Operations Management Midterm Exam Rod Jacobson Spring 2012 Joel Lenoir 1. Why do we study Operations Management?

What two words do I use consistently to describe the benefits? We study Operations Management (OM) for 4 main reasons. OM one of the main business functions and is related to all other functions so studying OM helps us to understand OM works with all the other functions to create a productive environment. OM refers to the operations aspect of an organization; we study this to understand how goods or services are produced. This way we can find the best way to conduct operations to achieve both efficiency and effectiveness. Because operations management is so important to all organizations it is important to understand what OM mangers do. This will allow others in the organization to work with the OM manager if they understand what he OM manger is trying to accomplish. Lastly OM is studied because of its cost within an organization. OM is a very expensive part of any organization, understanding OM can greatly improve the profitability of an organization. The two words associated with OM are efficiency and effectiveness. Good operations results in both, it allows a company to deliver an effective product or service while still being efficient. Proper operations management can take a company for a small business to a large firm with the right implementation. These two words are the benefits to an organization that practices good operations management. 2. In December, General Motors produced 6600 customized trucks at their Flint plant. The labor productivity at the plant is known to have been 0.10 trucks per labor-hour during the month. There were 300 laborers employed at the plant that month. a) How many hours did the average laborer work that month? Productivity = Units produced / Labor-hours used 0.10 = 6,600 units / Labor-hours used 6,600 / 0.10 = Labor-hours used 66,000 = Labor-hours used Average hours worked per laborer = 66,000 / 300 Average hours worked per laborer = 220 hours

b) If productivity can be increased to 0.11 trucks per hour, how many hours would the average laborer work that month? Productivity = Units produced / Labor-hours used 0.11 = 6,600 units / Labor-hours used 6,600 / 0.11 = Labor-hours used 60,000 = Labor-hours used Average hours worked per laborer = 60,000 / 300 Average hours worked per laborer = 200 hours 3. Rod Jacobson operates a bakery in downtown Lyndonville Vermont. Due to an excellent product and high traffic location, demand has increased by 25% in the past year. On far too many days, Rods bakery ran out of bread before all customers could be served. Due to the size of the bakery, no new ovens can be added without a very costly addition. One of the staff bakers suggested ways to load the ovens differently so that more loaves of bread can be baked at one time. This new process will require the ovens be loaded by hand, requiring additional man power. This is the only thing to be changed. Each baker works 160 per month. If the bakery makes 1500 loaves per month with a labor productivity of 2.344 loaves per labor-hour, how many workers will Rod need to add? New demand = current demand * 1.25 1,500 * 1.25 = 1,875 New Productivity: 2.344 = 1,875 / labor hours Labor hours = 1,875 / 2.344 = 800 Total workers needed = 800 labor hours / 160 hours per month Total workers needed = 5 workers Current Productivity: 2.344 = 1,500 / labor hours Labor hours = 1,500 / 2.344 = 640 Total workers needed = 640 labor hours / 160 hours per month Total workers needed = 4 workers Rod will need to add to hire 1 more worker. 4. Brandon Production is a small firm focused on the assembly and sale of custom computers. The firm is facing stiff competition from low-priced alternatives, and is looking at various solutions to remain competitive and profitable. Current financials for the firm are shown in the table below. In the first option, marketing will increase sales by 50%. The next option is Vendor (Supplier) changes, which would result in a decrease of

10% in the cost of inputs. Finally there is an OM option, which would reduce production costs 25%. Which of the options would you recommend to the firm if it can only pursue one option? In addition, comment on the feasibility of each option. Business Function Current Value Cost of Inputs $50,000 Production Costs $25,000 Revenue $80,000 Option 1: Increased Revenue 80,000 * 1.50 = $120,000 120,000 (50,000 + 25,000) = 45,000 Doubling sales is not always easy and should not be the only way to remain competitive and profitable. Cutting costs is more feasible and more controlled than increasing sales revenue for a business. Option 2: Decrease in Cost of Inputs 50,000 * 0.10 = $5,000 50,000 5,000 = $45,000 80,000 (45,000 + 25,000) = 10,000 This option seems feasible because it does not call for a huge cut in costs and should be able to be achieved without much trouble. I would say this is one of the most feasible options. Option 3: Reduce Production Costs 25,000 * 0.25 = 6,250 25,000 6,250 = 18,750 80,000 (50,000 + 18,750) = 11,250 Again this is a more feasible option than doubling sales, but still cutting costs by is not an easy task. 5. Starbucks is one of the best known coffeehouse chains in the world. Each store sells a variety of innovative products to complement the array of coffee choices available. However, 75% of current stores are located in the United States and the expensive nature of the coffee leaves Starbucks vulnerable to changes in consumer spending behavior (such as recessions). Recently Starbucks has begun initiatives to sell its specialty coffee beans for home use, presenting a chance for a large increase in revenue and diversification. However, Starbucks faces fierce competition seeking a piece of its lucrative market share and the threat of consumer behavior changes, given its reputation rides on a singular product. Perform a SWOT analysis for Starbucks.

Positive Strengths -Large selection of coffee, and specialty beverages -Unique style compared to competitors -Provides customers with internet access -Innovative ordering system, incorporating technology -Differentiation from competitors with many offerings and the environment of Starbucks is much different than that of many other coffee chains

Negative Weaknesses -Single product -Lack of a large global market compared to competitors -High prices

Internal

Opportunities -Increasing products to include selling their specialty coffee for home use -Expand to other countries to create a larger global presence
External

Threats -Increasing cost of coffee beans -Customer behavior -Social trends, customers want more than just coffee -Competition moving in on their market

6. Identify and explain the four basic global operations strategies. Give an example of each strategy. When organizations go global they need to approach the way they operate differently to suit the new areas they are expanding to. They can use one of the following global operations strategies to help them succeed in the global market, international, multidomestic, global, and transnational strategies. All of these strategies have their differences and make them effective and useful in different organizations. An international strategy basically deals with exports to gain a foot in the global market. It is simple for the companies doing it because they dont have to change their ways of operation very much to accomplish this. International strategy is low in both cost reduction and responsiveness. They are not aiming to lower costs or provide locations globally, just to get their product into the global market. Licensing is also seeing in international markets because it is low risk, all the risk is passed onto the licensee. An example of a company in an international market would be Harley-Davidson. A multidomestic strategy is driven by decentralization; operating decisions ultimately come down to the locations themselves no matter what country they are in, the advantage gained with this is highly competitive local responsiveness. This is seen primarily in franchises such as McDonalds or other chain type of dining and stores. The focus is on exporting the operations that made them successful not the products

themselves. It does not carry much cost advantage but is still a commonly see strategy to taking on the global market. Next is global strategy, seemingly just the opposite of multidomestic strategy, takes a centralized approach controlled by headquarters. This strategy is cost effective because it coordinates all the plants together learning from one another but still producing the same product no matter where the location. Caterpillar for example has factories around the globe, being the largest producer of earth moving equipment, but it is always the same no matter the factory it rolls out of. The result of this is low responsiveness but high cost reduction and creating economies of scale. Lastly is transnational strategy, this tries to combine the best of worlds, local responsiveness and cost reduction. This is achieved by spreading out resources but keeping them specialized, there is no centralization or decentralization, each subsidiary of the company operates locally. They try to create a network of flexible and efficient subsidiaries to stay cost effective. A company like this would be Nestle; although they are Swiss their assets are not even held there. 7. A network consists of the activities in the following list. Times are given in weeks. Activity A B C D E a. Preceding --A A, B C Time 8 3 7 3 4

Draw the network diagram.

A C E

Start D End

b.

Calculate the ES, EF, LS, LF, and Slack for each activity.
Activity A B C D E Time 8 3 7 3 4 ES 0 0 8 8 15 EF 8 3 15 11 19 LS 0 13 8 16 15 LF 8 16 15 19 19 Slack 0 13 0 8 0

c.

What is project completion time? Total project completion time is 19 weeks.

8. The network below represents a project being analyzed by Critical Path Methods. Activity durations are A=5, B=2, C=12, D=3, E=5, F=1, G=7, H=2, I=10, and J=6.

a. What task must be on the critical path, regardless of activity durations? Activity J will be on the path no matter what b. What is the duration of path A-B-E-H-J? 5 + 2 + 5 + 2 + 6 = 20 c. What is the critical path of this network? The critical path is A-B-G-I-J d. What is the length of the critical path? The length of the critical path is 5 + 2 + 7 + 10 + 6 = 30 e. What is slack time at activity H? Slack time of H is 5 f. What is the Late Finish of activity H? LF of H is 24 g. If activity C were delayed by two time units, what would happen to the project duration? The project duration would not change because the slack time of C is 5 so it can be delayed up to 5 days without affecting the project. Supporting Calculations

Activity a b c d e f g h i j

Time 5 2 12 3 5 1 7 2 10 6

ES 0 5 5 0 7 3 7 17 14 24

EF 5 7 17 3 12 4 14 19 24 30

LS 0 5 10 11 17 13 7 22 14 24

LF 5 7 22 14 22 14 14 24 24 30

Slack 0 0 5 11 10 10 0 5 0 0

Critical yes yes no no no no yes no yes yes

9. A partially solved PERT problem is detailed in the table below. Times are given in weeks. Optimistic Probable Pessimistic Expected Time Time Time Time Variance 7 9 14 9.5 1.361 2 2 8 3 0 8 12 16 12 0 3 5 10 5.5 1.361 4 6 8 6 0 6 8 10 8 0 2 3 4 3 0 2 2 8 3 1.000 6 8 16 9 2.778 4 6 14 7 2.778 2 2 5 2.5 0.250

Activity Preceding A -B A C A D A E B F B G C, F H D I H J G, I K E, J

a. Calculate the expected time for each activity. Enter these values in the appropriate column in the table above. b. Which activities form the critical path? A-D-H-I-J-K What is the estimated time of the critical path? 9.5 + 5.5 + 3 + 9 + 7 + 2.5 = 36.5 What are the project variance and the project standard deviation? Project variance = sum (variances on critical path) 1.316 + 1.316 + 1 + 2.778 + 2.778 + 0.250 = 9.528 Project standard deviation = sqrt (project variance) Sqrt (9.528) = 3.1

c.

d.

e.

What is the probability of completion of the project after week 40? Z = (40 36.5)/3.1 Z = 1.13 = 0.87076 = 87% chance of completion after week 40

10. Pirmin's Bike Shop is behind on a custom bike and needs to crash 8 hours of time from the 8-step project. Given the project table below calculate the crash cost for 8 hours of time-savings. Suppose Pirmin calls the customer and asks for a project extension, reducing the amount of time he needs to crash. Calculate both the maximum time-savings available on a $25 crash budget and the cost to crash four hours of savings. Normal Duration (hours) 2 3 5 3 6 1 7 10 Crash Duration (hours) 2 2 4 1 4 1 6 7

Activity A B C D E F G H

Normal Cost ($) 10 15 25 20 30 5 35 50

Crash Cost (S) 0 23 30 24 45 0 50 80

Immediate Predecessors None A B C C C,E F D,G

Critical Path is: A, B, C, E, F, G, H

activity A B C D E F G Normal - crash 0 1 1 2 2 0 1 crash $ - normal $ crash $ per period -10 17 17 5 5 4 2 15 7.5 -5 15 15

30

10

11. Weekly sales of ten-grain bread at the local organic food market are in the table below.
Based on the following data, forecast week 9 using a five-week moving average. WeekSales 1 2 3 4 5 6 7 8

415 389 420 382 410 432 405 421

Five-week moving average = past 5 months / 5 = 382 + 410 + 432 + 405 + 421 = 2050 = 2550 / 5 = 410 Forecast for week 9 = 410

12. A management analyst is using exponential smoothing to predict merchandise returns

at an upscale branch of a department store chain. Given an actual number of returns of 154 items in the most recent period completed, a forecast of 172 items for that period, and a smoothing constant of 0.3, what is the forecast for the next period? How would the forecast be changed if the smoothing constant were 0.6? Explain the difference in terms of alpha and responsiveness New forecast = last periods forecast + a(last periods actual demand last periods forecast) Forecast for smoothing constant of 0.3 = 172 + 0.3(154 172) = 172 5.4 = 166.6 Forecast for smoothing constant of 0.6 = 172 + 0.6(154 172) = 172 10.8 = 161.2 Alpha is changed to give more weight to either past or recent data. This is used to give a more accurate forecast.

13. Jim's department at a local department store has tracked the sales of a product over the
last ten weeks. Forecast demand using exponential smoothing with an alpha of 0.4, and an initial forecast of 28.0 for period 1. Calculate the MAD. What do you recommend?
month price per chip forecast forecasting error error * a forecast forecasting error

1 2 3 4 5 6 7 8 9 10

24 23 26 36 26 30 32 26 25 28

28.00 26.00 24.50 25.25 30.63 28.31 29.16 30.58 28.29 26.64

-4.00 -3.00 1.50 10.75 -4.63 1.69 2.84 -4.58 -3.29 1.36

-2.00 -1.50 0.75 5.38 -2.31 0.84 1.42 -2.29 -1.64 0.68

26.00 24.50 25.25 30.63 28.31 29.16 30.58 28.29 26.64 27.32 total MAD

4.00 3.00 1.50 10.75 4.63 1.69 2.84 4.58 3.29 1.36 37.63 3.763

14. A firm has modeled its experience with industrial accidents and found that the number
of accidents per year (Y) is related to the number of employees (X) by the regression equation Y = 3.3 + 0.049*X. R-Square is 0.68. The regression is based on 20 annual observations. The firm intends to employ 480 workers next year. How many accidents do you project? How much confidence do you have in that forecast? Y = 3.3 + (.049 * 480) = 26.82 accidents R-squared is the coefficient of determination which in this case is 0.68, thus 68% of the variation is from the dependent variable (y). I am confident in this forecast because more than half of the variation is related to this equation and that there are other factors that contribute to the number of accidents per year besides the number of employees.

15. A company is deciding if it should do design of a product in-house or outsource the

design. If outsourced the cost for a low bidder would be $40,000 and the cost for an expensive bidder $100,000. To do the design in-house would require over-time for an already stretched design team with total costs of $70,000. If all three designs (in-house, low bid, high bid) are equal in quality and the likelihood of finding a low bidder is 60% (meaning that 40% of the time the firm will have to hire the expensive bidder), should the company outsource design or do it in-house?

EMV = (.4)(100,00) + (.6)(40,000) = 64,00

0.4 High Bidder

100,000 total cost

Outsource

0.6 Low Cost

40,000 total cost

In-house

70,000 total cost

I would suggest the company outsource because the EMV in this case is the cost and it is lower for the outsourcing options than the total cost of designing in-house.

16. A company is deciding if it should design an advertising system for use on Twitter.
The first option is to skip out on designing, with no net costs or gains. The second option is System A, which would result in additional sales of either $50,000 under good conditions or $10,000 under bad conditions. The final choice is System B, which would increase sales by $20,000 under both good and bad conditions. Suppose that good conditions are twice as likely as bad conditions. Which option should the company pursue if developing a system costs $25,000? Based on this decision tree I would suggest system B because it has the highest EMV which in this case is the potential increase in sales from the system.

EMV = (.66)(50,000) + (.33)(10,000) = 36,300

Good (0.66)

50,000 sales increase

System A

EMV = (.66)(50,000) + (.33)(50,000) = 49,500

Bad (0.33)

10,000 sales increase

Good (0.66) 50,000 sales increase

System B

Bad (0.33) 50,000 sales increase

Skip Designing

No costs or gains

17. JDI, Inc. is trying to decide whether to make-or-buy a part (#J-45FPT). Purchasing
the part would cost them $1.50 each. If they design and produce it themselves, it will result in a per unit cost of $0.75. However, the design investment would be $50,000. Further, they realize that for this type of part, there is a 30% chance that the part will need to be redesigned at an additional cost of $50,000. Regardless of whether they make-or-buy the part, JDI will need 100,000 of these parts. Using decision trees analysis and EMV, what should JDI do? Show the decision tree.

EMV = (.7)(175,000) + (.3)(125,000) = 160,000

0.7

50,000 Initial Cost 50,000 Additional Cost 75,000 Mfg cost (100,000 * .75) 175,000

Make

0.3

50,000 Initial Cost 75,000 Mfg cost (100,000 * .75) 125,000

Buy 150,000 Mfg cost (100,000 * 1.50)

Based on this decision tree I would suggest they buy because the cost of buying the part is lower than the EMV which in this case is cost.

18.Construct a cause and effect diagram for why students arrive to class late. Include at
least three reasons for each of the M's.
Material (Class Supplies)
Finishing current homework

Method (Where theyre coming from)

Meeting with another professor Previous class ran late

Forgot the Book Didnt read the chapter Coming from burke Coming from work

Student Late To Class

Oversleeping (dismissing alarm)

Staying up night before Forgot they had class Car breaks down No motivation to go Bad roads due to weather

Manpower (Student)

Machine (Transportation)

19. Management is concerned that workers create more product defects at the very
beginning and end of a work shift than at other times of their eight hour workday. Construct a scatter diagram with the following data, collected last week. Is management justified in its belief? Number of Defects Tuesday Wednesday Thursday 9 6 8 5 3 4 2 4 3 0 5 2 6 2 4 3 3 2 4 4 6 7 8 5

First hour at work Second hour at work Third hour at work Fourth hour at work Fifth hour at work Sixth hour at work Seventh hour at work Eighth hour at work

Monday 12 6 5 4 1 4 7 5

Friday 7 5 3 3 5 1 3 9

Defects vs Hour at Work

14 12 Number of Defects 10 8 6 4 2 0 1st 2nd 3rd 4th 5th 6th 7th 8th hour hour hour hour hour hour hour hour at at at at at at at at work work work work work work work work Monday Tuesday Wednesday Thursday Friday

I would say they are justified because in looking at this it can be seen that the most defects happen during the 1st, 2nd, 7th, and 8th hours of work.

20. Mary is considering purchasing a machine from two suppliers. Supplier A's machine
has an annual fixed cost of $10,000 and a unit variable cost of $2.10. Supplier B's machine has an annual fixed cost of $16,000 and a unit variable cost of $3.00. How large should Mary's annual demand be in order to make Supplier B's machine the better choice? 10,000 + 2.10x = 16,000 + 3.00x -0.9x = 6,000

In this case it doesnt matter how large Marys annual demand is because Supplier Bs machine will always be more expensive because both the fixed and variable costs to use their machine are higher. It will always be a better choice for Mary to use Supplier A.

21. A non-profit organization is planning a raffle to raise money. It has two options for
tickets. The first option is to do the tickets by hand, with fixed costs of $50 and variable costs of $.05 per ticket. The second option is to outsource production. This would result in fixed costs of $500 and variable costs of $.01. If the organization plans to sell 10,000 tickets which option should it choose? Option A: 50 + (.05 * 10,000) = $550 Option B: 500 + (.01 * 10,000) = $600 If they sell 10,000 tickets they should choose option A.

22. Brandon's computer shop is considering two different configuration options. The first
one is to have each computer built by the sales associates when they have free time. The second option is to hire a dedicated assembly technician. Option A has variable costs of $50 per computer and no fixed costs. Option B has a fixed cost of $1,000 but variable costs of only $5 per computer. What is the cross-over point? 50x = 1000 + 5x 45x = 1000 x = 22.22 The crossover point is about 22 computers At this point both options will cost $1111, any number below this option A is better and anything above it option B is better.

23. How is benchmarking data used in the quality analysis of our own products and
services? Benchmarking is where an organization selects a standard that is seen as the very best performance for doing any activity or process. The point of this is to set a target to hit, by doing this you can compare your performance to that of the organization that youre using as a benchmark. To do this companies choose other organizations that are seen as the best, and that are similar to their own, even if they are not in the same industry then compare their performance to them. This gives an organization a direction and help them see where they can improve processes or activities to reach or surpass their benchmark.

24. What is the highest level quality belt anyone can obtain?
Six sigma master black belt is the highest quality belt anyone can obtain.

25. What does APICS stand for..and how many certification exams must you take?
Formerly the American Production & Inventory Control Society, APICS, stands for The Association of Operation Management. The APICS exam that will make one certified in

production and inventory management (CPIM) consists of 5 exams that must be passed to be certified. The exams are:

Basics of Supply Chain Management Master Planning of Resources Detailed Scheduling and Planning Execution and Control of Operations Strategic Management of Resources

apics.org