Chapter 3
between customers and production labor.
Importance of the service sector
The service sector, also called tertiary sector, is
the third of the three traditional economic
sectors.
Primary sector – farming, mining & fishing
Secondary sector – manufacturing
Includes all branches of human activity whose
essence is to provide services, thus providing a
work, knowledge, financial resources,
infrastructure, goods or their combination.
DISTINCTIVE FEATURES OF SERVICE SYSTEMS
The key distinction between service and
manufacturing systems is that SERVICES are
intangible outputs that are consumed in the
process of their production.
A Classification of Service Systems
The service sector does not consist of a
homogeneous group of services.
The industries within the service sector are too
heterogeneous for a common frame of analysis.
Classification Scheme
(by Baumol 1984)
1. Stagnant Personal Services
2. Substitutable Personal Services
3. Progressive Services Explosive Services
Stagnant Personal Services - these services
frequently require direct contact between the
customer and the service provider.
these services offer low innovation potential
and are difficult to standardize.
The Substitutable Personal Services - these
services also require direct personal contact,
and they have characteristics similar to stagnant
personal services.
Progressive Services - These services have two
components
One component requires little labor and
considerable cost reductions are possible with
it.
The second component is highly labor intensive
and is much like stagnant personal services.
Explosive Services - Involve virtually no contact
These services offer high innovation potential as
technological advances decrease cost
substantially.
Criteria for Competition
1. COST 3. Quality
2. Dependability 4. Flexibility or
customization
Service Strategy of a Firm
Positioning - A service firm must carefully
examine and evaluate its position with respects
to its competitors in order to determine an
effective strategy.
Implication for the manager
A manager should gain a clear understanding of
which criteria are relatively more important for
his or her firm.
Chapter 5: Inventory Planning and Control
SYMPTOMS OF MISMANAGED INVENTORIES
1. Total amount of inventory rises
faster than the growth of sales
2. Stockouts of items occur, causing
interruptions and delays
3. Clerical costs for procuring,
expediting, and maintaining
inventories become too high
4. Too much quantity in stock
5. Items are missing or misplaced.
Spoilage rates are too high
COMMON SOURCES OF SAVINGS
1. Lower purchase cost
2. Lower interest expenses
3. Increase in availability of internal
funds
4. Lower operating costs
5. Lower production cost per unit
6. Dependable delivery of production
7. Better customer service

Basic Inventory Model - Objective is to
determine the optimal order quantity that
minimizes the total incremental costs of holding
inventory and processing orders.
Holding Cost - Costs associated with inventory
level.
Preparation Cost - Costs associated with the
number of orders placed.
Inventory Models with Uncertain Demand
Single Period Model - Only a single
procurement is made over a single, well-defined
time period. This is applicable for stocking
seasonal inventories.
Order quantity-reorder point model -
Considers the situation, commonly faced by
materials managers, when an item is
continuously demanded. Determine the size
and when that order should be placed, reorder
point.
Service Level Method - Management specified
a policy such as stockouts should not occur
more than percent of time. ROP is simply
determined by the probability distribution for
demand during lead time.
Inventory Control Systems: 3 relevant
questions
1. How often should the assessment of
stock on hand be made?
2. When should a replenishment order
be placed?
3. What should be the size of the
replenishment order?
ABC CLASSIFICATION OF INVENTORY ITEMS
Controls for Class A items - Close control is
required for inventory items that have high
stockout costs and those items that account for
a large fraction of the total inventory value.
Controls for Class B items - Items should be
monitored and controlled by a computer-based
system.
Controls for Class C items - Items account for
the great bulk of inventory items, and carefully
designed but routine controls should be
adequate.
Chapter 6: Material Requirements Planning
Requirements Planning Concepts:
 Bill of Materials
 Demand dependence
 Product structures
 Forecasting versus Requirements
Bill of Materials – is constructed in a way that
reflects the manufacturing process. Information
useful to a material requirements system in a
form that can be maintained in a computerized
file.
Indented Bill – the dependence of parts and
components is indicated by indenting items in
the list.
Inventory Planning Systems
Lot Size Decision Policies
 Lot-for-Lot
 Economic Order Quantity (EOQ)
 Period Order Quantity (POQ)
 Part-Period Total Cost Balancing
Buffer Stocks in Requirements Systems
 Safety Lead Time
 Safety Stock
Lot-for-Lot – the lot size for a batch is chosen to
satisfy the net requirements for a single period.
Is cost-effective only when set-up costs are
extremely small in relation to holding costs.
Economic Order Quantity (EOQ) – EOQ is
calculated based on expected requirements.
Batch size is set to EOQ. Is not optimal in
material requirements planning systems
because the assumption of constant demand is
not met.
Period Order Quantity (POQ) – size is set equal
to the actual requirements in a predetermined
number of periods. Thus, the excess inventory
that may be carried under an EOQ policy is
eliminated.
Part-Period total cost balancing – holding costs
and set-up costs are balanced as closely as
possible for each lot size decision.
Buffer stocks in requirements systems – are
designed to absorb random variations in the
supply schedule.
Safety Lead Time – if the lead time for
manufacturing a component or a part is
variable, then stockouts could occur if a batch is
not scheduled for production sufficiently in
advance of actual requirements.
Safety stock – is needed to guard against
variability. Is determined by considering the
cost of stockouts and cost of holding excess
inventories.