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Chapter 1 - Operations and Supply Chain Management

1.1 What is operations and supply chain management?

Operations and Supply Chain Management (OSCM): defined as the design, operation, and improvement of the
systems that create and deliver the firm’s primary products and services

- Functional field of business with clear line management responsibilities

- Concerned with the management of the entire system that produces a product or delivers a service

Operations: the manufacturing and service processes that are used to transform the resources employed by a firm
into a product which is desired by customers

Supply chain: all activities associated with flow and transformation of goods and services: from raw materials to the
end-user, as well as the associated information flows

- Management of the supply chain needs to put effort into integrating the processes in the supply chain
- A valuable chain → must have effective coordination/integration of materials throughout entire supply chain
- Attention can be paid to the reduction of costs

Operations and supply chain processes

Process: one or more activities that transform inputs into outputs

Can be categorized into five categories:

1. Planning: processes needed to operate an existing supply chain strategically
2. Sourcing: the selection of suppliers to deliver the goods and services needed to create the firm’s product
3. Making: where the product is actually produced, or the service is provided
4. Delivering: refers to the logistic processes
5. Returning: the processes of receiving returned products from customers, and support for customers

Differences between goods and services

Goods Services

1. Tangible 1. Intangible (cannot be patented or returned)

2. Produced in facility separate from customer 2. Requires degree of interaction w customer
3. Produced to meet tight specifications 3. Inherently heterogeneous (exception of hard IT)
4. Can be stored / kept 4. Perishable and time dependent
5. Package of features that affect the 5 senses
a. Location, decoration, layout
b. Attitude/performance of employees
c. Speed, privacy, security

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The goods-services continuum

- Most product offerings are a combination goods / services

Goods-service continuum: shows the main focus of a certain business and goes from firms that only produce
products to firms that only produce services

Product-service bundling

Product-service bundling: when a firm builds service activities into its product offerings to create additional value for
the customer

- Firms that offer product-service bundles typically generate higher revenues

- BUT usually generate lower profits as a percentage of revenues when compared to focused firms

Stakeholders in the supply chain

- Supplier: supplies raw materials, semi-finished products, and finished products to downstream customers
- Manufacturer: selects the supplier and produces the goods, make-or-buy decisions concerning components
and semi-finished products
- Distributor: distribution of products from manufacturers to retailers and customers. Includes temporary
storage in warehouses
- Retailer: selling products / services to customers and performing marketing activities
- Customer: buys products and services

1.2 Efficiency, effectiveness, and value

Efficiency: doing something (producing product/service) at the lowest possible cost (smallest amount of resources)

Effectiveness: doing the right things to create the most value for the customer

- Maximizing efficiency & effectiveness at the same time can create conflict between the two goals (trade off)
- Eg. using the fewest people possible vs minimizing the amount of time customers need to wait in line

Value: the attractiveness of a product relative to its price

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Efficiency related ratios

annual credit sales

1) receivables turnover =
average accounts receivable

Measures the number of times receivables are collected, on average, during the fiscal year

cost of goods sold

2) inventory turnover=
average inventory value

Measures the average number of times inventory is sold and replaced during the fiscal year

revenue (¿ sales)
3) asset turnover=
total assets

Measures the amount of sales generated for every dollar’s worth of assets

Evaluating efficiency

- Relative cost of providing good/service = essential for high earning growth

- Highly efficient firms = successful during demand drops (continue to make a profit due to low cost structure)
- Relationships between the cost, profit margin, and return on assets are direct

Benchmarking: when one company studies the processes of another company to identify best practices

Chief Operating Officer (COO)

- Works with the CEO and company president to determine the company’s competitive strategy
- Ideas are filtered down through rest of the company
- Determines an org’s location, facilities, which vendors to use, and how the hiring policy is implemented

1.3 Historical development of operations and supply chain management

Manufacturing strategy: emphasizes how a factory’s capabilities could be used strategically to gain advantage over a
competing company

A variety of manufacturing strategies have been invented including:

1. Just-in time (JIT): an inventory strategy that orders and receives the parts needed ruing the production
exactly when they are needed, keeping inventory at a minimum
2. Total quality control (TQC): focusses on aggressively looking for defects in the production process
3. Lean manufacturing: refers to the concepts that are related to JIT and TQC
4. Total quality management (TQM): focussed on the customer and on continuous improvement. Everyone in
the organization is involved in quality improvement and it can only be successful when it is part of the
company’s strategy and philosophy

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 5. Six sigma: a statistical term that describes the quality goal of having no more than 3.4 defects per million
units. Refers to a philosophy and programme of high quality
6. Triple bottom line: evaluates the firm against social, economic, and environmental criteria
Other important terms

Business process reengineering (BPR): an approach to improving business processes that seeks to make
revolutionary changes as opposed to evolutionary (small) changes

Mass customization: the ability to produce a unique product exactly to a particular customer’s requirements

Electronic commerce: the use of the internet as an essential element of business activity

Sustainability: the ability to meet current resource needs without compromising the ability of future generations to
meet their needs

Business analytics: the use of current business data to solve business problems using mathematical analysis

Current issues in operations and supply chain management

OSCM is a dynamic field so multinationals are challenged with issues including:

- The coordination between mutually supportive, but separate organizations

- The organization of global supplier, production, and distribution networks
- The management of customer touch points
- Raising senior management awareness of operations as a significant competitive weapon
- Sustainability and the triple bottom line

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Chapter 2 - Strategy and Sustainability

2.1 A sustainable operations and supply chain strategy

- Strategy should describe how a firm intents to create and sustain value for its current shareholders
- Sustainability must be included in a firm’s strategy

Sustainability: the ability to meet current resource needs without compromising the ability of future generations to
meet their needs

The triple bottom line

Triple bottom line: evaluating the firm against social, economic, and environmental criteria

There are three dimensions of the triple bottom line:

1. Social responsibility: fair practices towards labor, the community, and the region a firm does business in
2. Economic prosperity: a firm’s obligation to compensate shareholders via competitive returns on investment
3. Environmental stewardship: the firm’s impact on the environment

2.2 What is operations and supply chain strategy

Operations and supply chain strategy: the setting of broad policies and plans that will guide the use of the resources
needed by the firm to implement its corporate strategy

- Major focus on operations effectiveness (relates to core business process needed to run the business)
- Considered part of a planning process as it coordinates operational goals with those of a larger organization

Operations effectiveness: performing activities in a manner that best implements strategic priorities at minimum
cost

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Formulating an operations and supply chain strategy

Competitive dimensions

Competitive dimensions are:

1. Cost vs price (make the product or deliver the service cheap)
2. Quality (make a great product or deliver a great service)
3. Delivery speed (make the product or deliver the service quickly)
4. Delivery reliability (deliver it when promised)
5. Coping with changes in demand (change its volume)
6. Flexibility and new-product introduction speed (change it)
7. Other product-specific criteria, such as environment, technical liaison and support (support it)

- Several attributes that customers take into account when deciding whether or not to buy a firm’s products
- Companies cannot excel on all competitive dimensions
- The notion of focus and trade-offs are central to the concept of operations and supply strategy

Trade offs: when activities are incompatible in a way that more of one thing automatically requires less of another

Straddling: when a firm seeks to match what a competitor is doing by adding new features, services, or technologies
to existing activities. This often creates problems if certain trade-offs need to be made

- Occurs when an org seeks to match the benefits of a successful position while maintaining its current position

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Order winners and order qualifiers

- A well coordinated collaboration between operations and the marketing department is needed to provide a
business with an understanding of its markets from both viewpoints
- Order winner and order qualifier are the marketing oriented dimensions that are important to success

Order winner: one or more specific marketing-oriented dimensions that clearly differentiate a product from
competing products

Order qualifiers: dimensions used to screen a product or service as a candidate for purchase

Example: if you are purchasing a computer, features such as screen size, weight, operating system version, and cost
are important qualifying dimensions, but the order-winning feature that differentiates one computer is battery life

2.2 What is operations and supply chain strategy

- Today’s global environment holds a lot of uncertainty

- Supply chains require strategic planners to evaluate relative riskiness of operations & supply chain strategies

Supply chain risk: the likelihood of a disruption that would impact the ability of a company to continuously supply
products or services

Risk can be categorized by viewing the inherent uncertainties related to operations and supply chain management
along two dimensions:

1. Supply chain coordination risks that have to do with the day-to-day management of the supply chain
2. Disruption risks which are caused by natural or human-made disasters

- Supply chain disruptions are unplanned and unanticipated events that disrupt the normal flow of goods and
materials within a supply chain and expose firms within the supply chain to operational and financial risks

Risk management framework

- Three step risk management process that can be utilized in situations where disruptions are likely:

These steps include:

1. Identify the sources of potential disruptions
2. Assess the potential impact of the risk
3. Develop plans to mitigate the risk

- Risk mapping involves assessment of the probability or relative frequency of an event against the aggregate
severity of the loss
- Depending on the evaluation, some risks might be considered acceptable (costs are not too large)

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2.3 Productivity measurement

Productivity: a measure of how well resources are used

outputs
productivity=
inputs

Example: 100 units are produced in 100 hours; therefor, the productivity is 100/100, which is 1 unit per hour

Increasing productivity

- Make ratio of outputs to inputs as large as practical

- Productivity is a relative measure (to be meaningful it must be compared with something else)

- Productivity comparisons can be made in 2 ways:

1. Use industry data: compare itself with similar operations within its industry
2. Compare to past data: measure productivity over time within the same organization

- Productivity can be expressed as:

1. Partial measures
2. Multifactor measures
3. Total measures

1 - Partial productivity measure

output
∂ measure=
singular input

output output output output

∨ ∨ ∨
labor capital materials energy

2 - Multifactor productivity measure

output
multifactor measure=
input +input +input

output output
∨
labor+capital + energy labor+ capital+ materials

3 - Total productivity measure

total output
total measure=
total input

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 output goods∧services produced
∨
inputs all resources used

Chapter 4 - Strategic Capacity Management

4.1 Capacity management in operations and supply chain management

Capacity: the output that a system is capable of achieving over a period of time

- When looking at capacity, managers must make sure to look at both resource inputs and product outputs
- Capacity must be stated relative to some period of time

Capacity management in operations: the ability to hold, receive, store, or accommodate a number of customers in a
system

Capacity can be considered in the following 3 dimensions:

1. Long range → longer than a year

2. Intermediate range → monthly/quarterly plans for the next 6-18 months
3. Short range → shorter than a month

Strategic capacity planning: finding the overall capacity level of capital-intensive resources to best support the firm’s
long term strategy

- The capacity level selected has a critical impact on the firm’s response rate, its cost structure, its inventory
policies, and its management and staff support requirements
- Inadequate: may lose customers through slow service or allowing competitors to enter the market
- Excessive: company may have to reduce prices to stimulate demand, underutilize its workforce, carry
excess inventory, or seek additional and less profitable products to stay in business

Capacity planning concepts

- The term capacity implies an attainable rate of output but does not talk about how long rate can be sustained
- To avoid this problem, the concept of best operating level is used

Best operating level: output level where average unit cost is minimized

- Used to determine the level of capacity for which the process was designed and, as a result, gives the volume
of output at which average unit costs are minimized
- Determining the minimum is difficult, as it includes a complex trade-off between the allocation of
fixed overhead costs and other costs
- An important measure is the capacity utilization rate:
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Capacity utilization rate: measure of how close the firm’s current output rate is to its best operating level (%)

capacity used
capacity utilization rate=
best operating level
*note: units must be the same
Example
If our plant’s best operating level was 500 cars per day and the plant was currently operating at 480 cars per day, the
capacity utilization rate would be 96%

480
capacity utilization rate= =0.96=96 %
500

Economies and Diseconomies of scale

Economies of scale: idea that as the plant gets larger and volume increases, the average cost per unit drops. At some
point, the plant gets too large and cost per unit increases

- Due to lower operating and capital costs

- Plants gain efficiencies when they become large enough to fully utilize dedicated resources
- BUT the plant can get too big and diseconomies of scale become a problem

Capacity focus

Focused factory: a facility designed around a limited set of production objectives. Typically the focus would relate to
a specific product or product group

- A firm should not expect to excel in every aspect of manufacturing performance: cost, quality, delivery speed
and reliability, changes in demand, and flexibility to adapt to new products
- Instead, it should select a limited set of tasks that contribute the most to corporate objectives
- A focused factor allows capacity to be focused on producing specific items

- The capacity focus concept can be operationalized through the mechanism of plant within a plant (PWP)

Plant within a plant (PWP): an area in a larger facility that is dedicated to a specific production objective (for
example, product group). This can be used to operationalize the focused factory concept.

- In simple terms: an area within a factory dedicated to a limited set of production objectives
- A focused factory may have multiple PWP’s, each of which could have separate sub-organizations, workforce
management, and equipment and process policies under the same roof
- Allows for the finding of the best operating level for each department

Capacity flexibility

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Capacity flexibility: having the ability to rapidly increase or decrease production levels, or to shift production capacity
quickly from one product or service to another

- Flexibility is achieved through flexible plants, processes, and workers, and through strategies that use the
capacity of other organizations
- Companies are becoming more concerned with flexibility as they design their supply chains
- Working with suppliers allows them to build capacity into their whole systems

Flexible plants:

- Ultimate in plant flexibility is the zero-changeover-time plant

- This type of plant can adapt to change by the use of moveable equipment, knockdown walls and is easily
accessible

Flexible processes:

- Flexible manufacturing processes allow rapid low-cost switching from one product to another, which is
sometimes referred to as economies of scope

Economies of scope: when multiple products can be produced at lower cost in combination than they can separately

- Businesses will typically combine multiple production and producing actions at one facility

Flexible workers:

- Flexible workers have multiple skills and the ability to switch easily from one kind of task to another
- They require broader training than specialized workers and need managers and staff support to facilitate
quick changes in their work assignments

4.2 Capacity planning

Capacity: the output that a system is capable of achieving over a period of time

- The objective of strategic capacity planning is to provide an approach for determining the overall capacity
level of capital–intensive resources that best supports the firm’s long-range competitive strategy

Before changing the capacity, three important issues should be considered

1 - Maintaining system balance

- Perfectly balanced plant: output of stage 1 provides the exact input requirements for stage 2 → stage 2’s
output provides the exact input requirement for stage 3 → and so on…

- However, in practice achieving a perfect design is mostly impossible and undesirable because:
- The best operating levels for each stage differ (more/less efficient at lower/higher output)
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 - Variability in product demand and the processes themselves may lead to imbalance

- There are various ways of dealing with imbalance such as:

1. Add capacity to stages that are bottlenecks (using temporary measures)
2. Use of buffer inventories in front of bottleneck stage to ensure it always has something to work on
3. Duplicating or increasing the facilities of one department on which another is dependent

- Approaches are increasingly being applied to supply chain design

2- Frequency of capacity additions Frequency of capacity reductions

Two types of costs to consider when adding capacity - Getting rid of capacity in response to
1. The cost of upgrading too frequently decreased demand can create major
2. The cost of upgrading too infrequently problems for a firm
- Permanent reductions in capacity would
require the sale of equipment or liquidation
of entire facilities

3 - Use of external capacity

- In some cases it may be cheaper to not add capacity at all

- Instead use some existing external source of capacity

- Two common strategies used by organizations are outsourcing and sharing capacity

Determining capacity requirements

- Capacity must consider: demands for individual product lines, plant capabilities, allocation of production

Typically done according to the following steps:

1. Use forecasting techniques to predict sales for individual products

2. Calculate equipment and labor requirements to meet product line forecasts
3. Project labor and equipment availabilities over the planning horizon

Capacity cushion: capacity in excess of expected demand

- Reserve capacity that handles sudden increases in demand or temporary losses of production capacity

Example: Expected annual demand on a facility is $10 million in products per year, and the design capacity is $12
million per year, it has a 20% capacity cushion. A 20% capacity cushion = to an 83% utilization rate (100% / 120%)

Using decision trees to evaluate capacity alternatives

- Used to lay out the steps of a capacity problem

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Decision tree: schematic model of the sequence of steps in a problem & the conditions + consequences of each step

- Composed of decision nodes with branches extending to and from them

- squares = decision points and circles = chance events
- Solving: work from end of the tree backward to the start (calculate expected values at each step)

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4.3 Planning service capacity

Several differences between service capacity planning and manufacturing capacity planning:

- Service capacity is more time and location-dependent & also subject to more volatile demand fluctuations
- Services cant be stored for later use
- Location matters: as there is a face-to-face setting, service capacity must be located nearby the customer
- Volatility of demand on a service delivery system is higher than on a manufacturing capacity planning for
three reasons:
1. Services cant be stored
2. Customers interact directly with the production system and they all have differing needs/demands
3. Service demand is directly affected by consumer behavior

Capacity utilization and service quality

- Planning capacity levels for services must consider the day-to-day relationship between service utilization
and service quality

4.4 Deterministic performance estimation

Design capacity: the theoretical maximum output of a system or process in a given period

Effective capacity: the capacity that can be expected given the product mix, methods of scheduling, maintenance,
and standard of quality

Inter arrival time: the time between two subsequent arrivals of products at their entrance in the process

Arrival rate: average number of customers that come to a facility during a specific period of time

Service rate: average number of customers that can be processed over the same period of time when

Throughput time: the time that passes between the moment at which the customer/product enters the system and
the moment at which the customer/product is ready

Deterministic throughput times: can be estimated by adding up the expected processing times of the different
processes

Departure rate: the number of products that leave the system per time unit. Determined by the speed of the
bottleneck. Only if the arrival process is the bottleneck, then the departure rate equals the arrival rate.

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Chapter 4A - Learning Curves

4A.1 The learning curve

Learning curve: a line displaying the relationship between the cumulative number of units produced and the time or
cost to produce the unit

- Plants produce more → gain experience in best production methods → reduces costs of production in a
predictable manner
- Plant’s cumulative production doubles → production costs decline by specific % depending on nature of org
- Can be applied to individuals or organizations

Individual learning: improvement that results when people repeat a process and gain skill or efficiency from their
own experience

- “Practice makes perfect”

Organizational learning: improvement that comes from both experience and from changes in administration,
equipment, and product design

- Results from practice AND changes in administration,

equipment, and product design
- In organizational settings, both kinds of learning occur
simultaneously

Note: sales volume becomes an important issue in achieving cost savings

Learning curve theory is based on three assumptions:

1. Amount of time required to complete a given task or unit of a product will be less each time the task is done
2. The unit time will decrease at a decreasing rate
3. The reduction in time will follow a predictable pattern

Two ways to think about the improved performance

that comes with learning curves:

1. Time per unit

2. Output per time period

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4A.2 How are learning curves modeled?

- Many ways to analyze past data to fit a useful trend line

- Exponential curve first as an arithmetic procedure and then as a` logarithmic analysis

Arithmetic tabulation approach

- Column for units is created by doubling, row by row, (eg. 1, 2, 4, 8…)

- The time for the first unit is multiplied by the learning percentage to obtain the time for the second unit
- The second unit is multiplied by the learning percentage for the fourth unit and so on…

Example: 80% learning curve

Logarithmic analysis

- In practice learning curves plotted using a graph with logarithmic scales

- The unit curves become linear throughout their entire range
- The cumulative curve becomes linear after the first few units

- Arithmetic tabulation approach is useful BUT direct logarithmic analysis

of learning curve problems is more efficient because it doesn’t require a
complete enumeration of successive time-output combinations
- Where such data are not available, an analytic model that uses
logarithms may be the most convenient way of obtaining output estimates

Power function analysis: The normal form of the learning curve equation is

n
Y x =K x

x = unit number
Y x = number of direct labor hours required to product the x th unit
K = number of direct labor hours required to produce the first unit
lo gb
n= , where b = learning percentage
log 2

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Learning curve tables

- Where learning percentage is know, the below table can be used to calculate estimated labor hours for a
specific unit or for cumulative groups of units
- We need only multiple the initial unit labor hour figure by the appropriate tabled value
- An alternative way to obtain the unit and cumulative factors is from the OSCM tools application
- Available at: http://oscm-pro.com/tools/

Learning curves: table of unit values

Managerial considerations in using learning curves

Managers should be aware of the following factors when using and interpreting learning curves:

1. Individual learning and incentives

2. Learning on new jobs vs old jobs → newer the job, the greater the improvement in labor hours and cost
3. Improvement comes from working smarter, not harder
4. Built-in production bias through suggesting any learning rate
5. Preproduction vs post production adjustments → learning depends on initial units of output and learning %
6. Changes in indirect labor and supervision
7. Changes in purchasing practices, methods, & organization structure → production rate → learning curve
8. Contract phase-out

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Chapter 7 - Service Processes

7.1 The nature of services

Services: activities that typically produce an intangible product

- Services cannot be patented

- Services typically require some degree of interaction with the customer
- Every service has a service package

Service package: a bundle of goods and services that is provided in some environment

The bundle consists of five features:

1. Supporting facility → the physical resource that must be in place before a service can be offered
2. Facilitating goods → the material purchased by the buyer
3. Information → operations data or information that is given to the customer in order to be able to efficiently
use the services (eg. weather reports)
4. Explicit services → benefits that are observable by the senses and that consist of the essential or intrinsic
features of the service (eg. air conditioning in a hotel room)
5. Implicit services → psychological benefits that the consumers may sense vaguely or the extrinsic features of
the service (eg. worry-free auto repair)

An operational classification of services

- Service organizations are mostly classified according to who the customer is and the service they provide

There are different degrees of customer / server contact:

- Customer contact: the physical presence of the c customer in the system

- Creation of the service: the work process involved in providing the service itself

- Extent of contact: a percentage of the time a customer must be in the system relative to the total time it
takes to perform the customer service

- High and low degree of customer contact: a concept that relates to the physical presence of the customer in
the system

Designing service organizations

- Services cannot be inventoried (cannot be stored) → important to consider when designing org.
- Too much capacity = excess costs
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 - Too little capacity = loss of customer
Structuring the service encounter: service-system design matrix

Buffed core: physical separation from a

customer

Permeable system: penetrable by the

customer via phone or face-to-face
contact

Reactive system: both penetrable and

reactive to customer’s requirements

According to the degree of customer service contact, sales opportunities, and production efficiency, the appropriate
way of designing the system service can be determined.

The six possibilities are:

1. Mail contact 4. Face-to-face tight specs

2. Internet and onsite technology 5. Face-to-face loose specs
3. Phone contact 6. Face-to-face total customization

● Service contact ranges from mail (minimal) to face-to-face (maximum). Matrix represents various degrees of
interaction,
● Production efficiency decreases as customer contact and influence increases. Face-to-face= high sales opp
but lower production efficiency. Lower contact methods = more efficient operations but offer limited sales
opport
● Internet buffers the company from the customer but offers opportunities for providing relevant information
systems and services
● Websites can intelligently react to customer input, creating significant sales opportunities. Can interfere with
real employees when necessary.

Marketing opportunities vs production efficiency

- Left side of the matrix: greater customer contact= greater sales opp. During service delivery
- Right side of the matrix: more customer influence= impact on production efficiency

Shifting position in the matrix

- Face-to face tight specs = situation with little process variation (fast food restaurants)
- Face to face loose specs = generally service process with options in performance or physical goods (full
service restaurants)
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 - Face to face total customization=service encounters where specifications are developed through customer
server interaction

Web platform business

- Service-system matrix developed from perspective of production system’s utilization of company resources

Web platform business: a firm that creates value by enabling the exchange of information and processing of
transactions between consumers and providers of a service or product

- Platform is on the internet

- Can be accessed on demand
- Provides the resources needed for information exchange and for carrying out transactions
- Platform business does not own inventory

- Examples: Facebook, Uber, Alibaba

- Connect parties interested in doing business but does not own G&S
- Shopping mall is also a platform business (uses brick and mortar locations instead of internet)
- Amazon = hybrid platform business because it supports straight sales of merchandise directly from its
warehouse but also goods listed by third-party sellers

- Servers as aggregators connecting users via

the internet
- Values of internet: large scale is possible

- Platform business creates value by

managing the transactions between the
consumers and the providers
- The transaction management is the
“factory” of this type of business
- Transactions are repeated in the same way
many times to exchange value
- Platform gets paid a small fee for providing
the service

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7.2 Service blueprinting and fail saving

Service blueprint: a flowchart of a process emphasizing what is visible and what is not visible to the customer

- Standard tool for service process design

- Emphasizes the importance of process design and sets a distinction between the high customer contact
aspects of the service and the activities that the customer doesn’t see
- A procedure that blocks the inevitable mistake from becoming a service defect is called a poka-yoke

Poka-yokes: procedures that prevent mistakes from becoming defects

- Poka-yokes can be applied to services too, and those applications can be classified into warning methods,
physical or visual contact methods, and the so called three-Ts which refers to:

1. Task to be done
2. Treatment accorded to the customer
3. Tangible or environmental features of the service facility

Poka-yokes can include: height bars at amusement parks; indented trays used by surgeons to ensure no instruments
are left in the patient; chains to configure waiting lines; take-a-number systems; turnstiles; beepers on ATms to warn
people to take their cards out of the machine; reminder calls for appointments

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7.3 Economics of the waiting line problem

- A major problem in service settings is the management of the waiting lines

- There is a dilemma of the cost of waiting and the added cost of providing more service
- Straightforward cost trade-off decisions: compare added costs to the value of time saved. Decisions
can be made in dollar terms. Eg. checkout stands
- Complex cost trade-off decisions: eg. waiting for a hospital bed. Cost: maintenance, difficulty in
quantifying the value of a patient's need for an unavailable bed. Challenge of placing dollar cost to a
human. Estimating lost hospital income.

The practice view of waiting lines

● Before looking at technical aspects, intuitive side is
necessary.

● Variable: number of arrivals over the hours when the service

is operational

Strategies to manage queues

There are several ways to manage queues:

1. Segmenting the customer

2. Training servers to be friendly
3. Informing your customers of what to expect
4. Trying to divert customer’s attention when waiting
5. Encouraging customers to come during slack periods

The queuing system

Queuing system: a process where customers wait in line for service

A queuing system contains three major components:

1. The source population and the way customers arrive at the time
2. The servicing system
3. The condition of the customers exiting the system (back to source population or not)

Customer arrivals

- Arrivals at a service system may be drawn from a finite or infinite population

A source population can be categorized into two categories

1. Finite population: a limited size customer pool that will use the service, and at times from a line

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 2. Infinite population: large enough in relation to the service system so that the population size caused by
subtractions or additions to the population doesn’t significantly affect the system probabilities
Distribution of arrivals

- When describing a waiting system, we need to define the manner in which customers or the waiting units are
arranged for service
- Waiting line formulas usually require an arrival rate

Arrival rate: the expected number of customers that arrive during each period

- A constant arrival distribution is periodic, with exactly the same time between successive arrivals
- Productive systems: the only arrivals approaching a constant interval period = subject to machine control
- Variable (random) arrival distributions are more common

Exponential distribution

- If arrivals at a service facility occur in a purely random fashion, a plot of the interarrival times yields an
exponential distribution

Exponential distribution: a probability distribution associated with the time

between arrivals

−λ t
f (t )= λ e

λ is the mean number of arrivals per time period

- The cumulative area beneath the curve is the summation of the equation over its positive range which is e− λt
- The integral allows us to compute the probabilities of arrivals within a specific time
- For example, for the case of one arrival per minute to a waiting line (λ=1), the following table can
be derived either by solving e− λt or by using app

Poisson Distribution

- Used when the arrival process is random

Poisson distribution: probability distribution for the number

of arrivals during each time period

n − λT
(λ T ) e
pT (n)=
n!

- Shows the probability of exactly n arrivals in time T

27
28
 Example:

If the mean arrival rate of units into a system is three per minute ( λ=3 ¿

We want to find the probability that exactly five units will arrive within a one-minute time period (n=5 ,T =1)

We have:

5 −3 ⋅1
(3 ⋅1) e 35 e−3
p1 (5)= = =2.025 e−3 =0.101
5! 120

Other arrival characteristics include:

1. Arrival patterns
2. Size of arrival unit (single or batch)
3. Degree of patience
○ Patient arrival
○ Impatient arrival (balking)
○ Impatient arrival (reneging)

Waiting lines and servers

- Queuing system consists primarily of waiting lines and the available number of servers
- Issues pertaining to waiting line characteristics and management, line structure, and service rate

Factors to consider with waiting lines include:

1. Length → infinite potential length or limited line capacity

2. Number of lines → single line or multiple lines
3. Queue discipline → priority rule(s) set for determining the order of
service to customers in waiting lines
4. The service rate → how fast they are served

29
Service time distribution

- Time the customer or unit spends with server once the service has started

Service rate: the number of customers a server can handle during a given time period

- If service times are random, they can be approximated using exponential distribution
- μ is the average number of units or customers that can be served per time period

Line structures

- Flow of items to be served may go through a single line, multiple lines, or mixture of the two

1. Single channel, single phase

○ Simplest type of waiting line
○ Example: one-person barber shop
2. Single channel, multiphase
○ Example: car wash
○ Series of services is performed in mostly
uniform sequence
3. Multichannel, single phase
○ Example: teller’s windows in a bank and
checkout counters
○ Uneven service time given each
customer results in unequal speed/flow
among lines
4. Multichannel, multiphase
○ Similar to previous one BUT two or more services are performed in sequence
○ Example: admission of patients in hospital
5. Mixed
a. Multiple to single channel structures
○ Lines that merge into one for single phase
○ Lines that merge into one for multiphase service
b. Alternative path structures
○ Similar to multichannel, multiphase but there may be switching from one channel to the next
after the first service has been rendered or the number of channels and phases may vary
after performance of the first service

Exiting the queuing system:

- Once served, two exit fates are possible

1. The customer may return to the source population and immediately become a competing candidate
for service again
2. There may be a low probability for reservice

30
Waiting line models

31
Examples of problems and solutions:
Problem 1: customers in line

Western National Bank is considering opening a drive-through window for customer service. Management
estimates that customers will arrive at the rate of 15 per hour. The teller who will staff the window can service
customers at the rate of 1 every 3 minutes or 20 per hour.

Part 1 - Assuming Poisson arrivals and exponential service, find:

1. The utilization of the teller
2. Average number in the waiting line
3. Average waiting time in the system, including service

Solution - part 1

1. The average utilization of the teller is (using Model 1 - Simple system)

λ 15
ρ= = =75 %
μ 20

2. The average number in the waiting line is

2
λ 15
Lq = = =2.25 customers
μ( μ−λ) 20(20−15)

3. The average number in the system is

λ 15
Ls = = =3 customers
μ−λ 20−15

4. Average waiting time in line is

Lq 2.25
W q= = =0.15 hour ,∨9 minutes
λ 15

5. Average waiting time in the system is

Ls 3
W s= = =0.2hour ,∨12 minutes
λ 15

Part 2 - Because of limited space availability and a desire to provide an acceptable level of service, the bank
manager would like to ensure, with 95% confidence, that no more than three cars will be in the system at any time.
- What is the present level of service for the three-car limit?
- What level of teller use must be attained?
- What must be the service rate of the teller to ensure the 95% level of service?

Solution - part 2

The present level of service for three or fewer cars is the probability that there are 0, 1, 2, or 3 cars in the system
From Model 1, Exhibit 7.12

32
 n
λ λ
Pn=(1− )( )
μ μ
15
At n=0 , P 0=(1− ) ¿
20
1
At n=1 , P1=( ) ¿
4
1
At n=2 , P2=( ) ¿
4
1
At n=3 , P3 =( ) ¿
4

The probability of having more than three cars in the system is 1.0 minus the probability of three or fewer cars
(100−68.4=31.6 %)
For a 95% service level of three or fewer cars, this states that P0 + P1 + P2 + P3=95 %

0 1 2 3
λ λ λ λ λ λ λ λ
0.95=(1− )( ) +(1− )( ) +(1− )( ) +(1− )( )
μ μ μ μ μ μ μ μ

[ ]
2 3
λ λ λ λ
0.95=(1− ) 1+ +( ) +( )
μ μ μ μ

λ
We can solve this by trial and error for values of .
μ

λ
If =0.50,
μ

0.95 ≟(1−0.5)(1+0.5+ 0.25+0.125)

0.95 ≠ 0.9375

λ
If =0.45,
μ

0.95 ≟(1−0.45)(1+0.45+0.203+ 0.091)

0.95 ≠ 0.96

λ
If =0.47,
μ

0.95 ≟(1−0.47)(1+0.47+ 0.221+0.104)

0.95 ≈ 0.9512

λ
Therefore, with the utilization ρ= of 47%, the probability of three or fewer cars in the system is 95%.
μ

λ
To find the rate of service required to attain this 95% service level, we simply solve the equation =0.47, where
μ

33
λ=¿ number of arrivals per hour

This gives μ=32 per hour

That is, the teller must serve approximately 32 people per hour (a 60% increase over the original 20-per-hour
capability) for 95% confidence that not more than three cars will be in the system

Perhaps service may be sped up by modifying the method of service, adding another teller, or limiting the types of
transactions available at the drive-through window. Note that with the condition of 95% confidence that three of
fewer cars will be in the system, the teller will be idle 53% of the time

Problem 2: Equipment selection

The Robot Company franchises combination gas and car wash stations throughout the United States. Robot gives a
free car wash for a gasoline fill-up or, for a wash alone, charges $5. Past experience shows that the number of
customers that have car washes following fill-ups is about the same as for a wash alone. The average profit on a
gasoline fill-up is about $7, and the cost of the car wash to Robot is $1. Robot stays open 14 hours per day.

Robot has three power units and drive assemblies, and a franchisee must select the unit preferred.

Unit 1 can wash cars at the rate of one every five minutes and is leased for $120 per day

Unit 2, a larger unit, can wash cars at the rate of one every four minutes but costs $160 per day

Unit 3, the largest, costs $220 per day and can wash a car in three minutes

The franchisee estimates that customers will not wait in line more than five minutes for a car wash. A longer time
will cause Robot to lose the gasoline sales as well as the car wash sale.

If the estimate of customer arrivals resulting in washes is 10 per hour, which wash unit should be selected?

Solution

Using unit 1, calculate the average waiting time of customers in the wash line ( μ for unit 1 = 12 per hour).

From the Model 2 - Constant Service TIme System equations,

For unit 2 at 15 per hour,

34
If waiting time is the only criterion, unit 2 should be purchased, But before we make the final decision, we must
look at the profit differential between both units.

With unit 1, some customers would balk and renege because of the 12.5 minute wait. And although this greatly
complicates the mathematical analysis, we can gain some estimate of lost sales with unit 1 by increasing
W q=5 minutes∨1 /12 hour (the average length of time customers will wait) and solving for λ .
This would be the effective arrival rate of customers:

Therefore, because the original estimate of λ was 10 per hour, an estimated 2 customers per hour will be lost. Lost
1
profit of 2 customers per hour x 14 hours x ($7 fill-up profit + $4 wash profit) = $154 per day
2

Because the additional cost of unit 2 over unit 1 is only $40 per day, the loss of $154 profit obviously warrants
installing unit 2

The original five-minute maximum wait constraint is satisfied by unit 2. Therefore, unit 3 is not considered unless
the arrival rate is expected to increase

Problem 3: Determining the number of servers

In the service department of the Glen-Mark Auto Agency, mechanics requiring parts for auto repair or service
present their request forms at the parts department counter

The parts clerk fills a request while the mechanic waits. Mechanics arrive in a random (Poisson) fashion at the rate
of 40 per hour and a clerk can fill requests at the rate of 20 per hour (exponential).

If the cost for a parts clerk is $30.00 per hour, and the cost for a mechanic is $60.00 per hour, determine the
optimum number of clerks to staff the counter.

(Because of the high arrival rate, an infinite source may be assumed)

35
 Solution
First, assume that three clerks will be used because having only one or two clerks would create infinitely long lines
(since λ=40 ,∧μ=20 ). The equations for Model 3—Multichannel System from Exhibit 7.12 will be used here. But
first we need to obtain the average number in line using the table of Exhibit 7.13. Using the table and values λ/μ =
2 and M = 3, we obtain Lq=0.889 mechanic

At this point, we see that we have an average of 0.889 mechanics waiting all day. For an eight-hour day at $60.00
per hour, there is a loss of a mechanic’s time worth 0.889 mechanic × $60.00 per hour × 8 hours = $426.72.

Our next step is to reobtain the waiting time if we add another parts clerk. We then compare the added cost of the
additional employee with the time saved by the mechanics. Again, using the table of Exhibit 7.13 but with M = 4,
we obtain:

This problem could be expanded to consider the addition of runners to deliver parts to mechanics; the problem
then would be to determine the optimal number of runners. This, however, would have to include the added cost
of lost time caused by errors in parts receipts. For example, a mechanic would recognize a wrong part at the
counter and obtain an immediate correction, whereas the parts runner might not.

Computer simulation of waiting lines

- Some waiting line problem that seem simple may be difficult or complicated to solve
- Been treating waiting lines as independent: either the entire system consists of a single phase, ore ach
service performed in a series is independent
- When a series of services is performed in sequence where the output rate of one becomes the input rate of
the next, we can no longer use simple formulas. Also true for problems where conditions don’t meet
requirements of equations
- The technique best suited to solving this type of problem is computer simulation

Examples:
- Simulation of trucking or airline systems. Here, [planned schedules can be simulated to better understand the
impact of traffic and different types of randomly occurring interruptions
- Simulation of factory production systems. Here the impact of such things as machine setups, breakdowns, or
working productivity variations can be analyzed

36
7.4 Practical information and formula overview

How to solve an exam question step-by-step:

1. Identify the appropriate waiting line model
2. Determine λ and μ
3. Identify the appropriate performance measure
4. Find the correct formula
5. Fill out the formula

Step 1: there are two waiting line model options

1. M/M/1, which refers to the arrival process
○ The first M stands for poisson distributed arrivals
○ The second M stands for negative exponential (random) service times
2. M/D/1, which refers to the service process
○ The M stands for poisson distributed arrivals
○ The D stands for deterministic (constant) service times

Step 2: determine λ and μ

- λ = mean number of arrivals per unit
- μ = mean number of people (or items) served per time period

Other important symbols are:

- N = number of arrivals
- T = the time period
- W q = the average queue time
- W s = the average time in the system
- Lq = the average queue length
- Ls = the average number of customers waiting in the system
- Po = the probability of idle service facility
- ρ = utilization

The formulas are:

M/M/1 formulas M/D/1

λ λ(2 μ− λ)
● Ls = ● Ls =
μ−λ 2 μ( μ−λ)
1 2 μ−λ
● W s= W s=
μ−λ ●
2
2 μ(μ−λ)
λ
● Lq = λ
2
μ( μ−λ) ● Lq =
λ 2 μ(μ− λ)
● W q=
μ (μ− λ) λ
● W q=
2μ¿¿

37
● ( μλ )
Pn >k =

38
Chapter 6 - Manufacturing Processes

6.1 Production Processes

Production process can be divided into three steps:

1. Sourcing the parts that are needed
2. Making the item
3. Shipping the item to the customer

Lead time: the time needed to respond to a customer order

● This time can range from a few years to only a few minutes

Customer order decoupling point: where inventory is positioned in the supply chain

● Allows processes or entities in the supply chain to operate independently

● Selection of decoupling points determines customer lead times and can impact inventory investment
● The closer this point is to the customer, the quicker the customer can be served
○ Trade-off: quicker response to customer demand = expense of greater inventory investment
■ Finished goods inventory is more expensive than raw material inventory
■ An item in finished goods inventory contains all raw materials needed to produce item

There are several points where the firm can position its customer order decoupling point:

1. Make-to-stock: the customer is served “on-demand” from finished goods inventory

○ CODP is located very close to the customer
○ Customer lead time is short, inventory investment is high, degree of customization is low

2. Assemble-to-order: pre-assembled components are put together in response to a specific customer order
○ CODP is located slightly further away from the customer than the make-to-stock firm
○ Customer lead time to is still short but a bit longer, inventory investment is still high but slightly
lower, degree of customization is a bit higher

3. Make-to-order: product is built directly from raw materials and components in response to a customer order
○ The CODP is located closer to the source
○ Customer lead time is quite long, inventory investment is lower, degree of customization is higher

4. Engineer-to-order: firm works with customer to design the product, which is then made from purchased
material, parts, and components
○ The CODP is located far from the customer and close to the source
○ Customer lead time is long, inventory investment is low, degree of customization is very high

39
 ● Depending on the environment and the location of the CODP, one would expect inventory concentrated in
finished goods, work-in-process, manufacturing raw material, or at the supplier

The following image shows where CODPs are positioned in what type of firms:

Lean manufacturing: to achieve high customer service with minimum levels of inventory investment

● Many make-to-stock firms invest in lean manufacturing programs to achieve higher service levels for a given
inventory investment
● Focus in make-to-stock environment: providing finished goods where and when the customers want them

Challenges:

● Make-to-stock: balance the level of finished inventory against the level of service to the customer
● Assemble-to-order: define a customer’s order in terms of alternative components and options
○ These components are carried in inventory so needs high flexibility

Calculating total number of combinations in an assemble-to-order firm:

Total number of combinations=N 1 ∙ N 2 ∙.... ∙ N n

● Focus in make-to-order and engineer-to-order environments is managing the capacity of critical resources
40
6.2 Production Process Mapping and Little’s Law

Make-to-stock process map

1. Material is purchased from a set of suppliers

2. Initially staged in raw material inventory
3. Material is used in a manufacturing process where the product is fabricated
4. Product is put into finished goods inventory
5. Shipped according to orders received from customers

● Material in a process is in one of two states

1. In transit: material is moving; referred to as “work-in-process” inventory
2. Buffer: sitting in inventory waiting to be used: allows different entities to operate independently

Total average value of inventory: the total investment in inventory at the firm, which includes raw material, work-in-
process, and finished goods

● Commonly tracked in accounting systems and reported in the firm’s financial statements
● Useful for accounting purposes but not for evaluating the performance of a process
● A better way to measure this is inventory turn

Inventory turn: an efficiency measure where the cost of goods sold is divided by the total average value or inventory

cost of goods sold

Inventory turn=
total average value of inventory

● This provides a relative measure that has some comparability (across similar firms)

● A measure directly related is days-of-supply

Days of supply: a measure of the number of days of supply of an item

● Inverse of inventory turn scaled to days

41
 ● Simple systems can be analyzed quickly using Little’s law

Little’s law: mathematically relates inventory, throughput, and flow time

The relationship is: Inventory=Throughput rate ⋅ Flow time

Throughput: is the long-term average rate that items are flowing through the process

Flow time: is the time that it takes a unit to flow through the process from beginning to end

● Inventory is measured in pieces

● Flow time in days
● Throughput in pieces per day

Example 6.1: Car batteries

An automobile company assembles cars in a plant and purchases batteries from a vendor in China. The average
cost of each battery is $45. The automobile company takes ownership of the batteries when they arrive at the
plant. It takes exactly 12 hours to make a car in the plant, and the plant assembles 200 cars per 8-hour shift
(currently, the plant operates one shift per day). Each car uses one battery. The company holds, on average, 8,000
batteries in raw material inventory at the plant as a buffer. Assignment: Find the total number of batteries in the
plant on average (in work-in-process at the plant and in raw material inventory). How much are these batteries
worth? How many days of supply are held in raw material inventory on average?

Solution
We can split this into two inventories: work-in-process and raw material. For the work-in-process, Little’s law can
be directly applied to find the amount of work-in-process inventory:

Inventory=throughput ∙ flow time

Throughput is the production rate of the plant, 200 cars per 8-hour shift or 25 cars per hour. Since we use one
battery per car, our throughput rate for the batteries is 25 per hour. Flow time is 12 hours, so the work-in-process
is

Work ∈ process inventory=25 batteries per hour ∙12 hours=300 batteries

We know from the problem that there are 8,000 batteries in raw material inventory, so the total number of
batteries in the pipeline on average is

Total inventory =8,000+300=8,300 batteries

These batteries are worth 8,300 ∙ $ 45=$ 373,500

The days of supply in raw material inventory is equal to the “flow time” for a battery in raw material inventory (or
the average amount of time that a battery spends in raw material inventory). Here, we need to assume that the
batteries are used in the same order they arrive. Rearrange our Little’s law formula to

42
 inventory
Flow time=
throughput

8,000 batteries
So, flow time= =40 days , which represents a 40−day supply of inventory
2,000 batteries per day

6.3 How Production Processes are Organized

Process selection involves the strategic decision of selecting what type of production processes to use in order to
produce a product or provide a service.

Five basic production process structures:

1. Project layout: used for large products produced in a fixed location where labor, materials, and equipment
are brought to the product

2. Workcenter layout (job shop): process with similar equipment and flexibility to be able to produce a variety
of products

3. Manufacturing cell: dedicated area where a group of similar products are being produced

4. Assembly line: an area where the work process is arranged in order of the progressive steps by which the
product is made

5. Continuous process: similar to the assembly line, but here the products flow in a continuous process

These process structures can be summarized in the project-process matrix: a framework depicting when the
different production process types are typically used, depending on product volume and how standardized the
product is

● It is desirable to design processes along the diagonal

43
Designing a production system

Project layout
● Visualize the product as the hub of a wheel with materials and equipment arranged concentrically around the
production point in the order of use and movement difficulty
● A high degree of task ordering is common → may be developed according to their assembly priority
○ Eg. manufacturing may follow a rigid sequence (from the ground up in a building-block fashion)
Workcenters
● Arrange in a way that optimizes the movement of material
● Is sometimes referred to as a department (focused on one type of operation)
● Optimal placement often means placing work-centers with large amounts of interdepartmental traffic
adjacent to each other

Manufacturing cells
● Formed by allocating dissimilar machines to cells that are designed to work on products that have similar
shapes and processing requirements

The process used to develop a manufacturing cell can be broken down into three distinct steps:

1. Group parts into families that follow a common sequence of steps

○ Classify parts by using some type of coding system
○ This part shows the routing of parts when a conventional workcenter based layout is used
○ Parts are routed through the individual workcenters to be produced

2. Next, dominant flow patterns are identified for each part family
○ Used as the basis for allocating equipment to the manufacturing cells

3. Machines and the associated processes are physically regrouped into cells
○ Often, there will be parts that cannot be associated with a family and specialized machinery that
cannot be placed in any single cell because of its general use
○ These unattached parts and machinery are placed in a ‘remainder cell’

44
45
6.4 Assembly-Line Design

Workstation cycle time: the time between successive units coming off the end of an assembly line

● At each workstation, work is performed on a product either by adding parts or by completing assembly
operations
● The work performed at each station is made of of many bits of work, termed tasks
● The total work to be performed at a workstation is equal to the sum of the tasks assigned to that workstation

Assembly line balancing: the problem of assigning tasks to a series of workstations so that the required cycle time is
met and idle time is minimized

● The problem is complicated by the relationships among tasks imposed by product design and process
technologies (called the precedence relationship)

Precedence relationship: the required order in which tasks must be performed in an assembly process

The following steps can be followed to balance an assembly line:

1. Define the subsequent relationships between tasks by using a precedence diagram

2. Determine the needed workstation cycle time (c) by calculating:

Production time per day

C=
Required output per day (¿ units)

3. Calculate the theoretical number of workstations (Nt) needed to satisfy the workstation cycle time constraint

Nt=
∑ of task×(T )
Cycle time(C )

4. Choose a primary rule by which tasks are assigned to workstations and a secondary rule in the case ties need
to be broken
5. Assign the tasks one by one to the workstations until the sum of the task times are equal to the workstation
cycle time calculated in step 2, until no other tasks are possible due to time restrictions
6. Asses the efficiency of the balance by calculating

Efficiency=
∑ of task×(T )
Number of workstations(N α )⋅Workstation cycle time(C)

7. If the balance is not efficient enough, rebalance it using a different decision rule

Example given on page 183-185 of the book

46
Splitting tasks

● Often, the longest required task time defines the shortest possible workstation cycle time for the production
line
● This task time is the lower time bound unless it is possible to split the tasks into two or more workstations

There are several ways to accommodate a specific length task:

1. Split the task

2. Share the task
3. Use parallel workstations
4. Use a more skilled worker
5. Work overtime
6. Redesign

Other possibilities to reduce the task time include an equipment upgrade, a roaming helper to support the line, a
change of materials, and multiskilled workers to operate the line as a team rather than as independent workers.

Flexible and U-Shaped line layouts

● Assembly-line balances frequently result in unequal workstation times

● Flexible line layouts are a common way of dealing with this problem

47
Chapter 6A - Break-even analysis

● Choice of which specific equipment to use in a process is often based on an analysis of cost trade-offs
● Often a trade-off between more and less specialized equipment
○ Less specialized equipment (general purpose) can be used in many different ways
○ More specialized equipment (special purpose) is often available as an alternative to a general-
purpose machine

Eg. Drilling holes in a piece of metal

● General purpose machine may be a simple hand drill
● Special purpose machine would be a drill press
○ The drill press will be much faster but much more expensive
○ Trade-offs involve the cost of the equipment, the setup time, and the time per unit

● Standard approach to choosing among alternative processes or equipment is a break-even analysis

● Break-even chart visually presents alternative profits and losses due to the number of units produced or sold
● Choice depends on anticipated demand

Example
Suppose a manufacturer has identified the following options for obtaining a machined part: It can buy the part at
$200 per unit (including materials); it can make the part on a numerically controlled semi automatic lathe at $75
per unit (including materials); or it can make the part on a machining center at $15 per unit (including materials).
There is negligible fixed cost if the item is purchased; a semiautomatic lathe costs $80,000; and a machining center
costs $200,000.

The total cost for each option is

Purchase cost=$ 200 ∙ demand

Produce usinglathe cost=$ 80,000+ $ 75∙ demand
Produce usingmachine center cost=$ 200 , 00+$ 75∙ demand

Solution
Whether we approach the solution to this problem as cost minimization or profit maximization really makes no
difference as long as the revenue function is the same for all alternatives. Exhibit 6A.1 shows the break-even point
for each process. If demand is expected to be more than 2,000 units (point A), the machine center is the best
choice because this would result in the lowest total cost. If demand is between 640 (point B) and 2,000 units, the
semi automatic lathe is the cheapest. If demand is less than 640 (between 0 and point B), the most economical
course is to buy the product.

The break-even point A calculation is

$ 80,000+ $ 75 ∙ demand=$ 200,000+ $ 15

48
 120,000
Demand ( point A )= =2,000units
60
Break-even chart of alternative processes

The break-even point B calculation is:

$ 200 ∙ demand=$ 80,000+ $ 75 ∙ demand

80,000
Demand ( point B)= =640 units
125

Consider the effect of revenue, assuming the part sells for $300 each. As Exhibit 6A.1 shows, profit (or loss) is the
vertical distance between the revenue line and the alternative process cost at a given number of units. At 1,000
units, for example, maximum profit is the difference between the $300,000 revenue (point C) and the
semiautomatic lathe cost of $155,000 (point D). For this quantity, the semi automatic lathe is the cheapest
alternative available. The optimal choices for both minimizing cost and maximizing profit are the lowest segments
of the lines: origin to B, to A, and to the right side of Exhibit 6A.1, as shown in green.

49
 Example 2
An automobile manufacturer is considering a change in an assembly line that should save money by reducing labor
and material cost. The change involves the installation of four new robots that will automatically install
windshields. The cost of the four robots, including installation and initial programming, is $400,000. Current
practice is to amortize the initial cost of the robots over two years on a straight-line basis. The process engineer
estimates that one full-time technician will be needed to monitor, maintain, and reprogram the robots on an
ongoing basis. This person will cost approximately $60,000 per year. Currently, the company uses four full-time
employees on this job and each makes about $52,000 per year. One of these employees is a material handler, and
this person will still be needed with the new process. To complicate matters, the process engineer estimates that
the robots will apply the windshield sealing material in a manner that will result in a savings of $0.25 per
windshield installed. How many automobiles need to be produced over the next two years to make the new robots
an attractive investment? Due to the relatively short horizon, do not consider the time value of money.

Solution
The cost of the current process over the next two years is just the cost of all four full-time employees

$ 52,000 per employee ∙ 4 employees ∙ 2 years=$ 416,000

The cost of the new process over the next two years, assuming the robot is completely costed over that time is

($ 52,000 per material handler ∙ $ 60,000 per technician)∙ 2+ $ 400,000 per robots−$ 0.25 ∙ autos

Equating the two alternatives:

$ 416,000=$ 624,000−$ 0.25 ∙ autos

Solving for the break-even point:

$ 208,000
=832,000 autos
$ 0.25

For more examples refer to page 204 of the book

50
51
Chapter 10 - Quality management and six sigma

10.1 Total Quality Management (TQM)

Total quality management (TQM): managing the entire organization so that it excels on all dimensions of products
and services that are important to the customer

● It has two main operational goals:

1. Careful design of the product or service
2. Assurance that the organization’s systems can consistently produce the design

● These goals can only be achieved if truly the whole organization makes an effort to reach them

Malcolm Baldrige National Quality award (1987): an award established by the US department of commerce given
annually to companies that excel in quality

Quality specifications and quality costs

● Fundamental to any quality program is the determination of quality specifications and the costs of achieving
(or not achieving) those specifications

Developing quality specifications

● The quality specifications of a product or service derive from decisions and actions made relative to the
quality of its design and the quality of its conformance to that design

Design quality: the inherent value of the product in the marketplace

Dimension Meaning

Performance Primary product or service characteristics

Features Added touches, bells and whistles, secondary characteristics

Reliability/durability Consistency of performance over time, probability of failing, useful life

Serviceability Ease of repair

Aesthetics Sensory characteristics (sound, feel, look, and so on)

Perceived quality Past performance and reputation

● A firm designs a product or service with certain performance characteristics and features based on what an
intended market expects
● Materials and manufacturing process attributes can greatly impact the reliability and durability of a product

52
Conformance quality: the degree to which the product or service design specifications are met

Quality at the source: making the person who does the work responsible for ensuring that specifications are met

Dimensions of quality: criteria by which quality is measured

Cost of quality

Cost of quality (COQ): expenditures related to achieving product or service quality, such as the costs of prevention,
appraisal, internal failure, and external failure

Three basic assumptions justify an analysis of the costs of quality:

1. Failures occur
2. Prevention is cheaper
3. Performance can be measured

The cost of quality can be classified into four types:

1. Appraisal costs: costs of inspecting, testing, & other task that make sure that the product or process is
correct
2. Prevention costs: the sum of all costs that are related to defects prevention
3. Internal failure costs: the costs related to fixing defects within the system
4. External failure costs: the costs related to fixing the defects that pass through the system

10.2 ISO 9000 and ISO 14000

● ISO 9000 and ISO 14000 are formal international quality standards for certification
○ ISO 9000 is concerned with B2B dealing requirements
○ ISO 1400 is concerned with environmental management
● Through planning while using these standards and the application of best practices throughout the entire
organization, defects can be prevented

ISO 9000: formal standards for quality certification developed by the international organization for standardization

The ISO 9000 standards are based on seven quality management principles:

1. Customer focus 5. Continual improvement

2. Leadership 6. Factual approach to decision making
3. Involvement of people 7. Mutually beneficial supplier relationships
4. Process approach

● There are three forms of certification:

1. First party: a firm audits itself against ISO 9000 standards
2. Second party: a customer audits its supplier

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 3. Third party: a qualified national or international standards or certifying agency serves as an auditor

External benchmarking for quality improvement

● Previous quality improvement approaches described are mostly inward looking

● They seek to make improvements by analyzing in detail the current practices of the company itself

External benchmarking: looking outside the company to examine what excellent performers inside and outside the
company’s industry are doing in the way of quality

Benchmarking typically involves the following steps:

1. Identify processes needing improvement

○ Identify a firm that is the world leader in performing the process
○ Contact the managers of that company and make a personal visit to interview managers and workers
○ Many companies select a team of workers from that process as part of the team of visitors
2. Analyze data
○ Looking at gaps between your company and benchmarking company
○ Two aspects of the study: (1) comparing the actual processes; (2) comparing the performance
according to a set of measures

10.3 Six sigma quality

Six sigma: a statistical term to describe the quality goal of no more than 3.4 defects out of every million units. Also
refers to a quality improvement philosophy and program

Defect: any component that does not fall within the customer’s specification limits

● Each step or activity in a company represents an opportunity for defects to occur and Six Sigma programs
seek to reduce the variation in the processes that lead to these defects
● Six SIgma advocates see variation as the enemy of the quality
● A process that is in Six Sigma control will produce no more than two defects out of every billion units

● A benefit of Six Sigma thinking is that it allows managers to readily describe the performance of a process in
terms of its variability and to compare different processes using a common metric called defects per million
opportunities

Defects per million opportunities (DPMO): a metric used to describe the variability of a process

The calculation requires three pieces of data:

1. Unit: the item produced or being serviced

2. Defect: any item or event that does not meet the customer’s requirements
3. Opportunity: a chance for a defect to occur

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55
It can be calculated as follows:

Number of defects
DPMO= ⋅1,000,000
Number of opportunities for error per unit ⋅number of units

Example
The customers of a mortgage bank expect to have their mortgage applications processed within 10 days of filing.
This would be called a critical customer requirement, or CCR, in Six Sigma terms. Suppose all defects are counted
(loans in a monthly sample taking more than 10 days to process), and it is determined that there are 150 loans in
the 1,000 applications processed last month that don’t meet this customer requirement. Thus, the DPMO =
150/1,000 × 1,000,000, or 150,000 loans out of every million processed that fail to meet a CCR. Put differently, it
means that only 850,000 loans out of a million are approved within time expectations. Statistically, 15 percent of
the loans are defective and 85 percent are correct. This is a case where all the loans processed within 10 days meet
our criteria. Often, there are upper and lower customer requirements rather than just a single upper requirement
as we have here.

Six Sigma methodology

● Statistical tools are employed in a systematic project-oriented fashion through the define, measure, analyze,
improve, and control (DMAIC) cycle
● The overarching focus of the methodology is is understanding and achieving what the customer wants

DMAIC is an acronym for the improvement methodology of six sigma. It stands for:

1. Define: identify the problem, define the requirements, and set the goals
2. Measure: gather the data, refine the problem, and measure the inputs and outputs
3. Analyze: develop problem hypotheses, identify the root causes, and validate hypotheses
4. Improve: develop improvement ideas, test, establish a solution, and measure the results
5. Control: establish performance standards and deal with any problems

Or else in more detail:

1. Define (D)
○ Identify customers and their priorities
○ Identify a project suitable for Six Sigma efforts based on business objectives as well as customer
needs and feedback
○ Identify critical-to-quality characteristics that the customer considers to have most impact on quality
2. Measure (M)
○ Determine how to measure the process and how it is performing.
○ Identify the key internal processes that influence CTQs and measure the defects currently generated
relative to those processes
3. Analyze (A)
○ Determine the most likely causes of defects.

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 ○ Understand why defects are generated by identifying the key variables that are most likely to create
process variation.

4. Improve (I)
○ Identify means to remove the causes of defects.
○ Confirm the key variables and quantify their effects on the CTQs.
○ Identify the maximum acceptance ranges of the key variables and a system for measuring deviations
of the variables.
○ Modify the process to stay within an acceptable range

5. Control (C)
○ Determine how to maintain the improvements
○ Put tools in place to ensure that the key variables remain within the maximum acceptance ranges
under the modified process

Analytical tools for Six Sigma

Flow charts (define stage)

● Many types of flow charts
● The one in shown depicts the process steps are part
of a SIPOC (supplier, input, process, output,
customer) analysis which in essence is a formalized
input-output model at the define stage

Run charts (define stage)

● Depict trends in data overtime
● Help companies understand the magnitude of a
problem at the define stage

Pareto charts (measure)

● Help breakdown a problem into the relative contributions of its components
● Based on the common empirical finding that a large % of problems are due to a
small % of causes

57
58
Checksheets
● Basic forms that help standardize data collection
● Used to create diagrams such as shown on the Pareto
chart

Cause-and-effect diagrams (analyze)

● Also known as fishbone diagrams
● Show hypothesized relationships between potential
causes and the problem under study
● Once the C&E diagram is constructed, the analysis would
proceed to find out which of the potential causes were in
fact contributing to the problem

Opportunity flow diagram

● Used to separate value-added from non-value-added steps in
a process

Process control charts

● These are time-sequenced charts showing plotted values
of a statistic, including a centerline average and one or
more control limits
● Used to assure that processes are in statistical control

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Other tools that have seen extensive use in Six Sigma projects are failure mode and effect analysis (FMEA) and design
of experiments (DOE)

Failure mode and effect analysis

● A structured approach to identify, estimate, prioritize, and evaluate the risk of possible failures at each stage
of a process
● Begins with identifying each element, assembly, or part of the process and listing the potential failure modes,
potential causes, and effects of each failure
● A risk priority number (RPN) is calculated for each failure mode
● It is an index used to measure the rank importance of the items listed in the FMEA chart

● Conditions include: (1) the probability that the failure takes place (occurrence), (2) the damage resulting from
the failure (severity), (3) the probability of detecting the failure in-house (detection)

● High RPN items should be targeted for improvement first

● The FMEA suggest a recommended action to eliminate the failure condition by assigning a responsible person
or department to resolve the failure by redesigning the system, design, or process and recalculating the RPN

Design of experiments (DOE)

● Sometimes referred to as multivariate testing
● Statistical methodology used for determining the C&E relationship between process variables (Xs) and the
output variable (y)
● In contrast to standard statistical tests, DOE permits experimentation with many variables simultaneously by
carefully selecting a subset of them

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10.4 Statistical quality control

Statistical quality control (SQC): a number of different techniques designed to evaluate quality from a conformance
view

● SQC from a conformanceview: how well are we doing at meeting the specifications that have been set during
the design of the parts or services that we are providing?
● Managing quality performance using SQC techniques usually involves periodic sampling of a process and
analysis of these data using statistically derived performance criteria
● SQC can be applied to logistics, manufacturing, and service processes

Examples of where SQC can be applied:

● How many paint defects are there in the finish of a car? Have we improved our painting process by installing
a new sprayer?
● How long does it take to execute market orders in our web-based trading system? Has the installation of a
new server improved the service? Does the performance of the system vary over the trading day?

● Processes that provide goods and services usually exhibit some variation in their output
● This variation can be caused by many factors (controllable and uncontrollable)

Assignable variation: deviation in the output of a process that can be clearly identified and managed

Common variation: deviation in the output of a process that is random and inherent in the process itself

Calculating the mean: Calculating standard deviation: Where:

n
σ =√ ❑ x i=observed value
∑ xi n=total number of observed values
X = i =1
❑

Understanding and measuring process variation

● Generally accepted that as variation is reduced, quality is improved but it is impossible to have 0 variation

Upper and lower specification limits: the range of values in a measure associated with a process that is allowable
given the intended use of the product or service

● A traditional way of interpreting such a specification is that any part that falls within the allowed range is
equally good, whereas any part falling outside the range is totally bad

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Process capability

A traditional view of the cost of variability Taguchi’s view of the cost of variability

● Taguchi argued that being within specification is not a yes/no decision, but rather a continuous function

Process capability with a shift in the process mean

Capability Index (Cpk)

Capability index (Cpk): the ratio of the range of values allowed by the design specifications divided by the range of
values produced by the process

● If the specification limits are larger than the three sigma allowed in the process, the mean of the process can
be allowed to drift off-center before readjustment, and a high percentage of good parts will still be produced
● The capability index is the position of the mean and tails of the process relative to design specifications
● The more off-center, the greater the chance to produce defective parts
● Because the process mean can shift in either direction, the direction of shift and its distance from the design
specification set the limit on the process capability
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 ● The direction of the shift is toward the smaller number

Formally stated, the capability index is calculated as the smaller of the two numbers as follows:

C pk =min
[ X−LSL USL− X
3σ
∨
3σ ]
10.5 Statistical process control procedures

● Process control is concerned with monitoring quality while the product or service is being produced
● Typical objectives of process control plans are to provide timely information whether currently produced
items are meeting design specifications and to detect shifts in the process that signal that future products
may not meet specifications

Statistical process control (SPC): techniques for testing a random sample of output from a process to determine
whether the process is producing items within a prescribed range

Attributes: quality characteristics that are classified as either conforming or not conforming to specifications

● Goods or services may be observed to be either good or bad, or functioning or malfunctioning

Two types of sampling

1. Sampling by attributes
2. Sampling by variables

Process control with attribute measurements: using p-charts

● Measurements by attributes means taking samples and using a single decision (the item is good or bad)
○ Yes or no decision so can use simple statistics to create a p-chart with a UCL and LCL

p=total number of defective units ¿ all samples Where: ¿

number of samples ∙ sample ¿ ¿ ¿
● p is the fraction defective
S p= √ ❑ s p is the standard deviation
●

UCL= p+ z s p ● n is the sample size

● z is the number of standard deviations, the Z-
LCL= p−z s p∨0 if less than 0 score, for a specific confidence

Process control chart evidence for investigation

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Size of the sample:
● Must be large enough to
allow counting of the
attribute
● A rule of thumb when setting
up a p-chart is to make the
sample large enough to
expect to count the attribute
twice in each sample

Process control with attribute measurements: using c-Charts

● Times when the product or service can have more than one defect
● When it is desired to monitor the number of defects per unit, the c-chart is appropriate
● The underlying distribution for the c-chart is the Poisson, which is based on the assumption that defects
occur randomly on each unit
● If c is the number of defects for a particular unit, then c is the average number of defects per unit, and the
standard deviation is √ ❑
● For the purposes of our control chart, we use the normal approximation to the Posson distribution and
construct the chart using the following control limits:

c = average number of defects per unit

Sc = √ ❑

UCL=c+ z √ ❑

LCL=c−z √ ❑
Process control with variable measurements: using X - and R-Charts

● X and R- (range) charts are widely used in statistical process control

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 ● In attribute sampling, we determine whether something is good or bad, fits or doesn’t fit

Variables: quality characteristics that are measured in actual weight, volume, inches, centimeters, or other measure
units

● In variables sampling, however, we measure the actual weight, volume, number of inches or other variable
measurements, and we develop control charts to determine the acceptability or rejection of the process
based on those measurements

There are four main issues to address in creating a control chart:

1. Size of samples
2. Number of samples
3. Frequency of samples
4. Control limits

How to construct X - and R-charts

If the standard deviation of the process distribution is known, the X -chart may be defined

UC L X= X + z S X and LC L X =X −z S X

S X =s/ √ ❑ : Standard deviation of sample means

s: Standard deviation of the process distribution
n: Sample size
X: Average of sample means or a target value set for the process
z: Number of standard deviations for a specific confidence (typically, z=3)

These pages were super different from the lecture and difficult to take notes on; refer to page 330 of the book

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Chapter 12 - Lean supply chains

12.1 Lean production

● Lean production is one of the most important operations and supply chain approaches

Lean production: integrated activities designed to achieve high-volume, high-quality production using minimal
inventories of raw materials, work-in-process, and finished goods

● The goal is to improve the supply chain in such a way that as much as waste as possible is eliminated

Customer value (in the context of lean production): everything that the customer is willing to pay for

● Value-adding activities transform materials and information into something that the customer wants
● Non-value-adding activities consume resources and do not directly contribute to the end result desired by
the customer

Waste: anything that does not add value from the customer’s perspective

Within the lean philosophy, seven types of waste that should be eliminated from the supply chain can be identified:

1. Waste from producing too much 5. Processing waste

2. Waste of waiting time 6. Waste of motion
3. Transportation waste 7. Waste from product defects
4. Inventory waste

● Waste elimination is a common goal in service operations and manufacturing operations

● Manufacturing operations are more controllable (uncertainty does result from material and labor inputs but
those can be anticipated and controlled to a greater extent)
● However, there is a difference between service operations and manufacturing operations in the sources of
variation that cause their waste

These sources are:

1. Uncertainty in task times: the task times within manufacturing operations are often fixed. However, every
service is unique, therefore there can be variation between service task times.

2. Uncertainty in demands: no forecast of demand is completely accurate. A manufacturer can deal with this by
storing its products in its inventory, but a service operator can't do that

3. Customer’s production of roles: in services, customers have an influence on the production of a service, so
there is a variety in how well the service provider performs its task

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 ● Lean production and Six Sigma works best when its operations are standardized and repeatable
● While services can be repeatable, it is hard to standardize them due to their uncertain nature
○ Eg. airlines → weather → demand uncertainty → canceled flights and rebooked passengers
● A price to being lean and the price is often at the expense of customer service when unlikely events occur

Lean production pull system

● In lean production, parts arrive at the next workstation just-in-time and are completed and move through the
process quickly
● Based on logic that nothing will be produced until needed → production need is created by actual demand
● Lean production needs high levels of quality at each stage of the process, strong vendor relationships, and a
fairly predictable demand for the end product

The Toyota Production system

● The lean philosophy originates from Japan within the firm Toyota (benchmark for lean manufacturing)
● It was developed to improve the quality and productivity and is based on two important values from the
Japanese culture: respect for other people and the elimination of waste

1. Elimination of waste
○ Waste is anything that is not absolutely essential to production
○ An expanded lean definition identifies the seven types of waste

2. Respect for people

○ Permanent workers have job security & level payrolls → more flexible, remain with a company, and
do everything in their power to help a company achieve its goals
○ Management views employees as assets, not as human machines
○ Relies heavily on subcontractor networks
○ Firms have long-term partnerships with their suppliers and customers
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12.2 Lean supply chains

● Customer value (considered from the entire supply chain) should center on the perspective of the end
customer with the goal being to maximize what the customer is willing to pay for a firm’s goods and services

Value stream: the value-adding and non-value adding activities required to design, order, and provide a product from
concept to launch, order to delivery, and raw materials to customers

● All inclusive view of the system = expansion of scope of and application of lean concepts created by Toyota

Waste reduction: the optimization of value-adding activities and elimination of non-value-adding activities that are
part of the value stream

Different components of a supply chain and what would be expected using a lean focus:

1. Lean suppliers
○ Able to respond to changes
○ Prices are generally lower (efficiency of lean processes)
○ Quality has improved to the point that incoming inspection at the next link is not needed
○ Deliver on time
○ Culture is one of continuous improvement
○ Businesses must include them in value stream planning

2. Lean procurement
○ A key to lean procurement is automation
■ E-procurement relates to automatic transaction, sourcing, bidding, and auctions using web-
based applications, and the use of software that removes human interaction and integrates
with the financial reporting of the firm
○ Another important aspect is visibility
■ Suppliers must be able to “see” into the customers’ operations
○ The overlap of these processes needs to be optimized to maximize value from the end-customer
perspective

3. Lean manufacturing
○ Lean manufacturing systems produce what the customers want, in the quantity they want, when
they want it, and with minimum resources
○ Applying these concepts presents opportunities for cost reduction and quality improvement

4. Lean warehousing
○ Relates to eliminating non-value-added steps and waste in product storage processes
○ Typical functions include: (1) receiving material; (2) storing; (3) replenishing inventory; (4) picking
inventory; (5) packing for shipment; (6) shipping

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 ○ Waste can be found in many warehousing processes such as: (1) shipping defects; (2)
overproduction or over shipment; (3) excess inventory; (4) excess motion and handling; (5) waiting
for parts; (6) inadequate information systems
5. Lean logistics
○ Lean concepts can be applied to the functions associated with movement of material through system
○ Some of the key areas include:
■ optimized mode selection and pooling orders
■ combined multi stop truckloads
■ optimized routing
■ cross docking
■ import/export transportation processes
■ backhaul minimization
○ The logistics functions need to be optimized by eliminating non-value-adding activities while
improving the value-adding activities

6. Lean customers
○ Lean customers have a great understanding of their business needs and specify meaningful
requirements
○ They value speed and flexibility and expect high levels of delivery performance
○ Interested in establishing effective partnerships with their suppliers
○ Expect value from they products they purchase and provide value to their customers

Benefits of a lean supply chain:

● Primarily in the improved responsiveness to the customer

● As business conditions change, the supply chain adapts to dynamic needs
● The ideal is a culture of rapid change with a bias for change when it is needed
● The reduced inventory inherent in a lean supply chain reduces obsolescence and reduces flow time through
the value-added processes
● The reduced cost along with improved customer service allows the firms a significant competitive advantage

12.3 Value stream mapping

Value stream mapping (VSM): a graphical way to analyze where value is or is not being added as material flows
through a process

● Valuable for the development of lean processes

● Technique is used to visualize product flows through various processing steps
● Also illustrates information flows that result from the process and information used to control flow

● Value stream map identifies all process that materials are subjected to within a plant, from raw material
coming into the plant, through delivery to the customer

● Creating a lean process requires a full understanding of the business

● Includes: production processes, material flows, and information flows
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Manufacturing process map

- Starting from the left, we see that

material is supplied on a weekly
basis and deposited in a raw
material inventory indicated by
the triangle
- The average level for this
inventory is 2,500 units
- Material is run through a 5 step
process consisting of machining,
drilling, cleaning, inspection, and
packaging
- Under each of these process
symbols is the activity cycle time
(CT), changeover time (C/O), lot
size, available number of seconds
per day, and percent uptime
- The cleaning activity is a multistep process where items are handled on a first come, first served basis
- In between each process are inventory buffers with the average inventory in these buffers depicted
- Material flows through the process at an average rate of 504 pieces/day over 20 days of operation per month

- Information flows are shown on the map

- The production control issues monthly demand forecasts, weekly orders to the supplier, and a weekly
production schedule that is managed by the supervisor on a daily basis
- Monthly forecasts are provided by the customer and they place their order on a weekly basis
- The timeline at the bottom shows the processing time for each production activity (in seconds) together with
the average inventory wait time
- Adding these times together gives an estimate of the lead time throughout the entire system

- VSM symbols are somewhat standardized, but there are many variations

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 ● Value stream mapping is a two part process
1. Depicting the current state of the process
2. Depicting a possible future state

Analysis showing potential areas for improvement

● In this map, we see a completely

redesigned process where the
individual production operations
have been combined into a
workcell operated by three
employees
● Rather than “pushing” material
through the system based on
weekly schedules generated by
production control, the entire
process is converted to a pull
system operated directly in
response to customer demand
● Note: the lead time in the new
system is only 5 days compared to
the 34-day lead time with the old
system

Kaizen: Japanese philosophy that focuses on continuous improvement

● This map has been annotated using Kaizen bursts that suggest the areas for improvement
● Kaizen bursts identify specific short-term projects that teams work on to implement changes to the process

12.4 Lean supply chain design principles

● There is a key set of principles that can guide the design of lean supply chains that have been proven to work

This set of principles can be divided into three categories:

1 - Lean concepts: 3 - Lean supply chains

a. Group technology a. Specialized plants
b. Quality at the source b. Collaboration with suppliers
c. Building of a lean supply chain
c. JIT production
2 - Lean production schedules The first two sets of principles relate to internal
a. Uniform plant loading production processes (the processes that actually
b. Kanban production control systems create the G&S). The third category applies lean
c. Determination of number of kanbans needed concepts to the entire supply chain
d. Minimized set up times

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Lean concepts

● Lean concepts require the layout to be designed to assure a balanced workflow with a minimal work-in-
process inventory
● Each workstation is part of a production line
● Capacity is balanced using the same logic for an assembly line
● Operations are linked through a pull system
● System designer must visualize how all aspects of the internal and external logistics system tie to the layout

Preventative maintenance: periodic inspection and repair designed to keep equipment reliable

Group technology

Group technology: philosophy in which similar parts are grouped into families, and the processes required to make
the parts are arranged in a specialized workcell

Group technology vs. departmental speciality

● Instead of transferring jobs

from one specialized
department to another,
group technology considers
all operations required to
make a part and groups
those machines together
● This technology gets rid of
movement and waiting time
between the different
operations, decreases the amount of inventory, and reduces the number of employees needed
● Workers, however, must be flexible to run several machines and processes
○ Due to their advanced skill level, these workers have increased job security

Quality at the source

Quality at the source: philosophy of making factory workers personally responsible for the quality of their output.
Workers are expected to make the part correctly the first time and to stop the process if there is a problem.

● Factory workers become their own inspectors, personally responsible for the quality of their output
● Workers concentrate on one part of the job at a time so quality problems are uncovered
● If the pace is too fast, if the worker finds a quality problem, or if a safety issue is discovered, the worker is
obligated to push a button to stop the line and turn on a visual signal
● People from other areas respond to the alarm and the problem
● Workers are empowered to do their own maintenance and housekeeping until the problem is fixed

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Just-in-time production (JIT)

Just-in-time production (JIT): producing exactly what is needed and no more, all the overproduction is considered
waste

● Anything over the minimum amount necessary is viewed as waste because effort and material expended for
something not needed now cannot be utilized now
● This is in contrast to relying on extra material just in case something goes wrong

● JIT is applied to repetitive manufacturing: when the same or similar items are made one after another
● JIT does not require large volumes and can be applied to any repetitive segments of a business
● Under JIT, the ideal lot size or production batch is one
● Important to minimize transit time and keep transfer quantities small
○ Vendors even ship several times a day to their customers to keep lot sizes small and inventory low
● The goal is to drive all inventory queues to zero, minimizing inventory investment and shortening lead times

Inventory hides problems

● When inventory levels are low, quality

problems become visible
● JIT exposes problems otherwise hidden by
excess inventories and staff

Lean production schedules

● Lean production requires a stable schedule over a lengthy time horizon

● Accomplished by level scheduling, freeze windows, and underutilization of capacity

Level schedule: a schedule that pulls material into final assembly at a constant rate

● A given production system equipped with flexible setups and amount of material in the pipelines can respond
to the dynamic needs of the assembly line

Freeze window: the period of time during which the schedule is fixed and no further changes are possible

● A benefit of the stable schedule is seen in how parts and components are accounted for in a pull system

Backflush: calculating how many of each part were used in production and using these calculations to adjust actual
on-hand inventory balances. This eliminates the need to actually track each part used in production
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 ● Underutilization and overutilization of capacity are controversial features of lean production
● Conventional approaches use safety stocks and early deliveries as a hedge against production problems like
poor quality, machine failures, and unanticipated bottlenecks in traditional manufacturing

● Under lean production, excess labor, machines, and overtime provide the hedge
● The excess capacity in labor and and equipment that results is much cheaper than carrying excess inventory
● When demand is greater than expected, overtime must be used
● Often, part-time labor is used when additional capacity is needed
● During idle periods, personnel can be put to work on other activities such as special projects, work group
activities, and workstation housekeeping

Uniform plant loading

Uniform plant loading: smoothing the production flow to decrease schedule variation

● When a change is made in final assembly, the changes are magnified throughout the line and the supply
chain
● The only way to eliminate the problem is to make adjustments as small as possible by setting a firm monthly
production plan for which the output rate is frozen

● Toyota found it could do this by building the same mix of products every day in small quantities
○ Heijunka: “smoothing” or “leveling”
● Always has a total mix available to respond to variations in demand

Kanban production control systems

Kanban: a signaling device used to control production

Kanban pull system: an inventory or production control system that uses a signaling device to regulate flows

● The authority to produce or supply additional parts comes from downstream operations

- Assembly line that is supplied with parts by a machine

center (the center makes two parts, A and B)
- Parts are stored in containers that are located next to the
the assembly line and next to the machine center
- Each container next to the assembly line has a withdrawal
kanban, & each container next ot the machine center has a
production kanban → referred to as two card kanban
system
- When the assembly line takes the first part A from a full container, a worker takes the withdrawal kanban
from the container and takes the card ot the machine center storage area
- In the machine center area, the worker finds a container of part A, removes the production kanban, and
replaces it with the withdrawal kanban which authorizes the movement of the container to the assembly line

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 - The freed production kanban is placed on a rack by the machine center, which authorizes the production of
another lot of material
- A similar process is followed for part B
There are also other approaches to signal the need for a production of a part:

1. Kanban squares, these are marked spaces on the floor, when the square is filled, no other parts are needed
2. Container system, sometimes the containers themselves are used to signal the need to fill it. When the
container is empty, there is a need to fill it
3. Colored golf balls, when a part is not needed anymore at a certain task, a golf ball is rolled down a pipe,
which indicates which part the operator should make next

● This approach can be used between manufacturing facilities/between manufacturers & external suppliers

Determination of the number of kanbans needed

● It is important to figure out how many kanban cards are required when setting up a kanban control system
● In a two card system, we are finding the the number of sets of withdrawal and production cards

● The kanban cards represent the number of containers of material that flow back and forth between the
supplier and the user areas
○ Each container represents the minimum production lot size to be supplied
○ The number of containers directly controls the amount of work-in-process inventory in the system
● Accurately estimating lead time needed to produce a container of parts is key to determining # of containers
○ This lead time is a function of the processing time for the container, any waiting time during the
production process, and the time required to transport the material to the user

● Enough kanbans are needed to cover the expected demand during this lead time plus some additional
amount for safety stock

The number of kanban card sets needed can be calculated as follows

Expected demand duringlead time+ safety stock Where:

K=
¿ the container K = number of kanban card sets
D = average number of units demanded per period
D ⋅ L(1+ S) L = lead time to replenish an order
K=
C S = safety stock expressed as a percentage of demand
during the lead time
C = container size

● A kanban system does not produce zero inventory; rather, it controls the amount of material that can be in
process at a time – the number of containers of each item
● The system can be adjusted to fit the current way the system is operating because card sets can be easily
added or removed from the system

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 ● If the workers find that they are not able to consistently replenish the item on time, an additional container
of material, with the accompanying kanban cards, can be added
● If it is found that excess containers of material accumulate, card sets can be easily removed, reducing the
amount of inventory
Example 12.1: Determining the number of Kanban card sets

Meritor, a company that makes muffler assemblies for the automotive industry, is committed to the use of kanban
to pull material through its manufacturing cells. Meritor has designed each cell to fabricate a specific family of
muffler products. Fabricating a muffler assembly involves cutting and bending pieces of pipe that are welded to a
muffler and a catalytic converter. The mufflers and catalytic converters are pulled into the cell based on current
demand. The catalytic converters are made in a specialized cell.

Catalytic converters are made in batches of 10 units and are moved in special hand carts to the fabrication cells.
The catalytic converter cell is designed so that different types of catalytic converters can be made with virtually no
setup loss. The cell can respond to an order for a batch of catalytic converters in approximately four hours. Because
the catalytic converter cell is right next to the muffler assembly fabrication cell, transportation time is virtually
zero.
The muffler assembly fabrication cell averages approximately eight assemblies per hour. Each assembly uses the
same catalytic converter. Due to some variability in the process, management has decided to have safety stock
equivalent to 10 percent of the needed inventory

How many kanban sets are needed to manage the replenishment of the catalytic converters?

Solution

In this case, the lead time for replenishment of the converters (L) is four hours. The demand (D) for the catalytic
converters is eight per hour. Safety stock (S) is 10 percent of the expected demand, and the container size (C) is 10
units.

8∙ 4 (1+0.1) 35.2
k= = =3.52 or 4 sets
10 10

In this case, we would need four kanban card sets, and we would have four containers of converters in the system.
In all cases, when we calculate k, we will round the number up because we always need to work with full
containers of parts. When the first unit of a batch of 10 catalytic converters is used in the muffler fabrication cell, a
“signal” card is sent to the catalytic converter cell to trigger the production of another batch.

Minimized setup times

● The reductions in setup and changeover times are necessary to achieve a smooth flow

● Shows relationship between lot size and setup costs

● Under a traditional approach, set up cost is treated
as a constant & optimal order quantity is shown as 6
● Under the kanban approach, setup cost is reduced,
& corresponding optimal order quantity is reduced

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 ● The order quantity has been reduced from 6 to 2 under lean methods by employing setup time-saving
procedures

Holding cost: includes the costs of storing inventory and the cost of money tied up in inventory

Setup cost: the wage costs attributable to workers making the setup, and various administrative and supplies costs
Lean supply chains

● Building a lean supply chain involves taking a systems approach to integrating the partners
● Supply must be coordinated with the need fo the production facilities,
● The production must be tied directly to the demand of the customers for products
● Speed and steady, consistent flow that is responsive to actual customer demand is important

The following concepts relate to lean network design:

Specialized plants
● Small specialized plants rather than large vertically integrated manufacturing facilities are important
● Large operations and their bureaucracies are difficult to manage and not in line with the lean philosophy
● Plants designed for one purpose can be constructed and operated more economically
● These plants are linked together so they can be synchronized to one another and to the need of the market
● Speed and quick response to changes are keys to the success of a lean supply chain

Collaboration with suppliers

● Suppliers are important to the process
● If a firm shares its projected usage requirements with its vendors, they have a long-run picture of the
demands that will be placed on their production and distribution systems
○ Some vendors are linked online with a customer →permits them to develop level production systems
● Confidence in the supplier or vendor’s delivery commitment allows reductions of buffer inventories
● Maintaining stock at a lean level needs frequent deliveries during the day
● Some suppliers even deliver directly to a location on the production line and not at a receiving dock
● When vendors adopt quality practices, incoming receiving inspections of their products can be skipped

Building of a lean supply chain

● A supply chain is the sum total of the organizations involved

Womack and Jones, in their seminal work Lean Thinking provide the following guidelines for implementing a lean
supply chain:

● Value must be defined jointly for each product family along with a target cost based on the customer’s
perception of value
● All firms in the value stream must make inadequate return on their investments related to the value stream
● The firms must work together to identify and eliminate muda (waste)
● When cost targets are met, the firms along the stream will immediately conduct new analyses to identify
remaining muda and set new targets

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 ● Every participating firm has the right to examine every activity in every firm relevant to the value stream as
part of the joint search for waste

Or else in summary, to be lean, everyone has to be on the same page!

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12.4 Lean services

● The suitability of different technique and the corresponding work steps depend on the characteristics of the
firm’s markets, production, and equipment technology, skill sets, and corporate culture

Ten successful techniques to apply lean techniques within service companies:

1. Organize problem solving groups

2. Upgrade housekeeping
○ Only the necessary items are kept in a work area
○ There is a place for everything and everything is clean and in a constant state of readiness
○ Employees should clean their own areas

3. Upgrade quality
○ Only cost-effective way to improve quality is to develop reliable process capabilities
○ Process quality is quality at the source
○ Quality doesn’t mean producing the best, it means consistently producing products and services that
give the customers their money’s worth

4. Clarify process flows

○ Changes in process flows can revolutionize service industries → improves process performance

5. Revise equipment and process technologies

○ Involves evaluation of the equipment and processes on their ability to:
i. meet the process requirements
ii. process consistently within tolerance
iii. fit the scale and capacity of the work group

6. Level the facility load

○ Synchronize production with demand
○ Avoid making customers wait for service

7. Eliminate unnecessary activities

○ A step that does not add value is waste and should be reengineered or eliminated

8. Reorganize physical configuration

9. Introduce demand-pull scheduling

10. Develop supplier networks

○ The term supplier networks refers to the cooperative association of suppliers and customers working
over the long term for mutual benefits

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Chapter 13 - Global Sourcing and Procurement

13.1 Strategic sourcing

Strategic sourcing: the development and management of supplier relationships to acquire goods and services in a
way that aids in achieving the needs of a business

● As a result of globalization & inexpensive communications technology, the basis for competition, is changing
● A firm is no longer constrained by the capabilities it owns
○ Outsourcing is so efficient that even core functions such as engineering, research and development,
manufacturing, information technology, and marketing can be moved outside the firm

● Sourcing activities depends on the item being purchased

Sourcing: a process suitable for procuring products that are strategically important to the firm

13.2 Outsourcing

● .

13.3 Total cost ownership (TCO)

● .

13.4 Measuring sourcing performance

● .

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Chapter 14 - Location, logistics, and distribution

14.1 Logistics

Devel

14.2 Decisions related to logistics

Devel

14.3 Locating logistics facilities

devel

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