BA 380 Lecture Notes Packet 2005

BA 380: OPERATIONS MANAGEMENT
GUIDELINES:
read the topics as outlined in the Lecture Notes

view the accompanying digitized lectures
attempt to work on (solve) the problems presented in the Lecture Notes
replicate the computer-assisted solutions to the problems discussed in
the digitized lectures as well as those explained during the in-person
sessions
formulate and bring questions about the readings/problems/concepts
and digitized lectures to the in-person sessions, or post them on the
Discussion Board (under Communication) in Blackboard
visit Blackboard at least three times a week
check emails at least once a day
post all questions related to the class on the Discussion Board in
Blackboard instead of emailing the question to the instructor. Questions,
concerns, or comments that are student-specific may be sent via regular
email.
organize study/help groups
Words to remember:
Prioritize, not procrastinate.
Spread out the work, not put things off until the last minute
Rene Leo E. Ordonez, PhD

Professor and Chair of Business
(541) 552-6720
ordonez@sou.edu
Prepared by: Rene Leo E. Ordonez, PhD

Notes to Accompany Operations Management (Stevenson, 2007
School of Business, SOU
Lecture Outlines and Digitized Lectures for

BA 380: Operation Management
Rene Leo E. Ordonez, PhD
School of Business
Southern Oregon University
Spring 2008 Edition
Note: The outlines listed below are based on the text Production Operations Management, 98h Edition,
by William Stevenson, Irwin-McGraw-Hill. The problems in each section are also taken from the same text.
This is a supplement material to the text.
Introduction
Lecture Notes
Page Number
2
Productivity, Competitiveness, Strategy
Forecasting
Reliability
28
Cost Volume Analysis and Capacity Planning
41
Decision Theory
47
Learning Curves
53
Introduction to Quality Control
59
Quality Control
62
Inventory Management
75
Project Management
88
Waiting Lines
97

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BA 380: Operations Management
Lecture Notes Page 2
Introduction
What is Productions and Operations Management?
A field of study involving the planning, coordinating, and executing of all

activities that create goods or provide services
Focus: To explore a variety of decision making tools that operations

managers can use in the decision making process. These tools are
classified as
o Quantitative
Queuing techniques
Inventory Models
Project models (PERT/CPM)
Forecasting techniques
Statistical models
Breakeven analysis
o Analysis of trade-offs
In inventory management we balance tradeoff between two
objectives minimize cost of carrying inventory and
maximize customer service level
The models in discussed will reflect tradeoffs between cost

and benefit
o System approach
Emphasizes interrelationships among subsystems
Main theme: the whole is greater than the sum of its

individual parts
From a systems viewpoint, the output and objectives of the

organization as a whole takes precedence over those of any
on subsystem
o Establishing priorities
Recognition of priorities means devoting more attention to
what is most important
Uses the Pareto phenomenon a relatively few factors are

most important dealing with those will have a
disproportionately large impact on the results achieved
Prepared by Rene Leo E. Ordonez, PhD

Notes to Accompany Operations Management, 9th Edition (Stevenson, 2007)
SOU School of Business
80/20 rule
o Ethics
Operations managers, like all managers have the
responsibility to make ethical decisions on:
Worker safety, product safety, quality, the
environment, the community, hiring and firing workers,
workers rights
Why study Operations Management (OM)?
Operations management activities at the core of all business

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

marketing, human resource, etc.) are interrelated with OM
POM is all about management all managers need to possess the

knowledge and skill in the content areas in OM learn and understand
the variety of decision making tools in the decision making process
A course that will prepare students in developing business plans (BA 499
Business Planning is the capstone course for ALL business majors)

Three Basic Functions of Business Organizations
Finance, Production/operations, Marketing
Marketing
Production/
Operations
Finance
The operations function involves the creation of inputs into outputs

Outputs
Goods and
Services
Transformation/
conversion
process
Inputs
Land
Labor
Capital
Information
Feedback
Feedback
Control
Feedback

Examples of Types of Operations

Type of Operation
Goods producing
Examples
Farming, mining,
construction, manufacturing,
power generation
Storage/transportation Warehousing, trucking, mail

service, moving, taxis,
buses, hotel, airlines
Exchange
Retailing, wholesaling,
banking, renting or leasing,
library loans
Entertainment
Films, radio and TV, plays,

concerts, recording
Communication
Newspapers, radio and TV

newscast, telephone,
satellite
Illustrations of the Transformation Process

Food
Processing
Hospital
Inputs
Processing
Output
Raw vegetables
Metal sheets
Water
Energy
Labor
Building
Equipment
Cleaning
Making cans
Cutting
Cooking
Packing
Labeling
Canned
vegetables
Inputs
Processing
Output
Doctors, nurses
Hospitals
Medical supplies
Equipment
Laboratories
Examination
Surgery
Monitoring
Medication
Therapy
Healthy patients

Examples of inputs, transformation, and outputs

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

Characteristics
Goods
Services
Output
Customer contact
Uniformity of input
Labor content
Uniformity of output
Measurement of productivity
Opportunity to correct quality
problems before delivery to
customer
Tangible
Low
High
Low
High
Easy
High
Intangible
High
Low
High
Low
Difficult
Low

Productivity, Competitiveness and Strategy

Productivity an index that measures outputs (goods or services) relative to the
input
Productivi ty
Output
Input
Some Examples of Different

Types of Productivity Measures
Partial measures
Output
Labor
Output
Machine
Multifactor measures
Output
Labor Machine
Total Measures
Goods or Service Produced

All inputs used to produce them
Output
Capital
Output
Energy
Output
Labor Capital Energy
Factors that Affect Productivity
Methods
Capital
Quality
Technology
Management

Strategy
Has a long term impact on the nature and characteristics of the

organization
Affects the ability of an organization to compete, or in the case of a

nonprofit organization, the ability to serve its intended purpose
The nature of an organizations strategy depends on its mission

Mission
The basis of the organization the reason for its existence

Mission statement
Answers the question, What business are we in?
Serves to guide formulation of strategies for the organization as well as the

decision making at all levels
Without it an organization is likely to achieve its true potential because

there is little direction for formulating strategies
Strategies and Tactics
Strategies are plans for achieving goals
Strategies provide focus
Tactics are the methods and actions to accomplish strategies

The how to part of the process
Strategy Formulation the formulation of an effective strategy must take into

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

doing a SWOT (strengths, weaknesses, opportunities, and threats)
analysis
price, quality, time, flexibility, service, location
2)
scan the environment the considering of events and trends that present
either threat or opportunities
External factors:
economic condition, political condition, legal environment, technology,
competition, markets
Internal factors:
Human resources, facilities and equipment, financial resources, customers,
products and services, technology, suppliers

Forecasting
Why forecast?
Features Common to all Forecasts
Conditions in the past will continue in the future

Rarely perfect
Forecasts for groups tend to be more accurate than forecasts for
individuals
Forecast accuracy declines as time horizon increases
Elements of a Good Forecast
Timely
Accurate
Reliable (should work consistently)
Forecast expressed in meaningful units
Communicated in writing
Simple to understand and use
Steps in Forecasting Process
Determine purpose of the forecast

Establish a time horizon
Select forecasting technique
Gather and analyze the appropriate data
Prepare the forecast
Monitor the forecast
Types of Forecasts
Qualitative
o Judgment and opinion
o Sales force
o Consumer surveys
o Delphi technique
Quantitative
o Regression and Correlation (associative)
o Time series

Forecasts Based on Time Series Data
What is Time Series?

Components (behavior) of Time Series data
o Trend
o Cycle
o Seasonal
o Irregular
o Random variations
Nave Methods
Nave Forecast uses a single previous value of a time series as the
basis of a forecast.
Ft yt 1
Techniques for Averaging
What is the purpose of averaging?

Common Averaging Techniques
o Moving Averages
o Exponential smoothing
Moving Average
n
Ft
A
i 1
Exponential Smoothing
Ft Ft 1 ( At 1 Ft 1 )

Techniques for Trend

Linear Trend Equation
yt a bt
where :
t specified number of time periods from t 0
y t forecast for time period t
a value of yt at t
b slope of the line
Curvilinear Trend Equation

yt a bt ct 2
where :
t specified number of time periods from t 0
y t forecast for time period t
a value of yt at t
b slope of the line
Techniques for Seasonality
What is seasonality?
What are seasonal relatives or indexes?
How seasonal indexes are used:

o Deseasonalizing data
o Seasonalizing data
How indexes are computed (see Example 7 on page 109)

Accuracy and Control of Forecasts

Measures of Accuracy
o Mean Absolute Deviation (MAD)
o Mean Squared Error (MSE)
o Mean Absolute Percentage Error (MAPE)
Forecast Control Measure
o Tracking Signal
Mean Absolute Deviation (MAD)
MAD
Actual Forecast
n
Mean Squared Error (or Deviation) (MSE)
MSE
( Actual Forecast )
n 1
Mean Square Percentage Error (MAPE)
Actual Forecast
MAPE
Actual
n
X 100
Tracking Signal
Tracking Signal
( Actual Forecast )
MAD

Problems:
2 Plot, Linear, MA, exponential Smoothing
5 Applying a linear trend to forecast
15 Computing seasonal relatives
17 Using indexes to deseasonalize values
26 Using MAD, MSE to measure forecast accuracy

Problem 2 (113)
National Mixer Inc., sells can openers. Monthly sales for a seven-month period were as follows:
Month
Feb
March
April
May
June
July
August
Sales
(000 units)
19
18
15
20
18
22
20
(a) Plot the monthly data on a sheet of graph paper.

(b) Forecast September sales volume using each of the following:
(1) A linear trend equation
(2) A five-month moving average
(3) Exponential smoothing with a smoothing constant equal to 0.20, assuming March
forecast of 19(000)
(4) The Nave Approach
(5) A weighted average using 0.60 for August, 0.30 for July, and 0.10 for June
(c) Which method seems least appropriate? Why?
(d) What does use of the term sales rather than demand presume?

EXCEL SOLUTION
(a) Plot of the monthly data

How to superimpose a trend line on the graph
Click on the graph created above (note that when you do this an item called
CHART will appear on the Excel menu bar)
Click on Chart > Add Trend Line
Click on the most appropriate Trend Regression Type
Click OK

(b) Forecast September sales volume using:

(1) Linear Trend Equation
Create a column for time period (t) codes (see column B)
Click Tools > Data Analysis > Regression

Fill in the appropriate information in the boxes in the Regression box that
appears
Sales data
Coded time period
Coded time period

(2) Five-month moving average
(3) Exponential Smoothing with a smoothing constant of 0.20, assuming March forecast
of 19(000)
Enter the smoothing factor in D1

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

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

Problem 5 (113)
A cosmetics manufacturers marketing department has developed a linear trend equation that can
be used to predict annual sales of its popular Hand & Foot Cream.
yt =80 + 15 t
where: yt = Annual sales (000 bottles)
t0 = 1990
(a) Are the annual sales increasing or decreasing? By how much?
(b) Predict annual sales for the year 2006 using the equation

Problem 15 (115)
Obtain estimates of daily relatives for the number of customers at a restaurant for the evening
meal, given the following data. (Hint: Use a seven-day moving average)
Day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Number
Served
80
75
78
95
130
136
40
82
77
80
94
125
135
42
Day
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Number
Served
84
77
83
96
135
140
37
87
82
98
103
144
144
48

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

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

Problem 17 (116) Using indexes to deseasonalize values

New car sales for a dealer in Cook County, Illinois, for the past year are shown in the following
table, along with monthly (seasonal) relatives, which are supplied to the dealer by the regional
distributor.
Month
Jan
Feb
Mar
April
May
Jun
Units
Sold
640
648
630
761
735
850
Index
0.80
0.80
0.70
0.94
0.89
1.00
Month
Jul
Aug
Sept
Oct
Nov
Dec
Units
Sold
765
805
840
828
840
800
Index
0.90
1.15
1.20
1.20
1.25
1.25
(a) Plot the data. Does there seem to be a trend?

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

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

(b) Deseasonalized Car Sales
Create formula in F6 (see

circled formula), then copy
onto F7 to F17
(c) Graph of seasonalized car sales versus deseasonalized car sales

Problem 26 (118) Using MAD, MSE, and MAPE to measure forecast accuracy
Two different forecasting techniques (F1 and F2) were used to forecast demand for cases of
bottled water. Actual demand and the two sets of forecasts are as follows:
Period
1
2
3
4
5
6
7
8
Demand
68
75
70
74
69
72
80
78
Predicted Demand
F1
F2
66
66
68
68
72
70
71
72
72
74
70
76
71
78
74
80
(a) Compute MAD for each set of forecasts. Given your results, which forecast appears to
be the most accurate? Explain.
(b) Compute MSE for each set of forecasts. Given your results, which forecast appears to
be the most accurate? Explain.
(c) In practice, either MAD or MSE would be employed to compute forecast errors. What
factors might lead you to choose one rather than the other?
(d) Compute MAPE for each data set. Which forecast appears to be more accurate?


Excel Solution
=ABS(c7-d7)
=(c7-d7)^2
=ABS(c7-d7)/c7
=AVERAGE(G8:G15)
=SUM(J8:J15)/(COUNT(J8:J15)-1)
=AVERAGE(M8:M15)

Reliability
What is reliability?
Measures the ability of a product, part, or system to perform its intended

function under a prescribed set of conditions
Failure situation in which the item does not perform as intended
Reliabilities always specified with respect to certain conditions a.k.a.

normal operating conditions e.g. temp, humidity, maintenance
How can reliability be improved? By improving the following:
Design
Production techniques
Testing
Using backups
Preventive maintenance procedures
Education
System design
Quantifying Reliability: Using Probability as a Measure

(1)
The probability that a product or system will function when activated

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

Product Reliability at a Point in Time
Considers the reliability of the components/parts of a product or

system
Product Reliability over time
Focuses on the length of service of the product (mean time

between failures)
Failure rate is a function of time and can follow an exponential

distribution (see page 159)
Or, can follow the Normal Distribution
Reliability over Time -- Exponential Distribution
f(T)
Reliability = e-T/MTBF
1 e-T/MTBF
0
10
12
14
16
Time

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

Reliability over Time -- Normal Distribution
T MeanWearou tTime
S tan dardDeviat ionofWearo utTime
Reliability = P(Z > z)
-4
-3
-2
-1

z
-3
-2
-1
STANDARD NORMAL DISTRIBUTION
z
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.0
0
0.0000
0.0398
0.0793
0.1179
0.1554
0.1915
0.2257
0.2580
0.2881
0.3159
0.3413
0.3643
0.3849
0.4032
0.4192
0.4332
0.4452
0.4554
0.4641
0.4713
0.4772
0.4821
0.4861
0.4893
0.4918
0.4938
0.4953
0.4965
0.4974
0.4981
0.4987
0.01
0.0040
0.0438
0.0832
0.1217
0.1591
0.1950
0.2291
0.2611
0.2910
0.3186
0.3438
0.3665
0.3869
0.4049
0.4207
0.4345
0.4463
0.4564
0.4649
0.4719
0.4778
0.4826
0.4864
0.4896
0.4920
0.4940
0.4955
0.4966
0.4975
0.4982
0.4987
0.02
0.0080
0.0478
0.0871
0.1255
0.1628
0.1985
0.2324
0.2642
0.2939
0.3212
0.3461
0.3686
0.3888
0.4066
0.4222
0.4357
0.4474
0.4573
0.4656
0.4726
0.4783
0.4830
0.4868
0.4898
0.4922
0.4941
0.4956
0.4967
0.4976
0.4982
0.4987
0.03
0.0120
0.0517
0.0910
0.1293
0.1664
0.2019
0.2357
0.2673
0.2967
0.3238
0.3485
0.3708
0.3907
0.4082
0.4236
0.4370
0.4484
0.4582
0.4664
0.4732
0.4788
0.4834
0.4871
0.4901
0.4925
0.4943
0.4957
0.4968
0.4977
0.4983
0.4988
0.04
0.0160
0.0557
0.0948
0.1331
0.1700
0.2054
0.2389
0.2704
0.2995
0.3264
0.3508
0.3729
0.3925
0.4099
0.4251
0.4382
0.4495
0.4591
0.4671
0.4738
0.4793
0.4838
0.4875
0.4904
0.4927
0.4945
0.4959
0.4969
0.4977
0.4984
0.4988
0.05
0.0199
0.0596
0.0987
0.1368
0.1736
0.2088
0.2422
0.2734
0.3023
0.3289
0.3531
0.3749
0.3944
0.4115
0.4265
0.4394
0.4505
0.4599
0.4678
0.4744
0.4798
0.4842
0.4878
0.4906
0.4929
0.4946
0.4960
0.4970
0.4978
0.4984
0.4989
0.06
0.0239
0.0636
0.1026
0.1406
0.1772
0.2123
0.2454
0.2764
0.3051
0.3315
0.3554
0.3770
0.3962
0.4131
0.4279
0.4406
0.4515
0.4608
0.4686
0.4750
0.4803
0.4846
0.4881
0.4909
0.4931
0.4948
0.4961
0.4971
0.4979
0.4985
0.4989

0.07
0.0279
0.0675
0.1064
0.1443
0.1808
0.2157
0.2486
0.2794
0.3078
0.3340
0.3577
0.3790
0.3980
0.4147
0.4292
0.4418
0.4525
0.4616
0.4693
0.4756
0.4808
0.4850
0.4884
0.4911
0.4932
0.4949
0.4962
0.4972
0.4979
0.4985
0.4989
0.08
0.0319
0.0714
0.1103
0.1480
0.1844
0.2190
0.2517
0.2823
0.3106
0.3365
0.3599
0.3810
0.3997
0.4162
0.4306
0.4429
0.4535
0.4625
0.4699
0.4761
0.4812
0.4854
0.4887
0.4913
0.4934
0.4951
0.4963
0.4973
0.4980
0.4986
0.4990
0.09
0.0359
0.0753
0.1141
0.1517
0.1879
0.2224
0.2549
0.2852
0.3133
0.3389
0.3621
0.3830
0.4015
0.4177
0.4319
0.4441
0.4545
0.4633
0.4706
0.4767
0.4817
0.4857
0.4890
0.4916
0.4936
0.4952
0.4964
0.4974
0.4981
0.4986
0.4990
Availability
Measures the fraction of time a piece of equipment is expected to

be operational
Availability ranges between 0 and 1
Availabili ty
MTBF
MTBF MTR
where : MTBF - mean time between failu

MTR - mean time to repair
Problems:
1 system reliability
2 system reliability
4 reliability and cost
7 comparing reliabilities of 2 systems
12 product life exponential distribution
17 product life normal distribution
18 product life normal distribution

Problem 1 (p172)
Consider the following system:
.90
.90
Determine the probability that the system will operate under each of these conditions:
(a) The system as shown
(b) Each component has a backup with a probability of 0.90 and a switch that is 100 percent
reliable.
(c) Backups with 0.90 reliability and a switch that is 99 percent reliable

Problem 2 (173)
A product is composed of four parts. In order for the product to function properly in a given
situation, each of the parts must function. Two of the parts each have a 0.96 probability of
functioning, and two each have a 0.96 probability of 0.99. What is the overall probability that the
product will function properly?

Problem 4 (p173)
A product engineer has developed the following equation for the cost of a system component:
C=(10P)2, where C is the cost in dollars and P is the probability that the component will operate
as expected. The system is composed of two identical components, both of which must operate
for the system to operate. The engineer can spend $173 for the two components. To the nearest
two decimal places, what is the largest component reliability that can be purchased?

Problem 7 (173)
A production line has three machines A, B, and C, with reliabilities of .99, .96, and .93,
respectively. The machines are arranged so that if one breaks down, the others must shut down.
Engineers are weighing two alternative designs for increasing the line's reliability. Plan 1 involves
adding an identical backup line, and Plan 2 involves providing backup for each machine. In either
case, three machines (A B, and C) would be used with reliabilities equal to the original three.
(a) Which plan will provide the higher reliability?
(b) Explain why the two alternatives are not the same.
(c) hat other factors might enter into the decision of which plan to adopt?

Problem 12 (174)
An electronic chess game has a useful life that is exponentially distributed with a mean of 30
months. Determine each of the following:
(a) The probability that any given unit will operate for at least:
(1) 39 months
(2) 48 months
(3) 60 months
(b) The probability that any given unit will fail sooner than:
(1) 33 months
(2) 15 months
(3) 6 months
(c) The length of service time after which the percentage of failed units will approximately equal:
(1) 50 percent
(2) 85 percent
(3) 95 percent
(4) 99 percent

Problem 17 (174)
A television manufacturer has determined that its 19-inch color TV picture tubes have a mean
service life that can be modeled by a Normal distribution with a mean of six years and a standard
deviation of one-half year.
(a) What probability can you assign to service lives of at least
(1) Five years?
(2) Six years?
(3) Seven and one-half years?
(b) If the manufacturer offers service contracts of four years on these picture tubes, what
percentage can be expected to fail from wear-out during the service period?

Problem 18 (174)
Refer to problem 17 above. What service period would achieve an expected wear-out rate of:
(a)
2 percent?
(b)
5 percent?

STRATEGIC CAPACITY PLANNING FOR PRODUCTS AND SERVICES

Cost Volume Analysis (CVA)
What is it?
Focus: relationships between COST, REVENUE, and VOLUME of output

Purpose: to estimate income of an organization under different operating
conditions
Usefulness: as a tool for comparing capacity alternatives
What does CVA require?
CVA requires the identification of two kinds of costs - Fixed and Variable
Fixed cost cost that does not change when output level is changed
(within a relevant range)
Variable cost cost that changes when the output level changes
Mixed cost items that contain both fixed and variable
Breakeven Analysis
What is it?
A tool used to determine profit level (or for determining breakeven point)
for certain output level
Important Equations
TR = R x Q
TC = FC + vcQ
P = TR TC
P = R x Q - (FC + vcQ)
P = Q (R VC) FC
Where:
TR total revenue
TC total cost
vc variable cost per unit
Q units produced and sold
P total profit
R revenue per unit
FC total fixed cost
Q = (P + FC)/(R VC)
QBEP = FC/(R VC)

Problem 3 (p 201)
A producer of pottery is considering the addition of a new plant to absorb the backlog of demand
that now exists. The primary location being considered will have fixed costs of $9,200 per month
and variable costs of $0.70 per unit produced. Each item is sold to retailers at a price that
averages $0.90.
a.
What volume per month is required in order to breakeven?
b.
What profit would be realized on a monthly volume of 61,000 units? 87,000 units?
c.
What volume is needed to provide a profit of $16,000 per month?
d.
What volume is needed to provide a revenue of $23,000 per month?
e.
Plot the total cost and total revenue lines.

Problem 4 (p 201)
A small firm intends to increase the capacity of a bottleneck operation by adding a new
machine. Tow alternatives, A and B, have been identified, and the associated costs and
revenues have been estimated. Annual fixed costs would be $40,000 for A and $30,000 for
B; variable costs per unit would be $10 for A and $12 for B; and revenue per unit would be
$15 for A and $16 for B.
a. Determine each alternatives break-even point in units
b. At what volume of output would the two alternatives yield the same profits?
c.
If the expected annual demand is 12,000 units, which alternative would yield the
higher profits?

Excel Solution
$60,000
$50,000
$40,000
Total Cost Line
$30,000
Total Revenue Line
$20,000
$10,000
$0
10000
20000
30000
40000
50000

60000
70000
Problem 8 (p 201)
A manager is trying to purchase a certain part or to have it produced internally. Internal
production could use either of two processes. One would entail a variable cost of $17 per unit
and an annual fixed cost of $200,000; the other would entail a variable cost of $14 per unit and an
annual fixed cost of $240,000.
Three vendors are willing to provide the part. Vendor A has a price of $20 per unit for any volume
up to 30,000 units. Vendor B has a price of $22 per unit for demand 1,000 units or less, and $18
per unit for larger quantities. Vendor C offers a price of $20 per unit for the first 1,000 units and
$19 for additional units.
(d) If the manager anticipates an annual volume of 10,000 units, which alternative would be best
from a cost standpoint? For 20,000 units, which alternative would be best?
(e) Determine the range of quantity for which each alternative is best. Are there any alternatives
that are never best? Which?

Excel Solution
Errata: B1 in the formulas above should be B2

Decision Theory
The Decision Process
Specify objectives and criteria for making decisions

Develop alternatives
Analyze and compare alternatives
Select the best alternative
Implement the chosen alternative
Monitor the results to ensure that desired results are achieved
Causes of Poor Decisions
Mistakes in the decision process

Bounded rationality
Suboptimization
Decision Environments
Certainty
Risk
Uncertainty
Decision Theory represents a general approach to decision making and

suitable for a wide range of operations management decision (e.g. capacity
planning, product and service design, equipment selection, and location
planning)
Decision Theory is suitable for decisions characterized by:
1) a set of future conditions exists that will have a bearing on the result of the
decision
2) a list of alternatives for the managers to choose from
3) a known payoff for each alternative under each possible future condition
To use this approach (Decision Theory), the manager must:
1)
2)
3)
4)
5)
identify the future conditions

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

Evaluation of Alternatives Depends on the Degree of Certainty Associated with

the Future Condition
1) Decision Making Under Certainty (known future conditions)
2) Decision Making Under Uncertainty (no info on how likely future conditions
will be)
a. Maximin
b. Maximax
c. Laplace
d. Minimax Regret
3) Decision Making Under Risk (the likelihood of each future outcome is
known)
a. Expected Monetary Value criterion (EMV)
b. Expected Value of Perfect Information (EVPI)
Decision Trees
Sensitivity Analysis
Problems:
1 DM under uncertainty
2 DM under risk, EVPI, decision tree
3 Sensitivity analysis
4 DM under risk, EVPI, and decision tree

Problem 1 (220)
A small building contractor has recently experienced two successive years in which work
opportunities exceeded the firms capacity. The contractor must now make a decision on
capacity for next year. Estimated profits under each of the two possible states of nature
are as shown in the table below. Which alternative should be selected if the decision
criterion is:
(a) Maximax?
(b) Maximin?
(c) Laplace?
(d) Minimax Regret?
Next Years Demand
Alternative
Low
High
Do Nothing
$50
$60
Expand
20
80
Subcontract
40
(Profit in $thousands)
70

Problem 2 (220)
Refer to Problem 1. Suppose after a certain amount of discussion, the contractor is able
to subjectively assess the probabilities of low and high demand:
P(low) = .3 and P(high) = .7
(a) Determine the expected profit of each alternative. Which alternative is best? Why?
(b) Analyze the problem using a decision tree. Show the expected profit of each
alternative on the tree.
(c) Compute the expected value of perfect information. How could the contractor use this
knowledge?

Problem 3 (220)
Refer to Problems 1 and 2. Construct a graph that will enable you to perform sensitivity
analysis on the problem. Over what range of P(high) would the alternative of doing
nothing be best? Expand? Subcontract?

Problem 4 (220)
A firm that plans to expand its product line must decide whether to build a small or large
facility to produce the new products. If it builds a small facility and demand is low, the net
present value after deducting for building costs will be $400,000. If demand is high, the
firm can either maintain the small facility or expand it. Expansion would have a net present
value of $450,000, and maintaining the small facility would have a net present value of
$50,000. If the large facility is built and demand is high, the estimated net present value is
$800,000. If demand turns out to be low, the net present value will be -$10,000.
The probability that demand will be high is estimated to be 0.60, and the probability of low
demand is estimated to be 0.40
(a) Analyze using a tree diagram
(b) Compute the EVPI. How could this information be used?
(c) Determine over which each alternative would be best in terms of the value of (demand
low)

Learning Curves
What is it?
An integral part in corporate strategy, such as decisions concerning

pricing, capital investment, and operating costs based on experience
curves
Individual learning the improvement that results when people repeat a

process and gain skill or efficiency from the experience
Usefulness:
component)
as a tool for estimating operating costs (particularly the labor

Manpower planning and scheduling
Negotiated purchasing
Pricing new products
Budgeting, purchasing, and inventory planning
Capacity planning
A graph displaying the relationship between unit production time and the
cumulative number of units produced (or repetition)
Learning Curve
1.2
1
99%
Tim e Per Unit
0.8
0.6
90%
0.4
0.2
80%
70%
145
137
129
121
113
105
97
89
81
73
65
57
49
41
33
25
17
0
Num ber of Repetitions

Learning Curve Theory Assumptions:

(1) The amount of time required to complete a given task or unit of a product
will be less each time the task is undertaken
(2) The unit time will decrease at a decreasing rate
(3) The reduction in time will follow a predictable pattern that is, every
doubling of repetitions results in a constant percentage decrease in time
per repetition
Important: Learning curves are referred to in terms of the complements of their
improvement rates. A 100% curve would mean NO improvement at all
Relevant Equations:
(a)
For computing the unit time requirement for the nth unit
Tn T1 n b
where : Tn time for the nth unit
T1 time for the first unit
n nth unit
b ln learning ratio/ ln 2
(b)
For computing the cumulative time requirement for n units

Use the Multipliers on Table below

LEARNING CURVE
COEFFICIENTS
70%
Unit
Number
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Unit
Time
1.000
0.700
0.568
0.490
0.437
0.398
0.367
0.343
0.323
0.306
0.291
0.278
0.267
0.257
0.248
0.240
0.233
0.226
0.220
0.214
0.209
0.204
0.199
0.195
0.191
0.187
0.183
0.180
0.177
0.174
Total Time
1
1.700
2.268
2.758
3.195
3.593
3.960
4.303
4.626
4.932
5.223
5.501
5.769
6.026
6.274
6.514
6.747
6.973
7.192
7.407
7.615
7.819
8.018
8.213
8.404
8.591
8.774
8.954
9.131
9.305
75%
Unit
Time
1
0.750
0.634
0.563
0.513
0.475
0.446
0.422
0.402
0.385
0.370
0.357
0.345
0.334
0.325
0.316
0.309
0.301
0.295
0.288
0.283
0.277
0.272
0.267
0.263
0.259
0.255
0.251
0.247
0.244
Total Time
1
1.750
2.384
2.946
3.459
3.934
4.380
4.802
5.204
5.589
5.958
6.315
6.660
6.994
7.319
7.635
7.944
8.245
8.540
8.828
9.111
9.388
9.660
9.928
10.191
10.449
10.704
10.955
11.202
11.446
80%
Unit
Time
1
0.800
0.702
0.640
0.596
0.562
0.534
0.512
0.493
0.477
0.462
0.449
0.438
0.428
0.418
0.410
0.402
0.394
0.388
0.381
0.375
0.370
0.364
0.359
0.355
0.350
0.346
0.342
0.338
0.335
Total Time
1
1.800
2.502
3.142
3.738
4.299
4.834
5.346
5.839
6.315
6.777
7.227
7.665
8.092
8.511
8.920
9.322
9.716
10.104
10.485
10.860
11.230
11.594
11.954
12.309
12.659
13.005
13.347
13.685
14.020

85%
Unit
Time
1
0.850
0.773
0.723
0.686
0.657
0.634
0.614
0.597
0.583
0.570
0.558
0.548
0.539
0.530
0.522
0.515
0.508
0.501
0.495
0.490
0.484
0.479
0.475
0.470
0.466
0.462
0.458
0.454
0.450
Total Time
1
1.850
2.623
3.345
4.031
4.688
5.322
5.936
6.533
7.116
7.686
8.244
8.792
9.331
9.861
10.383
10.898
11.405
11.907
12.402
12.892
13.376
13.856
14.331
14.801
15.267
15.728
16.186
16.640
17.091
90%
Unit
Time
1
0.900
0.846
0.810
0.783
0.762
0.744
0.729
0.716
0.705
0.695
0.685
0.677
0.670
0.663
0.656
0.650
0.644
0.639
0.634
0.630
0.625
0.621
0.617
0.613
0.609
0.606
0.603
0.599
0.596
Total Time
1
1.900
2.746
3.556
4.339
5.101
5.845
6.574
7.290
7.994
8.689
9.374
10.052
10.721
11.384
12.040
12.690
13.334
13.974
14.608
15.237
15.862
16.483
17.100
17.713
18.323
18.929
19.531
20.131
20.727
Problem 1 (357)
An aircraft company has an order to refurbish the interiors of 18 jet aircraft. The work has
a learning curve percentage of 80. On the basis of experience with similar jobs, the
industrial engineering department estimates that the first plane will require about 300
hours to refurbish. Estimate the amount of time needed to complete:
(a) The fifth plane
(b) The first five planes
(c) All 18 planes

Problem 3 (357)
A small contractor intends to bid on a job installing 30 in-ground swimming pools.
Because this will be a new line of work for the contractor, he believes there will be a
learning effect for the job. After reviewing time records from a similar type of activity, the
contractor is convinced that an 85 percent curve is appropriate. He estimates that the first
pool will take his crew 8 days to install. How many days should the contractor budget for?
(a) The first 10 pools?
(b) The second 10 pools?
(c) The final 10 pools?

Problem 5 (357)
A manager wants to determine an appropriate learning percentage for a certain activity.
Toward that end, times have been recorded for completion of each of the first six
repetitions. They are:
Repetition
1
2
3
4
5
6
Time
(minutes)
46
39
35
33
32
30

Introduction to Quality
What is QUALITY?
Broadly defined -- quality refers to the ability of a product or service to
consistently meet or exceed customer expectation
The Dimensions of Quality
1)
2)
3)
4)
5)
6)
7)
8)
Performance - refers to the main characteristics of the product or

service (use)
Special features - refers to the extra characteristics
Conformance - refers to how well a product or service corresponds to
a customer's expectations
Reliability - consistency of performance without breakdown
Durability - refers to the useful life of the product or service
Service after sale - handling of complaints, or checking on customer
satisfaction
Aesthetics - pleasing to look at
Safety - safe when use as directed
The determinants of quality (degree to which a product or service successfully

satisfies its intended purpose) are:
1) Design - the starting point for the level of quality eventually achieved
2) How well it conforms to design - the degree to which goods and
services conform to the intent of the designer
3) Ease of use - instruction on how to use the product must be easy to
understand, injuries caused to consumer can end up in litigation
4) Service after delivery - technical support/contact from the service
provider
Some of the consequences of poor quality
Loss of business
Liability
Productivity
Costs
1. Internal failure costs - failures discovered during
production
2. External failure costs - failures discovered after
delivery to customer
3. Appraisal costs - cost of activities designed to
ensure quality or to uncover defects
4. Prevention costs - cost of preventing defects from
occurring

Difference between modern quality management and the formerly traditional

approach
Quality Control by prevention vs. Quality Control by detection
Quality Gurus:
1. Deming - a statistics professor at NYU in the 40s, and is credited for
Japan's focus in quality and productivity
Known for his 14-point prescription for achieving quality in an

organization (see page 426 for list)
Four key elements in Deming's 14 points

i. appreciation for system
ii. a theory of variation
iii. a theory of knowledge
iv. psychology
2. Juran - like Deming also taught Japanese manufacturers how to improve

quality
Views quality as fitness-for-use
Believes that 80% of quality defects are management controllable
Describes Quality management as trilogy consisting of (1) quality

planning, (2) quality control (3) quality improvement
1. Quality planning is necessary to establish
processes that are capable of meeting quality
standards
2. Quality control is necessary to know when
corrective action is needed
3. Quality improvement will help find better ways
of doing things
Key element of Juran's philosophy is the commitment of management

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

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

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

Quality Control
Purpose of QC
To assure that the process is performing in an acceptable manner

Done through monitoring the process via inspection
Quality Assurance Relies on inspection
Inspection after production (acceptance sampling)

Inspection during production (statistical process control, or SPC)
Basic Issues in Inspection:

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

Finished products
Before a costly operation
Before an irreversible process
Before covering a process
Key Concepts:
Variation is the enemy of quality

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

Control Charts
Key tool for monitoring and controlling processes. A control chart is a timeordered plot of sample statistics
Purpose: used for detecting presence of special cause variation.
Components of a Control Chart

(1) Upper Control Limit
(2) Middle Value
(3) Lower Control Limit
Possible Errors in SPC

Type I error
Type II error
Managerial Considerations Concerning Control Charts
1. At what points in the process to use control charts
2. What size samples to take
3. What type of control chart

Four Common Types of Charts

A.
Control charts for Variables
(1) Mean chart (a.k.a x-bar chart) - used to monitor the average of the
process
UCL x z ( /
n)
LCL x z ( /
n)
UCL x A2 R
LCL x A2 R
where :
x grand mean
z confidence level
population standard deviation
n sample size
R average range
A2 value from table given a sample size
(2) Range chart (a.k.a. R-chart) - used to monitor the variability of the
process
UCL D4 R
LCL D3 R

B. Control charts for Attributes

(1) p-chart (proportion chart) - used to monitor the proportion of defectives
UCL p z
p (1 p )
n
LCL p z
p (1 p )
n
where :
p average proportion
z confidence level
(2) c-chart (used when the goal is to control the number of defects per
unit
UCL c z
LCL c z
where :
c average number of defects
z confidence level

Charts Illustrating a Process Not in Control

Table for A2, D3 and D4
Factor for R
Chart
Number of
Observation
s in
Subgroup
n
Factor
for xbar
Chart
A2
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1.88
1.02
0.73
0.58
0.48
0.42
0.37
0.34
0.31
0.29
0.27
0.25
0.24
0.22
0.21
0.20
0.19
0.19
0.18
Lower Upper
Control Control
Limit
Limit
D3
D4
0.00
0.00
0.00
0.00
0.00
0.08
0.14
0.18
0.22
0.26
0.28
0.31
0.33
0.35
0.36
0.38
0.39
0.40
0.41
3.27
2.57
2.28
2.11
2.00
1.92
1.86
1.82
1.78
1.74
1.72
1.69
1.67
1.65
1.64
1.62
1.61
1.60
1.59
Problems
4 Control charts for Variables Mean and Range charts
6 Control chart for Attributes p-chart
7 Control chart for Attributes c-chart
8 How many to produce given a certain production survival rate

Problem 10.4 (p. 482)

Computer upgrades have a nominal time of 80 minutes. Samples of 5 observations each have
been taken, and the results are listed below. Determine the upper and lower control limits for
mean and range charts, and decide if the process is in control.
1
79.2
78.8
80.0
78.4
81.0
2
80.5
78.7
81.0
80.4
80.1
SAMPLE
3
4
79.8
78.9
79.4
79.4
80.4
79.7
80.3
79.4
80.8
80.6
5
80.5
79.6
80.4
80.8
78.8
6
79.7
80.6
80.5
80.0
81.1

Excel Solution
UCL x A2 R
UCL D4 R
LCL x A2 R
LCL D3 R

Problem 10.6 (482)

A medical facility does MRIs for sports injuries. Occasionally a test yields inconclusive results and
must be repeated. Using the following sample data and n=200, determine the upper and lower
control limits for the fraction of retests using two-sigma limits.
Is the process in control? If not eliminate any values that are outside the limits and compute the
revised limits.
Number of
defectives
SAMPLE
6
7
8
10
11
12
13

Excel Solution
UCL p z
p (1 p )
n
LCL p z
p (1 p )
n

PROBLEM NO. 10 7 (483)

The postmaster of a small western city receives a certain number of complaints each day
about mail delivery. Assume that the distribution of daily complaints is Poisson. Construct
a control chart with three sigma limits using the following data. Is the process in control?
Number of
complaints
10
14
SAMPLE
7
8
5
12
10
11
12
13
14
13
10

Excel Solution

Problem 18 (485)
A production process consists of a three-step operation. The scrap rate is 10 percent for the first
step and 6 percent for the other two steps.
(a)
If the desired daily output is 450 units, how many units must be started to allow for loss
due to scrap?
(b)
If the scrap rate for each step would be cut in half, how many units would this save in
terms of the scrap allowance?
(c )
If the scrap represents a cost of $10 per unit, how much is it costing the company per day
for the original scrap rate?

INVENTORY MANAGEMENT
Importance of Inventory Management -- Good inventory management is essential to the
successful operation for most organizations because of:
1. The amount of money invested in inventory represents, and
2. The impact that inventories have on daily operations of an organization
Definitions:
Inventory a stock or store of goods
Independent vs. Dependent demand items
Independent demand items are the finished goods or other end items that are sold to someone
Dependent demand items are typically subassemblies or component parts that will be used in the
production of a final or finished product
Our focus: inventory management of finished goods, raw materials, purchased parts, and retail
items
Functions of Inventories
1.
2.
3.
4.
5.
6.
7.
To meet anticipated demand

To smooth production requirements
To decouple components of the production
To protect against stockouts
To take advantage of order cycles
To hedge against price increases, or to take advantage of quantity discounts
To permit operations (work in process)
Objectives of Inventory Control

1. Maximize level of customer service
2. Minimize costs (carrying costs and ordering costs)

Requirements for Effective Inventory Management

(1) A system to keep track of the inventory
periodic,
perpetual,
two-bin, and
universal product code (UPC)
(2) A reliable forecast of demand
(3) Knowledge of lead times and lead time variability
-lead time time between submitting a purchase order and receiving it
-lead time variability reliability of the supplier
(4) Estimates of inventory holding costs, ordering costs, and shortage costs
Holding cost
Ordering cost
Stockout cost
(5) A classification system for inventory items
ABC approach classifies inventory
according to some measure of importance
($ value) where A very important,
C least important



Formula for EOQ with Non-instantaneous Replenishment

Qo
2 DS
H
p
p u
where: D annual demand

S setup cost
H Holding (carrying cost) per unit
p production or delivery rate
d usage rate
C.
Quantity Discounts Model

1. Compute the common EOQ
2. Only one of the unit prices will have the EOQ in its feasible range. Identify
the range that:
If the feasible EOQ is on the lowest price range, that is the optimal
order quantity
If the feasible EOQ is in any other range, compute the total cost for
the EOQ and for the price breaks of all lower unit costs. Compare
the total costs EOQ is the one that yields the lowest total cost.

When to Order (reorder points - ROPs) Models

Objective: minimize the risk (probability) of stockouts
4 Determinants of the ROP
1. rate of demand
2. lead time
3. extent of demand and/or lead time variability
4. degree of stockout risk acceptable to management
Basic Formula for Computing ROP
ROP Expected demand during lead time Safety stock
A.
Constant demand and constant lead time

ROP d LT or simply dLT
B.
Variability is present in demand during lead time

ROP dLT z dLT
use this formula if an estimate of expected demand during lead

time and its standard deviation are available
ROP d LT z LT d
use this formula when data on lead time and demand are not
readily available

Shortages and Service Levels

The ROP computation does not reveal the expected amount of shortage for a
given lead time service level
Information on expected number of shortage per cycle, or per year can be
determined using the following:
A.
Expected number of units short per cycle, E(n)
E ( n) E ( z ) dLT
where : E ( n) - expected number of units short per cycle
E ( z ) - standardized number of units short using Table 12.3 (p. 569)
dLT - standard deviation of lead time demand
B.
Expected number of units short per year, E(N)
E ( N ) E ( n)
C.
D
Q
Annual Service Level
AnnualServiceLevel 1
E ( z ) dLT
E ( n)
1
Q
Q

Service Level for Single-period Model

Used to handle ordering of perishables
(fresh fruits, vegetables, seafood, flowers), and
Items that have a limited useful life
(newspaper, magazines)
Analysis focuses on two costs: shortage and excess
SL
Cs
C s Ce
where : C s shortage cost per unit

C e excess cost per unit
Problems:
2 ABC Inventory Classification
3 Basic EOQ
4 Basic EOQ
11 EOQ with Non-instantaneous Delivery
13 EOQ with Discount
28 EOQ, ROP, Shortages
33 EOQ for multiple products

Problem 2(585)
The following classification table contains figures on the monthly volume
and unit costs for a random sample of 16 units from a list of 2,000
inventory items at a health care facility.
Item
K34
K35
K36
M10
M20
Z45
F14
F95
F99
D45
D48
D52
D57
N08
P05
P09
Unit Cost
10
25
36
16
20
80
20
30
20
10
12
15
40
30
16
10
Usage
200
600
150
25
80
200
300
800
60
550
90
110
120
40
500
30

Problem 11 (586)
A company is about to begin production of a new product. The manager of the
department that will produce one of the components for the product wants to know
how often the machine used to produce the item will be available for other work.
The machine will produce the item at a rate of 200 units per day. Eighty units will
be used daily in assembling the final product . Assembly will take place 5 days a
week, 50 weeks per year. The manager estimates that it will take almost a full day
to get the machine ready for production run, at a cost of $60.
Inventory holding costs will be $2 per unit per year.
(a) What run quantity should be used to minimize total annual cost?
(b) What is the length of a production run in days?
During production, at what rate will inventory build up?
(d) If the manager wants to run another job between runs of this item, and
needs a minimum of 10 days per cycle for the other work, will there be enough time?

Problem 13 (587)
A mail-order house uses 18,000 boxes a year. Carrying costs are 20 cents per year per box,
and ordering costs are $32. The following price schedule applies. Determine:
Number of
Boxes
1000 to 1999
2000 to 4999
5000 to 9999
10000 or more
Price per
Box
1.25
1.2
1.18
1.15
(a) The optimal order quantity

Problem 28 (589)
A regional supermarket is open 360 days per year. Daily use of cash register tape
averages 10 rolls. Usage appears normally distributed with a standard deviation of 2
rolls per day. The cost of ordering tape is $1, and carrying costs are $0.40 per roll.
a year. Lead time is three days.
(a) What is the EOQ?
(b) What ROP will provide a lead time service level of 96%?
What is the expected number of units short per cycle with 96%? Per year?
(d) What is the annual service level?

Problem 33 (590)
Given the following list of items,
Item
H4-010
H5-201
P6-400
P6-401
P7-100
P9-103
TS-300
TS-400
TS-041
V1-001
Estimated
Annual
Ordering
Demand
Cost
D
S
20000
50
60200
60
9800
80
16300
50
6250
50
4500
50
21000
40
45000
40
800
40
26100
25
Holding
Cost (%) Unit Price
P
20%
2.5
20%
4
30%
28.5
30%
12
30%
9
40%
22
25%
45
25%
40
25%
20
35%
40
(a) Classify the items as A, B, and C
(b) Determine the EOQ for each item.

Project Management
What is a project?
Unique, one-time operations designed to accomplish a set of objectives in

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

Selecting the project manager
Selecting the project team
Planning and deciding the project
Managing and controlling project resources
Deciding if and when a project should be terminated
Planning and Scheduling With Gantt Charts
Gantt chart - a popular tool for planning and scheduling simple projects
Used to monitor progress over time by comparing planned progress to actual
progress
Planning with PERT/CPM
PERT (program evaluation review technique) and CPM (critical path method)
are two of the most widely used techniques for planning and coordinating
large-scale projects
By using PERT/CPM, managers are able to obtain:

(a) A graphical display of project activities
(b) An estimate of how long the project will take
(c) An indication of which activities are most critical to timely project
completion
(d) An indication of how long an activity can be delayed without lengthening
the project
Network Diagram a.k.a. precedence diagram is a chart used in PERT

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

Path a sequence of activities that leads from the starting node to the
finishing nodes
Critical path the path with the longest time
Critical activities activities that are on the critical path. They have zero
slack
Network conventions
a
a
c
b
b
a
c

Deterministic vs Probabilistic Time Estimates
Deterministic times if time estimates can be made with a high degree of

confidence that actual time will not differ significantly
Probabilistic times must include an indication of the extent of probable

variation
te
t0 4tm t p
6
(t p to ) 2
36
A Computing Algorithm
ES earliest time activity can start
EF earliest time an activity can finish
LS latest time an activity can start
LF latest time an activity can finish
EF = ES + t
ES
EF
ES
LS = LF - t
LS
LF
LS
LS
LF
LS
ES
EF
ES

Problem 1 (see page 802)

Problem 3 (Not in text)

The information below pertains to a project that is about to commence. As the project
manager, which activities would you be concerned with in terms of timely project completion?
Explain.
Activity
a
b
c
d
e
f
g
h
i
j
k
End
Immediate
Estimated
Predecessor
-A
B
B
C
-F
F
G
H
J
D,E,I,K
Time (days)
15
12
6
5
3
8
8
9
7
14
6
Estimated
Activity
a
b
c
d
e
f
g
h
i
j
k

Precedes
B
C,D
E
End
End
G,H
I
J
End
K
End
Time (days)
15
12
6
5
3
8
8
9
7
14
6
Problem 7 (804)
Three recent college graduates have formed a partnership and have opened an advertising
firm. The first project consists of activities in the following table.
Activity
A
B
C
D
E
F
G
H
I
End
Immediate
Predecessor
--A
-C
D
F
B
H
E,G,I
to
5
8
6
9
5
5
2
4
5
tm
6
8
8
12
6
6
3
4
7
tp
7
11
11
15
9
7
7
5
8
(a) Draw the precedence diagram
(b) What is the probability that the project can be completed in 24 days or less? In 21 days
or less?

Excel Solution

(c)
Suppose it is now the end of the seventh day and that activities A and B have been
completed. Time estimates for the completion of activity D are 5, 6, and 7. Activity C and H are
ready to begin. Determine the probability of finishing the project by day 24 and the probability of
finishing by day 21.

Problem 11(805)
The following precedence diagram reflects three time estimates for each activity. Determine:
9-1 0-1 2
(e)
1 1-1 2-1 3
(b )
8 -8 - 8
(a)
1 4-1 8-2 6
(f)
5 -6 - 7
(c )
8-1 0-1 4
( i)
5 -7-1 0
(k)
11
1 3-1 3-1 3
(g)
6 -6 - 6
(m )
1 1-1 2-1 4
(d )
10
5
7-1 0-1 2
(h )
1 0-1 1-1 2
( l)
(a) The expected completion time for each path and its variance
(b) The probability that the project will require more than 49 weeks.
(c) The probability that the project can be completed in 46 weeks or less.

Queuing
What is queuing theory?
The mathematical approach to the analysis of lines
Useful in planning and analysis of service capacity
Goal of queuing -- minimize total cost - costs associated with customers

waiting in line for service and those associated with capacity
System Characteristics
1) Population source
o Infinite source
o Finite source
1) Number of servers (channels)
o
Single
o
Multiple
2) Arrival and service patterns
o
Probability distribution (exponential, Poisson, etc)
3) Queue discipline (order of service)
o
First-come-first-served

F o u r C o m m o n V a r ia t io n s o f Q u e u e S y s t e m s
S in g le c h a n n e l,
s in g le p h a s e
S in g le c h a n n e l,
m u lt ip le p h a s e
M u lt ip le c h a n n e l,
s in g le p h a s e
M u lt ip le c h a n n e l,
m u lt ip le p h a s e

Queuing Models:
Infinite Sources
Assumptions:
o Poisson arrival rate
o System operates under steady state (average arrival and
service rates are stable)
Important note: The arrival () and service rates () must be in the
same units
Four Basic Models
5)
Single channel, exponential service time
6)
Single channel, constant service time
7)
Multiple channel, exponential service time
8)
Multiple priority service, exponential service time
Finite Source
(4) Appropriate for cases in which the calling population is limited to a
relatively small number of potential calls
(5) Example -- one person may be responsible for handling breakdown on
15 machines
(6) The mathematics of finite-source model can be complex, analysts
often use finite queuing tables in conjunction with simple formulas to
analyze these systems

Important Note: To solve queuing problems use the Excel templates that
accompany the text
Five Typical Measures of System Performance

Operations Managers Look at
1)
2)
3)
4)
5)
Average number of customers waiting (in line or in system)

Average time customers wait (in line or system)
System utilization (percentage of capacity used)
Implied cost of given level of capacity and its related waiting line
The probability that an arrival will have to wait for service
Infinite-source Symbols
Customer arrival rate
Service rate
LQ The average number of customer waiting for service
LS The average number of customers in the system
The system utilization

Wq The average time customers wait in line
Ws The average time customers spend in the system
1
Service time
P0 The probabilit y of zero units in the system
Pn The probabilit y of n units in the system
M The nunber of servers (channels)
Lmax The maximum expected number waiting in line

Problem 1 (844)
Repair calls are handled by one repairman at a photocopy shop. Repair time, including travel
time, is exponentially distributed, with a mean of two hours per call. Requests for copier
repairs come in at a mean rate of three per 8-hour day (assume Poisson).
Determine:
(a) The average number of customers awaiting repairs.
(b) System utilization
(c) The amount of time during an 8-hour day that the repairman is not out on call
(d) The probability of two or more customers in the system.
Excel Solution

Problem 2 (844)
A vending machine dispenses hot chocolate or coffee. Service time is 30 seconds per cup
and is constant. Customers arrive at a mean rate of 80 per hour, and this rate is Poisson
distributed. Determine:
(a) The average number of customer waiting in line
(b) The average time customers spend in the system
(c) The average number in the system
Excel Solution

Problem 4 (844)
A small town with one hospital has two ambulances to supply ambulance service. Requests
for ambulances during non-holiday weekends average 0.8 per hour and tend to be Poisson
distributed. Travel and assistance time averages one hour per call and follows an
exponential distribution. Find:
(a) System utilization
(b) The average number of customers waiting
(c) The average time customers wait for an ambulance
(d) The probability that both ambulances will be busy when a call comes in
Excel Solution

Problem 10 (845)
Two operators handle adjustments for a group of 10 machines. Adjustment time is
exponentially distributed and has a mean of 14 minutes per machine. The machines operate
for an average of 86 minutes between adjustments. While running, each machine can turn
out 50 pieces per hour. Find:
(a) The probability that a machine will have to wait for an adjustment
(b) The average number of machines waiting for adjustment
(c) The average number of machines being serviced
(d) The expected hourly output of each machine, taking adjustments into account
(e) Machine downtime represents a cost of $70 per hour; operator cost (including salary
and fringe benefits) is $15 per hour. What is the optimum number of operators?
Excel Solution



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BA 380: OPERATIONS MANAGEMENT

read the topics as outlined in the Lecture Notes

Rene Leo E. Ordonez, PhD

Prepared by: Rene Leo E. Ordonez, PhD

School of Business, SOU

Lecture Outlines and Digitized Lectures for

Productivity, Competitiveness, Strategy

Cost Volume Analysis and Capacity Planning

Introduction to Quality Control

Prepared by: Rene Leo E. Ordonez, PhD

School of Business, SOU

PRESENT THIS PAGE TO THE

Prepared by: Rene Leo E. Ordonez, PhD

School of Business, SOU

BA 380: Operations Management

Lecture Notes Page 2

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

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

The models in discussed will reflect tradeoffs between cost

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

From a systems viewpoint, the output and objectives of the

Uses the Pareto phenomenon a relatively few factors are

Prepared by Rene Leo E. Ordonez, PhD

SOU School of Business

BA 380: Operations Management

Lecture Notes Page 3

Operations management activities at the core of all business

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

POM is all about management all managers need to possess the

Prepared by Rene Leo E. Ordonez, PhD

SOU School of Business

BA 380: Operations Management

Lecture Notes Page 4

Three Basic Functions of Business Organizations

Finance, Production/operations, Marketing

The operations function involves the creation of inputs into outputs

Prepared by Rene Leo E. Ordonez, PhD

SOU School of Business

BA 380: Operations Management

Lecture Notes Page 5

Examples of Types of Operations

Storage/transportation Warehousing, trucking, mail

Films, radio and TV, plays,

Newspapers, radio and TV

Illustrations of the Transformation Process

Prepared by Rene Leo E. Ordonez, PhD

SOU School of Business

BA 380: Operations Management

Lecture Notes Page 6

Examples of inputs, transformation, and outputs

Production Good versus Service Operations

Prepared by Rene Leo E. Ordonez, PhD

SOU School of Business

BA 380: Operations Management

Lecture Notes Page 7

Productivity, Competitiveness and Strategy

Some Examples of Different

Goods or Service Produced

Factors that Affect Productivity

Prepared by Rene Leo E. Ordonez, PhD

SOU School of Business

BA 380: Operations Management

Lecture Notes Page 8

Has a long term impact on the nature and characteristics of the