CU RV ES
1. Fol l ow i ng an aggr essi ve pr i ci ng pol i cy
2. Focusi ng on cont i nui ng cost r educt i on and pr oduct i vi t y i mpr ovement
3. Bui l di ng on shar ed ex per i ence
4. Keepi ng capaci t y gr ow i ng ahead of demand

LI M I TATI O NS O F LEARN I N G CU RV ES
1. Because l eani ng cur ves di f f er f r om company t o company, as w el l as i ndust r y t o i ndust r y, est i mat es f or each
or gani zat i on shoul d be devel oped r at her t han appl yi ng someone el se s.
2. Lear ni ng cur ves ar e bot h based on t he t i me necessar y t o compl et e t he ear l y un i t s; t her ef or e, t hose t i mes must be
accur at e. As cur r ent i nf or mat i on becomes avai l abl e, r eeval uat i on i s appr opr i at e.
3. Any changes i n per sonnel , desi gn, or pr ocedur e can be ex pect ed t o al t er t he l ear n i ng cur ve, causi ng t he cur ve t o
spi k e up f or a shor t t i me, even i f i t i s goi ng t o dr op i n the l ong r un.
4. W hi l e w or k er s and pr ocess may i mpr ove, t he same l ear ni ng cur ves do not al w ays appl y t o i ndi r ect l abor and
mat er i al .
5. The cul t u r e of t he w or k pl ace, as w el l as r esour ces avai l abi l i t y and changes i n t he pr ocess, may al t er t he l ear ni ng
cur ve. For i nst ance, as a pr oj ect near s i t end, w or k er i n t er est and ef f or t may dr op, cur t ai l i ng pr ogr ess dow n t he
cur ve,

Discussion and Review Questions
1. How might the following business specialist use learning curves: accountants, marketers, financial analysts, people
managers, and computer programmers?
2. As a manager, which learning percentage would you prefer (other things being equal) 110 percent or 60 percent?
Explain.
3. What difference does it make a customer wants a 10,000 unit ordered produced and delivered all at one time or 2,500
unit batches?

Problems-solving Exercises
1. Digitel produces a new telephone system with built-in TV screens. Its learning rate is 80%
a. If the first one took 56 hours, how long will it take Digitel to make the eleventh system?
b. How long will the first 11 system take in total?
c. As a purchasing agent, you expect to buy units 12 through 15 of the new phone system. What would be your
expected cost for the units if Digitel charges P30 for each labor-hour?
2. If the first time you performed a job took 60 minutes, how long will the eight hour job take if you are on an 80%
learning curve?
3. A job applicant is being tested for an assembly line position. Management feels that steady-state times have
approximately reached after 1,000 performances. Regular assembly line workers are expected to perform the task
within four minutes.
a. If the job applicant performed the first test operation in 10 minutes and the second one in 9 minutes, should this
applicant be hired?
b. What is the expected time that the job applicant would finish the tenth unit?

References:
Richard B. Chase, Nicholas J. Aquilano, and F. Robert Jacobs, Production and Operations Management: Manufacturing and Services, 8
th
edition,
Irwin/McGraw-Hill, Boston, 1998
William J. Stevenson, Production/Operations Management, 5
th
edition, IrwinMcGraw-Hill, Boston, Massachusetts, 1996, Chapter 2, pp. 38-59.

Appendix LC-A
Learning Curve Coefficients


Name: Date:
Course & Year: Schedule:

Problem Sets on Learning Curve

1. A job applicant is being tested for an assembly line position. Management feels that steady state
times have been approximately reached after 1,000 performances. Regular assembly-line workers
are expected to perform the task within four minutes.
a. If the job applicant performed the first test operation in 10 minutes and the second one is 9
minutes, should this applicant be hired?
b. What is the expected time that the job applicant would take to finish the 10 unit?
c. What is the total expected time that the applicant would take to finish the 15 units?
d. What is a significant limitation of this analysis?

2. A potentially large customer offered to subcontract assembly work which is profitable only if you
can perform the operations at an average time of less than 20 hours each. The contract is for
1,000 units. You run a test and do the first one in 50 hours and the second one in 40 hours.
a. How long would you expect it take to do the third one?
b. Would you take the contract? Explain

3. An initial pilot run of ten unit produces the following times:
Unit Number Time (minutes) Unit Number Time (minutes)
1
2
3
4
5
39
29
23
19
17
6
7
8
9
10
16
15
13
13
12
a. According to this pilot run, what is your estimate of the learning rate?
b. How much time will it take for the next 90 units?
c. How much time will it take to make the 2,000
th
unit?

N.B: Use another sheet (coupon bond) paper as deem necessary.

Module on RELIABILITY
Introduction
Quantifying Reliability
C. RELI ABI LI TY AN D AV AI LABI LI TY
RELIABILITY
I t i s t he measur e of t he abi l i t y of a pr oduct , par t , or syst em t o per f or m
i t s i nt ended f unct i on under a pr escr i bed set of condi t i ons ( e.g., r epeat
sal e, pr oduct i mage and l egal i mpl i cat i on) .
I n tr oducti on
I mpor tant aspect of r el i abi l i ty
1 . Rel i abi l i ty as a pr obabi l i ty
Pr obabi l i t y i s t he per cent age of chance t hat pr oduct may f ai l as i t w as i nt ended t o f unct i on.
2 . D ef i ni t i on of f ai l ur e
Fai l ur e i s used t o descr i be a si t uat i on i n w hi ch an i t em does not per f or m as i nt ended.
3 . Pr escr i bed oper ati ng condi t i on
Nor mal oper at i ng condi t i ons i s t he set of condi t i ons under w hi ch an i t em s r el i abi l i t y i s speci f i ed. These i ncl ude
l oad, t emper at ur e, and humi di t y r anges as w el l as oper at i ng pr ocedur es and mai nt enance schedul es
Q uanti f yi ng Rel i abi l i ty
Pr obabi l i t y i s used i n t w o w ays:
1. The pr obabi l i t y t hat t he pr oduct or syst em w i l l f unct i on on any gi ven uni t .
2. The pr obabi l i t y t hat t he pr oduct or syst em w i l l f unct i on f or a gi ven l engt h of t i me
I ndependent even t s or component s ar e event s w hose occur r ence or non- occur r ence does not i nf l uence each ot her .

Rule 1: I f t w o or mor e event s ar e i ndependent and success i s def i ned as t he pr obabi l i t y t hat al l of t he event s occur ,
t hen t he pr obabi l i t y of success i s equal t o t he pr oduct of t he pr obabi l i t i es of t he event s.
Example. Suppose a room has two lamps, but to have adequate both lamps must work (success) when turned
on. One lamp has a probability of working of .90, and the other has a probability of working of .80. The
probability that both will work is .90 x .80 = .72.
Lamp 1 Lamp 2

Redundancy i nvol ves t he use of back up component s t o i ncr ease r el i abi l i t y.
Rule 2: I f t w o event s ar e i ndependent and success i s def i ned as t he pr obabi l i t y t hat at l east one of t h e event s w i l l
occur , t he pr obabi l i t y of success i s equal t o t he pr obabi l i t y of ei t her one pl us 1.0 0 mi n us t hat pr obabi l i t y mul t i pl i ed by
t he ot her pr obabi l i t y.
Example. There are two lamps in a room. One has a probability of lightning when turned on of .90 and the
other has a probability of lighting when turned on of .80. Only single lamp is needed to light for success. If
one fails to light when turned on, the other lamp is turned on. Hence, one of the lamps is a backup in case the
.90 .80

other one fails. Either lamp can be treated as the backup; the probability of success will be the same. The
probability of success is .90 + (1 - .90) x .80 = .98. It the .80 light first, the computation would be .80 + (1 - .80)
+ .90 = .98.

Lamp 2 (backup)

Lamp 1

Rule 3: I f t hr ee event s ar e i nvol ved and success i s def i ned as t he pr obabi l i t y t hat at l east one of t hem occur s, t he
pr obabi l i t y of success i s equal t o t he pr obabi l i t y t hat t he f i r st one ( any of t he event s) , pl us t he pr oduct of 1.00 mi n us
t hat pr obabi l i t y and t he pr obabi l i t y of t he second event ( any of t he r emai ni ng event s) , pl us t he pr oduct of 1.00 mi n us
each of t he f i r st t w o pr obabi l i t i es and t he pr obabi l i t y t he t hi r d event , and so on.

Example. Three lamps have probabilities of .90, .80, and .70 of lighting when turned on. Only one lighted lamp
is need for success; hence two of the lamps are considered to be backups.
The probability of success is .90 + (1 - .90) x .80 + (1 - .90) x (1 - .80) x 70 = .994

Lamp 3 (backup)

Lamp 2 (backup)

Lamp 1
D et er mi ne t he r el i abi l i t y of t he syst em show n bel ow .

.90
.80
.98
.90
.95
.90
.92
.70
.80
.90

I mproving Reliability
1. I mprove component design
2. I mprove product ion and/ or
assembly t echniques
3. I mprove t est ing
4. Use redundancy
5. I mprove prevent ive maintenance
procedures
6. I mprove user educat ion
7. I mprove design.

The system can be reduced to a series of three components

The system reliability is then the product of this 0.98 x 0.99 x 0.996 = 0.966
Pr obabi l i t i es ar e det er mi ned r el at i ve t o a speci f i ed l engt h of t i me. Thi s appr oach i s commonl y used i n pr oduct
w ar r ant i es, w hi ch per t ai n t o a gi ven per i od of t i me af ter pur chase of a pr oduct .

M ean of Ti me Betw een Fai l ur es ( M TBF) i s t he aver age l engt h of t i me bet w een f ai l ur es of a pr oduct or component .
P(no failure before T) = e
T/MTBF

where: e = Natural logarithm, 2.7183 ;
T = Length of service before failure; and
MTBF = Mean time between failure

T/MBTF

e
-
T/MBTF

T/MBTF
e
-
T/MBTF

T/MBTF
e
-
T/MBTF

0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
1.80
1.90
2.00
.9048
.8187
.7408
.6703
.6065
.5488
.4966
.4493
.4066
.3679
.3329
.3012
.2725
.2466
.2231
.2019
.1827
.1653
.1496
.1353
2.10
2.20
2.30
2.40
2.50
2.60
2.70
2.80
2.90
3.00
3.10
3.20
3.30
3.40
3.50
3.60
3.70
3.80
3.90
4.00
.1255
.1108
.1003
.0907
.0821
.0743
.0672
.0608
.0550
.0498
.0450
.0408
.0369
.0334
.0302
.0273
.0247
.0224
.0202
.0183
4.10
4.20
4.30
4.40
4.50
4.60
4.70
4.80
4.90
5.00
5.10
5.20
5.30
5.40
5.50
5.60
5.70
5.80
5.90
6.00
.0166
.0150
.0136
.0123
.0111
.0101
.0091
.0082
.0074
.0067
.0061
.0056
.0045
.0041
.0037
.0033
.0030
.0027
.0025
.0022
Values of e
T/MTBF
.90 + .90(1 - .90) .98 .95 + .92(1 - .95)

F
a
i
l
u
r
e

r
a
t
e

F
a
i
l
u
r
e

r
a
t
e

Reliability

e
T/ M TBF


The pr obabi l i t y t hat f ai l ur e w i l l occur bef or e t i me T i s 1.00 mi nus t hat amount ;

P(failure before T) = 1 - e
T/MTBF

M ean Ti me Bet w een Fai l ur e ( M TBF)
The t heor et i cal M TBF of a di sk dr i ve r epr esent s t he st eady st at e f ai l ur e r at e of a l ar ge popul at i on of dr i ves i n vol ume
manuf act ur e. Thi s i s t he ex pect ed t i me af t er t he i ni t i al bur n- i n phase t hat i t w i l l t ak e a har dw ar e component t o f ai l due
t o nor mal w ear and t ear .

Cal cul at i ng Theor et i cal M TBFs
The t heor et i cal M TBF of any har dw ar e conf i gur at i on can be cal cul at ed i f you have t he M TBFs of each component t hat
mak e up your conf i gur at i on. For ex ampl e, you can cal cul at e t he M TBF of your ser ver i f you have t he M TBFs of mai n
CPU boar d, di sk dr i ves, ser ver pack agi ng, et c - a r at her daunt i ng t ask . M ost di scussi ons of ser ver M TBF f ocus on di sk
dr i ve M TBFs f or a sever al r easons. Fi r st of al l , component s w i t h movi ng par t s (such as di sk dr i ve act uat or s and mot or s)
t ypi cal l y have si gni f i cant l y l ow er M TBFs t han non- movi ng component s ( such as memor y chi ps or mai n CPU boar ds) .
Because a ser ver 's t heor et i cal M TBF i s most i nf l uenced by t he M TBF of t he l east r el i abl e component as w el l as t he sheer
number of component s, di sk dr i ve M TBFs typi cal l y domi nat e t he over al l ser ver conf i gur at i on t heor et i cal M TBF.
Theor et i cal M TBF decr eases i n pr opor t i on t o t he number of component s t hat mak e up t he ser ver , so l ar ger
conf i gur at i ons cont ai ni ng many di sk dr i ves by def i ni t i on have a l ow er M TBF. Add t o t hat t he f act t hat di sk dr i ves
cont ai n data t hat may be t i me- consumi ng or i mpossi bl e t o r ecr eat e, i t i s easy t o see w hy di sk dr i ve r el i abi l i t y domi nat es
ser ver r el i abi l i t y di scussi ons.
The f ol l ow i ng ex ampl es i l l ust r at e t he i mpact of di sk dr i ve M TBF on over al l ser ver M TBF.
A ser ver 's t heor et i cal M TBF i s cal cul at ed f r om t he t heor et i cal M TBFs of t he component s t hat mak e up at t he ser ver :

w her e
N = M TBF of each component
x = t he number of component s i n t he conf i gur at i on
I f one component , such as a di sk dr i ve, has a si gni f i cant l y l ow er M TBF t han t he r est of t he popul at i on, i t s M TBF
domi nat es t he over al l ser ver M TBF. For ex ampl e, ex ami ne a ser ver cont ai ni ng one CPU mai n boar d w i t h an M TBF of

1,000,000 hour s, and a si ngl e dr i ve w i t h an M TBF of 300,0 00 hour s ( w e'l l i gnor e t he ot her component s f or si mpl i ci t y's
sak e) . The ser ver 's M TBF i s cal cul at ed as f ol l ow s:

= 230,769 hour s, cl ose t o t he di sk dr i ve's M TBF
Even i f al l your component s have hi gh M TBFs, t he over al l conf i gur at i on's over al l M TBF i s r educed i n di r ect pr opor t i on
t o t he number of component s i n t he conf i gur at i on. For ex ampl e, t he M TBF of a st or age subsyst em consi st i ng of t w o di sk
dr i ves w i t h i dent i cal 300,00 0 hour M TBFs i s:

= 150,000 hour s, ex act l y hal f t he M TBF of each di sk dr i ve
Si mi l ar l y, a 10- dr i ve conf i gur at i on M TBF i s one- t ent h t he M TBF of a si ngl e dr i ve, or 30,000 hour s, and a 100- dr i ve
conf i gur at i on i s r educed t o 3,000 hour s.

http://www.voxtechnologies.com/RAID_Solutions_and_Advanced_CTI_Platform/mtbf.htm

Pr oduct l i f e can somet i mes be model ed by a nor mal di str i bu ti on . The t abl e pr ovi des ar eas under a nor mal cur ve f r om
( essent i al l y) t he l ef t end of t he cur ve to a speci f i ed poi nt z, w her e z i s a st andar di zed val ue comput ed usi ng t he
f or mul a:
1

z =
T M ean w ear - ou t t i me
St an dar d devi at i on of w ear - ou t t i me

AVAILABILITY i s t he f r act i on of t i me a pi ece of equi pmen t i s ex pect ed t o be avai l abl e f or oper at i on.

Avai l abi l i t y =
M ean t i me betw een f ai l u r e ( M TBF)
M ean t i me betw een f ai l u r e ( M TBF) + M ean t i me t o r epai r ( M TR)

A copi er i s ex pect ed t o be abl e t o oper at e f or 2 0 0 h our s bet w een r epai r s, an d t h e mean r epai r t i me i s ex pect ed t o be t w o hou r s.
D et er mi n e t h e avai l abi l i t y of t h e copi er . Gi ven t h at M TBF = 2 0 0 hou r s, an d M TR = 2 h our s

Avai l abi l i t y =
2 0 0 h our s
= .9 9
2 0 0 h our s + 2 hour s

I mpl i cat i ons f or desi gn ar e r eveal ed by t he avai l abi l i t y f or mul a:
1. Avai l abi l i ty i ncr eases as t he mean t i me bet w een f ai l ur es i ncr eases.
2. Avai l abi l i ty i ncr eases as t he mean r epai r t i me decr eases.

1
Refer to the attach standard deviation (z) table.

Name: Date:
Course & Year: Schedule:

Problem Set on Reliability
1. A product design engineer must decide if a redundant component is cost-justified in a certain system. The
system in question has a critical component with a probability of 0.98 of operating. System failure would
involve a cost of P800, 000. For a cost of P4, 000, a switch could be added that would automatically
transfer the system to the backup component in the event of a failure. Should the backup be added if the
backup is also 0.98?

2. Due to extreme cost of interrupting production, a firm has two standby machines available in case of a
particular machine breakdown. The machine in use has a reliability of 0.94, and the backups have reliability
of 0.90 and 0.80. In the event of a failure, either backup can be pressed into service. If one fails, the other
backup can be used. Compute for the reliability.


3. A hospital has three independent fire alarm systems, with reliability of 0.95, 0.97, and 0.99. In the event of
fire, what is the probability that a warning would be given?

4. A weather satellite has an expected life of 10 years from the time it is placed into earth orbit. Determine its
probability of no wear-out before each of the following lengths of service. Assume the exponential
distribution is appropriate: a) 5 years, b) 12 years, c) 20 years, and d) 30 years.


5. What is the probability that the satellite describe in the problem item 4 will fail between 5 years and 12
years after being placed into the earth orbit?

6. One line of radial tires produced by a large company has a wear-out life that can be made using a normal
distribution with a mean of 25,000 miles and a standard deviation of 2,000 miles. Determine each of the
following: a) the percentage of tires that can be expected to wear out within 2,000 miles of the average
(i.e., between 23,000 miles and 27,000 miles), b) the percentage of tires that can be expected to fail
between 26,000 miles and 29,000 miles, and c) for what tire life would you expect 4 percent of the tires to
have worn out? Note: (1) miles are analogous to time and are handled in exactly the same way; (2)
the term percentage refers to a probability.


STANDARD NORMAL PROBABILITY TABLE

The table shows the area to the left of a z-score:

z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
-3.4 .0003 .0003 .0003 .0003 .0003 .0003 .0003 .0003 .0003 .0002
-3.3 .0005 .0005 .0005 .0004 .0004 .0004 .0004 .0004 .0004 .0003
-3.2 .0007 .0007 .0006 .0006 .0006 .0006 .0006 .0005 .0005 .0005
-3.1 .0010 .0009 .0009 .0009 .0008 .0008 .0008 .0008 .0007 .0007
-3.0 .0013 .0013 .0013 .0012 .0012 .0011 .0011 .0011 .0010 .0010
-2.9 .0019 .0018 .0018 .0017 .0016 .0016 .0015 .0015 .0014 .0014
-2.8 .0026 .0025 .0024 .0023 .0023 .0022 .0021 .0021 .0020 .0019
-2.7 .0035 .0034 .0033 .0032 .0031 .0030 .0029 .0028 .0027 .0026
-2.6 .0047 .0045 .0044 .0043 .0041 .0040 .0039 .0038 .0037 .0036
-2.5 .0062 .0060 .0059 .0057 .0055 .0054 .0052 .0051 .0049 .0048
-2.4 .0082 .0080 .0078 .0075 .0073 .0071 .0069 .0068 .0066 .0064
-2.3 .0107 .0104 .0102 .0099 .0096 .0094 .0091 .0089 .0087 .0084
-2.2 .0139 .0136 .0132 .0129 .0125 .0122 .0119 .0116 .0113 .0110
-2.1 .0179 .0174 .0170 .0166 .0162 .0158 .0154 .0150 .0146 .0143
-2.0 .0228 .0222 .0217 .0212 .0207 .0202 .0197 .0192 .0188 .0183
-1.9 .0287 .0281 .0274 .0268 .0262 .0256 .0250 .0244 .0239 .0233
-1.8 .0359 .0351 .0344 .0336 .0329 .0322 .0314 .0307 .0301 .0294
-1.7 .0446 .0436 .0427 .0418 .0409 .0401 .0392 .0384 .0375 .0367
-1.6 .0548 .0537 .0526 .0516 .0505 .0495 .0485 .0475 .0465 .0455
-1.5 .0668 .0655 .0643 .0630 .0618 .0606 .0594 .0582 .0571 .0559
-1.4 .0808 .0793 .0778 .0764 .0749 .0735 .0721 .0708 .0694 .0681
-1.3 .0968 .0951 .0934 .0918 .0901 .0885 .0869 .0853 .0838 .0823
-1.2 .1151 .1131 .1112 .1093 .1075 .1056 .1038 .1020 .1003 .0985
-1.1 .1357 .1335 .1314 .1292 .1271 .1251 .1230 .1210 .1190 .1170
-1.0 .1587 .1562 .1539 .1515 .1492 .1469 .1446 .1423 .1401 .1379
-0.9 .1841 .1814 .1788 .1762 .1736 .1711 .1685 .1660 .1635 .1611
-0.8 .2119 .2090 .2061 .2033 .2005 .1977 .1949 .1922 .1894 .1867
-0.7 .2420 .2389 .2358 .2327 .2296 .2266 .2236 .2206 .2177 .2148
-0.6 .2743 .2709 .2676 .2643 .2611 .2578 .2546 .2514 .2483 .2451
-0.5 .3085 .3050 .3015 .2s981 .2946 .2912 .2877 .2843 .2810 .2776
-0.4 .3446 .3409 .3372 .3336 .3300 .3264 .3228 .3192 .3156 .3121
-0.3 .3821 .3783 .3745 .3707 .3669 .3632 .3594 .3557 .3520 .3483
-0.2 .4207 .4168 .4129 .4090 .4052 .4013 .3974 .3936 .3897 .3859
-0.1 .4602 .4562 .4522 .4483 .4443 .4404 .4364 .4325 .4286 .4247
0.0 .5000 .4960 .4920 .4880 .4840 .4801 .4761 .4721 .4681 .4641

z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
0.0 .5000 .5040 .5080 .5120 .5160 .5199 .5239 .5279 .5319 .5359
0.1 .5398 .5438 .5478 .5517 .5557 .5596 .5636 .5675 .5714 .5753
0.2 .5793 .5832 .5871 .5910 .5948 .5987 .6026 .6064 .6103 .6141
0.3 .6179 .6217 .6255 .6293 .6331 .6368 .6406 .6443 .6480 .6517
0.4 .6554 .6591 .6628 .6664 .6700 .6736 .6772 .6808 .6844 .6879
0.5 .6915 .6950 .6985 .7019 .7054 .7088 .7123 .7157 .7190 .7224
0.6 .7257 .7291 .7324 .7357 .7389 .7422 .7454 .7486 .7517 .7549
0.7 .7580 .7611 .7642 .7673 .7704 .7734 .7764 .7794 .7823 .7852
0.8 .7881 .7910 .7939 .7967 .7995 .8023 .8051 .8078 .8106 .8133
0.9 .8159 .8186 .8212 .8238 .8264 .8289 .8315 .8340 .8365 .8389
1.0 .8413 .8438 .8461 .8485 .8508 .8531 .8554 .8577 .8599 .8621
1.1 .8643 .8665 .8686 .8708 .8729 .8749 .8770 .8790 .8810 .8830
1.2 .8849 .8869 .8888 .8907 .8925 .8944 .8962 .8980 .8997 .9015
1.3 .9032 .9049 .9066 .9082 .9099 .9115 .9131 .9147 .9162 .9177
1.4 .9192 .9207 .9222 .9236 .9251 .9265 .9279 .9292 .9306 .9319
1.5 .9332 .9345 .9357 .9370 .9382 .9394 .9406 .9418 .9429 .9441
1.6 .9452 .9463 .9474 .9484 .9495 .9505 .9515 .9525 .9535 .9545
1.7 .9554 .9564 .9573 .9582 .9591 .9599 .9608 .9616 .9625 .9633
1.8 .9641 .9649 .9656 .9664 .9671 .9678 .9686 .9693 .9699 .9706
1.9 .9713 .9719 .9726 .9732 .9738 .9744 .9750 .9756 .9761 .9767
2.0 .9772 .9778 .9783 .9788 .9793 .9798 .9803 .9808 .9812 .9817
2.1 .9821 .9826 .9830 .9834 .9838 .9842 .9846 .9850 .9854 .9857
2.2 .9861 .9864 .9868 .9871 .9875 .9878 .9881 .9884 .9887 .9890
2.3 .9893 .9896 .9898 .9901 .9904 .9906 .9909 .9911 .9913 .9916
2.4 .9918 .9920 .9922 .9925 .9927 .9929 .9931 .9932 .9934 .9936
2.5 .9938 .9940 .9941 .9943 .9945 .9946 .9948 .9949 .9951 .9952
2.6 .9953 .9955 .9956 .9957 .9959 .9960 .9961 .9962 .9963 .9964
2.7 .9965 .9966 .9967 .9968 .9969 .9970 .9971 .9972 .9973 .9974
2.8 .9974 .9975 .9976 .9977 .9977 .9978 .9979 .9979 .9980 .9981
2.9 .9981 .9982 .9982 .9983 .9984 .9984 .9985 .9985 .9986 .9986
3.0 .9987 .9987 .9987 .9988 .9988 .9989 .9989 .9989 .9990 .9990
3.1 .9990 .9991 .9991 .9991 .9992 .9992 .9992 .9992 .9993 .9993
3.2 .9993 .9993 .9994 .9994 .9994 .9994 .9994 .9995 .9995 .9995
3.3 .9995 .9995 .9995 .9996 .9996 .9996 .9996 .9996 .9996 .9997
3.4 .9997 .9997 .9997 .9997 .9997 .9997 .9997 .9997 .9997 .9998

Thanks to: http://www.stat.psu.edu/~herbison/stat200/stat200_model_demo/supplements/NormalTable.html


M ak e or Buy. A number of f actor s ar e
usual l y consi der ed.
1. Avai l abl e capaci t y.
2. Ex per t i se
3. Qual i t y consi der at i ons
4. The nat ur e of demand
5. Cost

D . PLAN N I N G AND D ESI GN I N G O F PRO D U CTI O N &/ or O PERATI O N S SYSTEM S

Pr ocess Sel ecti on
I t r ef er s t o t he w ay an or gani zat i on chooses t o pr oduce i t s goods or pr ovi de i t s ser vi ces. Essent i al l y i t i nvol ves choi ce
of t echnol ogy and r el at ed i ssues, and i t has i mpl i cat i ons f or capaci t y pl anni ng, l ayout of f aci l i t i es, equi pm ent , and
desi gn of w or k syst em.

Fi gur e 7. Pr ocess sel ect i on and syst em desi gn
Types of Pr ocessi ng
1. Cont i nuous pr ocessi ng syst em pr oduces l ar ge vol ume of one hi ghl y st andar di zed i t em.
Ther e i s l i t t l e or no pr ocessi ng var i et y. Sugar i s pr oduced by a cont i nuous pr ocessi ng syst em.
2. Repet i t i ve/ assembl y oper at i ons can be t hought of as semi - cont i nuous because t hey t end t o
i nvol ve l ong r uns of one or f ew si mi l ar i t ems. The out put of t hese oper at i ons i s f ai r l y st andar d,
i nvol vi ng ver y l i t t l e pr ocessi ng var i et y.
3. Bat ch pr ocessi ng i s somet i mes r ef er r ed t o as an i nt er mi t t en t pr ocessi ng syst em pr ocessi ng
syst em because many j obs ar e per f or med w i t h f r equent sh i f t i ng f r om one j ob t o anot her .
I nt er mi t t ent syst em t ends t o have a hi gh t o moder at e pr ocessi ng var i et y r ange.
4. Job shops ar e al so consi der ed as i nt er mi t t ent pr ocessi ng syst em because smal l quant i t i es ar e
pr oduced.
5. Pr oj ect s ar e speci al casea t ype of pr ocessi ng t hat i s empl oyed t o handl e a non- r out i ne j ob
encompassi ng a compl ex set of act i vi t i es.

M atch the Pr ocess and the Pr oduct

Pr oduct var i ety Hi gh M oder at e Low Ver y l ow
Equ i pmen t
f l ex i bi l i ty
Hi gh M oder at e Low Ver y l ow
Low Vol ume
Job Shop

M oder at e Vol ume
Bat ch

Hi gh Vol ume
Repet i t i ve
assembl y

Ver y Hi gh Vol ume
Cont i nuous f l ow

Tabl e 1. M at chi ng t he pr ocess w i t h pr oduct var i et y, equi pment f l ex i bi l i t y, and vol ume r equi r ement s.

Automati on
I t i s t he subst i t u t i on of machi ner y f or human l abor . M achi ner y i ncl udes sensi ng and cont r ol devi ces t hat enabl e
i t t o oper at e aut omat i cal l y.

Compu ter - Ai ded M anuf actur i ng ( CAM )
I t r ef er s t o t he use of comput er i n pr ocess cont r ol , r angi ng f r om r obot s t o aut omat ed qual i t y cont r ol . Th ese
syst ems r epl ace human f unct i ons w i t h machi ne f unct i ons.
1. Numer i cal l y cont r ol l ed ( N/ C) machi nes ar e pr ogr ammed t o f ol l ow a set of pr ocessi ng i nst r uct i ons based on
mat hemat i cal r el at i onshi ps t hat t el l t he machi ne t he det ai l s of t he oper at i ons t o be per f or med.
2. Comput er i zed numer i cal cont r ol ( CNC) w her e i ndi vi dual machi nes have t hei r ow n comput er .
3. D i r ect numer i cal cont r ol ( D NC) one comput er may cont r ol a number of N/ C machi nes.
4. Robot consi st s of t hr ee par t s: a mechani cal ar m, a pow er suppl y, and a cont r ol l er .
5. Fl ex i bl e manuf act ur i ng syst em ( FM S) i s a gr oup of machi nes t hat i ncl udes super vi sor y comput er cont r ol ,
aut omat i c mat er i al handl i ng, and possi bl y r obot s, or ot her aut omat ed pr ocessi ng equi pment . A gr oup of
machi nes desi gned to handl e i nt er mi t t en t pr ocess r equi r ement s and pr oduce a var i et y of si mi l ar pr oduct s.
6. Comput er - i nt egr at ed manuf act ur i ng ( CI M ) i s a syst em f or l i nk i ng a br oad r ange of manuf act ur i ng
act i vi t i es t hr ough an i nt egr at i ng comput er syst em, i ncl udi ng engi neer i ng desi gn, f l ex i bl e manuf act ur i ng
syst em, and pr oduct i on pl anni ng and cont r ol ( not al l el ement s ar e absol ut el y necessar y) .

O per ati on Str ategy
M anagement of technol ogy i s w her e manager s must w or k w i t h t echni cal ex per t s, ask i ng quest i ons and i ncr easi ng
t hei r under st andi ng of t he benef i t s and l i m i t at i ons of sophi st i cat ed pr ocessi ng equi pment and t echnol ogy, and
ul t i mat el y mak e deci si ons t hemsel ves.

Capaci ty Pl anni ng
The capaci t y of an oper at i ng un i t i s an i mpor t ant pi ece of i nf or mat i on f or pl anni ng pur poses. I t enabl es
manager s t o quant i f y pr oduct i on capabi l i t y i n t er ms of i npu t s or out put , and t her eby mak e ot her deci si ons or pl an
r el at ed t o t hose quant i t i es.
Capaci t y r ef er s to an upper l i mi t or cei l i ng on t he l oad t hat an oper at i ng uni t can handl e.
I mpor tance of Capaci ty D eci si ons
1. r el at es t o t he pot ent i al i mpact on t he abi l i t y of t he or gani zat i on t o meet f ut ur e demand.
2. st ems f r om t he r el at i onshi p bet w een capaci t y and oper at i ng cost .
3. al so l i es i n t he i ni t i al cost i nvol ved, of w hi ch capaci t y i s usual l y a maj or det er mi nant .
4. st ems f r om t he of t en r equi r ed l ong- t er m commi t ment of r esour ces and t he f act t hat , once t hey ar e
i mpl ement ed, i t may be di f f i cul t or i mpossi bl e t o modi f y t hose deci si ons w i t hout i ncur r i ng maj or cost .

D ef i ni ng and M easur i ng Capaci ty
D ef i ni ng capaci t y:
1. D esi gn capaci t y: t he max i mum out put t hat can possi bl y be at t ai ned.
2. Ef f ect i ve capaci t y: t he max i mum possi bl e ou t pu t gi ven a pr oduct mi x , schedul i ng di f f i cul t i es, machi ne
mai nt enance, qual i t y f actor s, ad so on.
3. Act ual out put ; t he r at e of out put act ual l y achi eved. I t cannot ex ceed ef f ect i ve capaci t y and i s of t en l ess t han
ef f ect i ve capaci t y due t o br eak dow ns, def ect i ve out put , shor t ages of mat er i al s, and si mi l ar f act or s.


M easur es of capaci ty
Busi ness I n puts O ut puts

Aut o
manuf act ur i ng
St eel mi l l
Oi l r ef i ner y
Far mi ng
Rest aur ant
Theat er
Ret ai l Sal es

Labor hour s, machi ne hour s
Fur nace si ze
Ref i ner y si ze
Number of acr es, number of
cow s
Number of t abl es, seat i ng
capaci t y
Number of seat s
Squar e f eet of f l oor space

Number of car per shi f t
Tons of st eel per day
Gal l ons of f uel per day
Bushel s of gr ai n per acr e per year , gal l ons of mi l k
per day
Number of meal s ser ved per day
Number of t i ck et s sol d per per f or mance
Revenue gener at ed per day

M easur es of system ef f ecti veness
1. Ef f i ci ency i s t he r at i o of act ual out put t o ef f ect i ve capaci t y.

Ef f i ci ency =
Act ual out put
Ef f ect i ve capaci t y

2. Ut i l i zat i on i s t he r at i o of act ual out put t o desi gn capaci t y.

Ut i l i zat i on =
Act ual out put
D esi gn capaci t y

Ex ampl e Pr obl em
Gi ven t he i nf or mat i on bel ow , comput e f or t he ef f i ci en cy and t he ut i l i zat i on of t he vehi cl e r epai r depar t ment .

D esi gn capaci t y =
Ef f ect i ve capaci t y =
Act ual out put =
50 t r uck s per day

Ef f i ci ency =
Act ual out put

=
36 uni t s per day
= 90 %
Ef f ect i ve capaci t y 40 uni t s per day

Ut i l i zat i on =
Act ual out put

=
36 uni t s per
day
= 72 %
D esi gn capaci t y
50 uni t s per
day

Thus, compar ed w i t h t he ef f ect i ve capaci t y of 40 uni t s per day, 36 per day l ook s pr et t y good. How ever , compar ed w i t h
t he desi gn capaci t y of 50 uni t s per day, 36 uni t s per day i s much l ess i mpr essi ve al t hough pr obabl y mor e meani ngf u l .


D eter mi nants of Ef f ect i ve Capaci ty

1. Faci l i t i es f act or s such as desi gn of f aci l i t i es, i ncl udi ng si ze and pr ovi si on f or ex pansi on, t r anspor t at i on cost , di st ance
t o mar k et , l abor suppl y, ener gy sour ces, r oom f or ex pansi on, l i k ew i se, l ayout of t he w or k i ng ar ea an d
envi r onment al f act or s such as heat i ng, l i ght i ng, and vent i l at i on.
2. Pr oduct / Ser vi ce Fact or s can have a t r emendous i nf l uence on capaci t y. The par t i cul ar mi x of pr oduct s or ser vi ce
r ender ed must al so be consi der ed si nce di f f er ent i t ems w i l l have di f f er ent r at es of out put .
3. Pr ocess f act or s. The quant i t y capabi l i t y of a pr ocess i s an obvi ous det er mi nant of capaci t y. A subt l er det er mi nant i s
t he i nf l uence of out put qual i t y.
4. Human Fact or . The t ask t hat mak e u p a j ob, t he var i et y of act i vi t i es i nvol ved, and t he t r ai ni ng, sk i l l s, and
ex per i ence r equ i r ed t o per f or m a j ob al l have an i mpact on t he pot ent i al and act ual out pu t . Empl oyee mot i vat i on
has a ver y basi c r el at i onshi p t o capaci t y, as do absent eei sm and l abor t ur nover .
5. Oper at i ons Fact or s. Schedul i ng pr obl ems may occur w hen an or gani zat i on has di f f er ences i n equi pmen t
capabi l i t i es among al t er nat i ves pi eces of equi pment or di f f er ences i n j ob r equi r ement s. I nven t or y st ock i ng
deci si ons, l at e del i ver i es, accept abi l i t y of pur chased mat er i al s and par t s, and qual i t y i nspect i on and cont r ol
pr ocedur es al so can have an i mpact on ef f ect i ve capaci t y.
6. Ex t er nal f act or s. Pr oduct st andar ds, especi al l y mi ni mum qual i t y and per f or mance st andar ds can r est r i ct
management s opt i ons f or i ncr easi ng and usi ng capaci t y. Thus, pol l ut i on st andar d on pr oduct s and equ i pment s
of t en r educe- ef f ect i ve capaci t y, as does paper w or k r equi r ed by gover nment r egu l at or y agenci es by engagi ng
empl oyees i n nonpr oduct i ve act i vi t i es.

A. Faci l i t i es
1. D esi gn
2. Locat i on
3. Layout
4. Envi r onment
B. Pr oduct or Ser vi ce
1. D esi gn
2. Pr oduct and Ser vi ce M i x
C. Pr ocess
1. Quant i t y capabi l i t i es
2. Qual i t y capabi l i t i es
D . Human Fact or s
1. Job cont ent
2. Job desi gn
3. Tr ai ni ng and ex per i ence
4. M ot i vat i on
5. Compensat i on
6. Lear ni ng r at es
7. Absent eei sm and l abor t ur nover
E. Oper at i onal
1. Schedul i ng
2. M at er i al s management
3. Qual i t y assur ance
4. M ai nt enance pol i cy
5. Equi pment br eak dow n
F. Ex t er nal Factor s
1. Pr oduct st andar ds
2. Saf et y r egul at i ons
3. Uni ons
4. Pol l ut i on cont r ol st andar ds
Tabl e 2. Fact or s t hat det er mi ne ef f ect i ve capaci t y

D eter mi ni ng Capaci ty Requi r ements
1. Long t er m consi der at i ons r el at e t o over al l l evel of capaci t y, such as f aci l i t y si ze;
2. Shor t - t er m consi der at i ons r el at e t o pr obabl e var i at i ons i n capaci t y r equi r ement cr eat ed by such t hi ng as seasonal ,
r andom, and i r r egul ar f l uct uat i ons i n demand.

D evel opi ng Capaci ty Al ter nati ves
1. D esi gn f l ex i bi l i t y i nt o syst ems.
2. Tak e a bi g pi ct ur e appr oach t o capaci t y changes.
3. Pr epar e t o deal w i t h capaci t y chunk s.
4. At t empt t o smoot h out capaci t y r equi r ement s.
5. I dent i f y t he opt i mal oper at i ng l evel .


Eval uat i ng Al ter nat i ves

1 . Cal cul at i ng Pr ocessi ng Requi r emen t

ex ampl e:
A depar t ment w or k s one 8 - hour shi f t , 250 days a year , and has t hese f i gur es f or usage of a machi ne t h at i s
cur r ent l y bei ng consi der ed:
Pr oduct Ann ual D emand
Standar d pr ocessi ng
t i me per uni t ( hour )
Pr ocessi ng ti me needed
( hour )

# 1
# 2
# 3

400
300
700

5.0
8.0
2.0

2,000
2,400
1,400
- - - - - - - -
5,800

W or k i ng one 8 - hour shi f t , 2 50 hour s a year pr ovi des an ann ual capaci t y of 8 x 2 50 = 2,00 0 hour s per y ear .
W e can see t hat t hr ee of t hese machi nes w oul d be needed t o handl e t he r equi r ed vol ume.
5,800 hour s
= 2.90 machi nes
2,000 hour s/ machi ne

2 . Cost- V ol ume Anal ysi s

Cost - vol ume anal ysi s f ocuses on a r el at i onshi p bet w een cost , r evenue, and vol ume of out put . The pu r pose of cost -
vol ume anal ysi s i s t o est i mat e t he i ncome of an or gani zat i on under di f f er ent oper at i ng condi t i ons. I t i s par t i cul ar l y
usef ul as a t ool f or compar i ng capaci t y al t er nat i ves.
a. Fi x ed cost s t end t o r emai n constant r egar dl ess of vol ume of out put . ( Ex ampl es i ncl ude r ent al cost s, pr oper t y
t ax es, equi pment cost s, heat i ng and cool i ng ex penses, and cer t ai n admi ni st r at i ve cost s) .
b. Var i abl e cost s var y di r ect l y w i t h vol ume of out put . The maj or component s of var i abl e cost s ar e gener al l y
mat er i al s and l abor cost s.
c. Br eak - even poi nt i s t he vol ume of out put at w hi ch t otal cost s and tot al r evenue ar e equal .
d. St ep cost s ar e cost s t hat i ncr ease st epw i se as pot ent i al vol ume i ncr eases.
e. For mul as:
TC = FC + VC x Q ( 2- 1)
TR = R x Q ( 2- 2)
P = TR TC
( 2- 3)
= R x Q ( FC + VC x Q)

Vol ume =
SP + FC
( 2- 5)
R - VC

QBEP =
FC
( 2- 6)
R - VC

FC = Fi x ed cost
V C = Var i abl e cost per uni t
TC = Tot al cost
TR = Total r evenue
R = Revenue
Q = Quant i t y or vol ume of out put
Q BEP = Br eak - even quant i t y
P = Pr of i t
SP = Speci f i ed pr of i t
Tabl e 3. Cost - vol ume symbol
Ex ampl e:
The ow ner of Ol d- Fashi oned Ber r y Pi es, S. Si mon, i s cont empl at i ng addi ng a new l i ne of pi es, w hi ch w i l l be
r equi r e l easi ng new equi pmen t f or a mont hl y payment of $6,000. Var i abl e cost w oul d be $2.00 per pi e, and pi es w oul d
r et ai l f or $7.00 each.
a. How many pi es must be sol d i n or der t o br eak even?
b. W hat w oul d t he pr of i t ( l oss) be i f 1,000 pi es ar e made and sol d i n a mont h?
c. How many pi es must be sol d to r eal i ze a pr of i t of $4,000?

FC = $6,000, VC = $2 per pi e, Rev = $7 per pi e

a. Br eak - even quant i t y
QBEP =
FC
=
$6,000
= 1,200 pi es/ mont h
Rev - VC $7 - $2

b. Quant i t y
For Q = 1,000, P = r ev x Q ( FC + VC X Q)
= $7 x 1,000 ( $6,000 + $2 X 1,000) = - $1,000

c. Br eak - even pr of i t
P = $4,000 sol ve f or Q i n t he pr ecedi ng equat i on:
$4,000 = $7Q ( $6,000 + $20)
Rear r angi ng t er ms, w e obt ai n
$50Q = $10,000 Q = 2,000 pi es
3. Fi nanci al Anal ysi s
a. Cash f l ow r ef er s t o t he di f f er ence bet w een t he cash- r ecei ved f r om sal es ( of goods or ser vi ces) and ot her sour ces
( e.g., sal e of ol d equi pment ) and t he cash out f l ow f or l abor , mat er i al s, over head, and t ax es.
b. Pr esent val ue ex pr esses i n cur r ent val ue t he sum of al l f ut ur e cash f l ow of an i nvest ment pr oposal
c. Payback i s a cr ude but w i del y used met hod t hat f ocuses on t he l engt h of t i me i t w i l l t ak e f or an i nvest ment t o
r et ur n i t s or i gi nal cost .
d. Pr esent val ue ( PV) met hod summar i zes t he i ni t i al cost of an i nvest ment , i t s est i mat ed annual cash f l ow s, and
any ex pect ed sal vage val ue i n a si ngl e val ue cal l ed t he equi val en t cur r en t val ue, t ak i ng i nt o account t he t i me
val e of money ( i .e., i nt er est r at es)

e. I nt er nal r at e of r et ur n ( I RR) summar i zes t he i ni t i al cost s, ex pect ed annual cash f l ow s, and est i mat ed f ut ur e
sal vage val ue of an i nvest ment pr oposal i n an equi val ent i n t er est r at e. I n ot her w or ds, t hi s met hod i dent i f i es t he
r at e of r et ur n t hat equat es t he est i mat ed f ut ur e r et ur n s and t he i ni t i al cost .

4. D eci si on Theor y i s a hel pf ul t ool f or f i nanci al compar i son of al t er nat i ves under condi t i on of r i sk or uncer t ai nt y.

5. W ai t i ng- l i ne anal ysi s. Anal ysi s of w ai t i ng l i nes i s of t en usef u l f or desi gni ng ser vi ce syst ems. W ai t i ng l i nes have a
t endency t o f or m i n a w i de var i et y of ser vi ce syst ems ( e.g., ai r por t t i ck et count er s, t el ephone cal l s t o a cabl e
t el evi si on company, and hospi t al emer gency r ooms) . The l i nes ar e sympt oms of bot t l eneck s oper at i ons. Anal ysi s i s
usef ul i n hel pi ng manager s choose a capaci t y l evel t hat w i l l be cost - ef f ect i ve t hr ough bal anci ng t he cost of havi ng
cust omer w ai t w i t h t he cost of pr ovi di ng addi t i onal capaci t y. I t can ai d i n t he det er mi nat i on of ex pect ed cost s f or
var i ous l evel s of ser vi ce capaci t y.

Pr obl em Sol vi ng on Br eak Even Anal ysi s

1. M ak e or buy. A f i r m s manager must deci de w het h er t o mak e or buy a cer t ai n i t em use i n t he pr odu ct i on of
vendi ng machi nes. Cost and vol ume est i mat es ar e as f ol l ow s:
M ak e Buy
Annual f i x ed cost
Var i abl e cost per uni t
Annual vol ume ( uni t s)
P6,750,0 00
P2,700
12,00 0
None
P 3,600
12,00 0
a. Gi ven t hese dat a, shoul d t he f i r m buy or mak e t hi s i t em?
b. Ther e i s a possi bi l i t y t hat vol ume coul d change i n t he f ut ur e. At w hat vol ume w oul d t he manager be i ndi f f er en t
bet w een mak i ng and buyi ng?

2. A publ i shi ng company f or a t ex t book f ound out t hat thei r mont hl y ex penses ar e P200, 000.00 and P100.00 on
ever y t ex t book . I f each t ex t book i s sol d at P 160.00

a. For mul at e t he cost f unct i on, r evenue f unct i on, and pr of i t f unct i on.
b. Fi nd t he br eak - even vol ume, cost , and pr of i t .
c. Show t he br eak - even gr aph and i nt er pr et .
d. I f t he company pr oduce and sel l 1,000 books, do t hey have a gai n or a l oss? How much?
e. I f t hey coul d sel l 20,000 book s, how much i s t he gai n or l oss?
f . I f t he company f or ecast r evenue of P 3,000,000.0 0 f or t he nex t mont h, how much w i l l be t he pr of i t .

3. An i mpor t ant pr ocess i n t he economi c pr ogr ess of a count r y i s t he r epl acement of human ef f or t w i t h machi nes. I f i t
cost P15 t o move one cubi c yar d of soi l f or bui l di ng a dam by human ef f or t w hi l e P5 t o do t he same j ob w i t h a
machi ne pl us a f i x ed cost of P1,000. a) Fi nd t he cost f unct i on f or human and machi ne ef f or t . b) Sk et ch t he br eak -
even gr aph and i nt er pr et . c) Fi nd t he mi ni mum number of cubi c yar d of soi l r equi r ed f or r epl aci ng human ef f or t
w i t h a machi ne.


D ECI SI O N M AKI NG

A. The D eci si on Pr ocess
a. Cause of Poor D eci si ons
b. D eci si on Envi r onment s
B. D eci si on Theor y
a. D eci si on M ak i ng Under Cer t ai nt y
b. D eci si on M ak i ng Under Uncer t ai nt y
c. D eci si on M ak i ng Under Ri sk
d. D eci si on Tr ees
e. Ex pect ed Val ue of Per f ect I nf or mat i on
f . Sensi t i vi t y Anal ysi s

The D eci si on Pr ocess
M ost successf ul deci si on mak i ng f ol l ow s a pr ocess t hat consi st s of t hese st eps:

1. I den ti f y the pr obl em . The f ocal poi nt of t he pr ocess, unl ess done car ef ul l y, t he r emai ni ng st eps can be mi sdi r ect ed.
I t may be di r ect ed t ow ar ds r emovi ng t he sympt oms of t he pr obl em r at her t han t he act ual pr obl em, al l ow i ng t he
pr obl em t o r esur f ace l at er . Sol ut i ons may addr ess t he basi c pr obl em, not t he sympt oms.
2. Speci f y obj ect i ves and the cr i ter i a f or choosi ng a sol ut i on . The deci si on mak er must i dent i f y t he cr i t er i a by w hi ch
pr oposed sol ut i ons w i l l be j udged. Common cr i t er i a of t en r el at es t o cost s, pr of i t s, r et ur n on i nvest ment , i ncr eased
pr oduct i vi t y, r i sk , common i mage, i mpact on demand, or si mi l ar var i abl es.
3. D evel op al ter nati ves. I n t he sear ch f or al t er nat i ves, t h er e i s al w ays t he danger t hat one or mor e pot ent i al l y super i or
al t er nat i ves w i l l be over l ook ed. Consequent l y, t he opt i mal al t er nat i ve may t ur n out t o be l ess t han opt i mu m. As a
gener al r ul e, ef f or t s ex pended n car ef ul l y i dent i f yi n g al t er nat i ves can yi el d subst ant i al di vi dends i n t er ms of t he
over al l deci si on.
4. Anal yz e and compar e al ter nati ves i s of t en enhanced by t he use of mat hemat i cal or st at i st i cal t echni ques.
5. Sel ect t he best al t er nat i ve w i l l depend on t he obj ect i ves of t he deci si on mak er and t he cr i t er i a t hat ar e bei ng used t o
eval uat e al t er nat i ves.
6. I mpl ement t he chosen al ter nati ve ( sol ut i on) si mpl y means car r yi ng out t he act i ons i ndi cat ed by t he chosen
al t er nat i ves. M any deci si on mak er s use t hi s appr oach by def aul t : By t he t i me t hey get ar ound t o mak i ng a deci si on,
i t s t oo l at e!
7. M oni tor t he r esu l ts to ensur e t hat desi r ed r esul ts ar e achi eved. Ef f ect i ve deci si on mak i ng r equi r es t hat t he r esul t s of
t he deci si on be moni t or ed t o mak e sur e t hat t he desi r ed consequences have been achi eved. I f t hey have not , t he
deci si on mak er may have t o r epeat t he ent i r e pr ocess; or per haps a r ev i ew of t he si t uat i on may r eveal an er r or i n
i mpl ement at i on, an er r or i n cal cul at i ons, or a w r ong assumpt i on t hat w i l l al l ow t he si t uat i on t o be r emedi ed
qui ck l y.

The deci si on pr ocess i s not al w ays compl et ed i n a sequent i al manner . I nst ead, t her e i s usual l y a cer t ai n amount of
back t r ack i ng and f eedback , especi al l y i n t er ms of devel opi ng and anal yzi ng al t er nat i ves.

Cause of Poor D eci si ons

1. f ai l ur es can be t r aced t o some combi nat i on of mi st ak es i n t he deci si on pr ocess;
2. bounded r at i onal i t y ( t he l i m i t at i on on deci si on mak i ng caused by cost s, human abi l i t i es, t i me, t echnol ogy, and
avai l abi l i t y of i nf or mat i on) ; and
3. subopt i mi zat i on ( t he r esu l t of di f f er ent depar t ment s each at t empt i ng t o r each a sol ut i on t hat i s opt i mum f or t hat
depar t ment ) .

D eci si on Envi r onments

Cer t ai nt y means t hat r el evant par amet er s such as cost s, capaci t y, and demand have k now n val ues. Ex ampl e, pr of i t per
uni t i s P5. You have an or der f or 200 uni t s. How much pr of i t w i l l you mak e?

Ri sk means t hat cer t ai n par amet er s have pr obabi l i st i c out comes. Ex ampl e, pr of i t i s P5 per un i t . Based on pr evi ous
ex per i ence, t her e i s a 50 per cent chance of an or der f or 100 uni t s and a 50 per cent chance of an or der f or 200 un i t s.
W hat i s t he ex pect ed pr of i t ?

Uncer t ai nt y means t hat i t i s i m possi bl e t o assess t he l i k el i hood of var i ous possi bl e f ut ur e event s. Ex ampl e, pr of i t i s P5
per uni t ; t h e pr obabi l i t i es of pot ent i al demands ar e unk now n.

D eci si on Theor y

D eci si on t heor y r epr esent s a gener al appr oach t o deci si on mak i ng. D eci si ons t hat l end t hemsel ves t o a deci si on t heor y
appr oach t end to be char act er i zed by t hese el ement s:
1. A set of possi bl e f ut ur e condi t i ons ex i st t hat w i l l have a bear i ng on t he r esul t s of t he deci si on.
2. A l i st of al t er nat i ves f or t he manager t o choose f r om.
3. A k now n payof f f or each al t er nat i ve under each possi bl e f ut ur e condi t i on.

I n or der t o use t hi s appr oach, a deci si on mak er w oul d empl oy t hi s pr ocess;

1. I dent i f y t he possi bl e f ut ur e condi t i ons ( e.g., demand w i l l be l ow , medi um, or hi gh; t he n umber of cont r act s
aw ar ded w i l l be one, t w o, or t hr ee; t he compet i t or w i l l or w i l l not i n t r oduce a new pr oduct ) . These ar e cal l ed st at es
of nat ur e.
2. D evel op a l i st of possi bl e al t er nat i ves, one of w hi ch may be t o do not hi ng.
3. D et er mi ne or est i mat e t he payof f associ at ed w i t h each al t er nat i ve f or ever y possi bl e f ut ur e condi t i on.
4. I f possi bl e, est i mat e t he l i k el i hood of each possi bl e f ut ur e condi t i on.
5. Eval uat e al t er nat i ves accor di ng t o some deci si on cr i t er i on ( e.g., max i mi ze ex pect ed pr of i t ) , and sel ect t he best
al t er nat i ve

Payof f t abl e i s a t abl e show i ng t he ex pect ed payof f s f or each al t er nat i ve i n ever y possi bl e st at e of nat ur e.

Al ter nati ves
Possi bl e f u tur e demand
Low M oder at e Hi gh
Smal l f aci l i t y
M edi um f aci l i t y
Lar ge f aci l i t y
P10
7
( 4)
P10
12
2
P10
12
16
* Pr esent val ue i n P mi l l i on


D eci si on M aki ng U nder Cer tai n ty
W hen i t i s k now n f or cer t ai n w hi ch of t he possi bl e f ut ur e condi t i ons w i l l act ual l y happen t he deci si on i s usual l y
r el at i vel y st r ai ght f or w ar d: Si mpl y choose t he al t er nat i ve t hat has t he best payof f under t hat st at e of nat ur e. Thi s i s
i l l ust r at ed i n t he f ol l ow i ng ex ampl e.
D et er mi ne t he best al t er nat i ve i n t he pr ecedi ng payof f t abl e, i f i t i s k now n w i t h cer t ai nt y t hat demand w i l l be: ( a) l ow ,
( b) moder at e, ( c) hi gh.
Choose t he al t er nat i ve w i t h t he h i ghest payof f . Thus, i f w e k now demand w i l l be l ow , w e w oul d el ect t o bu i l d t he smal l
f aci l i t y and r eal i ze a payof f of $10 mi l l i on. I f w e k n ow demand w i l l be moder at e, a medi um f aci l i t y w oul d yi el d t he
hi ghest payof f ( P12 mi l l i on ver sus ei t her P10 m i l l i on or P2 mi l l i on) . For hi gh demand, a l ar ge f aci l i t y w oul d pr ovi de
t he hi ghest payof f .

D eci si on M aki ng U nder U ncer tai nty
At t he opposi t e ex t r eme i s compl et e u ncer t ai nt y: no i nf or mat i on i s avai l abl e on how l i k el y t he var i ous st at e of nat ur e
ar e. Under t hose condi t i ons, f our possi bl e deci si on cr i t er i a ar e max i mi n, max i max , l apl ace, and mi ni max r egr et . These
appr oaches can be def i ned as f ol l ow s:

M ax i mi n D et er mi ne t he w or st possi bl e payof f f or each al t er nat i ve, and choose t he al t er nat i ve t hat h as t he best
w or st . The max i mi n appr oach i s essent i al l y a pessi mi st i c one because i t t ak es i n t o account onl y t he w or st possi bl e
out come f or each al t er nat i ve. The act ual out come may not be as bad as t hat , but t hi s appr oach est abl i shes a
guar ant eed mi ni mum.
M ax i max D et er mi ne t he best possi bl e payof f , and choose t he al t er nat i ve w i t h t hat payof f . The max i max appr oach i s
an opt i mi st i c, go f or i t st r at egy; i t does not t ak e i nt o account any payof f ot her t han t he best .
La Pl ace D et er mi ne t he aver age payof f f or each al t er nat i ve, and choose t he al t er at i ve w i t h t he best aver age. The La
Pl ace appr oach t r eat s t he st at es of nat ur e as equal l y l i k el y.
M ax i max r egr et D et er mi ne t he w or st r egr et f or each al t er nat i ve, and choose t he al t er nat i ve w i t h t he best w or st .

The mai n w eak ness of t hese appr oaches ( ex cept f or La Pl ace) i s t hat t hey do not t ak e i nt o account al l of t he payof f s.
I nst ead, t hey f ocus on t he w or st or best , and so t hey l ose some i nf or mat i on. The w eak ness of La Pl ace i s t hat i t t r eat s
al l st at es of nat ur e as equal l y l i k el y. St i l l , f or a gi ven set of ci r cumst ances, each has cer t ai n mer i t s t hat can be hel pf u l
t o a deci si on mak er .

Ref er r i ng t o t he pr ecedi ng payof f t abl e, det er mi n e w hi ch al t er nat i ve w oul d be chosen under each of these st r at egi es: ( a)
max i mi n, ( b) max i max , ( c) l apl ace.

Al ter nati ves
Possi bl e f u tur e demand Row t ot al
( i n $ mi l l i on)
Row aver age
( i n $ mi l l i on) Low M oder at e Hi gh
P10
7
( 4)
P10
12
2
P10
12
16
P30
31
14
P10.00
10.33
4.67
* Pr esent val ue i n P mi l l i on


Sol ut i on:
1. The w or st payof f s f or t he al t er nat i ves ar e show n at the t abl e. Hence, si nce P10 mi l l i on i s t he best , choose t o bui l d
t he smal l f aci l i t y usi ng t he max i mi n st r at egy.
2. The best payof f s ar e show n at t he t abl e. The best over al l payof f i s t he P16 mi l l i on i n t he t hi r d r ow . Hence, t he
max i max cr i t er i on l eads t o bui l di ng a l ar ge f aci l i t y.
3. For t he La Pl ace cr i t er i on, f i r st f i nd t he r ow t ot al s, and t hen di v i de each of t hese amount by t he number of st at es of
nat ur e ( t hr ee i n t h i s case) . Si nce t he medi um f aci l i t y has t he h i ghest aver age, i t w oul d be chose under t he La Pl ace
cr i t er i on.

D et er mi ne w hi ch al t er nat i ve w oul d be chosen usi ng a max i max r egr et appr oach t o t he capaci t y pl anni ng pr ogr am.

The f i r st st ep i n t hi s appr oach i s t o pr epar e a t abl e of oppor t uni t y l osses, or r egr et s ( t he di f f er ence bet w een a gi ven
payof f and t he best payof f i n t he same col umn) . To do t hi s, subt r act ever y pay of f i n each col umn f r om t he l ar gest
possi bl e payof f i n t hat col umn. For i nst ance, i n t he f i r st col umn t he l ar gest possi bl e payof f i s 10, so each of t he t hr ee
number s i n t hat col umn must be subt r act ed f r om 10. Goi ng dow n t o t he col umn, t he r egr et s w i l l be 1 0 1 0 = 0, 10
7 = 3, 10 ( - 4) = 1 4. I n t he second col umn, t he l ar gest posi t i ve payof f i s 1 2. Subt r act i ng each pay of f r om 12 yi el ds
t he f ol l ow i ng; 2, 0, and 10. I n t he t h i r d col umn, 16 i s t he l ar gest payof f . The r egr et s ar e 6, 4, and 0. These ar e
summar i zed i n a r egr et t abl e:

Al ter nati ves
Possi bl e f u tur e demand Regr ets ( i n $ mi l l i ons)
Low M oder at e Hi gh Low M oder at e Hi gh W or st
P10
7
( 4)
P10
12
2
P10
12
16
P 0
3
14
P 2
0
10
P 6
4
0
P 6
4
12

The second st ep i s t o i dent i f y t he w or st r egr et f or each al t er nat i ve. For t he f i r st al t er nat i ve, t he w or st i s 6; f or t he
second, t he w or st i s 4; and f or t he t hi r d, t he w or st i s 14.

The best of t hese w or st w oul d be chosen usi ng mi ni max r egr et . The l ow est r egr et i s 4, w hi ch i s f or a medi um
f aci l i t y. Hence, t hat al t er nat i ve w oul d be chosen.

D eci si on M aki ng U nder Ri sk

Bet w een t he t w o ex t r eme of cer t ai nt y and u ncer t ai nt y l i es t he case of r i sk . The pr obabi l i t y of occur r ence f or each st at e
of nat ur e can be est i mat ed. ( Not e t hat because t he st at es ar e mut ual l y ex cl usi ve and col l ect i vel y ex haust i ve, t hese
pr obabi l i t i es must add t o 1.00) A w i del y used appr oach under such ci r cumst ances i s t he ex pect ed monet ar y val ue
cr i t er i on. The ex pect ed val ue i s comput ed f or each al t er nat i ve, and one w i t h t he hi ghest ex pect ed val ue i s sel ect ed. The
ex pect ed val ue i s t he payof f s f or an al t er nat i ve w her e each pay i s w ei ght ed by t he pr obabi l i t y f or t he r el evant st at e of
nat ur e. Thus, t he appr oach i s:

Ex pected monetar y val ue cr i ter i on ( EM V ) D et er mi ne t he ex pect ed payof f of each al t er nat i ve, and choose t he
al t er nat i ve t hat has t he best ex pect ed payof f .


Usi ng t he ex pect ed monet ar y val ue cr i t er i on, i dent i f y t he best al t er nat i ve f or t he pr evi ous payof f t abl e f or t hese
pr obabi l i t i es: Low = 0.30, moder at e = 0.50 and hi gh = 0.20.

To f i nd t he ex pect ed val ue of each al t er nat i ve by mul t i pl yi ng t h e pr obabi l i t y of occur r ence f or each st at e of nat ur e by
t he payof f f or t hat st at e of nat ur e and summi ng t hem:

EV smal l = 0.30 ( P10) + 0.50 ( P10) + 0.20 ( P10) = P10
EV medi um = 0.30 ( P7) + 0.50 ( P12) + 0.20 ( P12) = P10.50
EV l ar ge = 0.30 ( P- 4) + 0.50 ( P2) + 0.20 ( P16) = $ 3

D eci si on Tr ees
A deci si on t r ee i s a schemat i c r epr esent at i on of t he al t er nat i ves avai l abl e t o a deci si on mak er and t hei r possi bl e
consequences

Ex ampl e of a D eci si on Tr ees

Ex er ci se: Tr y mak i ng a deci si on t r ee f or your col l ege pl ans i n t he nex t f i ve year s or so.


Ex pected V al ue of Per f ect I nf or mati on

I n cer t ai n si t uat i ons, i t i s possi bl e t o ascer t ai n w hi ch st at e of nat ur e w i l l act ual l y occur i n t he f ut ur e. The quest i on t o
consi der i s w het her t he cost of t he opt i on w i l l be l ess t han t he ex pect ed gai n due t o del ayi ng t he deci si on ( e.g., t he
ex pect ed payof f above t he ex pect ed val ue) . The ex pect ed gai n i s t he ex pect ed val ue of per f ect i nf or mat i on, or EVPI ,
w hi ch i s t he di f f er ence bet w een t he ex pect ed pay under cer t ai nt y and t he ex pect ed payof f under r i sk .
One possi bl e w ays of obt ai ni ng per f ect i nf or mat i on depend somew hat on t he nat ur e of t he deci si on bei ng made. For
ex ampl e, i nf or mat i on about consumer pr ef er ences m i ght come f r om mar k et r esear ch, addi t i onal i n f or mat i on about a
pr oduct coul d come f r om pr oduct t est i ng, l egal ex per t s mi ght be cal l ed on.
Ther e ar e t w o w ays t o det er mi ne t he EVPI . One i s t o comput e t he ex pect ed payof f under cer t ai n t y and subt r act t he
ex pect ed payof f under r i sk . That i s<

Ex pect ed val ue of
per f ect
i nf or mat i on
=
Ex pect ed payof f
under cer t ai nt y
-
Ex pect ed payof f
under r i sk

A second appr oach i s t o use t he r egr et t abl e t o comput e t he EVPI . To do t hi s, f i nd ex pect ed r egr et f or each al t er nat i ve.
The mi ni mum ex pect ed r egr et i s equal t o t he EVPI

Sensi ti vi ty Anal ysi s
Sensi t i ve anal ysi s pr ovi des a r ange of pr obabi l i t y over w hi ch t he choi ce of al t er nat i ve w oul d r emai n t he same. The
appr oach i l l ust r at ed her e i s usef ul w hen t her e ar e t w o st at es of nat ur e. I t i nvol ves const r uct i ng a gr aph and t hen usi ng
al gebr a t o det er mi n e a r ange of pr obabi l i t i es f or w hi ch a gi ven sol ut i on i s best . I n ef f ect , t he gr aph pr ovi des a vi sual
i ndi cat i on of t he r ange of pr obabi l i t y over w hi ch t he var i ous al t er nat i ves ar e opt i mal , and t he al gebr a pr ovi des ex act
val ues of t he endpoi nt s of t he r anges.
Gi ven t he f ol l ow i ng t abl e, det er mi ne t he r ange of pr obabi l i t y f or st at e of nat ur e # 2, t hat i s, P( 2) , f or w hi ch each
al t er nat i ve i s opt i mal under t he ex pect ed- val ue appr oach.

St at e of
Nat ur e
# 2 12 2 8
# 1 4 16 12
Al t er nat i ve A B C

Fi r st , pl ot each al t er nat i ve t o P( 2) . To do t hi s, pl ot # 1 val ue on t he l ef t si de of t he gr aph and t he # 2 val ue on t he r i ght
si de. For i nst ance, f or al t er nat i ve A, pl ot 4 on t he l ef t si de of t he gr aph and 12 on t he r i ght si de. Th en connect t hese t w o
poi nt s w i t h a st r ai ght l i ne. The t hr ee al t er nat i ves ar e pl ot t ed on t he gr aph show n bel ow .

The sl ope and equat i ons ar e:

# 1 # 2 Sl ope Equat i on
A
B
C
4
16
12
12
2
8
12 4 = + 8
2 16 = - 14
8 12 = - 4
4 + 8P( 2)
16 14P( 2)
12 4P( 2)

I f 16 14P( 2) = 12 4P92) ; t hen 4 = 10P( 2 ) . Sol vi ng, you obt ai n P( 2) = 0.40. Thus, al t er nat i ve B i s best f r om P( 2) = 0
up t o P( 2) = 0.40. B and C ar e equi val ent at P( 2) = 0.40
16

14

12

10

8

6

4

2
0 0.2 0.4 0.6 0.8 1.0
Pay of f # 2 Pay of f # 1
P (2)
B best C best A best
16

14

12

10

8

6

4

2

Al t er nat i ve C i s best f r om t hat poi nt unt i l i t s l i ne i nt er sect s al t er nat i ve A s l i ne. To f i nd t hat i nt er sect i on set t hose t w o
equat i ons equal and sol ve f or P( 2) . Th us, 4 + 8P( 2) = 12 4P( 2 ) . Rear r angi ng t er ms, you have 12P( 2) = 8. Sol vi ng,
you obt ai n P( 2) = 0.67. Th us, al t er nat i ve C i s best f r om P( 2) > 0.40 up t o P( 2 ) = 0.67, w her e A and C ar e equi val ent .
For val ues P( 2) gr eat er t han 0.67 up t o P( 2) = 1.0, A i s best .

Not e: i f a pr obl em cal l s f or r anges w i t h r espect t o P( 1), f i nd t he P( 2) r ange as above, and t hen subt r act each P( 2) f r om
1.00 ( e.g., 0.40 becomes 0.60, and 0,67 becomes 0.33)

Pr obl em Set f or D eci si on M ak i ng:

1 . Assu me t h e payof f s r epr esen t pr of i t s.

Al t er n at i ve l ocat i on s f or n ew
w ar eh ou se
A B C
New br i dge bu i l t 1 2 4
No n ew br i dge 1 4 1 0 6

a. Det er mi n e t h e al t er n at i ve t h at w ou l d be ch osen u n der each of t h ese deci si on cr i t er i a: max i mi n , max i max , an d l apl ace
b. Usi n g gr aph i cal sen si t i vi t y an al ysi s, det er mi n e t h e pr obabi l i t y f or n ew br i dge f or w h i ch each al t er nat i ve w ou l d be
opt i mal .
c. Usi n g t h e i n f or mat i on i n t h e payof f t abl e, devel op a t abl e of r egr et s, an d t h en : a) det er mi n e t h e al t er n at i ve t hat w ou l d
be ch osen u n der mi n i max r egr et , an d b) det er mi n e t h e ex pect ed val u e of per f ect i nf or mat i on u si n g t h e r egr et t abl e,
assu mi n g t h at t h e pr obabi l i t y of a n ew br i dge bei n g bu i l t i s 0 .6 0 .
d. Usi n g t h e pr obabi l i t i es of 0 .6 0 f or a n ew br i dge an d 0 .4 0 f or n o n ew br i dge, compu t e t h e ex pect ed val u e of each
al t er n at i ve i n t h e payof f t abl e, an d i den t i f y t h e al t er n at i ve t h at w ou l d be sel ect ed u n der t h e ex pect ed- val u e appr oach.
e. Su ppose t h at t h e val u es i n t h e payof f t abl e r epr esen t cost i n st ead of pr of i t s.
i . Det er mi n e t h e ch oi ce t h at you w ou l d mak e u n der each of t h ese st r at egi es: max i mi n, mi n i mi n , an d La Pl ace.
i i . Devel op t h e r egr et t abl e, an d i den t i f y t h e al t er n at i ve chosen u si n g each al t er n at i ve t h e EVPI i f P( n ew br i dge) = 0 .6 0
i i i . Usi n g sen si t i vi t y anal ysi s, det er mi n e t h e r an ge of P( n o n ew br i dge) f or w h i ch each al t er n at i ve w ou l d be opt i mal .
i v. I f P( n ew br i dge) = 0 .6 0 and P( no n ew br i dge) = 0 .4 0 , f i n d t h e al t er n at i ve ch osen t o mi n i mi ze ex pect ed cost .

2 . A smal l bu i l di n g con t r act or h as r ecen t l y ex per i en ced t w o su ccessi ve year s i n w h i ch w or k oppor t u n i t i es ex ceeded t h e
f i r m s capaci t y. Th e con t r act or mu st n ow mak e a deci si on on capaci t y f or t h e n ex t year . He h as est i mat ed pr of i t s u n der
each of t h e t w o st at es of n at u r e h e bel i eves mi gh t occu r , as sh ow n i n t h e t abl e bel ow .

Nex t year s
deman d
Hi gh P6 0 * P8 0 P7 0
Low 5 0 2 0 4 0
Al t er n at i ve Do n ot h i n g Ex pan d Su bcon t r act
* Pr of i t i n P mi l l i on s

a. W h i ch al t er n at i ve shou l d be sel ect ed i f t h e deci si on cr i t er i on i s: M ax i max , max i mi n, La Pl ace, an d mi n i max r egr et
b. Su ppose af t er a cer t ai n amou n t of di scu ssi on w i t h an accou n t ant , t h e con t r act or i s abl e t o su bj ect i vel y assess t h e
pr obabi l i t i es of l ow an d h i gh deman d: P( l ow ) = 0.3 0 and P( h i gh ) = 0.7 0 .
i . Det er mi n e t h e ex pect ed pr of i t of each al t er n at i ve. W h i ch al t er n at i ve i s best ? W hy?
i i . An al yze t h e pr obl em u si n g a deci si on t r ee. Show t h e ex pect ed pr of i t of each al t er n at i ve on t h e t r ee.
i i i . Compu t er f or t h e ex pect ed val u e of per f ect i n f or mat i on . How cou l d t h e con t r act or u se t h i s k n ow l edge?
c. Su bsequ en t l y, con st r u ct a gr aph t h at w i l l en abl e you t o per f or m sen si t i vi t y an al ysi s on t h e pr obl em. Over w h at r an ge
of P( h i gh ) w ou l d t h e al t er n at i ve of doi n g not h i n g be best ? Ex pan d? Su bcont r act ?

3 . A r esear ch er of a mar k et i n g agen cy has assembl e t h e f ol l ow i n g payof f t abl e of est i mat ed pr of i t s:
Con t r act
Recei ve P1 0 * P 8 P 5 P 0
Not r ecei ve - 2 3 5 7
Al t er n at i ve M P1 M P2 M P3 M P4
* Cost i n mi l l i on s of Peso.
Rel at i ve t o t h e pr obabi l i t y of not r ecei vi n g t h e con t r act , det er mi n e t h e r an ge of pr obabi l i t y f or each of t h e pr oposal w ou l d
max i mi ze ex pect ed pr of i t .


PLANNING & DESIGNING OF P/O SYSTEM - Part I: FORECASTING

Pedagogi cal O bj ecti ves: By t he end of t hi s t opi c di scussi on, t he st udent shoul d be abl e t o:
4. D ef i ne f or ecast i ng;
5. D i scuss w hy demand f or ecast i ng i s i mpor t ant i n managi ng t he P/ O syst em;
6. I dent i f y t he basi c t ypes of f or ecast i ng model s and descr i be some f or ecast i ng t echni ques under each model ;
7. For ecast usi ng quant i t at i ve t echni ques; and
8. Eval uat e t he ef f ect i veness of a f or ecast i ng t echni que.

D ef i ni t i on

For ecast i ng i s t he ar t and sci ence of pr edi ct i ng f ut ur e si t uat i ons. I t may i nvol ve t ak i ng hi st or i cal dat a and
pr oj ect i ng t hem i nt o t he f ut ur e w i t h sor t of mat hemat i cal model . I t may be a _______________ or i nt ui t i ve pr edi ct i on
of t he f ut ur e. I t may i nvol ve combi nat i on of t hese, t hat i s, a mat hemat i cal model adj ust ed by a manager s
______________ _______________.

Types of For ecasts

Or gani zat i ons use t hr ee t ypes of f or ecast s i n pl anni ng and ant i ci pat i ng t he f ut u r e of t hei r oper at i ons.
1. _______________ f or ecast s addr ess t he busi ness cycl e by pr edi ct i ng i nf l at i on r at es, money suppl i es, housi ng
st ar t s, and ot her pl anni ng i ndi cat or s.
2. _______________ f or ecast s ar e concer ned w i t h r at es of t echnol ogi cal pr ogr ess, w hi ch can r esul t i n t he bi r t h of
ex ci t i ng new pr oduct s, r equi r i ng new pl ant s and equi pment .
3. _______________ f or ecast s ar e pr oj ect i ons of demand f or a company s pr oduct or ser vi ces. These f or ecast s,
al so cal l ed sal es f or ecast s, dr i ve a company s pr oduct i on capaci t y and schedul i ng syst ems and ser ve as i nput s t o
f i nanci al , mar k et i ng, and human r esour ce pl anni ng.

W hy For ecast D emand?

1. To pl an f or t he syst em i n t er ms of pr oduct desi gn, pr ocess desi gn, capaci t y pl anni ng and equi pment i nvest m ent
and r epl acement .
2. To pl an t he use of t he syst em w hi ch i ncl udes _______________ r equi r ement s f or mat er i al s, pr oduct s and
ser vi ces; and _______________ schedul es and var yi ng l abor and mat er i al s?

For ecasti ng Ti me H or i z ons

1. ________________ f or ecast . Thi s f or ecast has a t i me span of up t o one year , but i s gener al l y l ess t han t hr ee
mont hs; i t i s used f or pl anni ng, pur chasi ng, j ob schedul i ng, w or k f or ce l evel s, j ob assi gnment s, and pr oduct i on
l evel s.
2. ________________ f or ecast . An i nt er medi at e f or ecast gener al l y spans f or t hr ee mont hs up t o t hr ee year s. I t i s
used i n sal es pl anni ng and budget i ng, cash budget i ng and anal yzi ng var i ous oper at i ng pl ans.
3. ________________ f or ecast . Gener al l y t hr ee year s or mor e i n t i me span, t hese f or ecast s ar e used i n pl anni n g
f or new pr oduct s, capi t al ex pendi t ur es, f aci l i t y l ocat i on or oper at i on ex pansi on, and r esear ch and devel opment .


The I nf l uence of Pr oduct Li f e Cycl e

Anot her f act or t o consi der w hen devel opi ng sal es f or ecast s, especi al l y l onger ones, i s t he pr oduct s l i f e cycl e. Pr oduct s,
and even ser vi ces, do not sel l at a constant l evel t hr oughout t hei r span of l i f e. M ost successf ul pr oduct s pass t hr ough
f our st ages: ( 1) i nt r oduct i on, ( 2) gr ow t h, ( 3) mat ur i t y, and ( 4) decl i ne.

Pr oduct s i n t he f i r st t w o st ages of t hei r l i f e cycl e need l onger f or ecast s t han t hose i n t he mat ur i t y and decl i ne
st ages. For ecast s ar e usef ul i n pr oj ect i ng di f f er en t st af f i ng l evel s, i nven t or y l evel s, and f actor y capaci t y as t he pr oduct
passes f r om t he f i r st t o t he l ast st age.

Types of For ecasti ng M odel s

1. _________________ M odel s

a. _________________. Thi s met hod sol i ci t s i nput f r om cust omer s or pot ent i al cust omer s r egar di ng t hei r
f ut ur e pur chasi ng pl ans. I t can hel p not onl y i n pr epar i ng a f or ecast , but al so i n i mpr ovi ng pr oduct
desi gn and pl anni ng new pr oduct s.
b. __________________. I n t hi s appr oach, each sal es per son est i mat es w hat sal es w i l l be i n hi s or her
r egi on or sal es t er r i t or y. These f or ecast s ar e t hen r evi ew ed t o ensur e t he r eal i st i c and t hen combi ned at
t he di st r i ct and nat i onal l evel s t o r each an over al l f or ecast est i mat es.
c. __________________. Under t hi s met hod, t he opi ni ons of a gr oup of hi gh - l evel manager s, of t en i n
combi nat i on w i t h st at i st i cal model s, ar e pool ed t o ar r i ve at a gr oup est i mat e of demand.
d. __________________. Ther e ar e t hr ee di f f er ent t ypes of par t i ci pant s i n t he D el phi met hod: deci si on-
mak er s, st af f per sonnel , and r espondent s. The deci si on- mak er s usual l y consi st of a gr oup of f i ve ( 5) t o
t en ( 10) ex per t s w ho w i l l be mak i ng t he act ual f or ecast . The st af f per sonnel assi st t he deci si on- mak er s
by pr epar i ng, di st r i but i ng, col l ect i ng, t abul at i ng, and summar i zi ng a ser i es of quest i onnai r es and
sur vey r esul t s. The r espondent s ar e a gr oup of peopl e, of t en l ocat ed i n di f f er ent pl aces, w hose
j udgment s ar e val ued and ar e bei ng sought . Thi s gr oup pr ovi des i nput s t o t he deci si on- mak er s bef or e
t he f or ecast i s made.

2. _________________ M odel s

a. __________________ M odel s. Ti me- ser i es model s pr edi ct on t he assumpt i on t hat t he f ut ur e i s a
f unct i on of t he past . I n ot her w or ds, t hey l ook at w hat happened over a per i od of t i me and use a ser i es
of past dat a t o mak e a f or ecast .
+ Nave f or ecast
+ M ovi ng aver ages
Si mpl e movi ng aver age
W ei ght ed aver age
+ Ex ponent i al smoot hi ng
b. __________________ M odel s. Causal model s, such l i near r egr essi on, i ncor por at e t he var i abl es or
f act or s t hat mi ght i nf l uence t he quant i t y bei ng f or ecast . For ex ampl e, a causal model f or appl i ance sal es
mi ght i ncl ude f act or s such as new housi ng st ar t s, adver t i si ng budget , and compet i t or s pr i ce.
+ Si mpl e r egr essi on
+ M ul t i pl e r egr essi on

M ean Absol ut e D evi ati on i s a measur e used t o eval uat e t he accur acy of a f or ecast i ng model .

Associ ati ve or Causal M odel s

Regr essi on Anal ysi s i s a f or ecast i ng t echni que t hat est abl i shes a r el at i onshi p bet w een var i abl es I n t hi s di scussi on,
w e consi der onl y:
1 . Tw o var i abl es; say, x and y
2 . A l i near r el at i onshi p bet w een t hem

w her e: y = dependent var i abl e, e.g., D emand, Sal es
x = i ndependent var i abl e, e.g., Ti me, Adver t i si ng, Pr i ce,
Unempl oyment , et c.,

Sl ope- i n ter cept f or m of a l i n e

y = a + bx

w her e:
a = y- i nt er cept
b = sl ope of t he l i ne; r at e of change of y w i t h
r espect t o x

b =
n x y - x y
n x
2
( x )
2

a =
y - bx
n

N .B.: Li near r egr essi on may be appl i ed onl y w hen t he r el at i onshi p bet w een t w o var i abl es i s l i near or near l y so. I n ot her
w or ds, t he r egr essi on l i ne: y = a + bx may be used t o f or ecast val ues of y f or any gi ven val ue of x onl y i f t her e i s a
si gni f i cant r el at i onshi p, i .e., hi gh cor r el at i on, bet w een x and y .

Q uesti on : But how do w e k now i f t he l i near r el at i onsh i p bet w een x and y i s si gni f i cant
Answ er : By cal cul at i ng t he cor r el at i on coef f i ci ent , r .

r =
n x y - x y

[ n x
2
( x )
2
] [ n y
2
( y)
2
]

I f | r | i s Then
Thus, f or our pur poses, t he r egr essi on l i ne: y = a + bx may be
used t o f or ecast val ues of y f or any gi ven val ue of x onl y w hen
| r | i s gr eat er t han or equal t o 0 .7 0 .
0 . 9 0 1 .0 0
0 . 7 0 0 .8 9
0 . 4 0 0 .6 9
0 . 2 0 0 .3 9
0 . 0 0 0 .1 9
ver y hi gh cor r el ati on
h i gh cor r el ati on
moder ate cor r el ati on
l ow cor r el ati on
sl i ght cor r el ati on

- NA VE APPROACH

Ft = At 1

- SI M PLE M OVI NG AVERAGE

Ai
Ft =
i = 1

n
- W EI GHTED M OVI NG AVERAGE

Ft = W i Ai , w her e 0 W i 1 and W i = 1.00

i = 1
- EXPONENTI AL SM OOTHI NG

Ft = Ft 1 + ( At 1 - Ft 1 ) , w her e 0 1

Ft
At 1
n
Ai
W i

Ft 1

= t he demand f or ecast f or per i od t
= t he act ual demand f or per i od t 1
= t he aver age per i od
= t he act ual demand f or per i od i
= t he w ei ght t o be mul t i pl i ed t o t he
act ual demand f or per i od i
= t he ex ponent i al smoot hi ng const ant
= t he demand f or ecast f or per i od t - 1

y = a + bx
a

b
- M EAN ABSOLUTE D EVI ATI ON (M AD )
y
x
=
y
x

x
y

n
n

M AD = | A
i -
F
i
|

n
i = 1

n

FO RECASTI N G Ti me Ser i es

The f ol l ow i ng data show t he number of l i t er s of gasol i ne sol d by Pet r on i n Bagui o Ci t y f or t he past 12 w eek s.
W eek
Act ual
D emand*
For ecast *
Nave SM A W M A ES, = 0.30 Li near t r end
F | A - F| F | A - F| F | A - F| F | A - F| F | A - F|
1 17
2 21
3 19
4 23
5 18
6 16
7 20
8 18
9 22
10 20
11 15
12 22
13
M AD
* 1,000 l i t er s
1. For ecast demand usi ng t he nave appr oach.
2. For ecast demand usi ng 3 - w eek si mpl e movi ng aver age model .
3. Usi ng a w ei ght of 0.40 f or t he most r ecent obser vat i on, 0.30 f or t he second most r ecent , 0.20 f or t he t hi r d most
r ecent , and 0.10 f or t he f our t h most r ecent , f or ecast demand usi ng 4- w eek w ei ght ed movi ng aver age model .
4. For ecast demand usi ng ex ponent i al smoot hi ng model w i t h = 0.30.
5. For ecast demand usi ng l i near t r end anal ysi s.
6. Cal cul at e t he M AD f or each of t he above f or ecast i ng model s. W hi ch f or ecast i ng model w oul d you r ecommend
t o Pet r on s manager ? W hy?
7. W hat demand f or ecast w oul d you r ecommend f or w eek 13?


FO RECASTI N G Li near Regr essi on

D on Henr i co s Pi zza i s i nt er est ed i n est abl i shi ng t he r el at i onshi p bet w een i t s adver t i si ng and sal es on t he
f ol l ow i ng dat a:
Q uar ter
Adver t i si ng
( P100,0 00)
Sal es
( PM i l l i on)

1 4 1
2 10 4
3 15 5
4 12 4
5 8 3
6 16 4
7 5 2
8 7 1
9 9 4
10 10 2

1. Can Don Henr i co s Pi zza use l i near r egr essi on anal ysi s t o f or ecast i t s f ut ur e sal es gi ven a pl anned adver t i si ng
ex pendi t ur e?
2. D et er mi ne t he est i mat ed equat i on of t he r egr essi on l i ne t hat def i nes t he r el at i onshi p bet w een sal es and
adver t i si ng.
3. I f D on Henr i co s Pi zza adver t i si ng ex pense i s ex pect ed t o be P1,100,000.00, w hat w oul d be t he cor r espondi ng
sal es f or ecast?
4. I f D on Henr i co s Pi zza spends f i ve per cent of sal es on pi zza box es, how much box es, i n peso vol ume, shoul d i t s
oper at i ons manager or der f or t he nex t quar t er ?

Q uanti tati ve For ecasti ng
The f ol l ow i ng t abl e r epr esent s sal es dat a f or pal m oi l ( i n hundr ed gal l ons) sol d by a gr ocer y st or e.

M onth Sal es 1. Gi ven a choi ce on w het her t o use t he nave appr oach; a 5- mont h SM A
model ; a W M A model w i t h w ei ght s 0.20, 0.30, and 0.50; and an ES
model w i t h = 0.60 and a f or ecast of 3,600 gal l oons i n t he f i r st
mont h; w hi ch model w oul d you use? W hy?
2. Based on your deci si on i n i t em 1, w hat shoul d be t he f or ecast f or
mont h 11?
3. W oul d you r ecommend usi ng l i near r egr essi on f or ecast i ng model f or
t hi s t i me ser i es dat a? W hy?
4. I f t he l i near r egr essi on may be used, w hat w oul d be t he f or ecast f or
mont h 16?
1
2
3
4
5
6
7
8
9
10
40
48
40
45
50
49
46
57
54
62


E. TOTAL QUALITY MANAGEMENT

Lear ni ng Obj ect i ves Af ter compl et i ng th i s topi c, you shoul d be abl e to:

1. D escr i be TQM .
2. Gi ve an over vi ew of pr obl em sol vi ng.
3. Gi ve an over vi ew of pr ocess i mpr ovement .
4. D escr i be and use var i ous qual i t y t ool s.

Total Q ual i ty M anagement a phi l osophy t hat i nvol ves ever yone i n an
or gani zat i on i n a cont i nual ef f or t t o i m pr ove qual i t y and achi eve cust omer
sat i sf act i on.

2 Key Phi l osophi es

1. Cont i nuous i mpr ovement seek s t o mak e never - endi ng
i mpr ovement s t o t he pr ocess of conver t i ng i npu t s i n t o
out put s.

2. Customer sati sf acti on i nvol ves meet i ng or ex ceedi ng
cust omer ex pectat i ons.

D escr i pt i on of t he TQM Appr oach

1. Fi nd ou t w hat customer s w ant. I nt egr at e t he cust omer s voi ce i n t he deci si on- mak i ng pr ocess. Be sur e t o
i ncl ude t he i n t er nal cust omer ( t he nex t per son i n t he pr ocess) as w el l as t he ex t er nal cust omer ( t he f i nal
cust omer ) .

2. D esi gn a pr oduct or ser vi ce that w i l l meet or ex ceed w hat customer s w ant. M ak e i t easy to use and easy t o
pr oduce.

3. D esi gn a pr oducti on pr ocess that f aci l i tates doi ng t he j ob r i ght the f i r st the f i r st ti me. D et er mi ne w her e
mi st ak es ar e l i k el y t o occur and t r y t o pr event t hem. W hen mi st ak es do occur , f i nd out w hy so t hat t hey ar e l ess
l i k el y t o occur agai n. St r i ve t o mak e t he pr ocess mi stak e- pr oof .

4. Keep tr ack of r esul ts, and use those to gui de i mpr ovemen t i n the system. Never stop t r yi ng t o i mpr ove.

5. Ex tend these concepts to suppl i er s and to di str i but i on.


Ot her El ement s of t he TQM Appr oach

1. Cont i nual i mpr ovement
2. Compet i t i ve benchmar k i ng
3. Empl oyee empow er ment
4. Team appr oach
5. D eci si ons based on f act s r at her t han opi ni ons
6. Know l edge of qual i t y tool s
7. Suppl i er qual i t y
Qual i t y at t he sour ce
Compar i ng t he Cul t ur es of TQM vs. Tr adi t i onal Or gani zat i ons
ASPECT TRAD I TI ONAL TQM
Over al l mi ssi on

Obj ect i ves

M anagement

Rol e of manager

Cust omer r equi r ement s

Pr obl ems
Pr obl em sol vi ng
I mpr ovement
Suppl i er s
Jobs
Focus

M ax i mi ze r et ur n on i nvest ment
Emphasi s on shor t t er m

Not al w ays open; somet i mes
i nconsi st ent obj ect i ves
I ssue or der s; enf or ce

Not hi ghest pr i or i t y; maybe
uncl ear
Assi gn bl ame; puni sh
Not syst emat i c; i ndi vi dual s
Er r at i c
Adver sar i al
Nar r ow , speci al i zed; much
i ndi vi dual ef f or t
Pr oduct or i ent ed

M eet or ex ceed cust omer
sat i sf act i on
Bal ance of l ong t er m and shor t
t er m
Open; encour ages empl oyee
i npu t ; consi st ent obj ect i ves
Coach, r emove bar r i er s, bui l d
t r ust
Hi ghest pr i or i t y; i mpor t ant t o
i dent i f y and under st and
I dent i f y and r esol ve
Syst emat i c; t eams
Cont i nual
Par t ner s
Br oad, mor e gener al ; much t eam
ef f or t
Pr ocess or i ent ed


Pr obl em Sol vi ng
To be successf ul , pr obl em- sol vi ng ef f or t s shoul d f ol l ow a st andar d
appr oach.
An i mpor t ant aspect of pr obl em sol vi ng i n t he TQM appr oach i s
el i mi nati ng the cause so t hat t he pr obl em does not r eoccur .
User s of t he TQM appr oach of t en l i k e t o t hi n k of pr obl ems as
oppor t uni t i es f or i mpr ovement .

Basi c St eps i n Pr obl em Sol vi ng

Step 1 D ef i ne the pr obl em and establ i sh an i mpr ovement goal .
Gi ve pr obl em def i n i t i on car ef ul consi der at i on; don t r ush t hr ough t hi s st ep because t h i s w i l l ser ve as
t he f ocal poi nt of pr obl em- sol vi ng ef f or t s.
Step 2 Col l ect data.
The sol ut i on must be based on f acts. Possi bl e t ool s i ncl ude check sheet s, scat t er di agr am, hi st ogr am, r un
char t , and cont r ol char t .
Step 3 Anal yz e the pr obl em.
Possi bl e t ool s i ncl ude Par et o char t , cause- and- ef f ect di agr am.
Step 4 Gener ate poten ti al sol uti ons.
M et hods i ncl ude br ai nst or mi ng, benchmar k i ng, i nt er vi ew i ng, and sur veyi ng.
Step 5 Choose a sol ut i on.
Be sur e w hat t he cr i t er i a ar e f or choosi ng a sol ut i on. ( Ref er t o t he goal est abl i shed i n St ep 1) . Appl y
cr i t er i a t o pot ent i al sol ut i ons and sel ect t he best one.
Step 6 I mpl ement the sol ut i on.
Keep ever yone i nf or med.
Step 7 M oni tor the sol uti on to see i f i t accompl i shes the goal .
I f not , modi f y t he sol ut i on or r et ur n t o St ep 1. Possi bl e t ool s i ncl ude cont r ol char t and r un char t .

Pr ocess I mpr ovement
A syst emat i c appr oach t hat i nvol ves document at i on, measur ement , and anal ysi s f or t he pur pose of i mpr ovi ng
t he f unct i on i ng of a pr ocess.
Typi cal goal s of pr ocess i mpr ovement i ncl ude: i ncr easi ng customer sati sf acti on , achi evi ng h i gher qual i ty,
r educi ng w aste, r educi ng cost, i ncr easi ng pr oducti vi ty, and speedi ng u p the pr ocess.


The Pl an- D o- Study- Act ( PD SA) Cycl e or t he D emi ng W heel i s t he concept ual basi s f or cont i nuous i mpr ovement
act i vi t i es.
Basi c St eps of t he PDSA Cycl e

Pl an . Begi n by st udyi ng t h e cur r en t pr ocess. D ocument
t hat pr ocess. Then col l ect dat a t o i dent i f y pr obl ems. Nex t ,
sur vey dat a and devel op a pl an f or i mpr ovement . Speci f y
measur es f or eval uat i ng t he pl an.
D o. I mpl ement t he pl an, on a smal l scal e i f possi bl e.
D ocument any changes made dur i ng t h i s phase. Col l ect dat a
syst emat i cal l y f or eval uat i on.
Study. Eval uat e t he dat a col l ect i on dur i ng t he do phase.
Check how cl osel y t he r esul t s mat ch t he or i gi nal goal s of t he
pl an phase.
Act . I f t he r esul t s ar e successf ul , st andar di ze t he new
met hod and communi cat e t he new met hod t o al l peopl e
associ at ed w i t h t he new pr ocess. I mpl ement t r ai ni ng f or t he
new met hod. I f t he r esu l t s ar e unsuccessf ul , r evi se t h e pl an and
r epeat t he cycl e, or cease t he pr oj ect .

Seven ( 7) Basi c Qual i t y Tool s

1 . Check Sheet
A t ool f or r ecor di ng and or gani zi ng dat a t o
i dent i f y a pr obl em.
For i dent i f yi ng t ypes of def ect s, w hen and
w her e t hey occur .

2 . Fl ow char t
A di agr am of t he st eps i n a pr ocess.
For i dent i f yi ng possi bl e poi n t s i n t he pr ocess
w her e pr obl ems occur .

3 . Scatter D i agr am
A gr aph t hat show s t he degr ee and di r ect i on
of r el at i onshi p bet w een t w o var i abl es.
M ay poi nt t o a cause of a pr obl em.

4 . H i stogr am
A char t of an empi r i cal f r equency
di st r i but i on.
Can be usef ul i n get t i ng a sense of t he
di st r i but i on of obser ved val ues; i f t he
di st r i but i on i s symmet r i cal , w hat t he r ange of
val ues i s, and i f t her e i s any unusual val ues.

5 . Par eto Anal ysi s
A t echni que f or cl assi f yi ng pr obl em ar eas accor di ng t o degr ee of i mpor t ance, and f ocusi ng on t he most
i mpor t ant .

6 . Cont r ol Char t
A st at i st i cal char t of t i me- or der ed val ues of a sampl e st at i st i c.
Can be used t o moni t or i f t he pr ocess out put i s i n cont r ol or out of cont r ol .

7 . Cause- and- ef f ect D i agr am
Al so cal l ed f i shbone or I shi k aw a di agr am.
Used t o sear ch f or t he cause( s) of a pr obl em.

SPC TO O LS CO M M O NLY USED FO R PRO BLEM SO LV I N G AND CO N TI N U O US I M PRO V EM EN T

1. Pr ocess Fl ow Char t A pi ct ur e w hi ch descr i bes t he mai n st eps, br anches and event ual out put s of a pr ocess

2. Par eto Anal ysi s A coor di nat ed appr oach f or i dent i f yi ng, r ank i ng, and w or k i ng t o per manent l y el i mi nat e def ect s.
Focuses on i mpor t ant er r or sour ces. 80/ 20 r ul e: 80 per cent of t he pr obl ems ar e due t o 20 per cent of t he causes.

A B C D F G
Fr equency Per cent age
100%

50%

0%

3. Run Char t A t i me sequence char t show i ng pl ot t ed val ues of a char act er i st i c.

4. H i stogr am A di st r i but i on show i ng t he f r equency of occur r ences bet w een t he hi gh and l ow r ange of data.

5. Scatter D i agr am Al so k now n as a cor r el at i on char t . A gr aph of t he val ue of one char act er i st i c ver sus anot her
char act er i st i c.

6. Check Sheet An or gani zed met hod f or r ecor di ng data.

ITEM S

_____
_____
A

B

C

D

E

F

G


7. Cause and Ef f ect D i agr am A t ool t hat uses a gr aphi cal descr i pt i on on t he pr ocess el ement s t o anal yze pot ent i al
sour ces of pr ocess var i at i on.

8. Cont r ol Char ts A t i me sequence char t show i ng pl ot t ed val ues of a st at i st i c, i ncl udi ng a cent r al l i ne and one or
mor e stat i st i cal l y der i ved cont r ol l i mi t s.

At t r i but e or var i abl e

Ti me

STATI STI CAL PROCESS CONTROL

A vi sual di spl ay cal l ed a cont r ol char t i s used to pl ot val ues of a measur e of pr ocess per f or mance ( e.g., t he t i me
di r ect or y assi st ance oper ator spends w i t h a cal l er ) t o det er mi ne i f t h e pr ocess i s i n cont r ol ( e.g., t he t i me i s l ess t han 30
seconds i n t he oper at or ex ampl e) .
The st eps i n const r uct i ng and usi ng qual i t y- cont r ol char t can be summar i zed as:
1. D eci de on some measur e of ser vi ce syst em per f or mance.
2. Col l ect r epr esent at i ve hi st or i cal dat a f r om w hi ch est i mat es of t he popul at i on mean and var i ance f or t he syst em
per f or mance measur e can be made.
3. D eci de on a sampl e si ze, and usi ng t he est i mat es of popul at i on mean and var i ance, cal cul at e ( by convent i on) 3
st andar d devi at i on cont r ol l i mi t s.
4. Gr aph t he cont r ol char t as a f unct i on of sampl e mean val ues ver sus t i me.
5. Pl ot sampl e means col l ect ed at r andom on t he char t , and i nt er pr et t he r esul t s as f ol l ow s:
a. Pr ocess i n cont r ol
b. Pr ocess out of cont r ol . I n t hi s case:
i . Eval uat e t he si t uat i on
i i . Tak e cor r ect i ve act i on
i i i . Check r esul t s of act i on
6. Updat e t he cont r ol char t on a per i odi c basi s, and i ncor por at e r ecent dat a.

Ef f ect
M achi ne
M at er i al M et hod
M an
Envi r onment
Pr ocess mean
LCL
UCL
LCL
Pr ocess-i n-cont r ol
Pr ocess-out -of -cont r ol
Pr ocess-out -of -cont r ol

Cont r ol char t s f or means f al l i nt o t w o cat egor i es based on t he t ype of per f or mance measur e. A var i abl e cont r ol char t
( X- char t ) r ecor ds measur ement s t hat per mi t f r act i onal val ues, such as l engt h, t i me, or w ei ght . An at t r i but e cont r ol chat
( p- char t ) r ecor ds di scr et e dat a, such as t he number of def ect s or er r or s as a per cent age.
St at i st i cal Pr ocess Cont r ol Pr obl ems

Sampl e si ze x - char t R- char t
n A2 D 3 D 4
2
3
4
5
5
7
8
9
10
12
14
16
18
20
22
24
1.880
1.023
0.577
0.729
0.483
0.419
0.373
0.337
0.308
0.266
0.235
0.212
0.194
0.180
0.167
0.157
0
0
0
0
0
0.076
0.136
0.184
0.223
0.283
0.328
0.363
0.391
0.415
0.434
0.451
3.267
2.574
2.282
2.114
2.004
1.924
1.864
1.816
1.777
1.717
1.672
1.637
1.608
1.585
1.566
1.548
Tabl e 1.1 Var i abl e Cont r ol Char t Const ant s

Tabl e 1.2 RI SK I N QUALI TY- CONTROL D ECI SI ONS

Q ual i ty- contr ol deci si on
Tr ue state of ser vi ce Take cor r ecti ve acti on D o nothi ng
Pr ocess i n cont r ol
Pr ocess out of cont r ol
Type I er r or ( pr oducer s r i sk )
Cor r ect deci si on
Cor r ect deci si on
Type I I er r or (consumer s r i sk )

Cont r ol char t i s a vi sual di spl ay t hat i s used t o pl ot val ues of a measur e of pr ocess per f or mance ( e.g., t he t i me a
di r ect or y assi st ance oper ator spends w i t h a cal l er ) t o det er mi ne i f t h e pr ocess i s i n cont r ol ( e.g., t he t i me i s l ess t han 30
seconds i n t he oper at or ex ampl e) . For ex ampl e, Fi gur e 1.1 show s a cont r ol char t t hat i s used t o moni t or emer gency
ambul ance r esponse t i me. Thi s char t i s a dai l y pl ot of mean r esponse t i me t hat per mi t s moni t or i ng per f or mance f or
unusual devi at i ons f r om t he nor m. W hen a measur ement f al l s out si de t he cont r ol l i mi t s t hat i s, above t he upper
cont r ol l i mi t ( UCL) or bel ow t he l ow er cont r ol l i mi t ( LCL) t he pr ocess i s consi der ed t o be out of cont r ol : consequent l y,
t he syst em i s i n need of at t ent i on.

Ex ampl e 1- 1: Cont r ol Char t f or Var i abl es ( x - char t )
The qual i t y- cont r ol char t f or mean ambul ance r esponse t i me show n i n Fi gur e 1.1 i s an ex ampl e of a var i abl e measur e.
I t i s based on t ak i ng a r andom sampl e of f our ambul ance cal l s each day t o cal cul at e a sampl e mean r esponse t i me t o
moni t or per f or mance. The r ange of t he sampl e val ues ( i .e., t he di f f er ence bet w een t he hi ghest and t he l ow est val ues)
w i l l be used i nst ead of t he st andar d devi at i on t o cal cul at e t he cont r ol l i mi t s. Assume t hat past r ecor ds of ambul ance
syst em per f or mance yi el d an est i mat ed popul at i on mean r esponse t i me of 5.0 mi nut es, w i t h an est i mat ed aver age r ange
of 3.1mi nut es. Appr opr i at e f or mul as f or cal cul at i ng t he cont r ol l i mi t s f or an x - char t usi ng t he R r ange as a subst i t ut e
f or t he st andar d er r or of t he mean ar e

UCL = x + A2 R
LCL = x + A2 R

w her e x = est i mat e of popul at i on mean
R = est i mat e of popul at i on r ange
A2 = val ue f r om Tabl e 1.2 f or sampl e si ze n


For ambul ance r esponse t i me cont r ol char t show n i n Fi gur e 1.1, t he cont r ol l i mi t s f or a sampl e si ze of f our ar e
cal cul at ed as f ol l ow s:

UCL = x + A2 R = 5.0 + ( 0.729) ( 3.1) = 7.26
LCL = x + A2 R = 5.0 - ( 0.729) ( 3.1) = 2.74

W e al so coul d moni t or t he var i ance of t he ambul ance r esponse t i mes usi ng t he r ange ( i .e., t he l ar gest val ue mi nus t he
smal l est val ue i n t he sampl e) as a measur e of var i ance. A r ange or R- char t can be const r uct ed i n a manner si mi l ar t o
t he x - char t by usi ng t he f ol l ow i ng f or mul as:

UCL = D 4 R
LCL = D 3 R

w her e R = est i mat e of popul at i on r ange
D 4 = UCL val ue f r om Tabl e 1.2 f or sampl e si ze n
D 3 = LCL val ue f r om Tabl e 1.2 f or sampl e si ze n

For our ambul ance case, t he r ange cont r ol l i mi t s ar e cal cul at ed usi ng t he constant s i n Tabl e 1.2 f or a sampl e si ze of
f our :

UCL = D 4 R = ( 2.282) ( 3.1 ) = 7.1
LCL = D 3 R = ( 0) ( 3.1) = 0

M
e
a
n

r
e
s
p
o
n
s
e

t
i
m
e
,

m
i
n
u
t
e
s

7.26

5.0

2.74

x

x

x
x

x
x x

x

Upper cont r ol l i mi t ( UCL)

x

Low er cont r ol l i mi t ( LCL)

1 2 3 4 5 6 7 8
Ti me, days
Fi gur e 1.1 x - char t f or ambul ance r esponse.


Name: D at e:
Cour se & Year : Schedul e:

Pr obl em Set f or St at i st i cal Pr ocess Cont r ol

1 . Con t r ol Ch ar t f or Var i abl e
To be come pr odu ct i ve, Resor t I n t er nat i on al i s i n t er est ed i n set t i n g st an dar ds f or t h e t i me t hat t el eph on e r eser vat i on cl er k s
spen d w i t h vacat i on er s mak i n g tou r ar r an gemen t s. Col l ect i n g dat a on t h e amou n t of t i me t h e r eser vat i on cl er k spen d w i t h
cu st omer s h as been pr oposed to det er mi n e t h e mean t i me an d aver age r an ge as w el l as to est abl i sh a pr ocess con tr ol char t f or
t h i s oper at i on . Th e t abl e bel ow r ecor ds t h e t i me i n mi n u t es t h at r eser vat i on cl er k s spen t an sw er i n g cal l s as f ou n d by obser vi n g
on e cal l each day dur i n g a t ypi cal w eek . Th e f i f t h r ow con tai n s t h e X val u es f or each day. Th e l ast r ow con tai n s t h e r ange ( i .e.,
h i gh - l ow ) val u es f or each day ( e.g., t h e h i gh f or M on day w as 1 4 an d t h e l ow w as 5 , yi el di n g a r an ge of 9 ) . Compu t e f or a)
popu l at i on mean an d r an ge, b) est abl i sh t h e con t r ol l i mi t s f or an x - char t w h en sampl i n g f our r andom cal l s each day f or each
cl er k , c) con st r uct an R- char t , an d d) pl ot t h e aver age cal l t i me.

Cl er k M on day Tu esday W edn esday Th u r sday Fr i day
Al i ce
Bi l l
Jan i ce
M i k e
5
6
1 4
8
1 1
5
1 3
6
1 2
1 2
1 0
9
1 3
1 0
9
1 2
1 0
1 3
9
1 4
x
Ran ge
8 .2 5
9
8 .7 5
8
1 0 .7 5
3
1 1 .0
4
1 1 .5
5

2 . Contr ol Char t f or Attr i bute
A r egi onal ai r l i n e i s concer n ed abou t i t s r ecor d of on - t i me per f or mance. Th e M emph i s h u b ex per i en ce 2 0 f l i gh t oper at i on s
each day of t h e w eek , w i t h t h e f ol l ow i n g r ecor d of on- t i me depar t u r es f or t h e pr evi ou s 1 0 days: 1 7 , 1 6 , 1 8 , 1 9 , 1 6 , 1 5 , 2 0 , 1 7 ,
1 8 , an d 1 6 . Pr epar e a p- char t w i t h a sampl e con si st i n g of 1 w eek s aver age on- t i me depar t ur e per cen t age.

3 . Th e t i me to mak e beds at a mot el sh ou l d f al l i n to an agr eed- on r an ge of t i mes. A sampl e of f our mai ds w as sel ect ed, an d t h e
t i me n eeded t o mak e a bed w as obser ved on t h r ee di f f er en t occasi on s:

Ser vi ce ti m e, seconds
M ai d Sam pl e 1 Sam pl e 2 Sam pl e 3
An n
Li n da
M ar i e
M i ch ael
1 2 0
1 3 0
2 0 0
1 6 5
9 0
1 1 0
1 8 0
1 5 5
1 5 0
1 4 0
1 7 5
1 4 0

a. D et er mi n e t h e u pper l i mi t and l ow er l i mi t f or an X- char t an d an R- ch ar t w i t h a sampl e si ze of f ou r .
b. Af t er t h e con t r ol char t w as est abl i sh ed, a sampl e of f our obser vat i on s had t h e f ol l ow i n g t i mes i n secon ds: 1 8 5 , 1 5 0 , 1 92 ,
an d 1 7 8 . I s cor r ect i ve act i on n eeded?

4 . Th e man agemen t of t h e D i n er s D el i gh t f r anch i sed r est aur an t ch ai n i s i n t h e pr ocess of est abl i sh i n g qu al i t y- con tr ol ch ar t f or
t h e t i me t h at each cu st omer i s gi ven to each cu st omer . M anagemen t t h i n k s t h e l en gt h of t i me t hat each cu st omer i s gi ven
sh ou l d r emai n w i t h i n cer t ai n l i mi t s to en han ce ser vi ce qual i t y. A sampl e of si x ser vi ce peopl e w as sel ect ed, an d t h e cust omer
ser vi ce t h ey pr ovi de w as obser ved f ou r t i mes. Th e act i vi t i es t h at t h e ser vi ce peopl e w er e per f or mi n g w er e i den t i f i ed, and t h e
t i me t o ser vi ce on e cu stomer w as r ecor ded as not ed bel ow :

Ser vi ce ti m e, seconds
Ser vi ce per son
Sam pl e 1 Sam pl e 2 Sam pl e 3 Sam pl e 4
1
2
3
4
5
6
2 0 0
1 2 0
8 3
6 8
1 1 0
1 1 5
1 5 0
8 5
9 3
1 5 0
9 0
6 5
1 7 5
1 0 5
1 3 0
1 4 5
7 5
1 1 5
9 0
7 5
1 5 0
1 7 5
1 0 5
1 2 5

a. D et er mi n e t h e u pper and l ow er con t r ol l i mi t s f or an X- char t an d an R- ch ar t w i t h a sampl e si ze of 6 .
b. Af t er t h e con t r ol char t w as est abl i sh ed, a sampl e of si x ser vi ce peopl e w as obser ved an d t h e f ol l ow i n g cu stomer ser vi ce
t i mes i n secon ds w er e r ecor ded: 1 8 0 , 1 2 5 , 1 1 0 , 9 8 , 1 5 6 , and 1 9 0 . I s cor r ect i ve act i on cal l ed f or ?


TIP TOP MARKET
Tip Top Market is a regional chain of supermarkets located in the Southeastern United States. Karen Martin, manager of one of the
stores, was disturbed by the large number of complaints from customers at her store, particularly on Tuesdays, so she obtained
complaint records form the stores customer service desk for the last eight Tuesdays.
Assume you have been asked to help analyzed the data and to make recommendations for improvement. Analyze the data using a
check sheet, a Pareto diagram, and run charts. Then construct a cause-and-effect diagram for the leading category on your Pareto
diagram.
On July 15, changes were implemented to reduce out-of-stock complaints, improve store maintenance, and reduce checkout line or
pricing problems. Do the results of the last two weeks reflect improvement?
Base on your analysis; prepare a list of recommendations that will address customer complaints.
June 1
out of orange yogurt
bread stale
checkout lines too long
overcharged
double charged
meat smelled strange
charged for item not purchased
couldnt find the sponges
meat tasted strange
store too cold
light out in parking lot
produce not fresh
lemon yogurt pass sell date
couldnt find rice
milk past sell date
stock clerk rude
cashier not friendly
out of maple walnut ice cream
something green in meat
didnt like music
checkout line too slow

June 8
fish smelled funny
out of diet bread
dented can
out of hamburger rolls
fish not fresh
cashier not helpful
meat tasted bad
ATM ate card
slippery floor
music too loud
undercharged
out of roses
meat spoiled
overcharged on two items
store too warm
out of rice
telephone out of order
overcharged
rolls stale
bread past sale date

June 15
wanted smaller size
too cold in store
out of Wheaties
out of Minute Rice
cashier rude
fish tasted fishy
ice cream thawed
double charged on hard rolls
long wait at check out
wrong price on item
overcharged
fish didnt smell right
overcharged on special
couldnt find aspirin
undercharged
out of diet cola
meat smelled bad
overcharged on eggs
bread not fresh
didnt like music
lost wallet
overcharged on bread

June 22
milk past sales date
store too warm
foreign object in meat
store too cold
eggs cracked
couldnt find lard
out of 42 oz. Tide
fish really bad
windows dirty
couldnt find oatmeal
out of Bounty paper towels
overcharged on orange juice
lines too long at checkout
couldnt find shoelaces
out of Smuckers strawberry jam
out of Frosty Flakes cereals
out of Thomas English Muffins

June 29
checkout line too long
out of Dove soap
out of Bisquick
eggs cracked
store not clean
store too cold
cashier to slow
out of skim milk
charged wrong price
restroom not clean
couldnt find sponges
checkout lines slow
out of 18 oz. Tide
out of Campbells turkey soup
out of pepperoni sticks
meat not fresh
overcharged on melon

July 6
out of straws
out of bird food
overcharged on butter
out of masking tape
stockboy was helpful
lost child
meat looked bad
overcharged on butter
out of Swiss chard
too many people in store
out of bubble bath
out of Dial soap
store too warm
price not as advertised
need to open more checkout
shopping carts hard to steer
debris in aisles
out of Drano
out of Chinese cabbage
store too warm
floors dirty and sticky
out of Diamond chopped walnuts

July 13
wrong price on spaghetti
water on floor
store looked messy
store too warm
cashier not friendly
out of Cheese Doodles
triple charged
out of Saran Wrap
out of Dove Bars
undercharged
out of brown rice
out of mushrooms
overcharged
checkout wait too long
shopping cart broken
couldnt find aspirin
out of Tip Top lunch bags
out of Tip Top straws

July 20
out of cucumbers
checkout lines too slow
found keys in parking lot
lost keys
wrong price on sale item
overcharged on corn
wrong price on baby food
out of 18 oz. Tide
out of Tip Top tissues
out of romaine lettuce
out of Tip Top toilet paper
out of red peppers
out of Tip Top napkins
out of apricots
out of cocktail sauce
water on floor
out of onions
out of squash
out of iceberg lettuce
out of Tip Top paper towels

July 27
out of bananas
reported accident in parking lot
wrong price of cranapple juice
out of carrots
out of fresh figs
out of Tip Top napkins
out of Tip Top straws
windows dirty
out of iceberg lettuce
dislike store decorations
out of Tip Top lunch bags
out of vanilla soy milk
wanted to know who won the
lottery
store too warm
oatmeal spilled in bulk section
out of Tip Top tissues
water on floor
out of Tip Top paper towels
out of Tip Top toilet paper
spaghetti sauce on floor
out of Peter Pan crunchy peanut
butter

Template of Quality Tools Required in the Case:

A. Check sheet
Complaint
category
Category description Frequency of occurrence
A Out of stock merchandise
B Expired or spoiled stock
C Cashier related complaints lines, charging
D Missing stocks
E Undesirable store ambiance temperature, lighting
F Poor customer service by other personnel
G Equipment related complaints

B. Pareto diagram (based on check sheet data)

C. Run chart (only for the category with the highest frequency of occurrences)

D. Control chart (only for the category with the highest frequency of occurrences)

E. Cause-and-effect diagram (only for the category with the highest frequency of occurrences)

F. List of recommendations (five alternative course of actions to address the most probable cause of the complain
category with the highest frequency of occurrence).

(Nota Bene: Group output should be written in intermediate paper. List the group members names that are only present)
C
u
m
u
l
a
t
i
v
e

f
r
e
q
u
e
n
c
y

o
f

o
c
c
u
r
r
e
n
c
e

F
r
e
q
u
e
n
c
y

o
f

o
c
c
u
r
r
e
n
c
e

A B C D E F (For illustr ation only )
100 %

F
r
e
q
u
e
n
c
y

o
f

o
c
c
u
r
r
e
n
c
e

6/ 1
(For illustr ation only )
0
6/ 8 6/ 15 6/ 222 6/ 29 7/ 6
7/ 13 7/ 20 (time)


F. PLANNING & DESIGNING OF P/O SYSTEM - Part II: FACILITY LAYOUT DESIGN

Lear ni ng Obj ect i ves
At t he end of t hi s modul e mat er i al , st udent shoul d be abl e t o;
1. D et er mi ne f aci l i t y l ayout desi gns
2. Li st t he advant ages of good l ayout
3. Recogni ze t he consi der at i ons of a good l ayout
4. D escr i be t he basi c t ypes of l ayout s
5. D evel op si mpl e pr ocess l ayout
6. Sol ve si mpl e l i ne bal anci ng pr obl em
7. Sol ve l oad di st ance pr obl em

Faci l i ty Layout
Faci l i t y l ayout i s t he desi gni ng of .. or conf i gur at i on of depar t ment s, .., and equ i pmen t t hat const i t u t e t he
.. pr ocess t o enhance t he of t he syst em and smoot hen t he . of t he pr oduct and/ or
ser vi ce.

Advantage of a Good Layout
1. Few er ..
2. .. mat er i al f l ow
3. Bet t er .
4. Reduce mat er i al handl i ng ..
5. Reduce .
6. Ef f ect i ve .. ut i l i zat i on

Consi der at i on of a Good Layout
1. .. and .. r equi r ement s. Capaci t y deci si ons ar e t he pr e- r equ i si t e t o a good l ayout . Onl y w hen w e k now
t he per sonnel , machi nes, and equi pment r equi r ed t hat w e can pr oceed w i t h t he l ayout and pr ovi de space f or each
component s of t he conver si on syst em.
2. Envi r onment al and .. D eci si ons may be r equi r ed about w i ndow s, pl ant er s, and hei ght of par t i t i ons t o
f aci l i t at e ai r f l ow or .. t o r educe noi se, ., t o pr ovi de pr i vacy, and so on.
3. Fl ow s of .. D eci si ons about t he best w ay t o f aci l i t at e communi cat i ons must be al so made. Thi s may r equi r e
deci si on about pr ox i mi t y as w el l as open .. ver sus hal f - hei ght s di vi der s ver sus pr i vat e of f i ces.
4. Cost of .. bet w een var i ous ar eas. Ther e may be uni que consi der at i ons r el at ed t o t he di f f i cu l t y of movement s
or t he i mpor t ance of cer t ai n ar eas bei ng adj acent t o each ot her .
5. .. equi pment . D eci si ons ar e al so r equi r ed about equi pmen t t o be used; such as conveyor s,
cr anes, f or k l i f t s, and car t s t o del i ver mat er i al or mai l cor r espondences.

Type of M anuf actur i ng and Ser vi ce O per ati ons
1. I nt er mi t t ent oper at i ons i ncl ude conver si on syst em t hat pr oduced .. vol umes, but .......... var i et y of i t ems or
ser vi ces ( such as: .., , and so on) .
2. Cont i nuous oper at i ons composed of conver si on syst em t hat pr oduced .. of one or f ew st an dar di ze i t ems;
ex ampl es ar e , .., and
3. Pr oj ect i s used t o pl an and coor di nat e .. j obs w i t h r el at i vel y l i f e span f or i nst ance .,
.., and ..

Si mpl e Pr ocess Layout

A C E
1 2 3
B D F
4 5 6

Locat i on W or k stat i on t o be assi gned

D esi gni ng Pr oduct Layout

Li ne Bal anci ng
Li ne bal anci ng ( Yamazumi ) i s t he pr ocess of assi gni ng .. t o .. t hat have appr ox i mat el y equal t i me
r equi r ement s.
Cycl e t i me i s t he .. t i me al l ow ed at each w or k stat i on t o compl et e i t s set s of task or a uni t .

H er e i s a si mpl e def i n i t i on and ex ampl e of l i ne bal anci ng:
Ever yone i s doi ng t he same amount of w or k
D oi ng t he same amount of w or k t o cust omer r equi r ement
Var i at i on i s smoot hed
No one over bur dened
No one w ai t i ng
Ever yone w or k i ng t oget her i n a BALAN CED f ashi on

Her e w e see oper at or number 1 over - pr oduci ng, t hus
cr eat i ng t he ot her 6 w ast es
W e si mpl y r e- bal ance t he w or k cont ent ( Re- di st r i but e some
of t he w or k ) , Usi ng a Yamazumi boar d as i s of t en k now n.

I n t he ex ampl e show n above, t he Yamazumi ex er ci se
l ook s i ncr edi bl y si mpl e so w hy doesn t ever y do i t ?

Ther e ar e t w o vi t al pr e- r equi si t e t o bal anci ng a l i ne w hi ch must be i n pl ace bef or e a Yamazumi ex er ci se can t ak e pl ace.
These ar e Tak t Ti me and St andar d W or k

Tak t Ti me

Tak t Ti me comes f r om a Ger man w or d t ak t meani ng r hyt hm or beat . I t i s a t er m of t en associ at ed w i t h t he t ak t t he
conduct or set s so t hat t he or chest r a pl ays i n uni son. Tak t Ti me i s used t o mat ch t he pace of w or k t o t he aver age pace of
cust omer demand. Tak t i s not a number t hat can be measur ed ( M i sconcept i on # 1) , and i s not t o be mi st ak en w i t h Cycl e
Ti me, w hi ch i s t he t i me i t t ak es t o compl et e one t ask . Cycl e Ti me may be l ess t han, mor e t han, or equal t o Tak t Ti me.
You can never measur e Tak t Ti me w i t h a st op w at ch. You must cal cul at e i t . The f or mul a f or Tak t Ti me i s:

Tak t Ti me =
Net Avai l abl e Ti me per Day
Cust omer D emand per Day


Tak t Ti me i s ex pr essed as seconds per pi ece , i ndi cat i ng t hat cust omer s ar e buyi ng a pr oduct once ever y so many
seconds. Tak t Ti me i s not ex pr essed as pi eces per second ( M i sconcept i on # 2) . By paci ng pr oduct i on to t hi s r at e of
cust omer demand, Lean M anuf act ur i ng seek s t o mi ni mi ze w as and ensur e on- t i me at a l ow cost .

Tak t t i me i s t he pr oduct i on D r umbeat bases on cust omer demand.

St andar d W or k
W het her you use st andar d w or k combi nat i on t abl es, st andar d w or k i nst r uct i on sheet s or any ot her st andar d w or k
document at i on w i l l depend upon t he t ype of w or k i nvol ved.

St andar d w or k i nst r uct i on sheet s pr ovi de a det ai l ed descr i pt i on of HOW t o do a par t i cul ar st ep of a w or k oper at i on.


Benef i t s of t he pr e- r equi si t es:
Takt ti me max i mi z es the pr oducti vi ty due to: Standar d oper ati ons pr ovi des:
1. Easi l y managed pr ocesses
2 . Out put of each pr ocess mat ches cust omer
demand
1. Capabl e and r epeat abl e pr ocesses
2. Pr ocess cont r ol at sour ce
3. I mpr oves accur acy of pl anni ng
4. Bet t er adher ence t o pl ans
5. A pl at f or m f r om w hi ch cont i nuous
i mpr ovement can be made
6. Reduce cost s
h t t p:/ / w w w .beyon dl ean .com/ l i n e- bal an ci n g.h t ml dat e r et r i eved 0 4 M ay 2 0 1 1 2 1 :5 4 :2 7

A Yamazumi char t i s a stack ed bar char t t hat show s t he bal ance of cycl e t i me w or k l oads bet w een a number of
oper at or s typi cal l y i n an assembl y l i ne or w or k cel l . The Yamazumi char t can be ei t her f or a si ngl e pr oduct or mul t i
pr oduct assembl y l i ne.

Yamazumi i s a Japanese w or d t hat l i t er al l y means t o st ack up.

Toyot a uses Yamazumi w or k bal ance char t s t o vi sual l y pr esent t he w or k cont ent of a ser i es of task s and f aci l i t at e w or k
bal anci ng and t he i sol at i on and el i mi nat i on of non val ue added w or k cont ent .
Sour ce: ht t p:/ / w w w .acsco.com/ Yamazumi .ht m dat e r et r i eved 04 M ay 2011 21:59:24

SOM E USEFUL FORM ULA:
O ut put r ate =
Oper at i ng t i me per day
Cycl e t i me

The t ask t i mes gover n t he r ange of possi bl e cycl e t i mes. The .. cycl e t i me i s equal t o t he . t ask t i me, and
t he max i mum cycl e t i me i s equal to t he sum of t he t ask t i mes.
Cycl e ti me =
Oper at i ng t i me per day
D esi r e out put r at e

As a gener al r ul e, t he cycl e t i me i s det er mi ned by t he desi r ed out put ; t hat i s, a desi r ed out put l evel i s sel ect ed, and t he
cycl e t i me
Theor et i cal mi ni mum number of stati ons =
Sum of t ask t i mes
Cycl e t i me

Pr ecedence di agr am i s a di agr am t hat show s t he el ement al t ask s and t hei r pr ecedence r equi r ement s.
Tw o w i del y used measur e of ef f ect i veness ar e
1. The per cent age of i dl e t i me of t he l i ne. Thi s i s somet i mes r ef er r ed t o as t he bal ance del ay. I t can be comput ed as
f ol l ow s;
Per cen tage of i dl e ti me =
I dl e t i me per cycl e
100
Act ual number of w or kst at i ons Cycl e t i me

I n ef f ect , t hi s i s t he aver age i dl e t i me di vi ded by t he cycl e t i me, mul t i pl i ed by 100. Not e t hat cycl e t i me r ef er s t o t he
act ual cycl e t i me t hat i s achi eved.

2. The ef f i ci ency of t he l i ne. Thi s i s comput ed as f ol l ow s
Ef f i ci ency = 100 Per cent age of i dl e t i me

Sampl e Pr obl em:
Task I mmedi ate f ol l ow er Task ti me ( i n mi nut es)
a
b
c
d
e
f
g
h
b
e
d
f
f
g
h
end
0.2
0.2
0.8
0.6
0.3
1.0
0.4
0.3
t = 3.8

Usi ng t he i nf or mat i on cont ai ned i n t he t abl e show n, do each of t he f ol l ow i ng:
1. D r aw a pr ecedence di agr am.
2. Assumi ng an ei ght - hour w or k day, comput e t he cycl e ti me needed t o obt ai n an out put of 400 uni t s per day.
3. D et er mi ne t he mi ni mum number of w or k stat i ons r equi r ed.
4. Assi gn t ask t o w or k st at i on usi ng t hi s r ul e: Assi gn t ask s accor di ng t o gr eat est number of f ol l ow i ng t ask s. I n case of a
t i e, use t he t i ebr eak er of assi gni ng t he t ask w i t h t he l ongest pr ocessi on t i me f i r st .
5. Comput e t he r esul t i ng per cent i dl e t i me and ef f i ci ency of t he syst em.

Pr ecedence di agr am:

Cycl e t i me
CT =
OT
=
480 mi nu t es per day
= 1.2 mi nut es per day
D 400 uni t s per day

Number of w or k st at i on
Nmi n =
Dt
=
400 uni t s per day 3.8 mi nut es
= 3.17 w or k st at i ons
OT 480 mi nu t es per day

Schedul e of i dl e t i me
Stati on
Ti me
r emai n i ng El i gi bl e W i l l f i t
Assi gn ( task
t i me) I dl e t i me
1

2

3

4
1.2
1.0
0.2
0.0
1.2
0.6
0.3
1.2
0.2
1.2
0.8
0.5

a,c
c,b
b,d
e,d
e,d
e
f
f
g
g
h
-
a,c
c,b
b
none
e.d
e
none
f
none
g
h
-
a( 0.2)
c( 0.8)
b( 0.2)
-
d( 0.6)
e( 0.3)
-
f ( 1.0)
-
g( 0.4)
h( 0.3)
-

0.0

0.3

0.2

0.5
1 . 0

Per cent age of i dl e t i me
% I T =
I T
=
1.0 mi nut e per cycl e
= 0.2083
Nact u al CT 4 st at i ons 1.2 mi nut es per cycl e

Ef f i ci ency of t he l i ne bal ance
Ef f i ci ency = 100 % - per cent of i dl e t i me

Ef f i ci ency = 100 - 20.83 = 79 %

a b
c d
e
f g h
0.2 0.2 0.3
0.8
0.6
1.0 0.4
0.3

Cl oseness Rat i ng
A
E
I
O
U
X
: Absol ut el y necessar y
: Especi al l y i mpor t ant
: I mpor t ant
: Or di nar y cl oseness OK
: Uni mpor t ant
: Undesi r abl e

Assi gnment of t he cl oseness r at i ng i s
subj ect i ve.

Rul e of t humb:
Ver y f ew A and X r el at i onshi ps shoul d
be assi gned. ( no mor e t han 5% of t he
cl oseness r at i ngs t o be an A and X) .
No mor e t han 10% shoul d be an E.
No mor e t han 15% t o be an I .
No mor e t han 20% t o be an O.
Thi s means t hat about 50% of t he
r el at i onshi ps shoul d be U.

Sampl e Pr obl em f or Cl oseness Rat i ng
Cl oseness r at i ng
1. Ar r ange si x depar t ment s i nt o a 2 x 3 gr i d so t hat
t hese condi t i ons ar e sat i sf i ed: 1 cl ose t o 2, 5 cl ose
t o 2 and 6, 2 cl ose t o 5, and 3 not cl ose t o 1 or 2.

2. Usi ng t he i nf or mat i on gi ven i n pr ecedi ng
pr obl ems, devel op a M ut her - t ype gr i d usi ng t he
l et t er s A, O, and X. Assume t hat any pai r of
combi nat i on not ment i oned have an O r at i ng.

Load D i st ance Techni que

M i ni mi zi ng Tr anspor t at i on Cost s or D i st ance

Assumpt i on: Cost s ar e di r ect , l i near f unct i on of di st ance.

Sampl e Pr obl em

Assi gn t he t hr ee depar t ment s t o l ocat i on A, B, and C, w hi ch ar e separ at ed by t he di st ance sh ow n i n Tabl e 2, i n such a
w ay t hat t r anspor t at i on cost i s mi ni mi zed. I f i t cost per met er t o move any l oad i s P5, comput e f or t he dai l y
t r anspor t at i on cost
Use t hi s heur i st i c r ul e: Assi gn depar t ment s w i t h t he gr eat est i nt er depar t ment al w or k f l ow f i r st .

Ri char d Mut her devel oped a mor e gener al appr oach t o t he pr obl em, whi ch al l ows f or
subj ect i ve i nput fr om anal yst s or manager s t o i ndi cat e t he r el at i ve i mpor t ance of
each combi nat i on of depar t ment pai r s. I n pr act i ce, t he l et t er s on t he gr i d ar e of t en
accompani ed by number s t hat i ndi cat e t he r eason f or each assi gnment ; t hey ar e
omi t t ed her e t o si mpl if y t he i l l ust r at i ons. Mut her suggest s t he f ol l owi ng l i st .
1. Use same equi pment or f aci l i t i es
2. Shar e t he same per sonnel or r ecor ds
3. Sequence of wor k f l ow
4. Ease of communi cat i on
5. Unsaf e or unpl easant condi t i ons
6. Si mi l ar wor k per f ormed

Tabl e 1. Locat i on ( D i st ance)
To
Fr om
A B C
A - 20 40
B 20 - 30
C 40 30 -
Tabl e 2. D epar t ment ( Load)
To
Fr om
1 2 3
1 - 10 80
2 20 - 30
3 90 70 -

Repr esent at i on :

Sol ut i on:
D epar t ment Number of Loads t o Locat i on D i st ance ( met er s) t o Load D i st ance Cost
1

2

3

2:10
3:80
1:20
3:30
1:90
2:70
A

C

B

C:40
B:20
A:40
B:30
A:20
C:30
400
1600
800
900
1800
2100
7600

P38000

Tr anspor t at i on M odel

The t r anspor t at i on pr obl em i nvol ves f i ndi ng t he l ow est - cost pl an
f or di st r i bu t i ng st ock s of goods or suppl i es f r om mul t i pl e
dest i nat i ons t hat demand t he goods or suppl i es. The t r anspor t at i on
model can be used t o det er mi ne how t o al l ocat e t he suppl i es
avai l abl e f r om t he var i ous f act or i es t o t he w ar ehouse t hat st ock or
demand t hose goods, i n such a w ay t hat t ot al shi ppi n g cost ( t i me,
di st ance) i s mi ni mi zed.
The i nf or mat i on needed t o use t he model consi st s of t he f ol l ow i ng:
1. A l i st of t he or i gi ns and each one s capaci t y or suppl y
quant i t y per per i od.
2. A l i st of t he dest i nat i ons and each one s demand per i od.
3. The uni t cost of shi ppi ng i t ems f r om each or i gi n t o each
dest i nat i on.
Tr anspor t at i on model must sat i sf y t hese assumpt i ons:
1. The i t ems t o be shi pped ar e homogeneous ( i .e., t hey ar e t he same r egar dl ess of t hei r sour ce of dest i nat i on) ,
2. Shi ppi ng cost per uni t i s t he same r egar dl ess of t he number of uni t s shi pped, and
3. Ther e i s onl y one r out e or mode of t r anspor t at i on bei ng used bet w een each sour ce and each dest i nat i on.
The descr i pt i on of t he t echni que of t he maj or st eps i n t he pr ocess i n t hi s or der :
1. Obt ai n an i ni t i al sol ut i on ( usi ng i nt ui t i ve l ow est cost appr oach or gr eedy met hod, nor t hw est t echni que, an d so
on)
2. Test i ng t he sol ut i on of opt i mal i t y
a. Eval uat i ng empt y cel l : St eppi ng- st one met hod
b. Eval uat i ng empt y cel l : The M odi f i ed D i st r i but i on met hod
3. I mpr ovi ng subopt i mal sol ut i ons
2
1 3 B
A
C
40m
20m
30m
Analysis:
Department
Workflow
(Load) Trip
Distance
(meters)
3-1
1-3
3-2
2-3
2-1
1-2
90
80
70
30
20
10
A-B
B-A
B-C
C-B
A-C
C-A
20
20
30
30
40
40

Sample Transportation Problem
Warehouse
Factory
A B C D
Supply
1
4 7 7 1
100
2
12 3 8 8
200
3
8 10 16 5
150
Demand 80 90 120 160


WAI T I N G LI N E M AN AGE M E N T

Thi s Book of t he Law shal l not depar t f r om your mout h, but you shal l medi t at e i n i t day and ni ght , t hat you may
obser ve t o do accor di ng t o al l t hat i s w r i t t en i n i t . Joshua 1:8

Le a rning O bje c tive s
1. D i scuss the basi c el ements of wai ti ng li ne probl ems
2. Provi de standard steady-state f ormula f or sol vi ng wai ti ng l i ne probl ems

Economics of the Waiting Line Problem

1. Cost Effect i veness Balance. I ni ti al l y, wi th mi ni mal servi ce capaci ty, the wai ti ng l i ne cost i s at a maxi mum. As servi ce
capaci ty i ncreased, there i s a reducti on i n the number of customer i n the l i ne and i n thei r wai ti ng ti mes, whi ch decrease
wai ti ng l i ne costs.
2. Pract i cal Vi ew of Wai t i ng Li nes. One i mportant variabl e is the number of arrival s over the course of the hours that
the servi ce system i s open. From the servi ce deli very vi ewpoi nt, customers demand varyi ng amounts of servi ce, of ten
exceedi ng normal capaci ty. We can have some control over arri val s i n vari ety of ways. For exampl e, we can have a short
l i ne (such as a drive-i n at a f ast-f ood restaurant wi th onl y several spaces), we can establi sh speci f i c hours f or speci f ic
customers, or we can run speci al s. For the server, we can af f ect servi ce ti me by usi ng f aster or sl ower server, f aster or
sl ower machi nes, di f f erent tool i ng, di f f erent materi al , di f f erent l ayout, f aster setup ti me, and so on. The essenti al poi nt i s
wai ti ng l i ne are not a f i xed condi ti on of a productive system but are to a very l arge extent wi thi n the control of the system
management desi gn.

The Queuing System

The queui ng system consi sts of essenti all y of three maj or components:

The source of populat i on and t he way cust omers arri ve at t he syst em

Cust omer Arri val : Arrival at a servi ce system may be drawn f rom a f i ni te or an i nf i ni te

1. Popul at ion Source

a. Fi ni t e Source ref ers to the l i mi ted-si ze customer pool that wil l use the servi ce and, at ti mes, f orm a l i ne. The reason
f or thi s f i ni te cl assif i cati on i s i mportant because when a customer l eaves i ts posi ti on as a member f or the popul ati on
(a machi ne breaki ng down and requi ri ng servi ce, f or exampl e), the si ze of the user group is reduced by one, whi ch
reduces the probabi l i ty of the next occurrence. Conversel y, when a customer i s servi ced and returns to the user group,
the popul ati on i ncreases and the probabi l i ty of a user requi ri ng servi ce al so i ncreases. Thi s f i ni te cl ass of probl ems
requi res a separate set of f ormul as f rom that of the i nf i ni te popul ati on case.

b. I nfi ni t e Popul at i on i s one l arge enough i n relati on to the servi ce system so that the popul ati on si ze caused by
subtracti on or addi ti on to the popul ati on (a customer needi ng servi ce customer returni ng to the popul ati on) does not
si gnif i cantl y af f ect the system probabi l i ti es.


2. Di st ri but i on of Arri val s. When descri bi ng a wai ti ng system, we need to def i ne the manner i n whi ch customer or the
wai ti ng uni ts are arranged f or servi ce.

a. Arri val rat e. Wai ti ng li ne f ormulas generall y requi re and arri val rate, or the number of uni ts per peri od (such as an
average of one every si x mi nutes). A constant arri val di stri buti on i s peri odi c, wi th exactl y the same ti me peri od
between successive arri val s. I n producti ve system, about the onl y arri val s that trul y approach a constant i nterval
peri od are those that are subj ect to machi ne control . Much more common vari abl e (random) arri val di stri buti on.

b. Vi ewpoi nt s in observi ng arri val s at a servi ce faci l i t y

i. Fi rst, we can anal yze the ti me between successive arri val s to see i f the ti mes f ol l ow some statisti cal di stri buti on.
Usuall y, we assume that the ti me between arri val s is exponenti al l y di stri buted.

Exponent i al Di st ri but ion. I n the f i rst case, when arrival s at a servi ce f aci li ty occur i n a purel y random f ashi on,
a pl ot of the i nter-arri val ti mes yi el ds an exponenti al di stributi on. The probabi l i ty f uncti on i s:
(t) = e-
t

where i s the mean number of arri vals per ti me peri od; e i s the natural al gori thm (2.7183), and t i s the arri val
ti me.

ii. Second, we can set some ti me l ength (T) and try to determi ne how many arri vals might enter the system wi thi n T.
We typi call y assume that the number of arri vals per ti me is Poi sson di stri buted.
P
T
(n) =
(T)
n
e-
t

n!
Poi sson i s a discrete di stri buti on (smoothed curve, the curve become smoother as n becomes l arge) because n
ref ers to the number of arri val i n a system, and thi s must be an i nteger. (For exampl e, there cannot be 1.5 arri val s).

Al so not that the exponenti al and Poi sson di stri buti on can be deri ved f rom one another, the mean and vari ance of
the Poi sson di stri buti on are equal and denote by . The mean of the exponenti al di stri buti on i s 1/ and i ts
variance i s 1/
2
. (Remember that the time between arrivals is exponentially distributed and the number
of arrivals per unit of time is Poi sson distributed.)

3. Ot her Arri val Charact eri st i cs

a. Arri val pat t erns. The arri vals at a system are f ar more control l abl e that is general . The si mpl est of all arri val -control
devi ces i s the posti ng of busi ness hours. Some servi ce demands are cl earl y uncontrol l abl e, such as emergency media
demand on a ci tys hospi tal are control l abl e to some extent by, say, keepi ng ambul ance drivers i n the servi ce regi on
i nf ormed of the status of thei r respecti ve host hospi tal .

b. Si ze of arri val . A si ngl e arri val may be thought of as a one uni t. (A uni t i s the small est number handl ed.) A batch
arri val i s some mul ti pl e of the uni t, such as a bl ock of 1,000 shares on the PSE, a case of eggs at the processi ng plants,
or a f ami l y party at a restaurant.

c. Degree of pat i ence. A pati ent arrival i s one who wai ts as l ong as necessary unti l the servi ce f aci li ty is ready to serve
hi m or her. (Even i f arri val s grumbl e and behave i mpati entl y, the f act that they wai t i s suf f i ci ent to label them as
pati ent arri val s f or the purpose of wai ti ng li ne theory.) These are two cl asses of i mpati ent arrival s. Member of the f irst
cl ass arrive, survey both the servi ce f aci li ty and the l ength of the li ne, and then deci de to l eave. Those i n the second
cl ass arrive, vi ew the si tuati on, j oi n the wai ti ng li ne, and then, af ter some peri od of ti me, depart. The behavi or of the
f i rst type i s termed bal k i ng, whil e the second i s termed r enegi ng.

n! i s def i ned as n(n-1)(n-2)(2)(1)

The Servi ci ng Syst em

The Queui ng System consi sts pri mari l y of the wai ti ng li ne(s) and the avail abl e number of servers. The f ol l owi ng discusses
i ssues pertai ni ng to wai ti ng li ne characteri sti cs and management, l i ne structure, and servi ce rate.

1. The Wai t ing Li ne. Factors to be consi der wi th wai ti ng li nes i nclude the l i ne l ength, number of li nes, and queue
di sci pli ne.

a. Lengt h. I n practi cal sense, an i nf i ni te l i ne si mpl y one that i s very l ong i n terms of the capaci ty of the servi ce system.
Exampl es i n i nfi ni t e pot ent i al l engt h are a l i ne of vehi cl es backed up f or mil es at a bri dge crossi ng and customer who
must f orm a l i ne around the bl ock as they wai t to purchase ti ckets at a theater. Gas stati on, l oadi ng docks, and parki ng
l ots have l i mi t ed li ne capaci t y caused by l egal restri cti on or physi cal space characteri sti cs.

b. Number of Lines. A si ngl e li ne or si ngl e f i l e is, of course, one l i ne onl y. The term mult i pl e l i ne ref ers to the si ngl e l i nes
that f orm i n f ront of two or more servers or to si ngl e li nes that converge at some central redi stri buti on poi nt.
c. Queue Di sci pl i ne. A queue disci pli ne i s a pri ori ty rul e or set of rul es f or determi ni ng the order of servi ce to
customers i n a wai ti ng li ne. The rul es sel ected can have a dramati c ef f ect on the systems overal l perf ormance. The
number of customer i n li ne, the average wai ti ng ti me, the range of vari abil i ty i n wai ti ng l i ne, and the ef f i ci ency of the
servi ce f acil i ty are just a f ew of the f actors af f ected by the choi ce of pri ori ty rul es. (F i r st come; fi r st ser ve (F CF S), shor t est
pr ocessi ng ti me, r eser vati on fi r st , emer genci es fi r st , hi ghest -pr ofi t customer fi r st , l argest or der s fi r st , best cust omer fi r st , l ongest wai ti ng ti me i n
l i ne, seni ori t y or di sabl e lane, and soonest pr omi sed dat e are some exampl es of pri ori ty rul es.)

2. Servi ce Ti me Di st ri but i on. Another i mportant f eature of the wai ti ng structure i s the ti me the customer or uni t spends
wi th the server once the servi ce has started. Wai ti ng li ne f ormul as general l y speci f y ser vi ce r at e as the capaci ty of the server
i n number of uni ts per ti me peri od (such as 12 compl eti ons per hour) and not as servi ce ti me, whi ch might average f i ve
mi nutes each. A const ant servi ce ti me rul es states that each servi ce takes exactl y the same ti me. As i n constant arri vals, thi s
characteri sti c i s generall y l i mi ted to machi ne-cont rol l ed operati ons. When servi ce ti mes are random, a good approxi mati on
of them can be given by the exponenti al di stri buti on. When usi ng the exponenti al distri buti on as an approxi mati on of the
servi ce ti mes, we wi ll ref er to as the average number of uni ts or customers that can be served per ti me peri od.

3. Li ne St ruct ure. The f l ow of i tems to be servi ced may go through a si ngl e li ne, mul ti pl e l i nes, or some mi xtures of the
two. The choi ce of f ormat depends partl y on the vol ume of customers served and partl y on the restri cti ons i mposed by
sequenti al requi rements governi ng the order i n whi ch servi ce must be perf ormed.

a. Si ngl e channel , si ngl e phase e.g., one-person barbershop
b. Si ngl e channel , mul t i pl e phase e.g., car wash (vacuumi ng, wetting, washi ng, rinsi ng, dryi ng, window
cl eaning, and parki ng)
c. M ul t i pl e channel , si ngl e phase e.g., bank tel l ers wi ndows and checkout counters i n high-volume
department stores
d. M ul t i pl e channel , mul t i pl e phase e.g., admission of hospi tal pati ents
e. M i xed. Under this general heading we consi der two categori es (1) mul ti pl e-to-si ngl e channel structures
(e.g., toll gate in NLEX, bri dge crossing, or subassembl y l ines) and (2) al ternate path structure.

The condi t i on of t he cust omer exi t i ng t he syst em (back t o source popul at i on or not ?)

Once a customer i s served, two exi t f ates are possi bl e: (1) the customer may return to the source popul ati on and immedi atel y
become a competi ti ve candi date f or servi ce agai n: or (2) there may be a l ow probabi l i ty of reservi ce. The f i rst case can be
i ll ustrated by a machi ne that has been routi nel y repai red and returned to duty but may break down agai n: the second can be
i ll ustrated by a machi ne that has been overhaul ed or modi f i ed and has a l ow probabi l i ty of reservi ce over the near f uture. I n a

l i ghter vei n, we might ref er to the f i rst as the recurri ng-common-col d case and to the second as the appendectomy-onl y-
one case.

Waiting Line Method

M easures of Wai t i ng Line Performance

They relate to potential customer dissatisfaction and costs.
1. The average number of customer waiting, either in line or in the system.
2. The average time customer waits, either in line or in the system.
3. System utilization, which refers to the percentage of capacity utilized.
4. The implied cost of a given level of capacity and its related waiting line.
5. The probability that an arrival will have to wait for service.

I nfi ni t e M odel

Al l assume a Poisson arrival rate. Moreover, the model pertai ns to a system operati ng under st eady-stat e condi ti ons; that i s, they
assume the average arri val and servi ce rate are stabl e. The f our model are descri bed bel ow

Prope rtie s of Some Sp e c ific Wa iting Line M od e ls

M odel Layout Service Phase
Source
Population
Arrival
Pattern
Queue
D isci pline
Service
Pattern
Permissi ble
Queue
Length
T ypi cal Example
1

2

3

4
Si ngl e channel

Si ngl e channel

Mul t i pl e channel

Si ngl e channel
Si ngl e

Si ngl e

Si ngl e

Si ngl e
I nf i ni te

I nf i ni te

I nf i ni te

Fi ni t e
Poi sson

Poi sson

Poi sson

Poi sson
FCFS

FCFS

FCFS

FCFS
Exponent i al

Const ant

Exponent i al

Exponent i al
Unl i mi t ed

Unl i mi t ed

Unl i mi t ed

Unl i mi t ed
D ri ve-i n t el l er at bank;
one-l ane t ol l bri dge:
Rol l er coast er ri des i n
amusement part
Part s count er i n aut o
agency
Machi ne breakdown and
repai r i n a f act ory

Infinite-Source Symbols

Symbols Represents Symbols Represents

L
q

L
s

r

Customer arrival rate
Service rate per server
The average number of customer waiting for
service
The average number of customer in the
system(waiting and/or being served)
The average number of customer being serve
The system utilization

W
q
W
s

1/
P
0

P
n

M
L
MAX

The average time customer wait in line
The average time customers spend in the system
(waiting in line and service time)
Service time
The probability of zero units in the system
The probability of n units in the system
The number of servers (channels)
The maximum expected number waiting in line

Ba sic Re la tionships

1. Syst em Ut i l i zat ion: Thi s ref ers to the rati o of demand (as measured by the arri val rate) to suppl y or capaci ty (as
measured by the product of the number of servers, M , and the servi ce rate, ).
=

M


2. The average number of customer bei ng served:
r =

{ N ote: and must be i n the same uni ts (e.g., customers per hour, customer per mi nute)}
Accordi ng to Li ttl es Law, f or stabl e system, the average number of customer i n li ne or i n the system i s equal to the average
customer arri val rate mul ti pli ed by the average ti me i n li ne or i n system. That i s,
L
s
= W
s
and L
q
= W
q

3. The average number of customer
a. Wai ti ng i n li ne f or servi ce: L
q
(Model dependent. Obtai n usi ng a tabl e or f ormul a.)
b. I n the system (l i ne pl us bei ng served): L
s
= L
q
+ r

4. The average ti me customers are
a. Wai ti ng i n li ne:
W
q
=
L
q

b. I n the system:
W
s
= W
q
+
1
=
L
s

Sample Problem Sets for Waiting Line Management

1. Customers arri ve at a bakery at an average rate of 16 per hour on weekday morni ngs. The arri val distri buti on can be
descri bed by a Poi sson di stri buti on wi th a mean of 16. Each cl erk can serve a customer i n an average of three mi nutes;
thi s ti me can be descri bed by an exponenti al di stri buti on wi th a mean of 3.0 mi nutes.
a. What are the arrival and servi ce rate?
b. Compute the average number of customer bei ng served at anyti me.
c. Supposed i t has been determi ned that the average number of customer wai ti ng i n l i ne i s 3.2. Compute the average
number of customer i n the system (i .e., wai ti ng i n li ne or bei ng served), the average ti me customers wai t i n l i ne, and
the average ti me i n the system.
d. D etermi ne t he system uti li zati on f or M = 1, 2, and 3 servers.

2. An ai rli ne is planni ng to open satel li te ti cket desk i n a new shoppi ng pl aza, staf f ed by one ti cket agent. I t is esti mated that
request f or ti ckets and i nf ormati on wil l average 15 per hour, and request wi ll have a Poisson distri buti on. Servi ce time i s
assumed to be exponenti al l y distri buted. Previ ous experi ence wi th si mi lar satel li te operati on suggests that mean servi ce
ti me shoul d be average about three mi nutes per request. D etermi ne each of the f ol l owi ng.
a. System uti li zati on.
b. Percentage of ti me the server (agent) wil l be i dl e.
c. The expected number of customer wai ti ng to be served.
d. The average ti me customer wi ll spend i n the system.
e. The probabi l i ty of zero customers i n the system and the probabi l i ty of f our customers i n the system.

A
n
s
w
e
r
s
:

1
.

a
)
T
h
e

a
r
r
i
v
a
l

r
a
t
e

i
s

g
i
v
e
n

i
n

t
h
e

p
r
o
b
l
e
m
:

=

1
8

c
u
s
t
o
m
e
r
s

p
e
r

h
o
u
r
.

T
h
e

s
e
r
v
i
c
e

t
i
m
e

c
a
n

b
e

c
h
a
n
g
e
d

t
o

a

c
o
m
p
a
r
a
b
l
e

h
o
u
r
l
y

r
a
t
e

b
y

f
i
r
s
t

r
e
s
t
a
t
i
n
g

t
h
e

t
i
m
e

i
n

h
o
u
r
s

a
n
d

t
h
e
n

t
a
k
i
n
g

i
t
s

r
e
c
i
p
r
o
c
a
l
.

T
h
u
s
,

(
4

m
i
n
u
t
e
s

p
e
r

c
u
s
t
o
m
e
r
)
/
(
6
0

m
i
n
u
t
e
s

p
e
r

h
o
u
r
)

=

1
/
1
5

=

1
/
.

I
t
s

r
e
c
i
p
r
o
c
a
l

i
s

=

1
5

c
u
s
t
o
m
e
r
s

p
e
r

h
o
u
r
;

b
)

r

=

1
.
2

c
u
s
t
o
m
e
r
s
;

c
)

L
s

=

4
.
8

c
u
s
t
o
m
e
r
s
,

W
q

=

0
.
2
0

h
o
u
r
s

p
e
r

c
u
s
t
o
m
e
r
,

o
r

1
2

m
i
n
u
t
e
s
,

W
s

0
.
2
6
7

h
o
u
r
s

o
r

a
p
p
r
o
x
i
m
a
t
e
l
y

1
6

m
i
n
u
t
e
s
;

d
)

M
=
2

p

=

.
6
0
,

M
=
3

p

=

.
4
0

M
=
4

p

=

.
3
0

2
.

a
)

p
=
.
7
5
;

b
)

2
5

p
e
r
c
e
n
t

c
)

L
q
=

2
.
2
5

c
u
s
t
o
m
e
r
s

d
)

W
s

0
.
2
0

h
o
u
r
s

o
r

1
2

m
i
n
u
t
e
s

e
)

P
0

=

.
2
5

P
4

=

.
0
7
9


Name: Score:
Course & Year: Schedule: Date:

Problem Set for Waiting Line Management

1 . Noel O . Pa n Jr. Lub e Inc. op era t es a f a st lub e a nd oil cha ng e g a ra g e. O n a t y p ica l d a y , cust omers arr ive at
t he ra t e of t hr ee p er hour a nd lub e job s a r e p erf ormed a t a n a ver ag e ra t e of one ever y 15 minut es. The
mecha nics op era t e a s a t ea m on one car at a t ime. Assuming Poisson a r r iva ls a nd ex p onent ia l ser vice, f ind .

a . Ut iliza t ion of t he lub e t ea m.

b . The a vera g e numb er of ca rs in line.

c. The a vera g e t ime a ca r wa it s b ef or e it is lub ed .

d . The t ota l t ime it t a kes t o g o t houg h t he syst em (t hat is, wa it ing in line p lus lub e t ime).

e. The a vera g e numb er of ca rs in t he syst em.

f . The a vera g e t ime a ca r is lub ed .

g . The p r ob a b ilit y of no car t o b e lub ed a nd oil cha ng ed in t he g a ra g e.

h. The p r ob a b ilit y t hat f ive ca r s b eing lub ed and oil cha ng ed in the ga r ag e.

2 . Ba r na chea Bus Liner is p lanning t o op en sa t ellit e t icket d esk in a Shoe Ma rt Cit y - Ba g uio, sta f f ed b y one
t icket ag ent . It is est ima t ed tha t r eq uest f or t ickets a nd inf or mat ion will a ver ag e 15 p er hour , a nd r equest
will ha ve a Poisson d ist r ib ut ion. Ser vice time is assumed t o b e ex p onent ia lly d ist r ibut ed. Pr evious ex p er ience

wit h simila r sat ellit e op era t ion sugg est s t hat mea n ser vice t ime should b e a ver a g e a b out t hr ee minut es p er
r eq uest . Det er mine ea ch of t he f ollowing .

a . Sy st em ut iliza t ion.

b . Per cent ag e of t ime t he ser ver (a g ent ) will b e id le.

c. The ex p ect ed numb er of cust omer wa it ing t o b e served .

d . The a vera g e t ime cust omer will sp end in t he sy st em.

e. The a vera g e numb er of cust omer b eing ser ved .

f . The ex p ect ed t ime a cust omer will wa it in t he line.

g . The p r ob a b ilit y of zer o cust omers in t he syst em.

h. The p r ob a b ilit y of f our cust omers in t he sy st em.

3 . Ba r ney Ta x i a nd Ha uling Ser vice p lans t o ha ve ca bs a t Vict or y Liner st a t ion. The exp ect ed a rr iva l r at e is 4 .8
cust omer s p er hour , and t he ser vice ra t e (includ ing ret ur n t ime t o t he st at ion) is exp ect ed t o b e 1 .5 p er hour .
How ma ny ca b s will b e need ed t o a chieve a n avera g e time in line of 20 minut es or less?


G. OPERATING & CONTROLLING THE P/O SYSTEM - Part II: PROJECT MANAGEMENT

Project: a unique, one time operational activity or effort.

Project Planning
The general management process is concerned with the planning,
organization, and control of an ongoing process or activity such as the
production of a product or delivery of a service. Project Management is
different in that it requires a commitment of resources and people to an
important undertaking that is not repetitive and involves a relatively short period
of time, after which the management effort is dissolved. A project has a unique
purpose, it is temporary, and it draws resources from various areas in the
organization; as a result, it s subject to more uncertainty than the normal
management process. Thus, the features and characteristics of the project
management process tend to be unique.
Project management encompasses three other major processesplanning,
scheduling, and control. It also includes a number of the more prominent
elements of these processes.
1. Planning ( Project Team, Work Breakdown Structure, Responsibility
Assignment Matrix)
2. Scheduling (Gantt Chart, CPM/PERT)
3. Control (Stay on Schedule, Risk Analysis and Quality Control, Cost
Control)

Elements of a Project Plan
Project plans generally include the following basic elements.
Objectives a detailed statement of what the project is to accomplish and
how it will achieve the companys goal and meet the strategic plan; and
an estimate of when it needs to be completed, the cost and the return.
Project scope a discussion of how to approach the project, the
technological and resource feasibility, the major task involved, and a
preliminary schedule; includes a justification of the project and what
constitutes project success.
Contract requirements a general structure of managerial, reporting, and
performance responsibilities, including a detailed list of staff, suppliers,
subcontractors, managerial requirements and agreements, reporting
requirements, and a projected organizational structure.
Schedules a list of all major events, tasks, and subschedules, from
which a master schedule is developed.
Resources the overall project budget of all resources requirements and
procedures for budgetary control.
Personnel identification and recruitment of personnel required for the
project team, including special skills and training.
Control procedure for monitoring and evaluating progress and
performance including schedules and cost.
Risk and problem analysis anticipating and assessing uncertainties,
problems, and potential difficulties that might increase the risk of project
delays and/or failure and threaten project success.

Project teams are made up of individuals from various areas and departments
within a company.

Matrix organization: a team structure with members from functional areas,
depending on the skills required.

Project manager is often under great pressure (time and budgetary constraints)

Scope statement: a document that provides an understanding, justification, and
expected results of a project.

Statement of work: a written description of the objective of a project (use for
determining work performance and for bidding of the subcontractors and
suppliers)

Work breakdown structure (WBS): breaks down a project into components,
subcomponents, activities, and tasks.

Organizational Breakdown Structure (OBS): a chart that shows which
organizational units are responsible for work items.

Responsibility Assignment Matrix (RAM): shows who is responsible for the
work in a project.

WBS Activities Hardware/Installation
OBS Units
1.1.1
Area
Prep
1.1.2
Tech/
Engineer
1.1.3
Wiring
1.1.4
Connections

Hardware engineering
Systems engineering
Software engineering
Technical support
Electrical staff
Hardware vendor
Quality manager
Customer/supplier
liaison

3

1
2

3

1
3

3
2

3

1

2
3

1
3
2
2
3

3

3
Level of responsibility: 1 = overall responsibility, 2 = performance responsibility, and 3 =
support

For global projects to successful, cultural differences, idiosyncrasies, and
issues must be considered as important parts of the planning process.

Project Scheduling

Gantt chart: a graph or bar chart with a bar for each project activity that shows
the passage of time. It has been a popular project scheduling tool since its
inception and is still widely used today. It is the direct precursor of the
CPM/PERT technique.

Month
0 2 4 6 8 10
Activity
1.Design house and obtain financing

2..Lay foundation

3.Order and receive materials

4..Build house

5.Select paint

6.Select carpet

7.Finish work

1 3 5 7 9
Month

Order System
Personnel Software Hardware

Slack: the amount of time an activity can be delayed without delaying the project.

Project Control
Project control is the process of making sure the project progresses toward a
successful completion. It requires that the project be monitored and progress be
measured so that any deviations from the project plan, and particularly the project
schedule, are minimized. If the project is found to be deviating form the planthat
is, it is not on schedule, cost overruns are occurring, activity results are not as
expected, and so onthen corrective actions must be taken. The following are the
key elements of project control:
1. Time Management: the process of making sure the project schedule does not
slip and it is on time. This requires monitoring of individual activity schedules
and frequent updates. If the schedule is being delayed on an extent that
jeopardizes the project success, then the project manager may have to shift
resources to accelerate critical activities.

Time-cost tradeoff: activities may have slack time, and resources can be
shifted from them to activities that are not on schedule, however, this can also
push the project cost above budget.

2. Cost Management: is often closely tied to time management because of the
time cost tradeoff occurrences. If the schedule is delayed, costs tend to
increase in order to get the project back on schedule.

3. Quality Management: quality management and control are an integral part of
the project management process. The process requires that project work be
monitored for quality and that improvements be made as the project
progresses just the same as in a normal production or manufacturing
operation. Poor-quality work increases the risk of project failure, just as a
defective part can result in a defective final product if not corrected.

4. Performance Management: the process of monitoring a project and
developing timed (i.e., daily, weekly, monthly) status reports to make sure that
goals are being met and the plan is being followed. It compares planed target
dates for events, milestones, and work completion with dates actually
achieved to determine whether the project is on schedule or behind schedule.
Key measures of performance include deviation from the schedule, resource
usage, and cost overruns.

Earned value analysis (EVA) is a standard procedure for numerically
measuring a projects progress, forecasting its completion date and cost and
measuring schedule and budget variation. Example given, schedule
variance compares the work performed during a time period with the work
that was schedule to be performed, and cost variance is the budgeted cost
of work performance minus the actual cost of the work.

5. Communication: communication needs for project and program management
control in todays global business environment tend to be substantial and
complex. The distribution of design documents, budget and cost documents,
plans, status reports, schedules, and schedule changes in a timely manner is
often critical to project success.

6. Enterprise Project Management: refers to the management and control of a
companywide portfolio of projects. In the enterprise approach to managing
projects, a companys goals are achieved through the coordination of
simultaneous projects. The company grows, changes, and adds value by
systematically implementing projects of all types across the enterprise.

CPM/PERT

Critical Path Method (CPM), developed in 1956 by research team at E.I. du Pont de
Nemours & Company, Inc., to initiate a project to developed a computerized
system to improve the planning, scheduling, and reporting of the companys
engineering programs (including plant maintenance and construction projects)

Program Evaluation and Review Technique (PERT) developed by research team
from Navy Special Project Office, and consulting firm developed a similar
network approach for the design of management control system for the
development of the Polaris Missile Project (a ballistic missile-firing nuclear
submarine).

Both CPM and PERT are derivatives of the Gantt chart, and are very similar.
However these are the differences:

1. With CPM a single estimate for activity was used that did not allow for any
variation in activity timesactivity times were treated as if they were known
for certain, or deterministic. With PERT, multiple time estimates were used
for each activity that allowed for variation in activity timesactivity times were
treated as probabilistic.
2. In PERT, activities were represented as arcs, or arrowed lines, between two
nodes or circles, whereas in CPM activities were represented as the nodes or
circles.

CPM/PERT uses a network to depict the precedence relationships among activities.

Project Network
1. Activity-on-node (AON): nodes represent activities, and arrows show
precedence relationships.

C

C C C C

C

Dummy activity is inserted into the network to show a precedence relationship, but it
does not represent any actual passage of time

2. Activity-on-arrow (AOA): arrows represent activities and nodes are events for
points in time.

The Critical Path

A network path is a sequence of connected activities that runs from the start to the end of
the network. The network in preceding illustration has several paths through it. In fact,
close observations of this network show for paths, identified as A, B, C, and D:

Design house
and obtain
financing
Lay
foundation
Order and
rec eive
materials
Build
house
Finish
work
Dummy
Selec t
paint
Selec t
c arpet
3
3
2
1
3
1
1
1
0
Lay
foundation
Order
materials
Order
materials
Lay
foundation
Dummy
3
3
Correc t Wrong
2 4 2
1
2 4
3 5 6
7
Design house
and obtain
financing
Lay
foundation
Build house
Order and
rec eive
materials
Selec t
paint
Selec t
c arpet
Finish
work
Ac tivity
number
Ac tivity
time

A:
B:
C:
D:
1-2-4-7
1-2-5-6-7
1-3-4-7
1-3-5-6-7

Critical path is the longest path through a network; it is the minimum project completion
time.

Path A:

Path B:

Path C:

Path D:
1-2-4-7
3 + 2 + 3 + 1 = 9 months
1-2-5-6-7
3 + 2 + 1 + 1 + 1 = 8 months
1-3-4-7
3 + 1 + 3 + 1 = 8 months
1-3-5-6-7
3 + 1 + 1 + 1 + 1 = 7 months

Conditions:
1. Activity 3 will start at 3 months
4. Activity 7 will finish at 9 months

Activity Scheduling

Activity
number
(AN)
Earliest
start
(ES)
Earliest
finish
(EF)

1
0 3
3 0 3
Activity
duration
(AD)
Latest
start
(LS)
Latest
finish

Node configurations
1. Earliest start time (ES): the earliest time an activity can start.

Earliest start time = maximum (Earliest finish time of immediate predecessors)
Earliest finish time = ES + t

2. Forward pass: starts at the beginning of a CPM/PERT network to determine the
earliest activity times.
3. Earliest finish time (EF): is the earliest time plus the activity time.
4. Latest start time (LS): the latest time an activity can start without delaying critical
path time.

Latest start time = LF + t
Earliest finish time = minimum (Latest start time of immediate following activities

5. Latest finish time (LF): the latest time an activity can be completed and still
maintain the project critical path time.
6. Backward pass: determines latest activity times by starting at the end of a
CPM/PERT network and working forward.

Activity Slack

Notice that for the activities on the critical path, the earliest times and latest times are
equal. This means that these activities on the critical path must start exactly on time and
cannot be delayed at all. If the start of any activity on the critical path is delayed, then the
overall project time will be increased. The activities on the critical path can be determined
by seeing for which activities ES=LS or EF= LF. For activities not on the critical path for
which the earliest and latest start times (or earliest and latest finish times), are not equal,
slack time exists.
Slack is the amount of time an activity can be delayed without affecting the overall
project duration. In effect, it is extra time available for completing an activity.

Slack (S) is computed using either of the following formulas: S = LS ES or S = LF
EF. For example, the slack for activity 3 is S = LS ES = 4 3 = 1 month. If the start of
activity 3 were delayed for one month, the activity could still be completed by month 5
without delaying the project completion time.

Activity LS ES LF EF

Slack S

*1
*2
3
*4
5
6
*7

* = critical path

0
3
4
5
6
7
8

0
3
3
5
5
6
8

3
5
5
8
7
8
9

3
5
4
8
6
7
9

0
0
1
0
1
1
0

It shows there is no slack for the activities on the critical path (marked with an
asterisk); activities not on the critical path have slack.

Shared slack means that the sequence of activities 3-5-6 can be delayed two months
jointly without delaying the project, but not three months.

Slack is beneficial to the project manager because it enables resource to be
temporarily diverted from activities with slack and used for other activities that might be
delayed for various reasons or for which the time estimate has proved to be inaccurate..

The times for the network activities are simply estimates, for which there is usually not
a lot of historical basis (since project tends to be unique undertakings). As such, activity
time estimates are subject to quite a bit of uncertainty. However, the uncertainty inherent
in activity time estimates can be reflected to a certain extent by using probabilistic time
estimates instead of the single, deterministic estimates.

Probabilistic Activity Times

It is rare that activity time estimates can be made with certainty. Project activities are
likely to be unique with little historical evidence that can be used as a basis to predict
activity times. Probabilistic time estimates reflect uncertainty of activity times.

In the PERT-type approach to estimate activity times, three time estimates for each
activity are determined, which enables us to estimate the mean and variance of a beta
distribution of the activity times.

Beta distribution: a probability distribution traditionally used in CPM/PERT. We
assume that the activity times can be described by a beta distribution for several
reasons:
1. The beta distribution mean and variance can be approximated with three time
estimates.
2. The beta distribution is continuous, but has not predetermined shape (such as the bell
shape of the normal curve). It will take on the shape indicatedthat is, be skewed
by the time estimates given.

The three times estimates for each activity are the most likely time (m), the optimistic
time (a), and the pessimistic time (b). The most likely time is a subjective estimate of the
activity time that would most frequently occur if the activity were repeated many times.
The optimistic time is the shorter possible time to complete the activity if everything went
right. The pessimistic time is the longest possible time to complete the activity assuming
everything went wrong. The person most familiar with an activity or the project manager
makes these subjective estimates to the best of his or her knowledge and ability.

These three times estimates are used to estimate the mean and variance of a beta
distribution, as follows.

Mean (expected time) =
a + 4m + b
6

Variance:
2
=
b a
6

where:
a =
m =
b =
optimistic time
most likely time
pessimistic time

2

Example of a project network with probabilistic time estimates:

Solution

As an example of the computation of the individual activity mean times and variance,
consider activity 1. The three time estimates (a = 6, m = 8, b = 10) are substituted in the
formula as follows:

t =
a + 4m + b
=
6 + 4(8) + 10
= 8 weeks
6 6

2
=
b - a
=
10 - 6
= 4/9 week
6 6

Activity Time Estimates for the example above:
Time Estimates (weeks)
Mean
time
Variance
Activity a m b t
2

1
2
3
4
5
6
7
8
9
10
11
6
3
1
2
2
3
2
3
2
1
1
8
6
3
4
3
4
2
7
4
4
10
10
9
5
12
4
5
2
11
6
7
13
8
6
3
5
3
4
2
7
4
4
9
0.44
1.00
0.44
2.78
0.11
0.11
0.00
1.78
0.44
1.00
4.00

Activity Earliest and Late Times and Slack
Activity t
2
ES EF LS LF S
1
2
3
4
5
6
7
8
9
10
11
8
6
3
5
3
4
2
7
4
4
9
0.44
1.00
0.44
2.78
0.11
0.11
0.00
1.78
0.44
1.00
4.00
0
0
0
8
6
3
3
9
9
13
16
8
6
3
13
9
7
5
16
13
17
25
1
0
2
16
6
5
14
9
12
21
16
9
6
5
21
9
9
16
16
16
25
25
1
0
2
8
0
2
11
0
3
8
0

Critical Path = 2-5-8-11 (no available slack times)

To determine the project variance, we sum the variance for the activities on the critical
path.

2
=
2
2 +
2
5 +
2
8 +
2
11
= 1.00 + 0.11 + 1.78 + 4.00
= 6.89 weeks

Probabilistic Network Analysis

The CPM/PERT method assumes that the activity times are statistically independent,
which allows us to sum the individual expected activity times and variance to get an
expected project time and variance. It is further assumed that the network mean and
variance are normally distributed. This assumption is based on the central limit theorem
of probability, which for CPM/PERT analysis and our purpose states that if the number of
activities is large enough and the activities are statistically independent, then the sum of
the means of the activities along the critical path will approach the mean of a normal
distribution.

Probabilistic analysis of a CPM/PERT network is the determination of the probability
that the project will be completed within a certain period given the mean and variance of
a monthly distributed project completion time. The value Z is computed using the
following formula:

Z =
x

where:
=
x =
=
Z =
variance
tp = project time
The proposed project time
Number of standard deviation x is from the mean

Normal Distribution of Project Time

= tp x

Project Crashing and Time-Cost Trade-Off

The project manager is frequently confronted with having to reduce the scheduled
completion time of a project to meet a deadline. In other words, the manager must finish
the project sooner than indicated by the CPM/PERT network analysis. Project duration
can often be reduced by assigning more labor to project activities, in the form of
overtime, and by assigning bore resources (material, equipment, and so on). However
additional labor and resources increase the project cost. Thus, the decision to reduce the
project duration must be base on an analysis of the tradeoff between time and cost.
Project crashing is a method for shortening the project duration by reducing the time of
one (or more) of the critical project activities to less than its normal activity time. This is
reduction in the normal activity time is referred to as crashing. Crashing is achieved by
devoting more resources, usually measured in terms of dollars, to the activities to be
crashed.

Crashing; reducing project time by expending additional resources.

Project crashing

Objective: the objective of project crashing is to reduce project duration while minimizing
the cost of crashing. Since the project completion can be shorten only by crashing
activities on the critical path, it may turn out that not all activities. However, as activities
are crashed. The critical path may change, requiring crashing of previous noncritical
activities to reduce the project completion time even further.

Normal activity cost: cost required to complete the activity

Crash time: an amount of time an activity is reduced.

Crash cost: is the cost of reducing activity time.

Activity 1 can be crashed a total of five weeks (normal time crash time = 12 7 = 5
weeks) at a total crash cost of $2000 (crash cost normal cost = $5000 - $3000 =
$2000). Dividing the total crash cost by the total allowable crash time yields the crash
cost of per week. Total crash cost / total crash time = $2000/5weeks = $400 per week.
1
2 2
Probabilit y
Z
2
3
4
5
6
7
8
9
10
11
S F
6,8,10
3,6,9
1,3,5
2,4,12
2,3,4
3,4,5
2,2,2
3,7,11
2,4,6
1,4,7
1,10,13

PROBLEM SET FOR PROJECT MANAGEMENT

Name: Date:
Course & Year: Schedule: Score:

The School of Information and Computing Science at Saint Louis University has outgrown its offices in
the Diego Silang Building (S) and is moving to Maryheights Campus Bakakeng (D), which has more space.
The move will take place during the three-week break between end of summer semester and the beginning of
the first semester. Movers will be hired from the universitys physical plant to move the furniture, boxes of
books, and files that the faculty will pack. The school has hired a local retail computer firm to move its office
computers so they will not be damaged. Following is a list of activities, their precedence relationships, and
probabilistic time estimates for this project:

Activity Description
Activity
Predecessor a m b
Time Estimate
(days)
a
b
c
d
e
f
g
h
i
j
Pack D offices
Network D offices
Pack S offices
Movers move D offices
Paint and clean D offices
Move computers
Movers move S offices
Computer installation
Faculty move and unpack
Faculty set up computers and offices
-
-
-
a
d
b, e
b, c, e
f
g
h, i
1
2
2
1
2
1
3
2
3
1
3
3
4
3
5
2
6
4
4
2
5
5
7
4
8
2
8
5
6
4
___
___
___
___
___
___
___
___
___
___

1. Calculate the most probable or mean time. Indicate the answer on the table above.

2. Construct the Network Diagram in the space provided below. Avoid DUMMIES, and ERASURES.
Determine the early start and the early finish of each activity. What is earliest finish of the project?


3. Reconstruct the Network Diagram in the space provided below. Determine the late start and the late finish
of each activity. What is the latest start of the project?

4. Tally the results following the table below.
Activity
Early Start
(ES)
Early Finish
(EF)
Late Start
(LS)
Late Finish
(LF)
Slack
(LS ES) or
(LF EF)
Is it the
Critical Path?

CRITICAL PATH:

5. Compute for the expected project completion.

6. Determine the variance of the activity.

7. Determine the probability of completing the project in 18 days or less.


i . OPERATI NG & CONTROLLI NG THE P/ O SYSTEM Par t I : I NVENTORY M ANAGEM ENT

Lear ni ng Obj ect i ves: Af t er compl et i ng t hi s modul e, st udent shoul d be abl e t o:
1. D ef i ne i nvent or y, i nvent or y management , quant i t y di scount ;
2. I dent i f y t ypes of i nvent or y;
3. Li st some r easons w hy or gani zat i ons have i nvent or y;
4. D i scuss t he concer ns and obj ect i ve of i nvent or y management ;
5. Li st t he t w o basi c i nvent or y deci si ons;
6. Li st r equi r ement s f or ef f ect i ve i nvent or y management ;
7. D i scuss t he r el evant i nvent or y cost s;
8. D i scuss t he t w o gener al t ypes of i nvent or y syst ems
9. Cl assi f y i nvent or y syst ems
10. D o comput at i ons r el at ed t o i nvent or y management and quant i t y di scount

I nvent or y r ef er s t o st ock or stor e of goods, may r el at e t o w or k- i n- pr ocess goods
Types of I nvent or i es
1. Raw mat er i al s and pur chased par t s
2. W or k - i n- pr ocess or par t i al l y compl et ed goods
3. Fi ni shed goods ( manuf act ur i ng f i r ms) or mer chandi se ( r et ai l st or es)
4. Repl acement par t s, t ool s, accessor i es, and suppl i es
5. Goods- i n- t r ansi t t o w ar ehouse or end user ( cust omer s)
W hy Or gani zat i on has I nvent or y
1. To meet ant i ci pat ed ..
st ocks ar e hel d t o sat i sf y ex pect ed aver age demand
2. To pr ot ect agai nst ..
st ocks, w hi ch ar e st ock s i n ex cess of aver age demand t o compensat e f or var i abi l i t y i n demand
and l ead t i me, can r educe t he r i sk of shor t ages.
3. To smoot h .. r equi r ement s
i nvent or i es ar e st or ed dur i ng .. per i ods t o meet over l y hi gh r equi r ement s dur i ng cer t ai n
seasonal per i ods.
4. To . component s of t he pr oduct i on t o di st r i but i on syst em
.. i nvent or i es ar e st ock ed bet w een successi ve oper at i ons t o mai nt ai n cont i nui t y of succeedi ng
oper at i ons i n case of . i n pr ecedi ng oper at i ons
Raw mat er i al s and suppl i es i nven t or i es ser ve as . bet w een t he suppl i er and t he f i r m
W or k - i n- pr ocess i nvent or i es ser ve as buf f er bet w een successi ve w or kst at i ons
Fi ni shed goods i nvent or i es ser ve as buf f er bet w een t he f i r m and i t s cust omer r equi r ement s
5. To per mi t
.. i nvent or i es ex i st t hr ough t he pr oduct i on t o di st r i but i on syst em due t o t he f act t hat pr oduct i on
oper at i ons t i me ( i .e., t hey ar e not i nst ant aneous) .
6. As a r esul t of t ak i ng advant age of .
To mi ni mi ze pur chasi ng and cost s, a f i r m may buy i n quant i t i es t hat ex ceed i mmedi at e
r equi r ement s. Thi s necessi t at es st or i ng t he ex cess f or l at er use.

The Concer ns of I nvent or y M anagement
1. . of t he st ock w hen needed t o max i mi ze l evel of cust omer ser vi ce
2. . of or der i ng and car r yi ng t he i nvent or y t o max i mi ze i nvent or y cost s

The Obj ect i ve of I nvent or y M anagement
To achi eve sat i sf act or y l evel of cust omer ser vi ce w hi l e k eepi ng i nvent or y cost s w i t hi n r easonabl e bounds: i .e.,
t r y t o achi eve a .. bet w een t he concer ns of i nvent or y management

The Basi c I nvent or y M anagement D eci si ons
1. .. .. ( si ze) How much t o or der
2. .. .. ( t i mi ng) W hen t o or der

Requi r ement s f or Ef f ect i ve I nvent or y M anagement
1. A syst em to .. . of t he i nvent or y on hand and on or der .
2. A r el i abl e . .. t hat i ncl udes an i ndi cat i on of possi bl e f or ecast er r or .
3. Know l edge of . . and l ead t i me var i abi l i t y.
4. Reasonabl e est i mat es of i nvent or y .. , .. ...., and ..
5. A f or pr i or i t i zi ng i nven t or y i t ems.
The Rel evant I nvent or y M anagement Cost s
1. Cost of t he i t em or . cost s
The sum pai d to t he suppl i er f or t he i t em r ecei ved
The di r ect manuf act ur i ng cost
.. i f t he i t em uni t cost i s const ant f or al l quant i t i es or der ed
.. i f t he i t em uni t cost var i es w i t h quant i t y or der ed, e.g., quant i t y di scount
2. Or der i ng or set up or cost s
The cost s i ncur r ed by pl aci ng an or der f or and r ecei vi ng t he i t em or i ncur r ed as set up cost s w hen i tems i s
manuf act ur ed
I ncl ude cost of post age, phone cal l s t o vendor s, l abor cost i n pur chasi ng and account i ng, r ecei vi ng cost s,
r ecor ds k eepi ng and pur chase or der suppl i es
3. Car r yi ng or hol di ng or . cost s
The cost s associ at ed w i t h havi ng t he i nvent or y on hand
I ncl ude i nsur ance, w ar ehouse r ent al s, heat i ng and l i ght i ng, t ax es, l osses due t o pi l f er ages, spoi l ages, or
br eak ages
. cost f or havi ng capi t al t i ed up i n i nvent or y
4. St ockout or .. cost s
The cost s associ at ed w i t h demand w hen st ocks have depl et ed
Loss of sal es

Cl assi f i cat i on Syst em
An i mpor t ant aspect of i nvent or y management i s t hat i t ems hel d i n i nvent or y ar e not of equal
i mpor t ance i n t er ms of pesos i nvest ed, pr of i t pot ent i al , sal es or usage vol ume, or st ockout
penal t i es. I t w oul d be unr eal i st i c t o devot e equal at t ent i on t o each of t hese i t ems. A mor e
r easonabl e appr oach w oul d be t o al l ocat e cont r ol ef f or t s accor di ng t o t he r el ati ve i mpor t ance
of t he var i ous i t ems i n i nvent or y.

The A- B- C Appr oach cl assi f i es i nvent or y i t ems accor di ng t o some measur e of i mpor t ance,
usual l y annual peso usage ( i .e., peso val ue per uni t mul t i pl i ed by annual usage r at e) and t hen
al l ocat es cont r ol ef f or t s accor di ngl y. Thr ee cl asses of i t ems ar e used:

A ( ver y i mpor t ant ) gener al l y account about 15% to 20% of t he number of i t ems i n i nvent or y but about 60% t o 70% of
t he peso usage. A i t ems shoul d r ecei ve cl ose at t ent i on t hr ough f r equent r evi ew of amount on hand and cont r ol over
w i t hdr aw al s, w her e possi bl e, t o mak e sur e t hat cust omer ser vi ce l evel s ar e at t ai ned.
B ( moder at el y i mpor t ant )
C ( l east i mpor t ant ) may account f or about 60% of t he number of i t ems but onl y about 10% of t he peso usage as an
i nvent or y. C i t ems shoul d r ecei ve onl y l oose cont r ol ( t w o- bi n syst em, bul k or der s)
The A- B- C concept can be appl i ed as a gui de to cycl e count i ng, w hi ch i s a physi cal count f i t ems i n i nvent or y. The
pur pose of cycl e count i ng i s t o r educe di scr epanci es bet w een t he amount s i ndi cat ed by i nvent or y r ecor ds and t he
act ual quant i t i es of i nvent or y on hand. Accur acy i s i mpor t ant because i naccur at e r ecor ds can l ead t o di sr upt i ons i n
pr oduct i on, poor cust omer ser vi ce, and unnecessar i l y hi gh i nven t or y car r yi ng cost s.
The k ey concer ns of cycl e count i ng f or management ar e:

1. How much accur acy i s needed?
2. W hen shoul d cycl e count i ng be per f or med?
3. W ho shoul d do i t ?

PERPETUAL SYSTEM ver sus PERI ODI C SYSTEM

Featur e Per petual System Per i odi c System
1 . Recor d k eepi n g

Per pet u al ; cou n t ed each t i me an
addi t i on or w i t h dr aw al i s made

Per i odi c; cou n t ed on l y at r evi ew per i od;
i n vol ves l oose mon i t or i n g of i n ven t or y
2 . Resou r ces r equ i r ed to
mai n t ai n

M or e, si n ce per pet u al r ecor d k eepi n g

3 . Si ze of i n ven t or y

Less t h at of t h e per i odi c syst em

M or e t h an t hat of t h e per pet u al syst em,
si n ce saf et y st ock i s added to avoi d
st ock ou t s i n bet w een r evi ew per i ods
4 . Type of i n ven t or y syst em
For h i gh er - pr i ced, cr i t i cal or
i mpor tan t i t ems

I nvent or y Syst em

1. Per pet ual Syst em
I nvent or y M odel I nvent or y D eci si on For mul a
Fi x ed- Or der Quant i t y or
Economi c Or der Quant i t y ( EOQ)
model
How much t o or der ?
EOQ i s const ant ; t he same
quant i t y or der ed each t i me

2 2 DCo DCo
EOQ
Ch iC

W hen t o or der ?
Or der i s pl aced w hen t he quant i t y
on hand dr ops to t he r eor der l evel
( R)

R dL

2. Per i odi c Syst em
I nvent or y M odel I nvent or y D eci si on For mul a
Fi x ed- Ti me Per i od or Fi x ed- Or der
I nt er val model
How much t o or der ?
q i s var i abl e; t he or der quant i t y
var i es each t i me an or der i s pl aced

( ) q d T L SS I
SS z T L

W hen t o or der ?
Or der i s pl aced w hen t he r evi ew
per i od ( T) ar r i ves


Assumpt i on of t he Basi c Economi c Or der Quant i t y ( EOQ) M odel

1. Ther e i s onl y one i t em i nvol ved
2. Annual demand ( usage) i s k now n
3. D emand ( usage) r at e i s uni f or m
4. The i t em uni t cost does not var y w i t h t he or der si ze ( no quant i t y di scount s)
5. Each or der i s r ecei ved i n a si ngl e del i ver y
6. Lead t i me i s k now and does not var y
7. Or der i ng or set up cost i s t he same r egar dl ess of t he amount or der ed
8. I nvent or y hol di ng cost i s based on aver age i nvent or y l evel
9. Al l demands f or t he i t em w i l l be sat i sf i ed ( no st ock out , no backor der )

Symbol s used i n t he Basi c EOQ M odel

TC =
D =
C =

R =
Tot al annual i nvent or y cost
Annual demand, uni t s
Cost per uni t of t he i t em, P/ uni t
Quant i t y t o be or der ed ( t he opt i mum
amount i s t he economi c or der
quant i t y, EOQ)
Reor der poi nt , uni t s
Co =
Ch =

L =
Set up or or der i ng cost , P/ or der
Annual hol di ng or car r yi ng cost per
uni t of aver age, P/ uni t ( of t en hol di ng
cost i s ex pr essed as per cent age of t he
i t em uni t cost , such t hat Ch = i C,
w her e i i s t he per cent car r yi ng cost )
Lead t i me, days

Quant i t y D i scount
Quant i t y di scount s ar e t he pr i ce r educt i on f or l ar ge or der s of f er ed t o cust omer s to i nduce t hem t o buy i n l ar ge
quant i t i es.
Ex . Pr i ce l i st f or a ex t r a- w i de gauze st r i ps of Bayombong Sur gi cal Suppl y Company

Or der Quant i t y Pr i ce per box
1 t o 44
45 t o 69
70 or mor e
P 80
68
56

2
Q D
TC Ch Co
Q


The cust omer must w ei gh t he pot ent i al benef i t s of r educed pur chase pr i ce and f ew er or der s t hat w i l l r esul t f r om
buyi ng i n l ar ge quant i t i es agai nst t he i ncr ease i n car r yi ng cost s caused by hi gher aver age i nvent or i es. The buyer s goal
w i t h quant i t y di scount s i s to sel ect t he or der quant i t y t hat w i l l mi ni mi ze t ot al cost s ( i .e., sum of car r yi ng cost, or der i ng
cost , and pur chasi ng cost ) .

Tot al cost = Car r yi ng cost + Or der i ng cost + Pur chasi ng cost
2
Q D
TC Ch Co PD
Q

P = u n i t pr i ce
Sampl e Pr obl em
The mai nt enance depar t ment of a l ar ge hospi t al uses about 816 cases of l i qui d cl eanser annual l y. Or der i ng cost s ar e
P480, car r yi ng cost ar e P160 per case a year , and t he new pr i ce schedul e i ndi cat es t hat or der s of l ess t han 50 cases w i l l
cost P800 per case, 50 t o 79 cases w i l l cost P720 per case, 80 t o 99 cases w i l l cost P680 per case, and l ar ger or der s w i l l
cost P640 per case. D et er mi ne t he opt i mal or der quant i t y and t he t ot al cost .
Sol ut i on:
D = 816 cases per year Co = P480 Ch = P160 per case per year
Range Pr i ce
< 50
50 t o 79
80 t o 99
100 >
P 800
720
680
640

Economi c Or der Quant i t y = _
2Co
Ch
= _
2( 816) ( 480)
160
= 70 cases
The 70 cases can be bought at P720 per case si nce 70 f al l s i n t he r ange of 50 t o 79 cases. The t otal cost t o pur chase 816
cases per year , at t he r at e of 70 cases per or der w i l l be:
TC = Car r yi ng cost + Or der i ng cost + Pur chasi ng cost
TC7 0 =
2
Ch +
Co + PD =
70
2
160 +
816
70
480 + 720( 81 6) = P598, 716
Si nce l ow er cost r anges ex i st , each must be check ed agai nst t he mi ni mum cost gener at ed by 70 cases at P720 each. I n
or der t o buy at P680 per case, at l east 80 cases must be pur chased. The t ot al cost at 80 cases w i l l be;
TC8 0 =
2
Ch +
Co + PD =
80
2
160 +
816
80
480 + 680( 81 6) = P566, 176
To obt ai n a cost of P640 per case, at l east 100 cases per or der ar e r equi r ed. The t otal cost w i l l be;
TC1 0 0 =
2
Ch +
Co + PD =
100
2
160 +
816
100
480 + 640( 816) = P534, 157
Ther ef or e, si nce 100 cases per or der yi el ds t he l ow est t ot al cost , 100 cases i s t he over al l opt i mal or der quant i t y.
Ex er ci se
Benguet El ect r i c Company uses 4,000 t oggl e sw i t ches a year . Sw i t ches ar e pr i ced as f ol l ow s: 1 t o 499, P36 each; 500 t o
999, P34 each; and 1,000 or mor e, P32.80 each. I t cost s appr ox i mat el y P720 t o pr epar e an or der and r ecei ve i t , and
t he car r yi ng cost s ar e 18% of pur chase pr i ce per uni t on an annual basi s. D et er mi ne t he opt i mal or der quant i t y and t he
t ot al annual cost .


Si ngl e- Per i od I ndependen t D emand I nven tor y M odel
W h en manager s ar e f aced w i t h on e- t i me i n ven t or y buys, t he so- cal l ed "New sboy M odel " can be an i mpor tan t t ool f or an al ysi s. Th e
n ame comes f r om t h e cl assi cal pr obl em f aced by n ew spaper ven dor s on a dai l y basi s. Th ese ven dor s mu st pl ace a on e- ti me or der
f or t h e n ex t day's paper s w i t h no ch ance of r eor der i n g sett i n g u p t h e pr esses agai n w ou l d be cost pr oh i bi t i ve. Si n ce deman d f or
t h e n ex t day i s u n k n ow n , t h e n ew spaper ven dor may or der "t oo mu ch" or "not en ou gh". I f t h i s ven dor or der s t oo mu ch, t h en s/ h e
w i l l f ace t h e cost of bei n g over st ock ed. Li k ew i se, i f t h e vendor or der s t oo f ew paper s, t h en s/ h e w i l l i n cu r t h e cost of bei n g
u n der st ock ed. Th e ven dor i s i n t er est ed i n bal an ci n g t h ese t w o cost s so t h at ex pect ed pr of i t i s max i mi zed.
Th e t oo- much cost , or t h e cost of bei n g over st ock ed, Cos, i n cl u des t h e cost of t h e l ef t over pr odu ct n et of an y sal vage val ue. Th i s
sal vage val u e mi gh t be n egat i ve, t h ough , i n t h e case of h avi n g t o di spose of ex cess, u sel ess pr oduct . I f t h e n ew sboy must t ak e h i s
l ef t over paper s t o t h e dump, t h er e i s a cost of tak i n g t h em th er e. Th e n ot - enou gh cost , or t h e cost of bei n g u n der stock ed, Cu s,
i n cl u des t h e l ost pr of i t f r om sal es n ot made an d t h e cost of th e l oss of cu stomer goodw i l l . Al t h ou gh t h e amou n t of goodw i l l l ost i s
di f f i cu l t t o est i mat e, i t n eeds t o be accou n t ed f or i n some man n er .
Th er e ar e many si mi l ar si t u at i on s u n der w h i ch manager s f ace t h i s same k i n d of di l emma. W h en a speci al i zed pi ece of equ i pmen t
i s pu r ch ased, a on e- t i me spar e par t s or der may be pl aced at t h e same t i me. Th e l ocal gr ocer y st or e bu ys br ead on ce a day an d
many ot h er per i sh abl e pr odu ct s on a r egu l ar basi s. Ai r l i n es mu st deci de how many r eser vat i on s t o t ak e f or a gi ven f l i gh t t h ey
may over book si n ce t h ey don 't k n ow h ow man y peopl e w i l l act u al l y sh ow u p and u se t h ei r r eser vat i on .

M ar gi nal Anal ysi s Appr oach

A mar gi n al anal ysi s appr oach compar es th e mar gi n al pr of i t (M P) of sel l i ng one mor e u n i t w i t h t he mar gi n al l oss (M L) associ at ed w i t h t hat
addi t i on al u n i t of i n ven t or y. I f P i s t h e pr obabi l i t y t h at on e mor e u ni t i s sol d, t hen t h e deci si on r ul e i s

I f ( P) M P ( 1 - P) M L, t h en st ock on e mor e u n i t .
W i t h some al gebr a,
( P) M P M L - ( P) M L
( P) M P + P( M L) M L
P ( M P + M L) M L
P M L / ( M P + M L)

An Ex ampl e
A h ar dw ar e st or e makes a on ce- a- year bu y of l i ve Ch r i st mas t r ees. Th e t r ees ar e pu r ch ased at a
cost of $10 each an d sel l f or $3 8 each . M an agement of t he st or e est i mat es deman d t o aver age 4 00
u n i t s and t o var y bet w een 30 0 and 5 0 0 t r ees, w i t h an y amou nt i n t h at r an ge equ al l y l i kel y. The
deman d di st r i bu t i on i s show n i n t he adj acent ex h i bi t . For ever y t r ee l ef t over at t he en d of t he season,
t h e st or e pays a $1 di sposal f ee, w h i l e f or ever y t r ee shor t , i t est i mat es t hat i t l oses $2 i n l ost cust omer
goodw i l l .
To f i nd t he best quan t i t y t o st ock , t he equat i on f or P i s used.
P M L / ( M P + M L)
Th e mar gi n al l oss, M L (or t h e cost of over st ock i n g, or t he cost of havi ng t oo mu ch ) i s t he cost of buyi n g t he t r ee pl us t h e di sposal cost . The
mar gi n al pr of i t , M P ( or t he cost of un der st ock i n g, or t he cost of n ot havi n g enou gh ) i s t he cost of l ost goodw i l l an d l ost pr of i t . Th er ef or e,
M L = $1 0 + $1 = $1 1,
M P = $2 8 + $2 = $3 0 , an d t h us,
P 1 1 / [ 30 + 1 1 ] = 0.2 7.
P= 0 .2 7 i s t he pr obabi l i t y t h at one mor e u ni t w i l l sel l , or t h e r i gh t - h and t ai l of t he di st r i bu t i on.
Th u s, t he pr obabi l i t y of meet i n g demand i s 1 - P, or 0.7 3, t h e l ef t - h and t ai l of t he di st r i but i on . For
t h e u n i f or m di st r i but i on , t he t ar get i n ven t or y l evel i s 0 .73 ( 5 0 0- 3 0 0 ) + 3 00 = 4 4 6 , as show n i n
t h e adj acent ex hi bi t . I n t h e l angu age of t he cur r en t si t u at i on , t h e har dw ar e st or e w an t s t o cover
7 3 % of t he possi bl e demand si t uat i ons. Not i ce t h at t he cost of bei n g un der st ocked, t he M P, i s
si gn i f i cant l y h i gher t h an t he cost of bei ng over st ock ed, t he M L. Th er ef or e, t he pr ef er en ce w oul d
be f or over st ock i n g, or st ock i n g mor e t h an t he ex pect ed demand of 4 0 0 u n i t s.

FIXED ORDER QUANTITY MODEL

1. Given the following data: annual demand, D = 1,000 units; ordering cost, S = P200 per order; holding cost,
H = P50 per unit per year; lead time, L = 5 days; and cost per unit, C = P500.
a. Find the economic order quantity.
b. Find the reorder point.
c. What would be your ordering policy for this item?
d. Find the total annual inventory cost,

2. A fastfood outlet uses 120 eight-ounce plastic cups each day and plans to be open 360 days a year. The cups
cost P9per dozen; Ordering costs are P200 order; and carrying costs are 50 percent of the item unit cost
(since space is a premium).
a. Find the economic order quantity, if delivery is instantaneous.
b. Currently, cups are ordered every 30 days. 1) Compare the current ordering quantity against the optimal
order quantity; and 2) Compare the current against the optimal total annual inventory cost. Which
ordering policy is more advantageous in terms of cost savings? By how much?

3. A toy manufacturer uses approximately 32,000 silicon chips annually. The chips are used at a steady rate
during the 240 days the plant operates. Annual holding cost is P27 per chip and ordering cost is P1, 080.
a. Find the economic order quantity.
b. Find the reorder point.
c. What would be your ordering policy for this item?
d. Find the total annual cost of ordering and carrying silicon chips.

4. Each year, Barney Company purchases 20,000 units of an item that costs P640 per unit. The cost of placing
an order is P480, and the cost to hold the item in inventory for one year is P50.
a. Calculate the economic order quantity.
b. What is the average inventory level, assuming that the minimum inventory level is zero?
c. Determine the total annual ordering cost and the total annual holding cost for the item if the economic
order quantity is used.

5. A large bakery buys sugar in 50-kilograms bags. The bakery uses an average of 1,344 bags a year. Preparing
an order and receiving a shipment of sugar involves a cost of P135. Annual carrying costs are P630 per bag.
The bakery operates 280 days per year.
a. Determine the economic order quantity.
b. What is the average number of bags on hand?
c. When should the bakery order for more sugar?
d. How many times per year will the bakery order for sugar?

FIXED TIME PERIOD MODEL

1. A drug store orders its antibiotics every two weeks when salesperson visits from one of the pharmaceutical
companies. Amoxicillin is one of its most prescribed antibiotics, with an average daily demand of 1,500
capsules. The standard deviation of daily demand was derived by examining prescriptions filled over the last
three months and was found to be 500 capsules. It takes nine days for the order to arrive. The drug store

manager has set a service level of 99 percent. The sales person has just arrived, and there are currently
25,000 capsules in stock.
a. How much additional stock must be carried to minimize the risk of stock out?
b. How many capsules of Amoxicillin should be ordered if lot size per order is 100 capsules?

2. The weekly demand for a product is 770 units. The standard deviation of daily demand is 10 units. The firm
reviews its inventory every 28 days. Each order for the product arrives 9 days after placement. At the time
of review, there are 10 units backorder. If 95 percent of all demand is to be satisfied from items in stock.
a. How many units should be the safety stock?
b. What is the products inventory status?
c. How many units should be ordered for this period?

QUANTITY DISCOUNT

1. Benguet Electric Cooperative, Inc. uses 4,000 toggle switches a year. Switches are priced as follows: 1 to
499, P36 each; 500 to 999, P34; and 1,000 or more, P32.80 each. It costs approximately P720 to prepare an
order and receive it, and the carrying costs are 18% of purchase price per unit on an annual basis. Determine
the optimal order quantity and the total annual cost.

2. A small manufacturing firm uses roughly 3,400 pounds of chemical dye a year. Currently the firm purchases
300 pounds per order and pays P150 per pound. The supplier has just announced that orders of 1,000 pounds
or more will be filled at a price of P100 per pound. The manufacturing firm incurs a cost of P5, 000 each
time it submits an order and assigns an annual holding cost of 17 percent of the purchase price per pound.
a. Calculate the order size that will minimize the total cost.
b. If the supplier offered the discount at 1,500 pounds instead of 1,000 pounds, what order size would
minimize total cost?

SINGLE-PERIOD INVENTORY MODEL

1. The local supermarket buys lettuce each day to ensure really fresh produce. Each morning any lettuce that is
left from the previous day is sold to a dealer that resells it to farmers who use it to feed their animals. This
week the supermarket can buy fresh lettuce for Php200 a box. The lettuce is sold for Php500 a box. Past
history says that tomorrows demand for lettuce average 250 boxes with a standard deviation of 34 boxes.
How many boxes of lettuce should the supermarket purchase tomorrow?

2. Semper Fidelis Pizza orders all of its pepperoni, olives, anchovies, and mozzarella cheese to be shipped
directly from Italy. An American distributor stops by every four weeks to take orders. Because the orders
are shipped directly from Italy, they take three weeks to arrive.
Semper Fidelis Pizza orders an average of 150 pounds of pepperoni each week, with a standard
deviation of 30 pounds. Semper Fidelis prides itself on offering only the best-quality ingredient and a high
level of service, so it wants to ensure a 98 percent probability of not stocking out on pepperoni.
Assume that the sales representative just walked in the door and there are currently 500 pounds of
pepperoni in the walk-in cooler. How many pounds of pepperoni would you order?

PREPARED & ADAPTED: napoleon i barnachea jr second semester ay 2011-2012 october 26, 2011 18:13:37

MGMT 6

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

MGMT 6

Uploaded by

Copyright:

Available Formats

PRODUCTION &/ or OPERATIONS MANAGEMENT Page 1

Sai n t Lou i s U n i ver si t y

You might also like