OM Study Guide Lessons 1-12

<Operations Management> Study Guide
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Study Guide
OPERATIONS MANAGEMENT

Content

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

Module Aims

The aims of this module are to:

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

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

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Learning Outcomes

On completion of this module, a participant will typically be able to:

1. Show a detailed knowledge and understanding of:

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

2. Demonstrate module specific skills with respect to:

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

3. Show cognitive skills with respect to:

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

4. Demonstrate transferable skills in:

i) Conceptual mapping of processes.
ii) Analytical reasoning.
iii) Communication.
iv) Operations management at work.
v) Problem formulation and decision making.
vi) Working with others.

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Delivery of Module and Lesson Plan

Session

Topics

Session Learning Outcomes

At the completion of this session,
participants will be able to:

Prescribed
Text,
Readings
and/or
Activities

1.

Operations as an
Instrument of
Competition

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

Heizer and
Render,
Chapters
1 and 2

2.

Forecasting

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

Heizer and
Render,
Chapter 4

3.

Design of Goods and
Services

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

Heizer and
Render,
Chapter 5

4.

Managing Quality

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

Heizer and
Render,
Chapter 6
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5.

Process Strategy and
Capacity Planning

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

Heizer and
Render,
Chapter 7

6.

Location and Layout
Strategies

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

Heizer and
Render,
Chapters 8
and 9

7.

Supply Chain
Management

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

Heizer and
Render,
Chapter 11

8.

Inventory
Management

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

Heizer and
Render,
Chapter 12
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9.

Materials
Requirements
Planning and ERP

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

Heizer and
Render,
Chapter 14

10.

Project Management

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

Heizer and
Render,
Chapter 3

11.

JIT and Lean
Systems

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

Heizer and
Render,
Chapter 16

12.

Maintenance and
Reliability

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

Heizer and
Render,
Chapter 17

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Teaching and Learning Methods

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

Indicative Readings

Textbooks required

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

Supplementary
reading

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

Online Journals

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

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

Specific for this module are the following requirements:

Weighting between components A and B - A: 70% B: 30%

Element Description Element
Type
% of
Component
% of Assessment

Component A (Controlled
Conditions)
Examination (180
minutes)
Summative 70% 70%
Component B (Assignment & Quiz)

1. Group Assignment Formative 20%

20%

2. Individual Online
Quiz
Formative 10%

10%

Total
100%

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Lesson 1 : Operations as an instrument of competition

Learning Outcomes:

At the end of this lesson, students should be able to:

1. Describe operations management in terms of inputs, processes, outputs,
information flows, suppliers, and customers.

2. Identify the global trends and challenges facing operations and value chains.

3. Explain how a pattern of decisions about processes and supply chains help to
develop the capabilities to achieve competitive priorities

1.1 What is Operations Management (OM)?

Hi students, welcome to the first lesson on Operations Management. (OM)

In this course, you will learn the activities of the operations function. Operation is an
exciting area of management that has a profound effect on the productivity of both
manufacturing and service industries. This course serves to equip you with a broad
understanding to the field of operations in a realistic and practical manner. Even if
you are not planning on a career in the operations areas, you will likely to be working
with people who are. Therefore, a solid understanding of the role of operations in an
organization is of substantial benefits to you.

Let us begin by defining what Operations Management is.

Operations Management (OM)

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

OM is the management of that part of an organisation that is responsible for
producing goods.

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

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1.2 Organising to produce Goods and Services

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

Department Responsible for

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

2. Operations Creating the product or service

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

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

Figure 1.1 The three major functional areas of a manufacturing firm

From the above chart, we can see that the manufacturing plant has these departments
under the Operations:

(1) Manufacturing The supervisors and operators who are responsible for the
conversion of inputs into outputs accordingly to the operations goals.

(2) Production Control The planning department that manages the loading,
movement and delivery of the inventory.

Operations
Finance/
Accounting
Marketing
Production
Control
Manufacturing
Quality
Control
Purchasing
Manufacturing
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(3) Quality Control The department that ensure that the quality of the outputs meet
the requirements of the customers.

(4) Purchasing The department that ensure timely purchase of various materials and
inventories for the smooth flow of operations.

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

Figure 1.2 The three major functional areas of an airliner

The airliner can organise its operations into four main areas:

(1) Flight operations (eg. scheduling of the pilots and cabin crews)
(2) Ground support (eg. luggage handler)
(3) Facilities maintenance (eg. regular servicing of the aircrafts)
(4) Catering (eg. ensure in-flight meals are provided)

1.3 The Transformation Process

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

Value-added :

A term used to describe the difference between the cost of inputs and the value or
price of outputs.

The essence of Operations function is to add value during the transformation process.
As such, businesses attempt to become more productive by critical examination of the
operations performed by workers to see whether they add value.

Eliminating or improving operations that do not add value decreases the cost of inputs
or processing, thereby increasing the value-added. The money generated by value-
added are used for Research and Development (R&D), investment in new facilities
and equipment, salaries and wages, and profits. Money so used will in turn generate a
greater amount of funds available for these purposes.

1.4 Why Study Operations Management?

(1) OM is the core activity of all business organizations.

(2) OM and related areas provide 50% or more career opportunities.

(3) OM is inter-related with activities of other functions like Finance, Accounting,
Human Resources, Logistics, Management Information System (MIS), Marketing and
Purchasing.

(4) OM is the production function that creates the products and services for
consumers.

It is essential to have a basic understanding of OM as business processes involve
systems that extends across functional boundaries, such as:

Finance and Operations
People in the Finance department not only need to understand inventory
management but, also, must be able to :
The economic system transforms
inputs to outputs

Land, Labor,
Capital,
Management
Goods and
Services

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

1.5 Ten Critical Decisions of Operations Management

Ten (10) Decision Areas Issues

1. Service and product design What good or service should we offer?
How should we design the product?

2. Quality management Who is responsible for quality?
How do we define quality?

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

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

5. Layout design How should we arrange the facility?
How large should the facility be to meet our plan?

6. Human resources and job
design
How do we provide a reasonable work
environment?
How much can we expect our employees to
produce?

7. Supply Chain Management
(SCM)
Should we make or buy this component?
Who are our suppliers and who can integrate into
our e-commerce program?

8. Inventory, Material
Requirement Planning (MRP)
and Just-in-time (JIT)
How much inventory of each item should we have?
When do we reorder?
9. Intermediate and short term
scheduling
Are we better off keeping people on the payroll
during slowdowns?
Which job do we perform next?

10. Maintenance Who is responsible for maintenance?
When do we do maintenance?

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1.6 Operations in the Service Sector

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

Characteristics of services

Dental clinic example
(1) Services are usually intangible. The patients cannot own the clinic or the
equipments after the dental treatments

(2) Services are often produced and
consumed simultaneously
The dental treatment performed by the
dentist is received by the patient at the
same time

(3) Services are often unique. Different patient asks for different dental
treatment

(4) Services have high customer
interaction
The dentist and the patient interact
closely through diagnostics question and
answer

(5) Services have inconsistent product
definition
The same dental treatment (eg, tooth
extraction) is performed differently for
different patients.

(6) Services are often knowledge-based.

The dentists are qualified professional
with recognized medical certificates.

(7) Services are frequently dispersed.

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

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

The following table shows additional differences between goods and services that
impact OM decisions

Attributes of Goods
(Tangible product)
Attribute of Services
(Intangible product)
1. Product can be resold

1. Reselling a service is unusual
2. Product can be inventoried

2. Many services cannot be inventoried.
3. Some aspects of quality are measurable 3. Many aspects of quality are difficult to
measure
4. Selling is distinct from production

4. Selling is often part of the service
5. Product is transportable 5. Provider, not product, is often
transportable
6. Site of facility is important for cost 6. Site of facility is important for
customer contact
7. Often easy to automate

7. Service is often difficult to automate
8. Revenue is generated primarily from
the tangible product
8. Revenue is generated primarily from
the intangible services.

1.8 Exciting New Trends in Production and Operations Management

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

Trend Contributing Factors

Global focus

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

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

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

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

Mass customization Cultural differences
Individual differences
Increasing awareness of options

Empowered
employees
More competence at the workplace required by :
Knowledge explosion
More technical workplace

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

1.9 Achieving competitive advantage through operations

An effective operations management effort must have a mission so it knows where it
is going and a strategy so it knows how to get there.

Firms achieve missions in three conceptual ways:

(1) differentiation
(2) cost leadership
(3) response

This means operations manager are called on to deliver goods and services that are

(1) better, or at least different
(2) cheaper
(3) more responsive.

Each of the three strategies provides an opportunity for operations managers to
achieve competitive advantage. Competitive advantage implies the creation of a
system that has a unique advantage over competitors. The idea is to create customer
value in an efficient and sustainable way. Pure forms of these strategies may exist,
but operations managers will more likely be called on to implement some
combination of them.

Let us look at how managers achieve competitive advantage through differentiation,
low cost and response.

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Competing on Differentiation

Differentiation

Distinguishing the offerings of an organization in a way that the customer perceives
as adding value.

When Apple first launched the iPhone, its touch screen function was totally
differentiated from other competitors products with keypads.

Differentiation is concerned with providing uniqueness. A firms opportunities for
creating uniqueness are not located within a particular function or activity but can
arise in virtually everything the firm does. Moreover, because most products include
some service, and most services include some product, the opportunities for creating
this uniqueness are unlimited.

In the service sector, one option for extending product differentiation is through an
experience. The idea of experience differentiation is to engage the customer to use
peoples five senses so they become immersed, or even an active participant, in the
product.

Examples:

(1) Disney does this with the Magic Kingdom.
(2) Hard Rock Caf differentiates by engaging the customer with classic rock
music, big screen rock videos.

Competing on Cost

Low-cost leadership

Achieving maximum value as perceived by the customer.

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

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

Competing on Response

Response

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

The third strategy option is response. Response is often thought as flexible response,
but it also refers to reliable and quick response. Indeed, we define response as
including the entire range of values related to timely product development and
delivery, as well as reliable scheduling and flexible performance.

Hewlett-Packard is an exceptional example of a firm that has demonstrated flexibility
in both design and volume changes in the volatile world of personal computers. HPs
products often have a life cycle of months, and volume and cost changes during the
brief life cycle are dramatic. However, HP has been successful at institutionalizing
the ability to change products and volume to respond to dramatic changes in product
design and costs thus building a sustainable competitive advantage.

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Review Questions

1. Define operations management. Will your definition accommodate both
manufacturing and service operations?

2. Identify the three (3) major functional areas of business organizations and briefly
describe how they interrelate.

3. Suppose your company is manufacturing canned vegetables. Explain the
Transformation process with the help of a diagram.

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

5. The creation of a unique advantage over competitors is called a ____________.

6. Competitive advantage in operations can be achieved by __________,
____________, and/or ________.

7. How can global operations improve the supply chain?

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Lesson 2 : Forecasting in Operations Management

Learning Outcomes:


1. Outline the steps that are used to develop a forecasting system for operations
management.

2. Outline the qualitative method of forecasting.

3. Outline the time-series method and causal method of forecasting

2.1 What is forecasting?

Everyday, managers are making decisions without knowing what will happen in the
future. Making good estimates is the main purpose of forecasting. In this lesson, we will
discuss the business sales forecasting and describe how to prepare, monitor, and judge the
accuracy of a forecast. Good forecasts are an essential part of efficient service and
manufacturing operations.

Forecast

The art and science of predicting the future.

Forecasting is the art and science of predicting future events. Forecasting may involve
taking historical data and projecting them into the future with the help of mathematical
model. It may be a subjective or intuitive prediction. Or it may involve a combination of
these that is, a mathematical model adjusted by a managers good judgement.

Forecasting Time Horizons

A forecast is usually classified by the future time horizons that it covers. Time horizons
fall into three categories:

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

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

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

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2.2 Types of Forecasts

Three major types of forecasts are used in organisations for the planning of future
operations. However, both Economic and Technological forecasting are specialised
techniques that may not come into operations managers scope.

Demand forecast
Also called Forecasts of Demand or Sales Forecasts, they project the demand for a
companys products or services that drives the companys production, capacity and
scheduling system, which in turn, serve as inputs to financial, marketing and personnel
planning.

Economic forecasts
These forecasts are used to predict inflation rates, money supplies and other planning
indicators to address the business cycle.

Technological forecasts
They are concerned with rates of technological progress and inventions of exciting new
products which would require new plants and equipment.

2.3 The 7 Steps Forecasting Process

Step Disneys example
(1) Determine the use
of the forecast
Disney uses park attendance forecasts to drive staffing,
opening times, ride availability, and food supplies.

(2) Select the items to
be forecasted
For Disney World, there are a few main parks. A forecast
of daily attendance at each park is the main number that
determines labor, maintenance and scheduling.

(3) Determine the time
horizon of the forecast
Is it short, medium, or long term? Disney develops daily,
weekly, monthly, annually and 5-year forecast.

(4) Select the
forecasting model(s)
Disney uses a variety of statistical models such as moving
averages, regression analysis. It also employs judgmental,
or qualitative models.

(5) Gather the data
needed to make the
forecast
Disneys forecasting team employs 35 analysts and 70 field
personnel to survey 1 million people/business every year.
(6) Make the forecast

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

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2.4 Qualitative Forecast

Qualitative Forecast:

Forecasts that incorporate such factors as the decision makers intuition, emotions,
personal experiences and value system.

Subjective factors include decision-makers opinions, intuitions and personal experiences.
This is a forecast based on the judgment and opinions of executives, consumer surveys,
sales staff and experts in situations when:

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

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

There is an absence of historical data for the introduction of new products or the re-
design of existing products or packaging

We shall discuss four qualitative forecasting techniques:

1. Jury of executive opinions
2. Delphi method
3. Sales force composite
4. Consumer market survey

2.4.1 Jury of executive opinions

Often used as part of long range planning (eg. New product development), it involves the
pooling of opinions of upper-level managers in combination with statistical models to
arrive at a group estimate of demand

2.4.2 Delphi method

It is used to predict when a certain event will occur. A series of questionnaires is
circulated among knowledgeable personnel who are able to contribute significantly.

This involves the gathering of opinions and keeping responses anonymous, to encourage
honest responses and reduce the prevailing of any persons opinions. The responses are
then used to develop the next questionnaire, to enlarge the scope of information for
participants to base their judgments.

2.4.3 Sales force composite

Direct contact with consumers makes sales staff or customer service staff aware of the
consumers plans for the future and therefore, a good source of information.

However, there are disadvantages to this approach:
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The inability to distinguish between what consumers would like to do and actually
will do

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

2.4.4 Consumer market survey

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

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

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

The possibility of the irrational behavior patterns from the consumers.

2.5 Quantitative Forecast

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

Quantitative Forecast:

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

Time Series Models

A time series is a time-ordered sequence of observations taken at regular intervals (eg,
hourly, daily, weekly, monthly, quarterly, annually). The data may be measurements of
demand, earning, profits, shipments, accidents, output, productivity etc.

Forecast techniques based on time series data are made on the assumption that future
values of the series can be estimated from past values.

There are a few methods grouped under time series models:

1. Nave approach
2. Moving averages
3. Exponential smoothing

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2.5.1 Nave approach

This is the most cost-effective and efficient objective forecasting model. It assumes that
the demand in the next period will be the same as the most recent period actual demand.

F
t
= A
t-1

where
F
t
= Current forecast
A
t-1
= Previous period actual demand

For example, if a tyre workshop sold 400 tyres last month, how many tyres should be
forecasted for sales this month? Using Nave approach, the forecast should be 400 tyres.

Likewise, if the actual demand for canned abalone was 20,000 cans during the previous
Chinese New Year, then the sales forecast for this Chinese New Year should be 20,000
cans.

2.5.2 Moving averages

Moving averages

A forecasting method that uses an average of the n most recent periods of data to
forecast the next period.

n a positive whole number

This approach is useful of the market demands can be assumed to stay fairly steady over
time, and uses a number of the most recent actual data values to generate a forecast.

For example, a 5-month moving average is found by simply summing the demand during
the past 5 months and dividing by 5.

Mathematically, the moving average is expressed as

MA
n
= Demand in previous n periods / n

where
MA
n
= Moving Average for n periods

n = number of periods in the moving average

Pg 24 of 122
Here is an example that shows how the 3-month moving averages are being
calculated.

Month Actual Sales 3-Month Moving Average
Jan 10
Feb 12
Mar 13
Apr 16 (10+12+13) / 3 = 11
May 19 (12+13+16) / 3 = 13
Jun 23 (13+16+19) / 3 = 16
Jul 26 (16+19+23) / 3 = 19
Aug 30 (19+23+26) / 3 = 22
Sep 28 (23+26+30) / 3 = 26
Oct 18 (26+30+28) / 3 = 28
Nov 16 (30+28+18) / 3 = 25
Dec 14 (28+18+16) / 3 = 20
(Source: Principles of Operations Management, Jay Heizer & Barry Render, 7
th
ed, pg 112)

The moving average method is effective in smoothing out sudden fluctuations in the
demand pattern to provide stable estimates. However, moving average has three
problems:

1. Increasing the size of n (the number of periods averaged) does smooth out
fluctuations better, but it makes the method less sensitive to real changes in the
data.

2. Moving averages cannot pick up trend very well. Because they are averages, they
will always stay within past levels and will not predict changes to either higher or
lower levels. That is, they lag the actual values.

3. Moving averages require extensive records of past data.

2.5.3 Exponential smoothing

This method involves very little record keeping of past data. It bases its new forecast on
the previous forecast plus a percentage of the difference between that forecast and the
actual value of the series at that point.

Exponential Smoothing Formula

F
t
= F
t-1
+ (A
t-1
F
t-l
)

where F
t
= new forecast
F
t-1
= previous periods forecast
A
t-1
= previous periods actual demand
= smoothing constant (0 1)

Pg 25 of 122
Example

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

New forecast (for December demand) = F
Nov
+ (A
Nov
F
Nov
)

= 500 + 0.4 (550 500)

= 500 + 20

= 520 cars

Selecting the Smoothing Constant

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

2.6 Accuracy and Control of Forecasts

Accuracy and control of forecasts is a vital aspect of forecasting. The complex nature of
most real world variables makes it almost impossible to correctly predict future values of
those variables on a regular basis

Most decision-makers will want to include accuracy as a factor when choosing among
different techniques, along with cost. Accurate forecasts are necessary for the success of
daily activities of every business organisation.

2.6.1 Measuring Forecast Error

The overall accuracy of any forecasting model moving average, exponential smoothing,
or other can be determined by comparing the forecasted values with the actual or
observed values.

The forecast error (or deviation) is defined as:

Forecast error = Actual demand Forecast value
= A
t
F
t

Several measures are used in practice to calculate the overall forecast error. These
measures can be used to compare different forecasting models, as well as to monitor
forecasts to ensure they are performing well. The most popular measures are Mean
Absolute Deviation (MAD) and Mean Square Error (MSE).
Pg 26 of 122
2.6.2 Mean Absolute Deviation (MAD)

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

Actual - Forecast
MAD = -------------------------
n

The example below applies MAD & MSE, as a measure of overall forecast error, by
testing two values of .

Quarter Actual Forecast with = 0.10 Forecast with = 0.50
1 180 175 175
2 168 175.50 = 175.00 + 0.10(180 175) 177.50
3 159 174.75 = 175.50 + 0.10(168 175.50) 172.75
4 175 173.18 = 174.75 + 0.10(159 174.75) 165.88
5 190 173.36 = 173.18 + 0.10(175 173.18) 170.44
6 205 175.02 = 173.36 + 0.10(190 173.36) 180.22
7 180 178.02 = 175.02 + 0.10(205 175.02) 192.61
8 182 178.22 = 178.02 + 0.10(180 178.02) 186.30
9 ? 178.59 = 178.22 + 0.10(182 178.22) 184.15

Qtr Actual Forecast
with = 0.10
Absolute
Deviation for
= 0.10
Forecast
with = 0.50
Absolute
Deviation for
= 0.50
1 180 175 5.00 175 5.00
2 168 175.50 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30

Deviation 82.45 Deviation 98.62
MAD 10.31 MAD 12.33
th
ed, pg 116)

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

Pg 27 of 122
2.6.3 Mean Square Error (MSE)

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

(Actual Forecast)
2

MSE = -------------------------
n

Quarter Actual Forecast with = 0.10 (Actual - Forecast)
2

1 180 175 (5)
2
= 25
2 168 175.50 (-7.5)
2
= 56.25
3 159 174.75 (-15.75)
2
= 248.06
4 175 173.18 (1.82)
2
= 3.33
5 190 173.36 (16.64)
2
= 276.89
6 205 175.02 (29.98)
2
= 898.70
7 180 178.02 (1.98)
2
= 3.92
8 182 178.22 (3.78)
2
= 14.31

(Actual - Forecast)
2
1526.46
MSE 190.8
th
ed, pg 117)

Is this MSE = 190.8 good or bad ? It all depends on the MSEs for other forecasting
approaches. A low MSE is better because we want to minimize MSE.

A drawback of using MSE is that it tends to accentuate large deviations due to the
squared term.

2.7 Choosing a forecasting technique

Many different kinds of forecasting techniques are available, and no single technique
works best in every situation. When selecting a technique for a given situation, the
manager or analyst must take a number of factors into consideration.

The two most important factors are cost and accuracy. How much money is budgeted for
generating the forecast? What are the possible costs of errors, and what are the benefits
that might accrue from an accurate forecast? Generally speaking, the higher the
accuracy, the higher the cost, so it is important to weigh cost-accuracy trade-offs
carefully. The best forecast is not the necessarily the most accurate or least costly;
rather, it is some combination of accuracy and cost deemed best by management.

Pg 28 of 122
Review Questions

1. Describe the three forecasting time horizons and their use.

2. Identify the seven steps involved in forecasting.

3. What are the differences between quantitative and qualitative forecasting methods?

4. Name and discuss three qualitative forecasting methods.

5. Identify four quantitative forecasting methods.

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

7. Describe two popular measures of forecast accuracy.

8. Given the following data, calculate the three-year moving averages for years 4 through
10.

Year Demand
1 74
2 90
3 59
4 91
5 140
6 98
7 110
8 123
9 99

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

Week Sales (cases)
1 17
2 21
3 27
4 31
5 19
6 17
7 21

Pg 29 of 122
10. Jim's department at a local department store has tracked the sales of a product over the
last ten weeks. Forecast demand using exponential smoothing with an alpha of 0.4, and
an initial forecast of 28.0. Calculate MAD.

Period Demand
1
24
2
23
3
26
4
36
5
26
6
30
7
32
8
26
9
25
10
28

Pg 30 of 122
Lesson 3: Product Design and Development

Learning Outcomes:


1. Outline the product development system and identify the stakeholders of this
process.

2. Explain the main techniques that are important to product development.

3. Explain the process of defining a product.

4. Identify the documents that are used to assist production personnel to manufacture
the defined product

3.1 Objectives of Product Design

The main focus of product design is customer satisfaction. Hence, it is essential for
designers to understand what the customer wants and design with that in mind.
Marketing is the primary source for this information.

Secondary focuses in product design relate to function, cost and potential profit,
quality, appearance, forecasted volume, ease of production, ease of assembly, and
ease of maintenance or service. It is crucial for designers to take into account the
operations capabilities of the organisation in order to achieve designs that fit with
those capabilities. This is sometimes referred to as designed for operations. Failure
to take this into consideration can result in reduced productivity, reduced quality, and
increased costs. For these reasons, it is wise for design to solicit input from
operations people throughout the design process to reduce the risk of achieving design
that looks good on paper but doesnt work in real world.

3.2 Product Life Cycles

Products are born. They live and they die. They are cast aside by a changing society.
It may be helpful to think of a products life as divided into four phases. Those
phases are introduction, growth, maturity and decline.

Product life cycles may be a matter of a few hours (a newspaper), months (seasonal
fashions), years, or decades (Volkswagen Beetle). Regardless of the length of the
cycle, the task of the operations manager is the same: to design a system that helps
introduce new products successfully. If the operations function cannot perform
effectively at this stage, the firm may be saddled with losers products that cannot be
produced efficiently and perhaps not at all.

Figure 3.1 shows the four life cycle stages and the relationship of product sales, cash
flow, and profit over the life cycle of a product. Note that typically a firm has
negative cash flow while it develops a product. When the product is successful, those
Pg 31 of 122
losses may be recovered. Eventually, the successful product may yield a profit prior
to its decline.

Figure 3.1: Product Life Cycle, Sales, Cost and Profit.
th
ed, pg 159)

3.3 Generating New Products

New Product Opportunities

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

The change

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

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

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

Negative cash
flow
I In nt tr ro od du uc ct ti io on n G Gr ro ow wt th h M Ma at tu ur ri it ty y D De ec cl li in ne e
S S
a a
l l
e e
s s
, ,

c c
o o
s s
t t
, ,

a a
n n
d d

c c
a a
s s
h h

f f
l l
o o
w w

C Co os st t o of f d de ev ve el lo op pm me en nt t a an nd d p pr ro od du uc ct ti io on n
C Ca as sh h
f fl lo ow w
N Ne et t r re ev ve en nu ue e ( (p pr ro of fi it t) )
S Sa al le es s
r re ev ve en nu ue e
L Lo os ss s

Pg 32 of 122

3.4 Product Development

Product Development System

An effective product strategy links product decisions with cash flow, market
dynamics, product life cycle, and the organisations capabilities. A firm must have
the cash for product development, understand the changes constantly taking place in
the marketplace, and have the necessary talents and resources available. The product
development system may well determine not only product success but also the firms
future.

Figure 3.2 shows the stages of product development. In this system, product concepts
are developed from a variety of sources, both external and internal to the firm.
Concepts that survive the product idea stage progress through various stages, with
nearly constant review, feedback, and evaluation in a highly participative environment
to minimise failure.

Figure 3.2 Product Development Stages
th
ed, pg
163)

3.5 Issues for Product Design

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

Scope of product
development team
Scope for design
and engineering
teams
Evaluation
Introduction
Test Market
Functional Specifications
Design Review
Product Specifications
Customer Requirements
Ability
Ideas

Pg 33 of 122
(1) Robust Design
(2) Modular Design
(3) Computer Aided Design (CAD)
(4) Computer Aided Manufacturing (CAM)
(5) Environmentally Friendly Design

3.5.1 Robust Design

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

3.5.2 Modular Design

Products designed in easily segmented components are known as modular designs.

Modular designs offer flexibility to both production and marketing. The production
department typically finds modularity helpful because it makes product development,
production, and subsequent changes easier. Moreover, marketing may like
modularity because it adds flexibility to the ways customers can be satisfied.

The customisation provided by modularity allows customers to mix and match to their
own taste. This is also the approach taken by Harley-Davidson, where relatively few
different engines, chassis, gas tanks, and suspension systems are mixed to produce a
huge variety of motorcycles.

It has been estimated that many automobile manufacturers
can, by mixing the available modules, never make two cars
alike.

This same concept of modularity is carried over to many
industries, from airframe manufacturers to fast food
restaurants. Airbus uses the same wing modules on
several planes, just as McDonalds and Burger King use
relatively few modules (cheese, lettuce, buns, sauces,
pickles, meat patties, French fries etc.) to make a variety of
meals.

3.5.3 Computer-Aided Design (CAD)

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

Pg 34 of 122
CAD software allows designers to save time and money by shortening development
cycles for virtually all products. The speed and ease with which sophisticated designs
can be manipulated, analysed, and modified with CAD makes review of numerous
options possible before final commitments are made.

Faster development, better products, and accurate flow of information to other
departments all contribute to a tremendous payoff for CAD. The payoff is
particularly significant because most product costs are determined at the design stage.

One extension to CAD is the design for manufacture and assembly (DFMA)
software, that allows designers to look at the effect of design on manufacturing of the
product.

A second CAD extension is 3-D object modelling that builds small prototypes.

3.5.4 Computer-Aided Manufacturing (CAM)

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

In essence, Computer aided Manufacturing (CAM) refers to the use of specialised
computer programs to direct and control manufacturing equipment. When computer
aided design (CAD) information is translated into instructions for computer-aided
manufacturing (CAM), the result of these two technologies is CAD/CAM.

The benefits of CAD and CAM include:

1. I mproved product quality. CAD permits the designer to investigate more
alternatives, potential problem and dangers.

2. Shorter design time. A shorter design phase lowers cost and allows a more
rapid response to the market.

3. Production cost reductions. Reduced inventory, more efficient use of
personnel through improved scheduling, and faster implementation of design
changes lower costs.

Pg 35 of 122

3.5.5 Environmentally Friendly Design Green Manufacturing

The concept of green manufacturing that is,
making environmentally sound products through
efficient processes. Companies can show their
sensitivity to green manufacturing in product and
process design in several ways:

1. Make products recyclable. Germany, a
leader in the green movement, has passed
a packaging ordinance requiring beer
brewers to use refillable bottles.

2. Use recycled materials. Scotch-Brite soap pads at 3M are designed to use
recycled plastics.

3. Use less harmful ingredients. Standard Register, like most of the printing
industry, has replaced environmentally dangerous inks with soybean-based
inks that reduce air and water pollution.

4. Use lighter components. The auto industry continues to expand the use of
aluminium and plastic components to reduce weight. This change in material,
while expensive, makes autos more environmentally friendly by improving
mileage.

5. Use less energy. While the auto industry is redesigning autos to improve
mileage, General Electric is redesigning a new generation of refrigerators that
require substantially less electricity during their life time.

6. Use less material. Most companies waste material in the plant and in the
packaging. An employee team at Sony semiconductor plant achieved a 50%
reduction in the amount of chemical used in the silicon wafer etching process.

BMW uses part made of recycled plastics and parts that can be recycled. Green
manufacturing means companies can reuse, refurbish, or dispose of a products
components safely and
reduce total life cycle
product costs.

Green manufacturing is
appreciated by the public,
and it can save money,
material, and the
environment we live in.
These are the kind of win-win situations that operations managers seek.

Pg 36 of 122
3.6 Defining a Product

Once new goods or services are selected for introduction, they must be defined. First,
a good or service is defined in terms of its functions that is, what it is to do. The
product is then designed, and the firm determines how the functions are to be
achieved. Management typically has a variety of options as to how a product should
achieve its functional purpose. For example, when a handphone is produced, aspects
of design such as the colour, size, layout of the button pads may make substantial
difference in ease of manufacture, quality, and market acceptance.

Most manufactured items as well as their components are defined by a drawing,
usually referred to as an engineering drawing. An engineering drawing shows the
dimensions, tolerances, materials, and finishes of a component. An example of the
engineering drawing is shown in figure 3.5.

Figure 3.4: An example of Engineering Drawings showing the dimensions, tolerances,
materials and finishes.

th
ed, pg 175)

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

3.7 Documents for Production

Once a product id selected, designed, and ready for production, production is assisted
by a variety of documents. Let us look at a few of them:

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

(2) Assembly chart A graphic means of identifying how
components flow into subassemblies and
ultimately into a final product.

(3) Route sheet A listing of the operations steps necessary to
Pg 37 of 122
produce a component with the material
specified in the bill of material.

(4) Work order An instruction to make a given quantity of a
particular item, usually to a given schedule.

(5) Engineering Change Notice
(ECN)
A correction or modification of an
engineering drawing or bill of material.

Figure 3.5 Assembly drawing
th
ed, pg 177)
Pg 38 of 122
Review Questions:

1. What is the objective of the product decision?

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

3. Identify the specific guidelines that can help an operations manager achieve
environmentally friendly designs.

4. Identify the general benefits derived from CAD.

5. Discuss the advisability of using modular assemblies in manufacturing. (What are
the advantages and disadvantages?)

6. If a design can be produced to requirements even when the production process has
unfavorable conditions, the design is said to be _________.

7. Products or services designed in easily segmented components are known as
___________.

8. A drawing that shows the dimensions, tolerances, materials, and finishes of a
component is a(n) ____________.

9. A listing of the components, their description, and the quantity of each required to
make one unit of product is the __________________.

10. An exploded view of the product is a(n) ____________.

Pg 39 of 122
Lesson 4 : Managing Quality

Learning Outcomes:


1. Define the major costs of quality.

2. Explain the basic principles and methods of TQM (Total Quality Management).

3. Describe the tools of TQM including the pareto charts, process charts cause-and
effect diagrams and statistical process control.

4. Describe how to determine whether a process is capable of producing a service or
product to specifications

4.1 The Meaning of Quality

Quality has becomes a major factor in a customers choice of product and service. If
the customer feels that he is getting what he paid for, he will tend to be satisfied with
the Quality of the product.

However, in order to maintain customer loyalty in todays highly competitive
markets, customer satisfaction alone is insufficient; customer delight is required for
customer retention. To retain the customers, goods must provide the highest quality.

4.2 Cost of Quality (COQ)

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

The Cost of Quality category codes are the following:

Prevention Costs

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

Appraisal Costs

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

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

Pg 40 of 122
External Error Costs

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

4.3 Total Quality Management (TQM)

Total Quality Management (TQM) refers to a quality emphasis that encompasses the
entire organisation, from supplier to customer. TQM stresses a commitment by
management to have a continuous company wide drive toward excellence in all
aspects of products and services that are important to the customer.

TQM is important because quality decisions influence the decisions made by
operations managers. The decisions deal with the various aspects of identifying and
meeting customer expectations. Meeting those expectations requires an emphasis on
TQM if a firm is to compete as a leader in world markets.

Quality expert W. Edwards Deming used 14 points to indicate how he implemented
TQM:

(1) Create consistency of purpose
(2) Lead to promote change
(3) Build quality into the products
(4) Build long term relationships
(5) Continuously improve product, quality, and service
(6) Start training
(7) Emphasize leadership
(8) Drive out fear
(9) Break down barriers between departments
(10) Stop haranguing workers
(11) Support, help, improve
(12) Remove barriers to pride in work
(13) Institute a vigorous program of education and self-improvement
(14) Put everybody in the company to work on the transformation

These 14 points were developed into these concepts for an effective TQM
management:

(1) Continuous improvement
(2) Six Sigma
(3) Employee empowerment
(4) Benchmarking
(5) Just-in-time (JIT)
(6) Knowledge of TQM Tools

Pg 41 of 122
4.3.1 Continuous Improvement

TQM requires a never-ending process of continuous improvement that covers people,
equipment, suppliers, materials and procedures. The basis of the philosophy is that
ever aspect of an operation can be improved. The end goal is perfection, which is
never achieved but always sought.

Walter Sherwhart, a pioneer in quality management, developed a circular model
known as PDCA (Plan, Do, Check, Act) as his version of continuous improvement.
Deming later took this concept to Japan during his work there after World War II.

Figure 4.1 The Plan-Do-Check-Act (PDCA) Cycle
th
ed, pg 199)

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

Phase Description

Plan

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

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

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

Act If the results are successful, standardize the new method and
communicate the new method to all people associated with the process.
Implementing training for the new method. If the results are
unsuccessful, revise the plan and repeat the process or cease the project.
Pg 42 of 122

Kaizen

The Japanese use the word kaizen to describe this
ongoing process of unending improvement the
setting and achieving of ever-higher goals.

In the U.S., TQM and zero defects are also used to
describe continuous improvement efforts.

Whether its PDCA, kaizen, or zero defects, the
operations manager is a key player in building a
work culture that endorses continuous
improvement.

4.3.2 Six Sigma

Today's competitive environment leaves no room for error. Companies must delight
their customers and relentlessly look for new ways to exceed their expectations. This
is why Six Sigma Quality has become a part of todays business culture.
Just what is Six Sigma? Six Sigma is a reference to the level of quality produced in a
manufacturing process. Most traditional companies believe that 99.9% good quality is
a terrific achievement. However, in todays standard, 99.9% is not so good, after all.
World class companies ship products to their customers with 99.99966% good quality.
From a statistical point of view, this means that they are shipping Six Sigma quality--
no more than 3.4 parts per million defects. This is nearly zero.
Six Sigma is a highly disciplined process that helps companies to focus on developing
and delivering near-perfect products and services.

Why "Sigma"? The word is a statistical term that measures how far a given process
deviates from perfection. The central idea behind Six Sigma is that if you can measure
how many "defects" you have in a process, you can systematically figure out how to
eliminate them and get as close to "zero defects" as possible.
The table below shows the comparison between 2, 3, 4, 5 & 6 sigma:
Sigma Defects per million chances/opportunities
2 308,537
3 67,000
4 6,200
5 233
6 3.4

Pg 43 of 122
Six Sigma DMAIC Methodology
The methodology consists of the following five (5) steps:
Definethe process improvement goals that are consistent with customer demands
and enterprise strategy.
Measurethe current process and collect relevant data for future comparison.
Analyze to verify relationship and causality of factors. Determine what the
relationship is, and attempt to ensure that all factors have been considered.
I mprove or optimize the process based upon the analysis using techniques like
Design of Experiments.
Control is to ensure that any variances are corrected before they result in defects.
Set up pilot runs to establish process capability, transition to production and
thereafter continuously measure the process and institute control mechanisms.

4.3.3 Employee Empowerment

Employee empowerment means involve employees in every step of the production
process. Consistently, business literature suggests that some 85% of quality problems
have to do with materials and processes, not with employee performance. Therefore,
the task is to design equipment and processes that produce the desired quality. This is
best done with a high degree of involvement, by those who understand the
shortcomings of the system. Those dealing with the system on a daily basis
understand it better than anyone else.

One study indicated that TQM program that delegate responsibility for quality to
shop-floor employees tend to be twice as likely to succeed as those implemented with
top-down directives.

Techniques for building employee empowerment include:

(1) building communication networks that include employees

(2) developing open, supportive supervisors

(3) moving responsibility from both managers and staff to production employees

(4) building high morale organisations

(5) creating such formal organisation structures as teams and quality circles

Pg 44 of 122

4.3.4 Benchmarking

Benchmarking is another ingredient in an organisations TQM program.
Benchmarking involves selecting a demonstrated standard of products, services, costs
or practices that represent the very best performance for processes or activities very
similar to your own.

The idea is to develop a target at which to shoot and then develop a standard or
benchmark against which to compare your performance.

The steps for developing benchmarks are:

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

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

4.3.5 Just-in-Time (JIT)

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

(1) JIT cuts the cost of quality

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

(2) JIT improves quality

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

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

Often the purpose of keeping inventory is to protect against poor production
performance resulting from unreliable quality. If consistent quality exists, JIT allows
firms to reduce all the costs associated with inventory.
Pg 45 of 122
4.4 Quality Control Seven (7) Tools

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

Tool Application
1. Check sheets Tool for Generating Ideas
2. Scatter diagrams Tool for Generating Ideas
3. Cause and effect diagrams Tool for Generating Ideas
4. Pareto diagrams Tool for Organising Data
5. Flowcharts Tool for Organising Data
6. Histograms Tool for Identifying Problems
7. Statistical Process Control (SPC) charts. Tool for Identifying Problems

Figure 4.2 The 7 Tools of Quality Control
th
ed, pg 204)
Pg 46 of 122

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

4.4.1 Check Sheet

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

4.4.2 Scatter Diagrams

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

4.4.3 Cause-and-Effect Diagram

The cause and effect diagram is sometimes called an Ishikawa diagram after its
inventor. It is also known as a fish bone diagram because of its shape. A cause and
effect diagram describes a relationship between variables. The undesirable outcome is
shown as effect, and related causes are shown as leading to, or potentially leading to,
the said effect. This popular tool has one severe limitation, however, in that users can
overlook important, complex interactions between causes. Thus, if a problem is
caused by a combination of factors, it is difficult to use this tool to depict and solve it.
A fish bone diagram displays all contributing factors and their relationships to the
outcome to identify areas where data should be collected and analyzed. The major
areas of potential causes are shown as the main bones, e.g., Materials, Methods,
Operators and Machines (above). Later, the sub-areas are depicted. Thorough analysis
of each cause can eliminate causes one by one, and the most probable root cause can
Pg 47 of 122
be selected for corrective action. Quantitative information can also be used to
prioritize means for improvement, whether it is for machine, design, or operator.

Figure 4.3 The Cause and Effect Diagram
th
ed, pg 205)

4.4.4 Pareto Analysis

Pareto analysis is a technique for focusing attention on the most important areas. The
Pareto concept, named after the 19
th
century Italian economist Vilfredo Pareto, is that
a relatively few factors generally account for a large percentage of the total cases (eg.
complaints, defects, problems). The ideas is to classify the cases according to degree
of importance, and focus on resolving the most important, leaving the less important.

Often referred to as the 80-20 rule, the Pareto concept states the approximately 80%
of the problems come from 20% of the items. For instance, 80% of machine
breakdowns come from 20% of the machines, and 80% of the product defects come
from 20% of the causes of defects.

Pg 48 of 122

Figure 4.4 The Pareto Chart
th
ed, pg 206)

4.4.5 Flowcharts

Flowcharts describe a process in as much detail as possible by graphically displaying
the steps in proper sequence. A good flowchart should show all process steps under
analysis by the quality improvement team, identify critical process points for control,
suggest areas for further improvement, and help explain and solve a problem.
By breaking down the process into a series of steps, the flowchart simplifies the
analysis and gives some indication as to what event may be adversely impacting the
process.

4.4.6 Histogram
The histogram plots data in a frequency distribution table. What distinguishes the
histogram from a check sheet is that its data are grouped into rows so that the identity
of individual values is lost. Commonly used to present quality improvement data,
histograms work best with small amounts of data that vary considerably. When used
in process capability studies, histograms can display specification limits to show what
portion of the data does not meet the specifications.
After the raw data are collected, they are grouped in value and frequency and plotted
in a graphical form (left). A histogram's shape shows the nature of the distribution of
the data, as well as central tendency (average) and variability. Specification limits can
be used to display the capability of the process.
Pg 49 of 122

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

Figure 4.5 The Statistical Process Control (SPC) Chart
th
ed, pg 208)
Pg 50 of 122

Review Questions

1. Quality has at least three categories of definitions; identify them. Provide a brief
explanation of each.

2. Identify the four costs of quality. Which one is hardest to evaluate? Explain.

3. Identify the major concepts of TQM.

4. How is source inspection related to employee empowerment?

5. What steps can be taken to develop benchmarks?

6. Explain how just-in-time processes relate to the quality of an organization's
outputs.

7. Identify the five steps of DMAIC.

8. _________ is the Japanese word for the ongoing process of incremental
improvement.

9. Explain how a Pareto chart can identify the most important causes of errors in a
process.

10. Perform a Pareto analysis on the following information:

11. Construct a cause-and-effect diagram showing why a student might be dissatisfied
with the cafeteria.

12. ________ are graphical presentations of data over time that show upper and
lower control limits for processes we want to control.
Reason for unsatisfying stay at hotel Frequency
Unfriendly staff 6
Room not clean 2
Room not ready at check-in 3
No towels at pool 33
No blanket for pull-out sofa 4
Pool water too cold 3
Breakfast of poor quality 16
Elevator too slow or not working 23
Took too long to register 7
Bill incorrect 3
Total 100
Pg 51 of 122
Lesson 5 : Process Strategy and Capacity Planning

Learning Outcomes:


1. Discuss the major process decisions and position each process on a volume-
variety product-process matrix.

2. Configure operations into work flows and layouts.

3. Define process reengineering and process improvement.

4. Distinguish between design capacity, effective capacity and efficiency.

5. Identify a systematic approach to capacity planning.

5.1 Process Strategy

A process strategy (or transformation) strategy is an organisations approach to
transforming resources into goods and services. The objective of a process strategy is
to build a production process that meets customer requirements and product
specifications within cost and other managerial constraints. The process selected will
have a long-term effect on the efficiency and flexibility of production, as well as on
cost and quality of the goods produced. Therefore, much of a firms operations
strategy is determined at the time of this process decision.

Figure 5.1 : Process selected must fit with Volume and Variety
th
ed, pg 256)
L Lo ow w
V Vo ol lu um me e
R Re ep pe et ti it ti iv ve e P Pr ro oc ce es ss s
H Hi ig gh h
V Vo ol lu um me e
V Vo ol lu um me e
Process Focus
projects, job shops (machine,
print, carpentry)
Standard Register
Repetitive
(autos, motorcycles)
Harley-Davidson

Product Focus
(commercial baked goods,
steel, glass)
Nucor Steel
H Hi ig gh h V Va ar ri ie et ty y
o on ne e o or r f fe ew w u un ni it ts s p pe er r
r ru un n, , h hi ig gh h v va ar ri ie et ty y
( (a al ll lo ow ws s c cu us st to om mi iz za at ti io on n) )

C Ch ha an ng ge es s i in n M Mo od du ul le es s
m mo od de es st t r ru un ns s, ,
s st ta an nd da ar rd di iz ze ed d
m mo od du ul le es s

L Lo ow w V Va ar ri ie et ty y
C Ch ha an ng ge es s i in n A At tt tr ri ib bu ut te es s
( (s su uc ch h a as s g gr ra ad de e, , q qu ua al li it ty y, ,
s si iz ze e, , t th hi ic ck kn ne es ss s, , e et tc c. .) )
l lo on ng g r ru un ns s o on nl ly y
Mass Customization
(difficult to achieve, but huge
rewards)
Dell Computer
P Po oo or r S St tr ra at te eg gy y ( (B Bo ot th h f fi ix xe ed d
a an nd d v va ar ri ia ab bl le e c co os st ts s a ar re e
h hi ig gh h) )

Pg 52 of 122

5.2 Four Process Strategies

Process focus
Repetitive focus
Product focus
Mass customization

5.2.1 Process Focus

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

Figure 5.2 : Job shop focuses on Processes.
th
ed, pg 257)

Process focus

A production facility organized around processes to facilitate low-volume, high-
variety production

The process focused firm has the following characteristics:

Facilities are organized around specific activities or processes
General purpose equipment and skilled personnel
High degree of product flexibility
Typically high costs and low equipment utilization
Product flows may vary considerably making planning and scheduling a
challenge
M Ma an ny y i in np pu ut ts s
M Ma an ny y v va ar ri ie et ty y o of f o ou ut tp pu ut ts s
Many departments and
many routings
Pg 53 of 122

5.2.2 Repetitive Focus

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

Figure 5.3 : Repetitive process
th
ed, pg 258)

Repetitive process

A product-oriented production process that uses modules.

The repetitive process line is the classic assembly line. Widely used in the assembly
of virtually all automobiles (eg. Honda, Toyota, BMW) and household appliances (eg.
TV, freezer, iron, vacuum cleaner etc), it has more structure and consequently less
flexible than a process-focused facility.

Fast-food firms (eg. McDonald) are an example of a repetitive process using
modules. (such as meat, cheese, sauce, tomatoes, onions etc).

The repetitive process firm obtains both the economic advantage of the continuous
model (where many of the modules are prepared) and custom advantage of the low
volume, high variety model.

In summary, the characteristics of the repetitive focused firm are:

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

R Ra aw w
m ma at te er ri ia al ls s
a an nd d m mo od du ul le e
i in np pu ut ts s
M Mo od du ul le es s
c co om mb bi in ne ed d
f fo or r m ma an ny y
o ou ut tp pu ut t
o op pt ti io on ns s
F Fe ew w
m mo od du ul le es s
Pg 54 of 122

5.2.3 Product Focus

High-volume, low-variety processes are product focused. The facilities are organized
around products. They are called continuous processes, because they have very
long, continuous production runs.

Products such as glass, paper, light bulbs, tin sheets, beer, soft drinks, metal rods are
made via a continuous process. Some products such as lightbulbs are discrete; others,
such as rolls of paper, are non-discrete.

Figure 5.4 : Product focus process
th
ed, pg 259)

Product focus

A facility organized around products; a product-oriented, high-volume, low-variety
process.

It is only with standardization and effective quality control that firms established
product-focused facilities. An organisation producing the same lightbulbs or hot dog
bun day after day can organize around a product. Such organization has an inherent
ability to set standards and maintain a given quality, as opposed to an organization
that is producing unique products everyday, such as a photocopying shop or general
purpose clinic.

A product-focused facility produced high volume and low variety. The specialized
nature of the facility requires high fixed cost, but low variable costs reward high
facility utilization.

In summary, the product focused process has the following characteristics:

Facilities are organized by product
High volume but low variety of products
Long, continuous production runs enable efficient processes
Typically high fixed cost but low variable cost
Generally less skilled labor
F Fe ew w
i in np pu ut ts s
O Ou ut tp pu ut t
v va ar ri ia at ti io on ns s i in n
s si iz ze e, , s sh ha ap pe e, ,
a an nd d
p pa ac ck ka ag gi in ng g
Pg 55 of 122

5.2.4 Mass Customisation

Our increasingly wealthy and sophisticated world demands individualized goods and
services. The explosion of variety has taken place in automobiles, personal
computers, hand-phones, and thousand of other areas. In spite of this proliferation of
products, operations managers have improved quality while reducing costs.
Consequently, the variety of products continues to grow.

Operations managers use mass customization to produce this vast array of goods and
services. Mass customization is the rapid, low-cost production of goods and services
that fulfill increasingly unique customer desires. But mass customization is not just
about variety; it is about making precisely what the customer wants when the
customer wants it economically.

Mass Customisation

Rapid, low-cost production that caters to constantly changing unique customer
desires.

Mass customization brings us the variety of products traditionally provided by low-
volume manufacture (a process focus) at the cost of standardized high-volume
(product-focused) production. However, achieving mass customization is a challenge
that requires sophisticated operation capabilities.

Figure 5.5 : Requirements to achieve Mass Customisation
th
ed, pg 261)

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

Mass Customization
E Ef ff fe ec ct ti iv ve e
s sc ch he ed du ul li in ng g
t te ec ch hn ni iq qu ue es s
R Ra ap pi id d t th hr ro ou ug gh hp pu ut t
t te ec ch hn ni iq qu ue es s
R Re ep pe et ti it ti iv ve e F Fo oc cu us s
F Fl le ex xi ib bl le e p pe eo op pl le e
a an nd d e eq qu ui ip pm me en nt t
P Pr ro oc ce es ss s- -F Fo oc cu us se ed d
H Hi ig gh h v va ar ri ie et ty y, , l lo ow w v vo ol lu um me e
L Lo ow w u ut ti il li iz za at ti io on n ( (5 5% % t to o 2 25 5% %) )
G Ge en ne er ra al l- -p pu ur rp po os se e e eq qu ui ip pm me en nt t
P Pr ro od du uc ct t- -F Fo oc cu us se ed d
L Lo ow w v va ar ri ie et ty y, , h hi ig gh h v vo ol lu um me e
H Hi ig gh h u ut ti il li iz za at ti io on n ( (7 70 0% % t to o 9 90 0% %) )
S Sp pe ec ci ia al li iz ze ed d e eq qu ui ip pm me en nt t
M Mo od du ul la ar r t te ec ch hn ni iq qu ue es s
S Su up pp po or rt ti iv ve e
s su up pp pl ly y c ch ha ai in ns s
Pg 56 of 122
In summary, the main characteristics of Mass Customisation are:

The rapid, low-cost production of goods and service to satisfy increasingly
unique customer desires
Combines the flexibility of a process focus with the efficiency of a product
focus

5.3 Importance of Capacity Planning

An organization determines its long-term capabilities through capacity
planning. Capacity planning is done with respect to:

o Demand of the products or services

o Technology of equipment and processes to make and deliver those
products and services

o The competitive environment

Invariably, the plans are to deliver the products or services on time, at the
right price and the right quality.

Capacity is expressed in two ways:

Design capacity maximum output rate designed

Effective capacity what is actually used is the effective capacity
this is determined by real demand minus allowances, like planned
maintenance.

The lack of capacity results in loss of customers while overcapacity is
wasteful. How does one find the balance? A systematic approach to plan
capacity to find the balance is important, and it must be recognized early that
this not a pure science. It must be done continuously, through some hard
decisions to expand and contract, in order that a firm will be able to have the
intended capacity to serve its customers needs.

One needs to start from three basic questions, namely,

1. What type of capacity is needed?
2. How much capacity is needed?
3. When must the capacity be made available?

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

Pg 57 of 122
Steps of Capacity Planning Process:

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

5.4 Capacity planning for a service firm

The questions the service firm must ask itself and the steps that follow
subsequently may not be any different from what has been described so far.
However, the nature of the products makes capacity planning for a factory
more finite than that for a service firm.

Services being intangible and perishable pose difficulties to capacity
planning, like how near should the premises be located to potential customers?
Other considerations will be whether the capacity is for the peak period and if
that is done, what to do with excess capacity during the lull period?

For example how many cash register queues ought to be planned to service a
supermarkets potential customers, in order to keep the waiting time
reasonable. What happens to the 10 a.m. to 12 noon or 3 p.m. to 6 p.m.
periods when few people visit the supermarkets? Would re-assigning the jobs
to cash registers attendants to the stores be acceptable to them? Otherwise,
what can be done to this idle capacity?

Capacity planning here focuses on speed of delivery and reduction of
customer waiting time. Managing demand may need to be part of the capacity
management strategy.
Pg 58 of 122

Review Questions

1. Name the four basic process strategies; describe them in a complete sentence or
two each.

2. Why is equipment utilization in process-focused service industries often low?

3. Compare an intermittent process to a continuous process on the basis of variety,
volume, equipment utilization, and inventory.

4. How are modules useful in manufacturing processes?

5. What is mass customization?

6. What is Dell Computer's source of competitive advantage? In a short paragraph,
explain some of the steps Dell has taken to develop this advantage.

7. What is the fundamental distinction between design capacity and effective
capacity? Provide a brief example.

8. Why is the capacity decision important?

9. A good capacity decision requires that it be tightly integrated with the
organization's strategy and investments. But there are other "considerations" to
making a good capacity decision. Name them. Describe each in a sentence or two.

Pg 59 of 122
Lesson 6 : Location and Layout Strategies

Learning Outcomes:


1. Understand how goods-producing and service location decisions differ.

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

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

What are the evaluation criteria is it for increased revenues or community
service ?
What are the important factors market locations or raw materials ?
What other alternatives of location ?
o Identify the general region for a location
o Identify a small number of community alternatives
o Identify site alternatives among the community alternatives
Evaluate the alternatives and make a selection

6.2 Factors that affect location decisions

Depending on the type of business, and whether manufacturing or service, certain
factors may rank in importance over others. Some of the factors that affect location
decisions can be classified into three levels :

1. Regional Factors
2. Community Consideration
3. Site-related Factors
Pg 60 of 122
6.2.1 Regional Factors

The primary regional factors involve:

Location of raw materials or supplies
Firms locate near / at source of raw materials out of necessity, perishability of
materials, and to reduce transportation costs.

Location of markets
Beside climate, tax and monetary incentives proximity to markets serve as part of
firms competitive strategies to reduce distribution costs and increase convenience to
consumers.

Labour factors
For labour-intensive organizations, availability of labour is very important. Skills and
worker attitudes of potential employees are factors that impact upon labour costs.

Climate and Taxes
Climate and taxes also affect location decision-making, beside low-cost energy or
labour. Weather conditions can cause delayed deliveries and work disruptions due to
inability of employees to get to work, and policies on business and personal income
taxes are major factors that either attract or reduce attractiveness to companies.

6.2.2 Community Considerations
Although new businesses may mean sources of future tax revenues and new job
opportunities, firms whose activities that will pollute the environment or lessen the
quality of life are generally unwelcome by communities. Firms, on the other hand,
determine the desirability of a community by :
Size of the community
Attitude of the community toward them
Availability of facilities for its workers and managers to live in, such as :
o Facilities for education, shopping, religious worship, and recreation
o Transportation
o Quality of police, fire and medical services
Cost
Availability of utilities
Environmental regulations
Governmental incentives

Pg 61 of 122
6.2.3 Site-related Factors
Sites are long-term commitments. Primary considerations are site-related factors,
land costs aside, such as:

Suitability for type of business, especially for heavy manufacturing or erection of
large buildings soil conditions, load factors, drainage rates

Size, architectural features and regulations governing room for future expansion,
current utility, sewer capacities

Parking facilities for employees, customers, access roads for trucks, or rail spurs

Zoning restrictions industrial parks for light manufacturing or assembly,
warehouse operations, customer service facilities
Proximity to, and size of airport / rail stations for firms whose executives are
required to travel frequently

6.3 Methods of evaluating location alternatives
There are four major methods in location alternatives evaluation:

Factor-Rating Method
Centre-of-Gravity Method
Locational Cost-Profit-Volume Analysis
Transportation Model
We shall consider only Factor-Rating Method and Centre-of-Gravity Method here.

6.3.1 The Factor-Rating Method
Also known as Factor-Weighting Method, Factor Rating Method is widely used
because of its easy-to-understand format. It provides a mechanism for combining
diverse factors by assigning a range of point values to major factors affecting a set of
possible sites. The factors of each site are then rated and given a point value from its
assigned range. The site with the highest total points would be selected.

To develop a factor rating, the following procedure is used :
1. Develop a list of relevant factors called critical success factors
2. Assign a weight to each factor
3. Develop a scale for each factor
4. Score each location for each factor
5. Multiply score by weights for each factor for each location
6. Recommend the location with the highest point score

Pg 62 of 122
Alternatively, managers may prefer to establish minimum thresholds for composite
scores, that is, alternatives can be rejected without further consideration if they fail to
meet that minimum. However, should none of the alternatives meet the minimum,
either additional alternatives must be identified and evaluated or the minimum
threshold must be re-evaluated.

6.3.2 Centre of Gravity Method

The Centre of Gravity method is often used to locate intermediate or distribution
warehouses. This technique locates single facilities by considering existing facilities,
the distances between them, and the volumes of goods to be shipped. By using a map
that is accurately drawn to scale with the locations of existing facilities indicated, a
coordinate is then overlaid on the map to determine relative locations. Once the
coordinate system is in place, the coordinates of each destination can be determined.
In a simple calculation, inbound and outbound transportation costs are assumed equal
and special shipping costs for less than full loads are excluded.

6.3.3 Locational Break-Even Analysis

This method of cost-volume analysis is used for industrial locations
Three steps in the method
1. Determine fixed and variable costs for each location
2. Plot the cost for each location
3. Select location with lowest total cost for expected production volume

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

inefficient operations high cost, bottlenecks
accidents or safety hazards
changes in design of products / services
introduction of new products / services
changes in environmental or other legal requirements
Pg 63 of 122
morale problems lack of face-to-face contact
changing markets, needs or new technology

Layout decisions are important as they
have a significant impact on the cost and efficiency of operations poor
layout design can adversely affect system performance
involve long-term commitments hence mistakes are difficult to overcome
require substantial investments of money and effort already costly in itself
both in terms of labour, materials, and time, facility layout becomes doubly
costly in re-organizing an existing arrangement as it would entail
o direct cost of re-organization
o expense of curtailing operations during the changeover

6.4.1 Product-oriented layout
Product layouts are arranged to correspond to the technological processing
requirements of products that are highly standardized. As each item follows the same
sequence and move quickly from operation to operation, product layouts achieve a
smooth and rapid flow of large volumes of goods or customers through a system,
hence the term, production line.

6.4.2 Process-oriented layout
Process layouts feature departments that group item-processing or service-provision
by similar operations to handle discontinuous workflow (referred to as intermittent
processing). As process layouts are designed to handle varied processing
requirements, equipment are arranged by type rather than by processing sequence.
Use of general-purpose equipment can also provide the flexibility to handle a wide
range of processing requirements. Machine shops and hospitals are examples of
process layouts in manufacturing and service environments, respectively.

6.4.3 Fixed-Position layout
Fixed-position layouts arise out of necessity, due to the nature of the project (such as
building a house), weight, size or bulk that make movement of the product
undesirable or extremely difficult. In such an arrangement, workers, materials and
equipment are moved about as needed while keeping the items that are being worked
on stationary.
Pg 64 of 122

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

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

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

6.4.6 Service or Retail layout

Allocates shelf space and responds to customer behavior
Such as department stores, supermarkets, specialty stores take into account:
Presence of customers
Opportunity to influence sales volume and customer attitudes
Traffic patterns and traffic flow

6.4.7 Office layout
It consists of grouping of workers, their equipment, and spaces to provide comfort,
safety, and movement of information.
Two trends are influencing the transformations of office layouts:
Increasing use of electronic communications replacing flow of paperwork
Open-concept to create an image of openness with use of low-rise partition.

Pg 65 of 122
Review Questions

1. State the fundamental objective of a firm's location strategy. How is this basic
objective carried out by industrial or goods-producing firms; how does that differ
for service firms?

2. Identify five factors that affect location decisions at the site level.

3. "Proximity" or closeness implies that a firm should locate "close" to something.
What are the three kinds of proximity described in the text? What are the basic
conditions under which each is appropriate? What kinds of firms are likely to use
each of these?

4. Identify the four major quantitative methods for solving location problems.

5. What kinds of location decisions are appropriate for use of center-of-gravity
analysis? What variable is being optimized in this analysis?

6. Using the factor ratings shown below, determine which location alternative should
be chosen on the basis of maximum composite score.

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

College Map Coordinate (x, y) Load
A (2,10) 3
B (6,8) 2
C (4,9) 4
D (9,5) 1
E (8,1) 3
F (3,2) 2
G (2,6) 1

8. Identify the seven fundamental layout strategies. Describe the use of each one very
briefly.

9. What are the advantages and disadvantages of product layouts?
Location
Factor Weight A B C
Easy access 0.15 86 72 90
Parking facilities 0.20 72 77 91
Display area 0.18 86 90 90
Shopper (walking) traffic 0.21 94 86 80
Neighborhood wealth 0.16 99 89 81
Neighborhood safety 0.10 96 85 75
Pg 66 of 122
Lesson 7 : Supply Chain Management

Learning Outcomes:


1. Explain the strategic importance of supply chains for service providers, as well as
for manufacturers.

2. Define the key design strategies associated with supply chain processes.

3. Explain the process of outsourcing and vendor selection.
4. Explain the process of managing the complete cycle of materials as they move
from suppliers to production, warehousing, distribution and to the customer.

7.1 The Supply Chains Strategic Importance

Many firms spend a huge portion of their sales dollars on purchases. Because such a
high percentage of an organisations costs are determined purchasing, relationships
with suppliers are increasingly integrated and long term. Joint efforts that improve
innovation, speed design, and reduce costs are common. Such efforts, when part of a
corporate-wide strategy, can significantly improve both partners competitiveness.
This integrated focus places added emphasis on procurement and supplier
relationships which must be managed. The discipline that manages these
relationships is known as supply chain management.

Supply chain management is the integration of the activities that procure materials
and services, transform them into intermediate goods and the final product, and
deliver them to customers

Important activities include determining

1. Transportation vendors
2. Credit and cash transfers
3. Suppliers
4. Distributors
5. Accounts payable and receivable
6. Warehousing and inventory
7. Order fulfillment
8. Sharing customer, forecasting, and production information

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

Pg 67 of 122

Figure 7.1 : A Supply Chain for Beer.
th
ed, pg 434)

Supply Chain Management

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

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

Pg 68 of 122

7.2 How Supply Chain Decision Affect Strategy

To ensure that the supply chain supports the firms strategy, managers need to
consider the supply chain issues shown in the below table.

Low-Cost Strategy Response Strategy Differentiation
Strategy
Suppliers goal

Supply demand at
lowest possible cost

Respond quickly to
changing
requirements and
demand to minimize
stockouts

Share market research;
jointly develop
products and options

Primary
selection
criteria

Select primarily for
cost

capacity, speed, and
flexibility

product development
skills

Process
characteristics

Maintain high
average utilization

Invest in excess
capacity and flexible
processes

Modular processes that
lend themselves to
mass customization

Inventory
characteristics

Minimize inventory
throughout the chain
to hold down cost

Develop responsive
system with buffer
stocks positioned to
ensure supply

Minimize inventory in
the chain to avoid
obsolescence

Lead-time
characteristics

Shorten lead time as
long as it does not
increase costs

Invest aggressively to
reduce production
lead time

Invest aggressively to
reduce development
lead time

Product-design
characteristics

Maximize
performance and
minimize costs

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

Use modular design to
postpone product
differentiation as long
as possible

7.3 Outsourcing

Outsourcing transfers some of what are traditional internal activities and resources of
a firm to outside vendors. Outsourcing is part of continuing trend towards utilizing
the efficiency that comes with specialization. The vendor performing the outsourced
service is a n expert in that particular specialty. This leaves the outsourcing firm to
focus on its critical success factors, that is, its core competencies that yield a
competitive advantage.

In recent years, many firms typically outsource areas such as information technology,
accounting, legal, logistics, and production to external vendors.

Pg 69 of 122
7.4 Supply Chain Strategies

For goods and services to be obtained from outside sources, the firm must decide on a
supply chain strategy.

We will cover three such strategies:

Many Suppliers
Few Suppliers
Vertical Integration

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

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

7.4.3 Vertical Integration

Vertical integration is to develop the ability to produce goods or services previously
purchased or actually buying from a supplier or distributor.

Figure 7.2 : Vertical Integration can be forward or backward.
th
ed, pg 440)
Baked goods Baked goods
Computers Computers
Watches Watches
Calculators Calculators
Dealers Dealers
Finished goods Finished goods
(customers) (customers)
Circuit boards Circuit boards
Distribution Distribution
systems systems
Forward integration
Flour milling
Integrated
circuits
Automobiles
Current
transformation
Steel Steel
Backward
integration
Farming Farming Silicon Silicon Iron ore Iron ore
Raw material Raw material
(suppliers) (suppliers)
Baked goods Baked goods
Computers Computers
Watches Watches
Calculators Calculators
Dealers Dealers
Finished goods Finished goods
(customers) (customers)
Circuit boards Circuit boards
Distribution Distribution
systems systems
Forward integration
Flour milling
Integrated
circuits
Automobiles
Current
transformation
Steel Steel
Backward
integration
Farming Farming Silicon Silicon Iron ore Iron ore
Raw material Raw material
(suppliers) (suppliers)
Vertical Integration Vertical Integration Examples of Vertical Integration Examples of Vertical Integration Vertical Integration Vertical Integration Examples of Vertical Integration Examples of Vertical Integration
Pg 70 of 122

7.5 Vendor Selection

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

We now examine vendor selection as a three-stage process

Vendor evaluation
Vendor Development
Negotiations

7.5.1 Vendor evaluation

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

Figure 7.3 : Weighted Approach to Vendor Selection
th
ed, pg 447)

3.9 3.9 1.00 1.00 Total Total
1.0 1.0 5 5 .20 .20 Integrity (environmental compliance/ Integrity (environmental compliance/
ethics) ethics)
.2 .2 2 2 .10 .10 Information systems capability (e Information systems capability (e- -
procurement, ERP) procurement, ERP)
.6 .6 4 4 .15 .15 Financial and managerial strength Financial and managerial strength
(stability and cost structure) (stability and cost structure)
.1 .1 2 2 .05 .05 Facilities/location Facilities/location
.2 .2 2 2 .10 .10 Quality systems and performance Quality systems and performance
.2 .2 4 4 .05 .05 Distribution/delivery capability Distribution/delivery capability
.6 .6 4 4 .15 .15 Production process capability Production process capability
(flexibility/technical assistance) (flexibility/technical assistance)
1.0 1.0 5 5 .20 .20 Engineering/research/innovation skills Engineering/research/innovation skills
Weight Weight
x Score x Score
Scores Scores
(1 (1- -5) 5) Weights Weights Criteria Criteria
3.9 3.9 1.00 1.00 Total Total
1.0 1.0 5 5 .20 .20 Integrity (environmental compliance/ Integrity (environmental compliance/
ethics) ethics)
.2 .2 2 2 .10 .10 Information systems capability (e Information systems capability (e- -
procurement, ERP) procurement, ERP)
.6 .6 4 4 .15 .15 Financial and managerial strength Financial and managerial strength
(stability and cost structure) (stability and cost structure)
.1 .1 2 2 .05 .05 Facilities/location Facilities/location
.2 .2 2 2 .10 .10 Quality systems and performance Quality systems and performance
.2 .2 4 4 .05 .05 Distribution/delivery capability Distribution/delivery capability
.6 .6 4 4 .15 .15 Production process capability Production process capability
(flexibility/technical assistance) (flexibility/technical assistance)
1.0 1.0 5 5 .20 .20 Engineering/research/innovation skills Engineering/research/innovation skills
Weight Weight
x Score x Score
Scores Scores
(1 (1- -5) 5) Weights Weights Criteria Criteria
Pg 71 of 122
The selection of competent suppliers is critical. If good suppliers are not selected,
then all other supply-chain efforts are wasted. As firms move towards using fewer
long-term suppliers, the issues of financial strength, quality management, research,
technical ability, and potential for a close long-term relationship play an increasingly
important role. These attributes should be noted in the evaluation process.

7.5.2 Vendor Development

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

7.5.3 Negotiations

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

(a) Cost-Based Price Model
The supplier opens books to the purchaser. The contract price is then based on time
and materials or on a fixed cost with an escalation clause to accommodate changes in
the vendors labor and materials costs.

(b) Market-Based Price Model
The price is based on a published, auction, or indexed price. Many commodities
(agriculture products, paper, metal, etc) are priced this way.

(c) Competitive Bidding When suppliers are not willing to discuss costs,
competitive bidding is often appropriate. It is used for infrequent purchases and may
make establishing long-term relationships difficult.

Pg 72 of 122
7.6 Logistics Management

Procurement activities may be combined with various shipping, warehousing, and
inventory activities to form a logistics system. The objective of logistics management
is to obtain efficient operations through the integration of all material acquisition,
movement, and storage activities. When transportation and inventory costs are
substantial on both the input and output sides of the production process, an emphasis
on logistics may be appropriate.

When logistics issues are significant or expensive, many firms opt for outsourcing the
logistics function.

Logistics companies often have the tracking technology that reduces transportation
losses and support delivery schedules that adhere to precise delivery time windows.
This allows competitive advantage to be gained through reduced costs and improved
customer service

7.6.1 Distribution Systems

Trucking
Moves the vast majority of manufactured goods
Chief advantage is flexibility

Railroads
Capable of carrying large loads
Little flexibility though containers and piggybacking have helped with this

Airfreight
Fast and flexible for light loads
May be expensive

Waterways
Typically used for bulky, low-value cargo
Used when shipping cost is more important than speed

Pipelines
Used for transporting oil, gas, and other chemical products

7.6.2 Third-Party Logistics

Supply chain managers may find that outsourcing logistics is advantageous in driving
down inventory investment and costs while improving delivery schedule and speed
through the use of third part logistics (3PL) companies.

Specialised logistics firms support this goal by coordinating the suppliers inventory
system with the service capability of the delivery firm. Examples of 3PL are FedEx,
DHL & UPS.

Pg 73 of 122
Review Questions

1. _______________ is the management of activities that procure raw materials,
transform those materials into intermediate goods and final products, and deliver the
products through a distribution system.

2. The supply chain strategy of ____________ increases the willingness to participate
in JIT.

3. ___________ is developing the ability to produce goods or services previously
purchased or actually buying a supplier or a distributor.

4. As the firm strategies vary from low-cost to response to differentiation, how does
this impact the criteria used for selection of a supply chain strategy?

5. Transferring to external vendors a firms activities that have traditionally been
internal is known as _________.

6. Of the three stages of vendor selection, the stage at which criteria, weights, and
scores allow a numeric comparison is ______________.

7. A company is about to select a vendor for the outsourcing of all of its engineering,
environmental, and CAD requirements. It has identified four criteria critical to the
selection. These criteria, and their importance weights, appear below. Three firms,
A, C, and E, have indicated that they are interested in this position. The company
has scored each of the three candidates on these criteria, using a 1-10 scale, where
10 is best. Candidate A scored 7, 7, 7, and 5 on the four criteria. Candidate C
scored 9, 4, 8, and 6. Candidate E scored 5, 10, 10, and 7. Which vendor has the
highest composite score?

Criterion Weight
Engineering expertise .40
Financial and managerial strength .20
Integrity .15
Staff experience and qualifications .25

8. What are the three negotiation strategies? Briefly describe each of them.

9. _____________ is an approach that seeks efficiency of operations through the
integration of all material acquisition, movement, and storage activities.

10. What advantages may result from effectively outsourcing the logistics function to
a third party?
Pg 74 of 122
Lesson 8 : Inventory Management

Learning Outcomes:


1. Determine the items deserving most attention and tightest inventory control.

2. Calculate the economic order quantity and apply it to various situations.

3. Determine the order quantity and reorder point for a continuous review inventory
control system.

4. Determine the review interval and target inventory level for a periodic review
inventory control system.

5. Define the key factors that determine the appropriate choice of an inventory
system.

8.1 Importance of Inventory Management

Inventory management is among the most important operations management functions
because inventory requires a great deal of capital and affects the delivery of goods to
customers. Inventory management has an impact on all business functions, particularly
operations, marketing and finance. Inventories provide customer service, which is of
vital interest to marketing. Finance is concerned with the overall financial picture of the
organisation, including funds allocated to inventory. And operations need inventories to
assure smooth and efficient production.

There are, however, conflicting inventory objectives within the firm. The finance
function generally prefers to keep the level of inventories low to conserve capital,
marketing prefers high levels of inventories to enhance sales, while operations prefers
adequate inventories for efficient production and smooth employment levels. Inventory
management must balance these conflicting objectives and manage inventory levels in the
best interests of the firm as a whole.

8.2 Reasons for holding inventory

8.2.1 To meet anticipated customer demand

A customer can be a person who walks in off the street to buy a new laptop, handphone.
These inventories are referred to as anticipation stocks because they held to satisfy
expected (i.e. average) demand.

8.2.2 To smooth production requirement

Firms that experience seasonal pattern in demand often build up inventories during pre-
season periods to meet overly high requirement during seasonal periods. These
inventories are aptly named as seasonal inventories
Pg 75 of 122

8.2.3 To decouple operations

Historically, manufacturing firms have used inventories as buffers between successive
operations to maintain continuity of production that would otherwise be disrupted by
events such as breakdowns of equipment and accidents that cause a portion of the
operation to shut down temporarily. The buffers permit other operations to continue
temporarily while the problem is being solved. Similarly, firms have used buffers of raw
materials to insulate production from disruptions in deliveries from suppliers, and
finished goods inventory to buffer sales operations from manufacturing disruptions.

8.2.4 To prevent against stockouts

Delayed deliveries and unexpected increases in demand increase the risk of shortages.
Delay can occur because of weather conditions, supplier stock-outs, deliveries of wrong
materials, quality problems, and so on. The risk of shortages can be reduced by holding
safety stocks, which are stocks in excess of average demand to compensate for
variabilities in demand and lead time.

8.2.5 To take advantage of order cycles

To minimise purchasing and inventory costs, a firm often buys in quantities that exceed
immediate requirements. This necessitates storing some or all of the purchased amount
for later use. Similarly, it is usually economical to produce in large rather small
quantities. Again, the excess output must be stored for later use. Thus, inventory storage
enables a form to buy and produce in economic lot sizes without having to try to match
purchases or production with demand requirement in the short run. This results in
periodic orders, order cycles. The resulting stock is known as cycle stock.

8.2.6 To hedge against price increases

Occasionally a firm will suspect that a substantial price increase is about to occur and
purchase larger-than-normal amounts to beat the increase. The ability to store extra
goods also allows a firm to take advantages of price discounts for larger orders.

8.2.7 To permit operations

The fact that production operations take a certain amount of time (i.e. they are not
instantaneous) means that there will generally be some work-in-process (WIP) inventory.
In addition, intermediate stocking of goods including raw materials, semi-finished items
and finished goods at production sites, as well as goods stored in warehouses leads to
pipeline inventories throughout a production-distribution system.

8.2.8 To take advantage of quantity discount

Suppliers may give discounts on large orders.

Pg 76 of 122

8.3 Relationship between cost and inventory

Three basic costs are associated with inventories : holding, ordering and shortage costs.

8.3.1 Holding or carrying cost

Cost to carry an item in inventory for a length of time, usually a year.

This cost is related to store the items physically. Costs includes interest, insurance, taxes,
depreciation, obsolescence, deterioration, spoilage, breakage, pilferage (stealing) and
warehousing costs (heat, light, rent, security). They also include opportunity costs
associated with having funds that could be used elsewhere tied up in inventory.

Holding costs are stated in either of two ways : as a percentage of unit price or as a dollar
amount per unit. Typical annual holding costs range from 20-40% of the value of an
item. In other words, to hold a $100 item in inventory for one year could cost from $20
to $40.

8.3.2 Ordering cost

Cost of ordering and receiving inventory. They are the costs that vary with the actual
placement of an order. Besides shipping costs, they include determining how much is
needed, preparing invoices, shipping costs, inspecting goods upon arrival for quality and
quantity, and moving the goods to temporary storage. Ordering costs are generally
expressed as a fixed dollar amount per order, regardless of order size.

When a firm produces it own inventory instead of ordering it from a supplier, the costs of
machine setup (eg. preparing equipment for the job by adjusting the machine, changing
cutting tools) are analogous to ordering costs. That is, they are expressed as a fixed
charge per production run, regardless of the size of the run

8.3.3 Shortage cost

The shortage cost result when demand exceeds the supply of inventory on hand. These
costs can include the opportunity cost of not making a sale, loss of customer goodwill,
late charges, and similar costs. Furthermore, if the shortage occurs in an item carried for
internal use (eg. to supply an assembly line), the cost of lost production or downtime is
considered a shortage cost. Such costs can easily run into hundreds of dollars a minute or
more. Shortage costs are sometimes difficult to measure, and they may be subjectively
estimated.

Pg 77 of 122

8.4 ABC Classification System

In inventories, a few items usually account for most of the inventory value as measured
by dollar usage. Thus, one can manage these few items intensively and control most of
the inventory value.

In inventory work, the items are usually divided into these three classes : A, B and C.

Class A typically contains about 20% of the items and 80% of the dollar usage. It
therefore represents the most significant few.

At the other extreme, class C contains 50% of the items and only 5% of the dollar usage.
These items contribute very little of the dollar value of inventory.

In the middle is class B, with 30% of the items and 15% of the dollar usage.

The classification of inventory in this way is often called ABC analysis or the 80-20 rule
(Pareto rule)

The table 8.1 is an example of an inventory with 10 items. In this case, items 3 and 6
account for a great deal of the dollar usage (73.2%). On the other hand, items 1, 5, 7, 8
and 10 are low in dollar usage (10.5%)

Table 8.1 Annual usage of items by dollar value :

Item Annual Demand Unit Cost Annual $ usage % of $ usage

1 5,000 $1.50 $7,500 2.9
2 1,500 $8.00 $12,000 4.7
3 10,000 $10.50 $105,000 41.2
4 6,000 $2.00 $12,000 4.7
5 7,500 $0.50 $3,750 1.5
6 6,000 $13.60 $81,600 32.0
7 5,000 $0.75 $3,750 1.5
8 4,500 $1.25 $5,625 2.2
9 7,000 $2.50 $17,500 6.9
10 3,000 $2.00 $6,000 2.4
Total $254,725 100.0

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

Pg 78 of 122
Table 8.2 ABC Classification

Class Item Numbers % of total items % of total $ usage

A 3, 6 20 73.2

B 2, 4, 9 30 16.3

C 1, 5, 7, 8, 10 50 10.5

Total 100 100.0

The designation of three classes is arbitrary; there could be any number of classes. Also,
the exact percentage of items in each class will vary from one inventory to the next. The
important factors are the two extremes: a few items which are significant and a large
number of items which are relatively insignificant.

Most of the dollar usage in inventory (80%) can be controlled by closely monitoring the
A items (20%). For these items, a tight control system including continuous review of
stock levels, less safety stock, and close attention to record accuracy might be used.

On the other hand, looser control might be used for C items. A periodic review system
could be used to consolidate orders from the same supplier, and less record accuracy
might be sufficient. The B items require an intermediate level of attention and
management control.

With computerised systems, a uniform level of control is sometimes used for all items.
Nevertheless, the management of inventories still requires the setting of priorities, and the
ABC concept is often useful in doing this.

8.5 Economic Order Quantity (EOQ) Model

The question of how much to order is frequently determined by using an Economic Order
Quantity (EOQ) model. EOQ model is used to identify a fixed order size that will
minimise the sum of the annual cost of holding inventory and ordering inventory.

Assumptions for the EOQ model :

1) Only one product is involved
2) Annual demand requirements are known
3) Demand is spread evenly throughout the year so that the demand rate is reasonably
constant
4) Lead time does not vary
5) Each order is received in a single delivery
6) There are no quantity discount

Pg 79 of 122

Figure 8.1 Economic Order Quantity (EOQ) Model

Annual carry cost is computed by multiplying the average amount of inventory on hand
by the cost to carry one unit for one year, even though any given unit would not
necessarily be held for a year. The average inventory is simply half of the order quantity.

The amount on hand decreases steadily from Q units to 0, for average of (Q+0)/2, or Q/2.

Using the symbol H to represent the average annual carrying cost per unit, the total
annual carrying cost is

Annual carrying cost = (Q/2) x H

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

Annual ordering cost is a function of the number of orders per year and the ordering cost
per order :

Annual ordering cost = (D/Q) x S

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

Order Size, Q = 700 units
Usage rate = 100 units/day
Lead time = 2 days
Re-order point = 200 units (2 days supply)
Q=700 units
Reorder
point =200
units
Quantity
on hand
Usage rate =
100 units/day
Day
Receiv
e
order
Receiv
e
order
Receiv
e
order
Place
order
Place
order
Lead time
= 2 days
Pg 80 of 122

Figure 8.2 Cost Components of Economic Order Quantity (EOQ) Model

The total annual cost associated with carrying and ordering inventory when Q units are
ordered each time is

Total Cost = Annual carrying cost + Annual ordering cost

TC = (Q/2)H + (D/Q)S

The total cost curve is U-shaped and it reaches its minimum at the quantity where
carrying and ordering costs are equal. An expression for the optimal order quantity, Q
o

can be obtained using calculus. The result is the formula :

Differentiate TC with respect to Q

d TC / d Q = d (QH/2) + d (D/Q) S = H/2 DS/Q
2

Setting the result equal to zero, and solving for Q

0 = H/2 DS/Q
2

Annual
Cost
Order Quantity
Annual
Cost
Annual
Cost
Order Quantity
Order Quantity
(Q/2)H
(D/Q)S
TC = (Q/2)H + (D/Q)S
A. Carrying costs linearly related to
order size
B. Ordering costs are inversely and
nonlinearly related to order size
C. The total cost curve is U-shaped.
Pg 81 of 122

Q
2
= (2DS)/H

Q = (2DS/H)

The minimum total cost is then found by substituting Q
o
for Q, thus

Q
o
= (2DS/H)

Example :

A telecommunication manufacturing plant uses approximately 64,000 integrated circuit
(IC) chips every year. Annual holding cost is $6 per chip and ordering cost is $120.
Determine the optimal order quantity.

Answer :

Demand, D = 64,000 chips per year
Ordering cost, S = $120
Holding cost, H = $6 per unit per year

Optimal order quantity,

Q
o
= (2DS/H)

= (2 x 64000 x 120) / 6

= 1600 chips

8.6 Fixed Order Quantity System & Fixed Order Period System

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

Reasons for using the Fixed Order Period Model

In some cases, a suppliers policy might encourage orders at fixed intervals. Even when
that is not the case, grouping orders for items from the same supplier can produce savings
in shipping costs. Furthermore, some situations do not readily lend themselves to
continuous monitoring of inventory levels. Many retail operations (eg. small grocery
stores) fall into this category. The alternative for them is to use fixed period ordering,
which requires only periodic checks of inventory level.
Pg 82 of 122
Determining the amount to order

Figures 8.3 and 8.4 provide a comparison of the fixed quantity and fixed period systems.
In the fixed quantity arrangement, orders are triggered by a quantity (ROP), while in the
fixed period arrangement orders are triggered by a time. Therefore, the fixed period
system must have stock-out protection for lead time plus the next order cycle, but the
fixed quantity system needs protection only during lead time because additional orders
can be placed at any time and will be received shortly thereafter. Consequently, there is
greater need for safety stock in the fixed period model than in fixed quantity model.

Both models are sensitive to demand experience just prior to reordering, but in somewhat
different ways. In the fixed quantity model, a higher-than-normal demand causes a
shorter time between orders, whereas in the fixed period model, the result is a larger
order size.

Figure 8.3 Fixed Period Order Model

Quantity
on hand
Time
Receive
order
Receive
order
Place
order
Place
order
Place
order
Receive
order
Order quantity
Safety Stock
Pg 83 of 122
Another difference is that the fixed quantity model requires close monitoring of inventory
levels in order to know when the amount on hand has reached the reorder point. The
fixed period model requires only a periodic review (i.e. physical count) of inventory
levels just prior to placing an order to determine how much is needed.

To summarise, good inventory management is often the mark of a well-run organisation.
Inventory levels must be planned carefully, in order to balance the cost of holding
inventory and the cost of providing reasonable level of customer service. Successful
inventory management requires a system to keep track of inventory transactions, accurate
information about demand and lead times, realistic estimates of certain inventory-related
costs, and a priority system for classifying the items in inventory and allocating control
efforts.

Figure 8.4 Fixed Quantity Order Model

Reorder point
(ROP)
Quantity
on hand
Time
Receive
order
Receive
order
Place
order
Place
order
Place
order
Receive
order
Order quantity
Safety Stock
Pg 84 of 122
Review Questions

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

2. Describe ABC inventory analysis in one sentence. What are some policies that may
be based upon the results of an ABC analysis?

3. Your company has compiled the following data on the small set of products that
comprise the specialty repair parts division. Perform ABC analysis on the data. Which
products do you suggest the firm keep the tightest control over? Explain.

SKU Annual Demand Unit Cost
R11 250 $250
S22 75 $90
T33 20 $60
U44 150 $150
V55 100 $75

4. What are the assumptions of the EOQ model?

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

6. List the typical cost components that constitute ordering costs in inventory systems.

7. Given the following data: D=65,000 units per year, S = $120 per setup, P = $5 per
unit, and I = 25% per year, calculate the EOQ and calculate annual costs following
EOQ behavior.

8. What is a reorder point?

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

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

Pg 85 of 122
Lesson 9 : Materials Requirements Planning and ERP

Learning Outcomes:


1. Explain how the concept of dependent demand is fundamental to resource planning.

2. Describe a master production schedule (MPS) and the information it provides.

3. Discuss the logic of a material requirements planning (MRP) system.

4. Identify production and purchase orders needed for dependent demand items.

5. Explain how enterprise resource planning (ERP) systems can foster better resource
planning.

9.1 Independent versus Dependent Demand

A crucial distinction in inventory management is whether demand is independent or
dependent.

Independent demand is influenced by market conditions outside the control of operations.
Eg. Finished goods inventories and spare parts for replacement usually have independent
demand.

Dependent demand is related to the demand for items that are subassemblies or
components parts to be used in the production of finished goods.

Therefore, once management receives an order or make a forecast of the demand for the
final product (independent demand), quantities required for all components can be
computed, because all components are dependent items.

9.2 An Overview of MRP

The Material Requirement Planning (MRP) is a dependent demand technique that uses a
bill-of-material (BOM), inventory, expected receipts, and a master production
schedule (MPS) to determine material requirements.

The MRP system is used by many companies and has the following benefits:

1. Better response to customer orders and market changes wins orders and market
share;

2. Improved utilization of facilities and labor yields higher productivity and return of
investment;

3. Reduced inventory levels free up capital and floor space for others use.
Pg 86 of 122
Material Requirement Planning (MRP) is a computer-based information system that
translates the finished product requirements of the master schedule into time-phased
requirements for subassemblies, component parts, and raw materials, working backward
from the due date using lead times and other information to determine when and how
much to order.

MRP is designed to answer three questions :

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

9.2.1 MRP Requirements

The effective use of MRP requires that the operations manager know the following:

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

9.2.2 Master Production Schedule (MPS)

The Master Production Schedule (MPS) states which end items to be produced, when
they are needed, and in what quantities.

The quantities in a master schedule come from a number of different sources, including
customer orders, forecasts, and orders from warehouses to build up for seasonal
inventories.

Figure 9.1 : Master Production Schedule (MPS)
th
ed, pg 564)
Months J anuary February
Aggregate Production Plan 1,500 1,200
(Shows the total
quantity of amplifiers)
Weeks 1 2 3 4 5 6 7 8
Master Production Schedule
(Shows the specific type and
quantity of amplifier to be
produced
240-watt amplifier 100 100 100 100
150-watt amplifier 500 500 450 450
75-watt amplifier 300 100
Months J anuary February
Aggregate Production Plan 1,500 1,200
(Shows the total
quantity of amplifiers)
Weeks 1 2 3 4 5 6 7 8
Master Production Schedule
(Shows the specific type and
quantity of amplifier to be
produced
240-watt amplifier 100 100 100 100
150-watt amplifier 500 500 450 450
75-watt amplifier 300 100
Pg 87 of 122
9.2.3 Bill of Materials

A Bill of Materials (BOM) contains a listing of all of the assemblies, subassemblies,
parts, and raw materials that are needed to produce one unit of finished product. Thus,
each finished product has its own bill of materials.

The listing in the bill of materials is hierarchical; it shows the quantity of each item
needed to complete one unit of the following level of assembly. The nature of this aspect
of a bill of materials is clear when we consider a product structure tree, which provides
a visual depiction of the subassemblies and components needed to assemble a product.

The example below shows how to develop the product structure and explode it to reveal
the requirements for each component. A bill of material for item A consists of items B
and C. Items above any level are called parents; items below any level are called
children. By convention, the top level in a BOM is the 0 level

Figure 9.2 : Bill of Materials and Product Structure Tree
th
ed, pg 565)

Based on the above product structure tree, assuming the demand for A is 50 units, we
can explode the requirements for the components parts as follow:

Part B: 2 x number of As = (2)(50) = 100
Part C:3 x number of As = (3)(50) = 150
Part D: 2 x number of Bs + 2 x number of Fs = (2)(100) + (2)(300) = 800
Part E: 2 x number of Bs + 2 x number of Cs = (2)(100) + (2)(150) = 500
Part F: 2 x number of Cs = (2)(150) = 300
Part G:1 x number of Fs = (1)(300) = 300

B B
(2) (2)
Std. 12 Std. 12 Speaker kit Speaker kit C C
(3) (3)
Std. 12 Std. 12 Speaker kit w/ Speaker kit w/
amp amp- -booster booster
1 1
E E
(2) (2)
E E
(2) (2)
F F
(2) (2)
Packing box and Packing box and
installation kit of wire, installation kit of wire,
bolts, and screws bolts, and screws
Std. 12 Std. 12 Speaker Speaker
booster assembly booster assembly
2 2
D D
(2) (2)
12 12 Speaker Speaker
D D
(2) (2)
G G
(1) (1)
Amp Amp- -booster booster
3 3
Product structure for Product structure for Awesome Awesome ( (A A) )
A A
Level Level
0 0
B B
(2) (2)
(3) (3)
1 1 B B
(2) (2)
(3) (3)
B B
(2) (2)
(3) (3)
1 1
E E
(2) (2)
E E
(2) (2)
F F
(2) (2)
2 2 E E
(2) (2)
E E
(2) (2)
F F
(2) (2)
E E
(2) (2)
E E
(2) (2)
F F
(2) (2)
E E
(2) (2)
E E
(2) (2)
F F
(2) (2)
2 2
D D
(2) (2)
D D
(2) (2)
G G
(1) (1)
3 3 D D
(2) (2)
D D
(2) (2)
G G
(1) (1)
D D
(2) (2)
D D
(2) (2)
D D
(2) (2)
D D
(2) (2)
G G
(1) (1)
G G
(1) (1)
3 3
A A
Level Level
0 0
A A
Level Level
0 0
Pg 88 of 122

9.2.4 Accurate Inventory Records

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

9.2.5 Lead Time for components

The time required to purchase, produce, or assemble an item

For production the sum of the order, wait, move, setup, store, and run times

For purchased items the time between the recognition of a need and the
availability of the item for production

Using the example in figure 9.2, when the BOM is modified by adding lead time for each
component, we then have a time-phased product structure. Time is this structure is
shown on the horizontal axis.

Figure 9.3 : Time-phased product structure
th
ed, pg 568)

| | | | | | | | | | | | | | | |
1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8
Time in weeks Time in weeks
F F
2 weeks 2 weeks
3 weeks 3 weeks
1 week 1 week
A A
2 weeks 2 weeks
1 week 1 week
D D
E E
2 weeks 2 weeks
D D
G G
1 week 1 week
1 week 1 week
2 weeks to 2 weeks to
produce produce
B B
C C
E E
Start production of D Start production of D
Must have D and E Must have D and E
completed here so completed here so
production can begin production can begin
on B on B
| | | | | | | | | | | | | | | |
1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8
| | | | | | | | | | | | | | | |
1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8
F F
2 weeks 2 weeks
3 weeks 3 weeks
F F
2 weeks 2 weeks
3 weeks 3 weeks
2 weeks 2 weeks
3 weeks 3 weeks
1 week 1 week
A A
1 week 1 week
A A
2 weeks 2 weeks
1 week 1 week
D D
E E
2 weeks 2 weeks
1 week 1 week
D D
E E
2 weeks 2 weeks
D D
G G
1 week 1 week
2 weeks 2 weeks
D D
G G
1 week 1 week
1 week 1 week
produce produce
B B
C C
E E
1 week 1 week
produce produce
B B
C C
E E
Start production of D Start production of D Start production of D Start production of D
on B on B
on B on B
Pg 89 of 122
9.3 MRP Structure

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

Figure 9.4 : Structure of the MRP system
th
ed, pg 568)

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

Output Reports Output Reports
MRP by
period report
MRP by
date report
Planned order
report
Purchase advice
Exception reports
Order early or late
or not needed
Order quantity too
small or too large
Data Files Data Files
Purchasing data
BOM
Lead times
(Item master file)
Inventory data
Master
production schedule
Material
requirement
planning
programs
(computer and
software)
MRP by
period report
MRP by
date report
Planned order
report
Purchase advice
Exception reports
Order early or late
or not needed
Order quantity too
small or too large
MRP by
period report
MRP by
date report
Planned order
report
Purchase advice
Exception reports
Order early or late
or not needed
Order quantity too
small or too large
MRP by
period report
MRP by
period report
MRP by
date report
MRP by
date report
Planned order
report
Planned order
report
Purchase advice Purchase advice
Exception reports
Order early or late
or not needed
Order quantity too
small or too large
Exception reports
Order early or late
or not needed
Order quantity too
small or too large
Purchasing data
BOM
Lead times
(Item master file)
Inventory data
Purchasing data
BOM
Lead times
(Item master file)
Inventory data
Purchasing data
BOM
Lead times
(Item master file)
Inventory data
Master
production schedule
Master
production schedule
Master
production schedule
Material
requirement
planning
programs
(computer and
software)
Material
requirement
planning
programs
(computer and
software)
Material
requirement
planning
programs
(computer and
software)
Pg 90 of 122

Figure 9.5 : Gross material requirements plan for 50 units of final product A
th
ed, pg 569)

The procedures to work out the gross materials requirements are:

1. Starts with a production schedule for the end item 50 units of Item A in week 8

2. Using the lead time for the item, determine the week in which the order should be
released a 1 week lead time means the order for 50 units should be released in week
7

3. This step is often called lead time offset or time phasing

4. From the BOM, every Item A requires 2 Item Bs 100 Item Bs are required in week
7 to satisfy the order release for Item A

5. The lead time for the Item B is 2 weeks release an order for 100 units of Item B in
week 5

6. The timing and quantity for component requirements are determined by the order
release of the parent(s)

7. The process continues through the entire BOM one level at a time often called
explosion

8. By processing the BOM by level, items with multiple parents are only processed
once, saving time and resources and reducing confusion

9. Low-level coding ensures that each item appears at only one level in the BOM

Week Week
1 2 3 4 5 6 7 8 Lead Time
A. Required date 50
Order release date 50 1 week
B. Required date 100
Order release date 100 2 weeks
C. Required date 150
E. Required date 200 300
Order release date 200 300 2 weeks
F. Required date 300
D. Required date 600 200
Order release date 600 200 1 week
G. Required date 300
Week Week
1 2 3 4 5 6 7 8 Lead Time
A. Required date 50
B. Required date 100
C. Required date 150
E. Required date 200 300
Order release date 200 300 2 weeks
F. Required date 300
D. Required date 600 200
Order release date 600 200 1 week
G. Required date 300
Pg 91 of 122

9.4 Material Requirement Planning II (MRP II)

Once an MRP system is in place, inventory data can be augmented by other useful
information:

Labor hours
Material costs
Capital costs
Virtually any resource

This system is generally called MRP II or Material Resource Planning

9.5 Enterprise Resource Planning (ERP)

The enterprise resource planning (ERP) is an extension of the MRP system to tie in
customers and suppliers, it:

1. allows automation and integration of many business processes
2. shares common data bases and business practices
3. display produces information in real time

The ERP also coordinates business from supplier evaluation to customer invoicing

The ERP modules include:

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

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

Warehouse management
Logistics
Electronic catalogs
Quality management

ERP systems have the potential to:

Reduce transaction costs
Increase the speed and accuracy of information

Pg 92 of 122

Figure 9.6 : MRP and ERP information flows, showing customer relationship
management (CRM), supply chain management (SCM) and finance/accounting.
th
ed, pg 582)

9.5.1 Advantages of ERP Systems

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

Pg 93 of 122

9.5.2 Disadvantages of ERP Systems

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

Pg 94 of 122
Review Questions:

1. ______________ is a dependent demand technique that uses a bill of material,
inventory, expected receipts, and a master production schedule to determine material
requirements.

2. What is MRP? Identify four benefits from its use.

3. A(n) ____________ is a timetable that specifies what is to be made and when.

4. What information is necessary for an operations manager to make effective use of a
dependent inventory demand model?

5. A(n) ____________ is a listing of the components, their description, and the
quantity of each required to make one unit of a product.

6. If the explosion of the bill of material tells MRP how much of each part is needed,
how does MRP learn when each of these parts is needed?

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

A
D
C(3) B(2)
E(2) D

Pg 95 of 122

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

9. Each X requires 2 of component Y and 1 of part W. Each Y requires 10 of Z. Each
W requires 3 of Q and 2 of R. Lead times are X = 1 week, Y = 1 week, W = 2 weeks,
R = 1 week, Z = 3 weeks, and Q = 3 weeks.

a. Construct the time-phased product structure.
b. Construct the bill of material.

10. Describe how MRP II differs from MRP.

11. What does enterprise resource planning (ERP) allow an organization to do?

12. What are the advantages of enterprise resource planning (ERP)?

13. What are the disadvantages of enterprise resource planning (ERP)?

Pg 96 of 122
Lesson 10 : Project Management

Learning Outcomes:


5. Discuss the business case for a project.

6. Describe a project in terms of a work breakdown structure.

7. Understand the CPM & PERT approaches

8. Understand the use of Gantt charts in project management.

10.1 The importance of Project Management

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

Pg 97 of 122

Figure 10.1 Project planning, scheduling and controlling
th
ed, pg 58)
Pg 98 of 122
10.2 Project Planning

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

The project organisation works best when:

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

Figure 10.2 A sample project organisation
th
ed, pg 59)

10.2.1 The Project Manager

Project management is quite often the province and responsibility of the project
manager (PM). The PM participates directly in the activities that produce the end
result, but rather strives to maintain the progress and productive mutual interaction of
various parties in such a way that overall risk of failure is reduced.
A project manager is often a client representative and has to determine and implement
the exact needs of the client, based on knowledge of the firm he/she is representing.
The ability to adapt to the various internal procedures of the contracting party, and to
Test
Engineer
Mechanical
Engineer
P Pr ro oj je ec ct t 1 1
Project
Manager
Technician
Technician
P Pr ro oj je ec ct t 2 2
Project
Manager
Electrical
Engineer
Computer
Engineer
Marketing Finance Human
Resources
Design Quality
Mgt
Production
President
Pg 99 of 122
form close links with the nominated representatives, is essential in ensuring that the
key issues of cost, time, quality, and above all, client satisfaction, can be realized.
In whatever field, a successful project manager must be able to envisage the entire
project from start to finish and to have the ability to ensure that this vision is realized.
Any type of product or service buildings, vehicles, electronics, computer software,
financial services, etc. may have its implementation overseen by a project manager
and its operations by a product manager.

10.2.2 Work Breakdown Structure

The project management team begins its task well in advance of project execution so
that a plan can be developed. One of first steps is to carefully establish the projects
objectives, then break the project down into manageable parts.

This WBS defines the project by dividing it into its major subcomponents (or tasks),
which are then subdivided into more detailed components, and finally into a set of
activities and their related costs. The division of the project into smaller and smaller
tasks can be difficult, but is critical to managing the project and to scheduling success.
Gross requirements for people, supplies, and equipment are also estimated in this
planning phase.

The WBS typically decreases in size from top to bottom and is indented like this:

Level

1. Project
2. Major tasks in the project
3. Subtasks in the major tasks
4. Activities (or work packages) to be completed

Example: Development of the Microsofts operating system Windows Vista.

Figure 10.3 : Work Breakdown Structure (WBS)
th
ed, pg 60)
L Le ev ve el l I ID D
L Le ev ve el l N Nu um mb be er r A Ac ct ti iv vi it ty y
1 1 1 1. .0 0 D De ev ve el lo op p/ /l la au un nc ch h W Wi in nd do ow ws s V Vi is st ta a O OS S
2 2 1 1. .1 1 D De ev ve el lo op p o of f G GU UI Is s
2 2 1 1. .2 2 E En ns su ur re e c co om mp pa at ti ib bi il li it ty y w wi it th h e ea ar rl li ie er r
W Wi in nd do ow ws s v ve er rs si io on ns s
3 3 1 1. .2 21 1 C Co om mp pa at ti ib bi il li it ty y w wi it th h W Wi in nd do ow ws s M ME E
3 3 1 1. .2 22 2 C Co om mp pa at ti ib bi il li it ty y w wi it th h W Wi in nd do ow ws s X XP P
3 3 1 1. .2 23 3 C Co om mp pa at ti ib bi il li it ty y w wi it th h W Wi in nd do ow ws s 2 20 00 00 0
4 4 1 1. .2 23 31 1 E En ns su ur re e a ab bi il li it ty y t to o i im mp po or rt t f fi il le es s
Pg 100 of 122
10.3 Project Scheduling

Project scheduling involves sequencing and allocating time to all project activities.
At this stage, managers decide how long each activity will take and compute how
many people and materials will be needed at each stage of production.

Gantt Chart

A Gantt chart is a popular type of bar chart that illustrates a project schedule. Gantt
Charts are low cost means of helping managers make sure that:
1. all activities are planned for
2. their order of performance is accounted for
3. the activity time estimates are recorded
4. the overall project time is developed

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

The project scheduling serves several purposes:

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

Time
J F M A M J J A S
Design
Prototype
Test
Revise
Production
Pg 101 of 122
10.4 Project Management Techniques : PERT & CPM

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

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

Questions PERT & CPM can answer:
1. When will the entire project be completed?
2. What are the critical activities or tasks in the project?
3. Which are the noncritical activities?
4. What is the probability the project will be completed by a specific date?
5. Is the project on schedule, behind schedule, or ahead of schedule?
6. Is the money spent equal to, less than, or greater than the budget?
7. Are there enough resources available to finish the project on time?
8. If the project must be finished in a shorter time, what is the way to accomplish
this at least cost?

Pg 102 of 122
10.4.2 Network diagrams

The first step in a PERT or CPM network is to divide the entire project into
significant activities in accordance with the work breakdown structure (WBS). In this
course, we will introduce the Activity-On-Node (AON) diagram.

Under the AON convention, nodes designate activities. The table below shows six
common activity relationship in networks:

Common Activity 1 Common Activity 2

A comes before B, which comes
before C

A and B must both be completed before C
can start


B and C cannot begin until A is
completed

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


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

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

th
ed, pg 64)
A
C
D B A
B
C
D
A
B
C
D
B
A
C
A
C
B
A
B C
Pg 103 of 122

Example : Activity-on-Node at Milwaukee Paper

Activity Description Immediate Predecessors
A Build internal components
B Modify roof and floor
C Construct collection stack A
D Pour concrete and install frame A, B
E Build high-temperature burner C
F Install pollution control system C
G Install air pollution device D, E
H Inspect and test F, G

Table 10.1 : Milwaukee paper Manufacturings Activities and Predecessors.
th
ed, pg 65)

Figure 10.4 Complete AON Network for Milwaukee Paper
th
ed, pg 67)
G
E
F
H
C A
Start
D B
Pg 104 of 122
10.5 Determining the Project Schedule

Once the project network has been drawn to show all the activities and their
precedence relationships, the next step is to determine the project schedule. That is,
we need to identify the planned starting and ending time for each activity.

To find out how long the project will take, we perform the critical path analysis for
the network. It is necessary to bear in mind that:

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

Forward Pass

Earliest start (ES) = earliest time at which an activity can start, assuming all
predecessors have been completed

Earliest finish (EF) = earliest time at which an activity can be finished

Figure 10.5 Notation used in Nodes for Forward Pass
th
ed, pg 69)

A
Activity Name or
Symbol
Earliest
Start
ES
Earliest
Finish
EF
Activity Duration
2
Pg 105 of 122

Begin at starting event and work forward

Earliest Start Time Rule:

If an activity has only a single immediate predecessor, its ES equals the EF of
the predecessor
If an activity has multiple immediate predecessors, its ES is the maximum of
all the EF values of its predecessors

ES = Max {EF of all immediate predecessors}

Earliest Finish Time Rule:

The earliest finish time (EF) of an activity is the sum of its earliest start time
(ES) and its activity time

EF = ES + Activity time

Figure 10.6 Earliest Start and Earliest Finish Time for Milwaukee Paper
th
ed, pg 70)

E

4
F

3
G

5
H

2
4 8 1
3
1
5
4
8 1
3
7
D

4
3 7
C

2
2 4
B

3
0 3
Start
0
0
0
A

2
2 0
Pg 106 of 122

Review Questions

1. What are the three phases of a project? Describe each in a sentence or two.

2. Identify the responsibilities of project managers.

3. _______________ divides a project into more and more detailed components.

4. What is a project organization?

5. Identify and describe briefly each of the purposes of project scheduling.

6. What is the objective of critical path analysis?

7. Explain why the critical path is the longest, not the shortest, path through a
network.

8. Briefly discuss what is meant by critical path analysis. What are critical path
activities and why are they important?

9. A network consists of the activities in the following list. Times are given in
weeks.

Activity Preceding Time
A -- 8
B -- 3
C A 7
D A, B 3
E C 4
F D 6

a. Draw the network diagram.
b. Calculate the ES and EF for each activity.
c. What is project completion time?

10. Describe the differences between a Gantt chart and a PERT/CPM network.

Pg 107 of 122
Lesson 11 : JIT and Lean Systems

Learning Outcomes:


1. Identify the characteristics and strategic advantages of JIT (just-in-time) and lean
systems.

2. Describe how lean systems can facilitate the continuous improvement of processes.

3. Understand kanban systems for creating a production schedule in a lean system.

4. Explain the implementation issues associated with the application of lean systems.

11.1 Just-in-Time, The Toyota Production System and Lean Operations

In this lesson, we will discuss JIT, TPS, and lean operations as approaches to
continuing improvement that drive out waste and lead to world class organizations.

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

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

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

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

If there is any distinction between JIT, TPS & lean operations, it is that:

JIT emphasizes forced problem solving;

TPS emphasizes employee learning and empowerment in an assembly-line
environment;

Lean operations emphasize understanding the customer.

Pg 108 of 122
11.1.1 Eliminate Waste

Waste is anything that does not add value from the customer point of view, examples
are storage, inspection, delay, waiting in queues, and defective products do not add
value and are 100% waste.

Taiichi Ohno, noted for his work on the Toyota Production System (TPS), identified
seven categories of wastes:

1 Overproduction producing more than the customer orders or producing
early
2 Queues idle time, storage and waiting are wastes

3 Transportation moving material between plants or work centres and
handling more than once is waste.
4 I nventory unnecessary raw material, work-in-process (WIP),
finished goods, and excess operating supplies that add no
value is waste
5 Motion movement of equipment or people that adds no value is
waste
6 Over-processing extra work performed on the product that adds no value is
waste.
7 Defective products returns, warranty claims, rework and scrap are wastes.

For over a long period of time, managers have used housekeeping for a neat,
orderly, and efficient workplace and as a mean of reducing waste. Operations
managers have included a 5Ss checklist as part of the housekeeping efforts.

The 5 Ss are:
1 Sort/segregate keep what is needed, identify non-value item and
remove them. Getting rid of the non-value items makes
spaces available and usually improves work flow.
2 Simplify/straighten label and display for easy use

3 Shine/sweep clean daily, eliminate all of dirt, contaminations and
clutter.
4 Standardize remove variations from processes by developing
standard operating procedures and checklists.
5 Sustain/self-discipline review work periodically to recognize efforts and
motivate to sustain progress

US managers often add two additional Ss that contribute to establishing and
maintaining a lean workplace:

Safety build in good safety practices into the above five activities.

Support/maintenance reduce variability and unplanned downtime and costs.
Integrate daily shine tasks with preventive maintenance.

Pg 109 of 122

11.1.2 Remove Variability

JIT systems require managers to reduce variability caused by both internal and
external factors. Variability is any deviation from the optimum process that delivers
perfect production time, every time. The less variability in a system, results in less
waste in the system. Most variability is created by tolerating waste or by poor
management.

Among the sources of variability are:

1. Incomplete or inaccurate drawings or specifications
2. Poor production processes resulting in incorrect quantities, late, or non-
conforming units
3. Unknown customer demands

Both JIT and inventory reduction are effective tools in identifying causes of
variability

11.1.3 Improve Throughput

Throughput is a measure (in units or time) that it takes to move an order from receipt
to delivery. The time between the arrival of raw materials and the shipping of the
finished order is called manufacturing cycle time.

A technique to increase throughput is a pull system. A pull system pulls a unit to
where it is needed as it is needed. Pull system are a standard tool of JIT systems. Pull
systems use signals to request production and delivery from supplying stations to
stations that have production capacity available. The pull system concept is used both
within the immediate production process and with suppliers. By pulling material in
small lots, inventory cushions are removed, exposing problems and emphasizing
continual improvement, at the same time, the manufacturing cycle time is reduced.

On the other hand, a push system dumps orders on the downstream stations
regardless of the need.

11.2 Just-In-Time (JIT)

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

Pg 110 of 122

Figure 11.1 JIT contribute to Competitive Advantage.
th
ed, pg 645)

Pg 111 of 122
11.2.1 JIT Partnerships

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

Four goals of JIT partnerships are:

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

Figure 11.2 Characteristic of JIT Partnerships
th
ed, pg 646)

11.2.2 Concerns of Suppliers

Successful JIT partnerships require that supplier concerns be addressed. These
concerns include:

1. Diversification Suppliers may not want to tie themselves to long-term
contracts with one customer. The suppliers perception is that they reduce
their risk if they a variety of customers.

2. Scheduling Many suppliers have little faith in the purchasers ability to
produce orders to a smooth, coordinated schedule.

Pg 112 of 122
3. Changes Engineering or specification changes can create havoc with JIT
because of inadequate lead times for suppliers to implement the necessary
changes.

4. Quality Capital budgets, processes, or technology may limit quality.

5. Lot sizes Suppliers may see frequent delivery in small lot sizes as a way to
transfer buyers holding costs to suppliers.

11.3 JIT Layout

JIT layout reduces waste due to movement. The movement of material on a factory
floor does not add value. Consequently, managers want flexible layouts that reduce
the movement of both people and material. JIT layouts place material directly in the
location when needed. For instance, an assembly line should be designed with
delivery points next to the line so material need not be delivered first to a receiving
department and then moved again. When a layout reduces distance, firms often save
labor and space and may have the added bonus of eliminating potential areas of
accumulation of unwanted inventory.

The following are a few layout tactics:

11.3.1 Distance Reduction

Large lots and long production lines with single-purpose machinery are being
replaced by smaller flexible cells
Often U-shaped for shorter paths and improved communication
Often using group technology concepts

11.3.2 Increased Flexibility

Cells designed to be rearranged as volume or designs change
Applicable in office environments as well as production settings
Facilitates both product and process improvement

11.3.3 Impact on Employees

Employees are cross trained for flexibility and efficiency
Improved communications facilitate the passing on of important information
about the process
With little or no inventory buffer, getting it right the first time is critical

11.3.4 Reduced Space and Inventory

With reduced space, inventory must be in very small lots
Units are always moving because there is no storage

Pg 113 of 122
11.4 Kanban

One way to achieve small lot sizes is to move inventory through the shop only as
needed rather than pushing it on to the next workstation whether or not the personnel
there are ready for it. As noted earlier, when inventory is moved only as needed, it is
referred to as a pull system, and the ideal lot size is one. The Japanese call this
system kanban. Kanbans allow arrivals at a work centre to match (or nearly match)
the processing time.

Kanban is the Japanese word for card. In their efforts to reduce inventory, the
Japanese use systems that pull inventory through work centres. They often use a
card to signal the need for another container of material hence the name kanban.
The card is an authorization for the next container of material to be produced.
Typically, a kanban signal exists for each container of items to be obtained. An order
for the container is then initiated by each kanban and pulled from the producing
department or supplier. A sequence of kanbans pulls the material through the plant.

Figure 11.3 Kanban Signals Pull Material Through the Production Process.
th
ed, pg 653)

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

Work Work
cell cell
Raw Raw
Material Material
Supplier Supplier
Kanban Kanban
Purchased Purchased
Parts Parts
Supplier Supplier
Sub Sub- -
assembly assembly
Ship Ship
Kanban Kanban
Kanban Kanban
Kanban Kanban
Kanban Kanban
Finished Finished
goods goods
Customer Customer
order order
Final Final
assembly assembly
Kanban Kanban
Work Work
cell cell
Work Work
cell cell
Raw Raw
Material Material
Supplier Supplier
Raw Raw
Material Material
Supplier Supplier
Kanban Kanban Kanban Kanban
Purchased Purchased
Parts Parts
Supplier Supplier
Sub Sub- -
assembly assembly
Sub Sub- -
assembly assembly
Ship Ship Ship Ship Ship Ship
Finished Finished
goods goods
Customer Customer
order order
Finished Finished
goods goods
Finished Finished
goods goods
Customer Customer
order order
Customer Customer
order order
Final Final
assembly assembly
Final Final
assembly assembly
Pg 114 of 122
11.5 Toyota Production System

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

11.5.1 Continuous improvement

Build an organizational culture and value system that stresses improvement of
all processes
It is part of everyones job

11.5.2 Respect for people

People are treated as knowledge workers
Engage mental and physical capabilities
Empower employees

11.5.3 Standard work practice

Work shall be completely specified as to content, sequence, timing, and
outcome
Internal and external customer-supplier connection are direct
Product and service flows must be simple and direct
Any improvement must be made in accordance with the scientific method at
the lowest possible level of the organization

11.6 Lean Operations

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

11.6.1 Building a Lean Organization

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

Pg 115 of 122
Lean systems tend to have the following attributes:

Use J I T techniques to eliminate virtually all inventory.

Build systems that help employees produce a perfect part every time.

Reduce space requirements by minimizing travel distance.

Develop partnerships with suppliers, helping them to understand the needs of the
ultimate customer.

Educate suppliers to accept responsibility for satisfying end customer needs.

Eliminate all but value-added activities. Material handling, inspection, inventory,
and rework are the likely targets because they do not add value to the product.

Develop employees by constantly improving job design, training, employee
commitment, teamwork, and empowerment.

Make jobs challenging, pushing responsibility to the lowest level possible.

Build worker flexibility through cross-training and reducing job classifications.

Success requires the full commitment and involvement of managers, employees, and
suppliers. The rewards that lean producers reap are spectacular. Lean producers
often become benchmark performers.

Pg 116 of 122

Review Questions

1. What three things does the Toyota Production System (TPS) emphasize?

2. Identify Ohno's Seven Wastes. Which one of these deals most directly with
distance reductions?

3. What are the 5S's? Why does the list of the 5S's sometimes have seven elements?

4. Define variability within the context of JIT.

5. Identify sources of variability.

6. Differentiate between a push and a pull system.

7. Define manufacturing cycle time in the context of JIT systems.

8. Identify the layout tactics appropriate for a JIT environment.

9. What are the goals of JIT partnerships?

10. What is a kanban?

11. Identify some of the signals that kanban systems use.

12. How are lean operations and the Toyota Production System (TPS) alike? How are
they different?

13. What are the five reasons given by suppliers for their reluctance to enter into JIT
systems? Elaborate on one of these, of your choosing.

Pg 117 of 122
Lesson 12: Maintenance and Reliability

Learning Outcomes:


1. Explain the strategic importance of maintenance and reliability.

2. Understand the concept of reliability.

3. Understand preventive and breakdown maintenance.

4. Outline the techniques for establishing maintenance policies.

12.1 The Strategic Importance of Maintenance and Reliability

Operations Managers must avoid the undesirable result of equipment failure, because
it can be disruptive, inconvenient and wasteful. Machine and product failures can
have far-reaching effects on an organisations operations, reputation, and profitability.

The objective of maintenance and reliability is to maintain the capability of the
system while controlling costs. Good maintenance system removes variability.
Systems must be designed and maintained to reach expected performance and quality
standards.

The interdependency of operator, machine, and mechanic is a hallmark of successful
maintenance and reliability. This is illustrated in figure 12.1.

Figure 12.1 Good maintenance and reliability strategy requires employee involvement
and good procedures.
th
ed, pg 670)

E Em mp pl lo oy ye ee e
I In nv vo ol lv ve em me en nt t
Information sharing
Skill training
Reward system
Employee empowerment
M Ma ai in nt te en na an nc ce e a an nd d R Re el li ia ab bi il li it ty y
P Pr ro oc ce ed du ur re es s
Clean and lubricate
Monitor and adjust
Make minor repair
Keep computerized records
R Re es su ul lt t
s s
Reduced inventory
Improved quality
Improved capacity
Reputation for quality
Continuous improvement
Reduced variability
Pg 118 of 122

12.2 Reliability

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

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

Reliability is as important as quality since it is a key factor in many purchasing
decisions. Unfortunately, the testing of a design to assess its reliability is difficult and
sometimes impossible.

Improving Individual Components

Because failures do occur in real world, understanding their occurrence is an
important reliability concept.

The method of computing system reliability (R
s
) is simple. It consists of finding the
products of the individual reliability as follows:

R
s
= R
1
R
2
R
3
.. R
n

Where R
1
= Reliability of component 1
R
2
= Reliability of component 2 and so on.

Example :

Reliability of the process is

R
s
= R
1
x R
2
x R
3
= .90 x .80 x .99 = .713 or 71.3%

The basic unit of measure for reliability is the product Failure Rate (FR).

R R
s s

R R
3 3

.99
R R
2 2

.80
R R
1 1

.90
F FR R( (% %) ) = = x x 1 10 00 0% %
N Nu um mb be er r o of f f fa ai il lu ur re es s
N Nu um mb be er r o of f u un ni it ts s t te es st te ed d
F FR R( (N N) )
= =
N Nu um mb be er r o of f f fa ai il lu ur re es s
N Nu um mb be er r o of f u un ni it t- -h ho ou ur rs s o of f o op pe er ra at ti in ng g
t ti im me e
Pg 119 of 122
There is another common measure of failure, namely, Mean Time Between Failure
(MTBF). It measures average time from one failure to the next. Thus, the longer the
MTBF, the more reliable is the product. The formula is:

Failure Rate Example

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

12.3 Maintenance

Maintenance of facilities and equipment is essential to achieve specified levels of
efficiency, quality and reliability. The cost of breakdown in the system can be very
high in financial terms, poor staff morale and bad relations with customers.

Maintenance is all activities involved in keeping a systems equipment in working
order.

Therefore, the objectives of good maintenance are:

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

b) To maximize the useful life of the equipment.

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

d) To minimize the total production or operating costs directly attributable to
equipment service and repair.
M MT TB BF F = =
1 1
F FR R( (N N) )
F FR R( (% %) ) = = ( (1 10 00 0% %) ) = = 1 10 0% %
2 2
2 20 0
F FR R( (N N) ) = = = = . .0 00 00 01 10 06 6 f fa ai il lu ur re e/ /u un ni it t
h hr r
2 2
2 20 0, ,0 00 00 0 - - 1 1, ,2 20 00 0
M MT TB BF F = = = = 9 9, ,4 43 34 4 h hr rs s
1 1
. .0 00 00 01 10 06 6
Pg 120 of 122

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

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

12.4 Types of Maintenance Policy

There are two main types of maintenance policy. Namely:

12.4.1 Breakdown Maintenance

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

12.4.2 Preventive Maintenance

This involves performing routine inspections and servicing. The intention is to build
a system that will find potential failures and make changes or repairs that will prevent
failure from occurring.

Formal preventive maintenance may take four different forms. In practice, all four
types of policies often operate together, overlap or coincide. The policies are:

Time based doing maintenance at regular intervals especially when usage cannot be
easily measured.

Work based maintenance is determined by usage such as operating hours, volume of
production, etc.

Opportunity based repair takes place when the equipment or system is not working
to minimize production disruption

Condition based relies on periodic inspection to determine the condition of wear
and tear.

Pg 121 of 122

12.4.3 Improving Repair Capabilities

The repair capabilities of maintenance department can be increased by:

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

12.5 Total Productive Maintenance (TPM)

In automated production environment, an equipment breakdown at one operation will
quickly cause all other downstream operations to fail. Therefore, an extensive
preventive maintenance programme is essential to reduce the frequency and severity
of workflow interruption in these situations.

One of the strategies is to combines total quality management with strategic view of
maintenance from process and equipment design to preventive maintenance. This
will reduce variability through employee involvement and excellent maintenance
records. For such strategy to be successfully implemented, TPM should include:

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

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

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

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

e) Preventive maintenance plans that utilize the best practices of operators,
maintenance departments and depot service.
Pg 122 of 122

Review Questions

1. What is the role of people, especially empowered employees, in an effective
maintenance strategy?

2. Define reliability.

3. Increasing the number of parts or components in a product tends to reduce its
reliability. Why is this true only when adding components in series?

4. A product is composed of a series connection of four components with the
following reliabilities. What is the reliability of the system?

Component 1 2 3 4
Reliability .90 .95 .97 .88

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

Took my
money
.85
Made
wrong
change
.90
Dispensed
wrong
beverage
.95
Dispensed
warm
beverage
.98
Power
failed
.995
Out of
stock
.85
Couldn't
make
change
.98
Wouldn't
take my
dollar bill
.60

6. What is FR(N)? How is it calculated? How are FR(N) and MTBF related?

7. Ten high-intensity bulbs are tested for 100 hours each. One failed at 40 hours;
another failed at 70 hours; all others completed the test. Calculate FR(%), FR(N), and
MTBF.

8. Define maintenance.

9. What is breakdown maintenance?

10. What is the primary concept of total productive maintenance (TPM)? List the
other elements of total productive maintenance.

~ End ~

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