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Operations Management 12: Distribution Challenges

Logistics – the movement of goods in a supply chain (includes incoming shipments,


movement within a facility, and outgoing shipments)
 Third Party Logistics (3PL) – the outsourcing of logistics management
o Potential Benefits: take advantage of specialists’ knowledge, their well-
developed information system, and their ability to obtain more favorable
shipping rates, and enabling the company to focus more on its core business
 Reverse Logistics– the backward flow of goods returned to the supply chain (ex.
Defective, unsold, recycled)
o Closed-Loop Supply Chain – a manufacturer controls both the forward and
reverse shipment of product
o Gatekeeping – screening returned goods to prevent incorrect acceptance of
goods with the intent of reducing the cost of returns by screening returns at
the point of entry into the system and refusing to accept goods that should not
be returned or goods that are returned to the wrong destination
o Avoidance – finding ways to minimize the number of items that are returned
(can involve product design, quality assurance, monitoring forecasts during
promotional programs to avoid overestimating demand to minimize returns of
unsold product)
 Radio Frequency Identification (RFID) – the use of tags that project information
via radio waves to track goods in the supply chain
o The tag has an integrated circuit and an antenna that project information and
other data to network-connected RFID readers using radio waves
o Provide unique identification, enabling businesses to identify, tack, monitor,
or locate practically any object in the supply chain that is within range of a
tag reader
o Increases supply chain visibility, improves inventory management, improves
quality control, and enhances relationships with suppliers and customers
o Eliminates the need for manual counting and bar-code scanning of goods at
receiving docks, which eliminates errors and speeds up the process
 Traffic Management – overseeing the shipment of incoming and outgoing goods
(includes handling schedules and decisions on shipping method and times, taking
into account costs of various alternatives, government regulations, the needs of
the organization relative to quantities and timing, and external factors such as
potential shipping delays or disruptions)

Order Fulfillment – the processes involved in responding to customer orders (involves order
processing, billing, inventory management, warehousing, packing, shipping, and delivery)
 Engineer-to-Order (ETO) – products are designed and built according to customer
specifications
o Frequently used for large-scale construction projects, custom homebuilding,
home remodeling, and for products made in job shops
o Fulfillment time can be relatively lengthy because of the nature of the project,
as well as the presence of other jobs ahead of the new one
 Make-to-Order (MTO) – a standard product design is used, but product of the
final product is linked to the final customer’s specifications
o Used by aircraft manufacturers
o Fulfillment time is generally less that with ETO fulfillment, but still fairly
long
 Assemble-to-Order (ATO) – products are assembled to customer specifications
from a stock of standard and modular components
o Used by computer manufacturers (such as Dell)
o Fulfillment times are fairly short, often a week or less
 Make-to-Stock (MTS) – production is based on a forecast and products are sold to
the customer from finished goods stock
o Used in department stores and supermarkets
o Order Fulfillment is immediate
o E-Commerce – the use of electronic technology to facilitate business
transactions
 Variation of MTS where there is a lag in fulfillment to allow for
shipping

Transportation
 Transportation to and from facilities can represent as much as 25% of the product
cost
 Total transportation cost in the US is over 10% of GDP
 The importance of transportation has grown with increasing globalization of
supply chains, growth in e-commerce and the associated home-delivery of
products, and rising fuel prices
 Modes of Transportation
o Air
o Truck
o Rail
o Water
 For global trade, intermodal transportation is dominant with containers shipped
via water/rail/truck combinations

Distribution Strategies
 Direct Shipment – items are shipped directly from suppliers to retail stores
 Warehousing – Items are stocked in warehouses (distribution centers) and are
shipped to stores as required
 Cross-docking – warehouses function as shipping coordination points rather than
inventory storage points and items are transferred between trucks so outbound
trucks to retailers have products from multiple suppliers
 Key Decisions
o Choice of transportation modes
o Number and location of warehouses
o Extent to which orders are aggregated over time before shipping
Operations Management 13: Location and Layout Planning

Why Make Location Decisions?


 New company
 Expand markets
 Accommodate growth in demand
 Reduce costs
 Depletion of resources
 Mergers and acquisitions

Location Decisions
 Can impact capacity and flexibility
 Are long-term commitments
 Can impact investment requirements, operating costs and revenues, and
operations
 Poor location decisions can result in excessive transportation costs, a shortage of
qualified labor, loss of competitive advantage, inadequate supplies of raw
materials
Location Options
 Expansion
 Add new locations while retaining existing ones
 Shut down at one location and move to another
 Do nothing

Process for Making Location Decisions


 Decide on the criteria
 Identify the important factors
 Develop location alternatives
o Identify a country
o Identify a general region
o Identify a small number of community alternatives
o Identify site alternatives
 Evaluate and make selection

Supply Chain Considerations


 Determining the number and location of suppliers, production facilities,
warehouses, and distribution centers
 Centralized distribution generally yields scale economies and tighter control than
decentralized distribution
 Decentralized distribution tends to be more responsive to local needs

Factors when Selecting a Country


 Government
 Labor
 Resources
 Financial incentives
 Market potential
 Cultural differences
 Safety

Regional Factors
 Location of raw materials
o Necessity
o Perish-ability
o Transportation Costs
 Location of markets
o Competitive strategy
o Perish-ability
 Cost and availability of labor
 Taxes
 Climate
 Geographic Information System (GIS) – a computer-based tool for collecting,
storing, retrieving, and displaying demographic data on maps

Community Considerations
 Taxes and environmental regulations
 Enticements
o Tax abatements
o Low cost loans
 Attitude toward type of business
 Quality of life
o Schools
o Cost of Living
o Recreation
 Services
o Fire
o Medical
o Police
 Cost and availability of utilities
 Microfactory – small factory with a narrow product focus, located near major
markets

Site-Related Factors
 Land
o Cost
o Conditions
 Room for future expansion
 Transportation
o Access roads
o Rail spurs
 Zoning Restrictions
 Industrial parks – land that is already developed for manufacturing operations
(power, water, sewer hookups have been attended to and zoning restrictions do not
require special attention)

Multiple Plant Manufacturing Strategies


 Product Plant Strategy – entire products or product lines are produced in separate
plans, and each plan usually supplies the entire domestic market
o Decentralized approach
o Each plant can focus on a narrow set of requirements that entails
specialization of labor, materials, and equipment along product lines
o Plan locations may be widely scattered or clustered relatively close to one
another
 Market Area Plant Strategy – plants are designed to serve a particular geographic
segment of a market
o Operating costs tend to be higher than those of product plants
o Significant reduction in the cost of shipping can be made
o Particularly desirable when shipping costs are high due to volume, weight, or
other factors
o Requires centralized coordination of decisions to add or delete plants, or to
expand or downsize plants
 Process Plant Strategy – different plants concentrate on different aspects of a
process
o Best suited for products that have numerous components
o Separating the production of components results in less confusion than if all
production was carried out at the same location
o Requires a centralized coordination of production throughout the system
 General-Purpose Plant Strategy – plants are flexible and capable of handling a
range of products
o Allows for quick response to product or market changes
o Can be less productive than a more focused approach

Center of Gravity – method for locating a distribution center that minimizes distribution costs
 Can include supplier locations too
 Treats distribution cost as a linear function of distance and the quantity shipped
 Acceptable variation is that quantities are allowed to change, as long as their
relative amounts remain the same
 Uses a map that shows the locations of destinations
x iW i y W
 x cg  y cg  i i
W i W i
o xi = x coordinate of destination i
o yi = y coordinate of destination i
o Wi = weight for destination I (ex. Quantity to be shipped)
 
Factor Rating – general approach to evaluating locations that includes quantitative and
qualitative inputs
 Provides a rational basis for evaluation and facilitates comparison among
alternatives by establishing a composite value for each alternative that
summarizes all related factors

Step 1: Determine which


factors are relevant

Step 2: Assign a weight to


each factor that indicates
its relative importance
compared with all other
factors (typically weights
sum to 100

Step 3: Decide on a common scale for all factors and set a minimum acceptable score if
necessary

Step 4: Score each location alternative

Step 5: Multiply the factor weight by the score for each factor, and sum the results for each
location alternative

Step 6: Choose the alternative that has the highest composite score, unless it fails to meet the
minimum acceptable score

Technology – the application of scientific discoveries to the development and improvement of


products and services and operations processes
 Technological Innovation – the discovery and development of new or improved
products, services, or processes for producing or providing them
 Product and service technology – the discovery and development of new products
and services
 Process technology – includes methods, procedures, and equipment used to produce
goods and provide services
 Information Technology (IT) – the science and use of computers and other
electronic equipment to store, process, and send information

Process Selection – deciding how to organize the production of goods and services
 Key Questions
o How much variety in products or services?
o What is the expected volume?
o What degree of flexibility will be needed?
Process Types
 Job Shop – operates on a relatively small scale when a low volume of high-variety
goods or services are needed
o Small jobs with somewhat different processing requirements
o High flexibility using general purpose equipment
o Skilled workers
 Batch – for when a moderate volume of goods or services and can handle a
moderate variety in products and services
 Repetitive – used when for volume of more standardized goods or services
o Also referred to as assembly
 Continuous – used for a very high volume of non discrete, highly standardized
output with almost no variety
 Project – a non repetitive set of activities directed towards a unique goal within a
limited time frame

Facility Layout – the configuration of departments, work centers, and equipment


 Reasons for design of layout
o New facility or new products
o Inefficient operations
o Accidents, safety hazards, or morale problems
o Changes in methods or equipment, the design of products, the volume or mix
of products, or environmental or legal requirements
 Importance
o Require substantial investments of money and effort
o Involve long-term commitments
o Significant impact on the cost and efficiency of operations
 Basic objective is to facilitate a smooth flow of work, material, and information
through the system

Types of Layouts
 Product Layout – layout that uses standardized processing operations to achieve
smooth, rapid, high-volume flow
o Repetitive Processing
o Work is divided into a series of standardized tasks, permitting specialization of
equipment and division of labor
o Achieve a high degree of labor and equipment utilization, which tends to offset
their high equipment cost
o Production Line – standardized layout arranged according to a fixed sequence
of production tasks
o Assembly Line – standardized layout arranged according to a fixed sequence of
assembly tasks
o Preventative Maintenance – periodic inspection and replacement of worn parts
or those with high failure rates to reduce the probability of breakdowns during
operations

o Advantages
 High utilization of specialized labor and equipment
 Low material handling cost and WIP inventory
 Routine scheduling, accounting, and inventory control
 Low unit cost
 U-Shaped Production Line
o More compact
o Often requires half the length of a straight production line
o Increased communication in work assignments
o Materials enter the plant at the same point that finished products leave it

 Process Layout – layouts that can handle varied processing requirements


o Job Shop Processing
o Intermittent Processing – non repetitive processing
o Features departments or other functional groupings in which similar kinds of
activities are performed
o Since the layout is more focused on the type of process, the system is much less
vulnerable to shutdown caused by mechanical failure or absenteeism

o Advantages
 System can handle a variety of processing requirements
 Not particularly vulnerable to equipment failures
 General purpose equipment often less costly
 Possible to use individual incentive systems
Operations Management 15: Process Analysis & Job Design

Process – a means of converting various inputs (land, labor, capital, information) into
outputs (goods and services)

Process Analysis – involves understanding what the process does, how and why it does it,
how effectively it works, and how it might be improved
 Diagnostic process that involves technical analysis, observation, and judgment
 Assesses the work or conversion activity performed by some working unit

Process Flow Diagram

 Task or Operation
 Flow
 Decision Points
 Storages or Queues
 Work Order – specifies the number of units to be produced at a time and the
sequence of steps required

The Operating Unit


 Work Center – people and/or equipment that perform a task
 Setup Time – time to prepare or clean up for the task; independent of the # of jobs
in the batch
 Run Time – the sum of the times required to complete the work for each task
 Capacity – the ability to process units of work per unit of time and can be
expressed in either units of output or in units of time
Time Available
o Capacity (in units) =
Cycle Time
 Capacity Utilization – a measure of how much of the available capacity is being
used

o Relates the demand for the work center and the capacity at the work center
Capacity Required
o Capacity Utilization =
Capacity Available
 Jobs – the desired output for the operating unit or work center
 Throughput or Elapsed Time – time for each unit to pass through the process,
 including waits
 Cycle Time – time between job completions; the rate at which items are produced
Operating Time Per Day
o Cycle Time =
Desired Output Rate


o Sometimes a weighted average is used
o The maximum time allowed at each workstation to complete its set of tasks on
a unit
o Establishes the output rate of a line
o Minimum cycle time is equal to the longest task time
o Maximum cycle time is equal to the sum of the task times

Work Flow
 Bandwidth – the ability of an operating unit to tolerate wide variances in work
order requirements
o General Purpose equipment
o Flexible layouts
o Volume Surges
 Balance – when capacities of different work centers are similar
o Line Balancing – the process of assigning tasks to workstations in such a way
that the workstations have approximately equal time requirements
 Minimizes the idle time along the line and results in a high utilization of
labor and equipment
 Unbalanced lines are undesirable in terms of inefficient utilization of
labor and equipment and can also cause morale problems at the slower
stations for workers who much work continuously
 Factors that prevent a perfectly balanced line
 Not feasible to combine certain activities into the same bundle
 Differences among elemental task length cannot always be
overcome by grouping tasks
 Requires technological sequences
 Bottleneck – the work center with the least capacity and longest task time
o Limits system capacity
o Defines the cycle time for the process
 Time Standards – the expected amount of time to perform a task, given that the
work center is available for working on that operation, based on some expectation
of worker and machine efficiency
o Work Measurement – a field of study encompassing analytical methods for
studying work to find improvements, maximum efficiency, and good time
estimates for various tasks
 Job Shop – uses general purpose equipment and personnel to deal with small
batch sizes,
o Great bandwidth for routing and product diversity
o Long throughput times
o Low machine capacity utilization
o Many storage steps
o High ratio of setup time to run time
o Random bottlenecking at different work centers
 Flow Shop – an operating unit where the process is turned on at some point and
runs continuously
o Neither individual units nor batches are produced
o Highly specialized equipment
o Relatively small groups of products
o Work centers are dominated by machines rather than people
o Throughput times are very short
o WIP inventory levels are low
o Virtually no setups done

Measuring Performance
 Yield – percent of good items
Input Quantity
o Yield =
Output Quantity
 Scrap Rate – percent of bad items
o Scrap Rate = 1 - Yield

Precedence Diagram – a diagram that shows elemental tasks and their precedence
requirements

 Visually portrays the tasks that are to be performed along with the sequential
requirements

Job Design – the act of specifying the contents and methods of jobs
 What will be done (tasks)
 Who will do what (division of labor)
 How the job will be done
o Ergonomics – incorporation of human factors in the design of the workplace
 The scientific discipline concerned with the understanding of
interactions among human s and other elements of a system, and the
profession that applies theory, principles, data and methods to design
in order to optimize human well-being and overall system performance
o Technology
o Principals of Motion Economy
 Where the job will be done (layout)
 Two Philosophies
o Efficiency – emphasizes a systematic, logical approach to job design
o Behavioral – emphasizes satisfaction of wants and needs

Specialization – work that concentrates on some aspect of a product or service


 Rationale for specialization is the ability to concentrate one’s efforts and thereby
become proficient at that type of work
 Advantages for Management
o Simplifies training
o High productivity
o Low wage costs
 Advantages for Labor
o Low education and skill requirements
o Minimum responsibilities
o Little mental effort needed

Behavioral Approach
 Job Enlargement – giving a worker a larger portion of the total task, by horizontal
loading
o Horizontal Loading – the additional work is on the same level of skill and
responsibly as the original job
o Goal is to make the job more interesting by increasing the variety of skills
required and by providing the worker with a more recognizable contribution to
the overall output
 Job Rotation – having workers periodically exchange jobs
o Used to avoid having one or a few employees stuck in monotonous jobs
o Allows workers to broaden their learning experience and enables them to fill in
for others in the event of sickness or absenteeism
 Job Enrichment – increasing responsibility for planning and coordination of tasks,
by vertical loading
o Focuses on the motivating potential of worker satisfaction
 Lean operations – uses job enlargement and job enrichment, where workers are
cross-trained to be able to perform a wider variety of tasks and given more
authority to manage their jobs

Self-Direct Teams – groups empowered to make certain changes in their work processes
 Designed to achieve a higher level of teamwork and employee involvement
 Benefits
o Fewer Managers
o Quicker implementation
o Higher Quality
o Greater work satisfaction
 Challenges
o Managers threatened
o Conflicts between team members
o When should supervisor intervene?

Methods Analysis – analyzing how a job is done


 Need for methods analysis
o Changes in tools and equipment
o Changes in product design or introduction of new products
o Changes in materials or procedures
o Government regulations or contractual agreements
 Procedure
1. Identify the operation to be studied
2. Get employee input
3. Study and document current method
4. Analyze the job
a. Flow process charts – chart used to examine the overall sequence of an
operation by focusing on movements of the operator or flow of
materials
b. Worker-machine charts – chart used to determine portions of a work
cycle during which an operator and equipment are busy or idle
5. Propose new methods
6. Install new methods
7. Follow-up to ensure improvements have been achieved

Motion Study – systematic study of the human motions used to perform an operation
 Purpose is to eliminate unnecessary motions and to identify the best sequence of
motions for maximum efficiency
 Techniques
o Motion Study Principles – guidelines for designing motion-efficient work
procedures divided into three categories
 Principles for use of the body
 Principles for arrangement of the workplace
 Principles for the design of tools and equipment
o Therbligs – basic elemental motions that make up a job
 Improvements are made based on an analysis of therbligs by
eliminating, combining, or rearranging them
 Search
 Select
 Grasp
 Hold
 Inspect
 Etc.
o Micromotion Study – the use of motion pictures and slow motion to study
motions that otherwise would be too rapid to analyze
o Simo Chart – used to study simultaneous motions of the hands; invaluable in
studying operations such as data entry, sewing, surgical procedures, etc.
Operations Management 16: Aggregate Planning

Sales and Operations Planning – intermediate-range decisions to balance supply and demand,
integrating financial and operations planning

Aggregate Planning – intermediate-range capacity planning, usually covering 2 to 12 months


 Goal is to achieve a production plan that will effectively utilize the organization’s
resources to match expected demand
 Make decisions on output rates, employment levels and changes, inventory levels
and changes, back orders, and subcontracting in or out
 “Big picture” approach to planning
 Begins with a forecast of aggregate demand for the intermediate range
 Meet demand requirements by setting output, employment, and finished-goods
inventory levels or service capacities
o Concerned with quantity and the timing of expected demand
o Concerned with minimizing the cost of the aggregate plan
 Updated periodically to take into account updated forecasts and other changes
 Inputs to aggregate planning
o Resources: workforce/production rates, facility and equipment capacity
o Demand forecast
o Policies on workforce changes
o Subcontracting
o Overtime
o Inventory levels/changes
o Back orders
o Costs: inventory carrying cost, back orders, hiring/firing, overtime, inventory
changes, subcontracting
 Outputs
o Total cost of a plan
o Projected levels of inventory, output, employment, subcontracting,
backordering

Demand and Supply Options


 Demand Options
o Pricing – used to shift demand from peak periods to off-peak periods so that it
corresponds more closely with capacity
o Promotion – advertising and promotions can help shift demand closer to
capacity with knowledge of response rates and response patterns to achieve the
desired results
o Back orders – orders are taken in one period and deliveries promised for a later
period
o New demand – uneven demand for different periods of time makes it difficult
to match the capacity of the firm
 Supply Options
o Hire and Fire Employees
 The extent to which operations are labor intensive determines the
impact that changes in the workforce level will have on capacity
 Union contracts may restrict the amount of hiring and laying off a
company can do
 Highly skilled workers are generally more difficult to find than lower-
skilled workers and recruiting them involves greater costs
o Overtime/Slack time
 Less severe method for changing capacity
 Can be implemented more quickly and allows the firm to maintain a
steady base of employees
 Overtime permits the company to maintain a skilled workforce and
employees to increase earnings, and companies may save money
because fringe benefits are already fixed
o Part-time Workers
 Independent Contractors – contract workers to fill certain needs of the
production, often working alongside regular workers, having a different
pay scale and no benefits, can be added or subtracted with greater ease,
gives companies greater flexibility in adjusting the size of the workforce
o Inventories
 Finished goods inventories involve a holding or carrying cost, along
with cost of money tied up that could be invested elsewhere, and
insurance cost
o Subcontracting
 Enables planners to acquire temporary capacity
 Less control over the output and may lead to higher costs and quality
problems
 Outsourcing – contracting with another organization to supply some
portion of the goods or services on a regular basis

Meeting Uneven Demand


 Maintain a level workforce
o Workforce changes can have a major impact on the lives and morale of
employees
o Can be disruptive for managers
o Can involve a significant amount of paperwork
 Maintain a steady output rate
o Level Capacity Strategy – maintaining a steady rate of regular-time output
while meeting variations in demand by a combination of options
o Some combination of subcontracting, backlogging, and use of inventories to
absorb fluctuations
 Match demand period by period
o Chase Demand Strategy – matching capacity to demand; the planned output
for a period is set at the expected demand for that period
 Inventories can be kept relatively low
 Lack of stability in operations
 When forecast and operations differ, morale can suffer since it quickly
becomes obvious to workers and mangers that efforts have been wasted
 Use a combination of decision variables

Choosing a Strategy
 Company policy
 Flexibility
 Costs

Techniques for Aggregate Planning


Step 1: Determine demand for each period
Step 2: Determine capacities for each period
Step 3: Identify company or departmental policies that are pertinent
Step 4: Determine unit costs for regular time, overtime, subcontracting, holding
inventories, back orders, layoffs, and other relevant costs
Step 5: Develop alternative plans and compute the cost for each
Step 6: If satisfactory plan emerge, select the one that best satisfies the objectives

 Informal Trial-and-Error
o Consists of developing simple tables or graphs that enable planners to visually
compare projected demand requirements with existing capacity
o Alternatives are usually evaluated based on overall costs
o Does not necessarily result in the optimal aggregate plan
 Linear Programming – technique that optimizes the results by maximizing or
minimizing a function such as profit or cost subject to additional constraints on
the resources used
o Decision Variables – represent the choices available to the decision maker
 # Of full time employees in each period
 # Of full time employees hired
 # Of full time employees fired
 Full time output in each period
 Overtime output in each period
 Part time output in each period
 Ending inventory in each period
 Backorders in each period
o Objective function – a mathematical expression that can be used to determine
performance
 Full time cost per unit x Full time output
 Part time cost per unit x Part time output
 Overtime cost per unit x Overtime output
 Hire cost per employee x # of full time employees hired
 Fire cost per employee x # of employees fired
 Inventory carrying cost per unit x Average inventory units
 Backorder cost per unit x # of backorders
o Constraints – the limitations that restrict the alternatives available to the
decision maker
 Inventory Balance equations: Current Inventory – Current Backorder
= Previous Inventory – Previous Backorders + Current total
production output – Current demand
 Employee Balance Equations: Current Full time Employees = Previous
Full time Employees + Current # hired – Current # fired
 Regular Capacity Constraints: Current full time output ≤ output per
full time employee x # of full time employees
 Overtime Capacity Constraints: Current Overtime output ≤ maximum
use of overtime (%) x Output per full time employee x # of Full time
employees
 Full Time Worker Constraints: Current full time output ≥ Minimum
utilization of full time employees (%) x Output per full time employee
x # of full time employees
 Safety Stock Constraints: Current Ending Inventory ≥ Safety Stock
Target (units)
 End of Year Inventory Constraint: Ending inventory in final period ≥
Year-end target (units)
o Linearity – optimization problems can only be formulated as linear programs
when the objective function and all constraints are linear functions of the
decision variables
o Divisibility – the decision variables can take on fractional values and are not
restricted to integer values
o Certainty – the values of all parameters such as costs and demands are known
and not random

Operations Management 16: IS for Operations

Material Requirements Planning (MRP) – a computer-based information system that


translates master schedule requirements for end items into time-phased requirements for
subassemblies, components, and raw materials
 Automates enormous tasks of tracking large numbers of parts and subassemblies
and coping with changes
 Differentiates between independent and dependent demand
 Low levels of in-process inventories
 Ability to track material requirements
 Ability to evaluate capacity requirements method of communicating across
functions
 Dependent demand – demand for items that are subassemblies or component parts
to be used in the production of finished goods
o Sporadic or lumpy
o Large quantities are used at specific points in time with little or no usage at
other times
o Only needs to be stocked just prior to the time they will be needed in the
production process
 Independent demand – demand for items with no relationship to the demand of
other components
o Must be carried on a continual basis

Inputs of MRP
 Master schedule – states which end items are to be produced, when these are
needed, and in what quantities
o Cumulative Lead Time – the sum of the lead times that sequential phases of a
process require, from ordering of parts or raw materials to completion of final
assembly
 Bill of Materials – a listing of all the raw materials, parts, subassemblies, and
assemblies needed to produce one unit of a product
o Product structure tree – a visual depiction of the requirements in a bill of
materials, where all components are listed by levels
o Low-level Coding – restructuring the bill of materials so that multiple
occurrences of a component all coincide with the lowest level at which the
component occurs
 Inventory records – stored information on the status of each item by period of
time
o Gross requirements – total expected demand for an item or raw material in a
time period
o Scheduled receipts – open orders scheduled to arrive from vendors or elsewhere
in the pipeline
o Projected On Hand – expected amount of inventory that will be on hand at
the beginning of each time period
o Net requirements – the actual amount needed in each period
o Planned-order Receipts – quantity expected to be received by the beginning of
the period in which it is shown
o Planned-order releases – planned amount to order in each time period; offset
by lead time
o Information about raw materials and suppliers
o Changes due to stock receipts and withdrawals, canceled orders, etc.

MRP Processing
 Takes the end item requirements specified by the master schedule and “explodes”
them into time-phased requirements for assemblies, parts, and raw materials using
the bill of materials offset by lead times
 Pegging – the process of identifying the parent items that have generated a given
set of material requirements for an item
o Enables managers to determine which products will be affected if orders are
late due to late deliveries, quality problems, or other problems
 Updating the System
o Regenerative System – approach that updates MRP records periodically
 Batch-type system
 Compiles all changes that occur within the time interval and
periodically updates the system
 Less expensive
o Net-change System – approach that updates MRP records continuously
 Modify to reflect changes as they occur
 Only the changes are exploded through the system, level by level so the
entire plan does not need to be regenerated

Outputs of MRP
 Planned-order – a schedule indicating the amount and timing of future orders
 Order releases – authorization for the execution of planned orders
 Changes – revisions of due dates or order quantities, or cancellation of orders
 Performance-control reports – evaluation of system operation, including
deviations from plans and cost information
 Planning reports – data useful for assessing future material requirements
 Exception reports – data on any major discrepancies encountered
 Inventory Transaction

Safety Stock
 Identify activities or operations that are subject to variability and determine the
extent of that variability
 Lot sizing – choosing a lot size for ordering or production
o Managers can realize economies by grouping orders
o Combining period demands into a single order has a cascading effect down
through the product tree so lower levels in the tree need to be considered as
well as their setup and holding costs
o Uneven period demand and the relatively short planning horizon require a
continua recalculation and updating of lot sizes
o Lot-for-lot ordering – the order or run size for each period is set equal to
demand for that period, minimizing investment in inventory
o Economic Order Quantity Model – minimizes cost if usage is fairly uniform;
less useful for end items than for items and materials at lower levels
o Fixed-Period Ordering – provides coverage for some predetermined number of
periods

Enterprise Resource Planning – integration of financial, manufacturing, and human resources


on a single computer system
 Represents an expanded effort to integrate standardized record keeping that will
permit information sharing among different areas of an organization in order to
manage the system more effectively
 Provides a system to capture and make data available in real time to decision
makers and other users throughout the organization
 Hidden Costs
o Training
o Integration and Testing
o Data conversion
o Data analysis
o Consultants ad infinitum
o Replacing staff
o Implementation teams
o Waiting for the return on investment
o Post-ERP

Operations Management 18: Management of Quality

Quality – the ability of a product or service to consistently meet or exceed customer


expectations
 Evolution of Quality Management
o From quality assurance: Reactive, emphasis on finding and correcting defects
before reaching the market
o To a Strategic approach: Proactive, focus on preventing mistakes from
occurring in the first place
 Dimensions of Quality
o Performance – main characteristics of the product or service
o Aesthetics – appearance, feel, smell, taste
o Special Features – extra characteristics
o Conformance – how well a product or service corresponds to design
specifications
o Reliability- consistency of performance
o Durability – the useful life of the product or service
o Perceived value – indirect evaluation of quality
o Serviceability – handling of complaints or repairs
 Determinants of Quality
o Quality of Design – intention of designers to include or exclude features in a
product or service
 Take into account the wants and needs of customers along with the
production capabilities, safety, liabilities, and costs
o Quality of Conformance – the degree to which goods or services conform to the
intent of the designers
 Affected by the capabilities of equipment used, the skills, training and
motivation of workers, the extent to which the design lends itself to
production, the monitoring process to assess conformance, and the
taking of corrective action when necessary
o Ease of Use
 Increase the chances that a product will be used for its intended
purposes and in such a way that it will continue to function properly
and safely
o Service
 Recall and repair of the product, adjustment, replacement or buyback,
or reevaluation of a service
 Responsibility for Quality
o Top management
 Ultimate responsibility for quality
 Must institute programs to improve quality, guide, direct, and
motivate managers and workers, and set an example by being involved
in quality initiatives
o Design
 Attention to the processes that will be required to produce the products
or services
o Procurement
 Responsible for obtaining goods and services that will not detract from
the quality of the organization’s goods
o Production/Operations
 Responsible for ensuring that processes yield products that conform to
design specifications
 Monitoring processes and finding and correcting root causes of
problems
o Quality Assurance
 Responsible for gathering and analyzing data on problems and working
with operations to solve problems
o Packaging and Shipping
 Must ensure goods are not damaged in transit and that packages are
clearly labeled, instructions are included and that all parts of included
and shipped in a timely manner
o Marketing and Sales
 Responsible for determining customer needs and to communicate them
to appropriate areas of the organization
o Customer Service
 Responsible for communicating problems learned from customers to the
appropriate departments, deal in a reasonable manner with customers,
work to resolve problems, and follow up to confirm that the situation
has been effectively remedied
 Benefits of Goods Quality
o Enhanced reputation for quality
o The ability to command premium prices
o Increased market share
o Greater customer loyalty
o Lower liability costs
o Fewer production or service problems
 Consequences of Poor Quality
o Loss of business – damaging to the business’ reputation and can lead to
decreased market share
o Liability – damages and injuries resulting from faulty design or poor
workmanship can be substantial in cost
o Productivity – poor quality during the manufacturing process can increase the
amount of time needed for the process
o Costs
 Costs of Quality
o Appraisal Costs – costs of activities designed to ensure quality or uncover
defects, including measuring, evaluating, and auditing materials, parts,
products, and services to assess conformance with quality standards
o Prevention Costs – costs of reducing potential for quality problems
o Failure Costs – costs caused by defective parts or products or by faulty services
 Internal Failures – those discovered during the production process
 External Failures – those discovered after delivery to the customer
o Return on Quality – an approach that evaluates the financial return of
investments in quality
Quality Control – a process that evaluates output relative to a standard and takes corrective
action when output does not meet standards
 Inspection – appraisal of goods or services
o How much, how often, and where to inspect
o Select a sample plan based on the costs of testing versus passing defects
o Use results to decide frequency of subsequent inspections
o Raw Materials inspection based on supplier’s track record
o Before processes that are bottlenecks, expensive, irreversible or hide defects
o Before shipment and packaging
 Quality Control Techniques
o Acceptance Sampling – inspection of lots before and after production
o Statistical Process Control – inspection and corrective action during
production

Total Quality Management (TQM) – a philosophy that involves everyone in an organization


in a continual effort to improve quality and achieve customer satisfaction
 Top Management Commitment
 Employee Involvement and Empowerment
 Tools and Data driven decision making
 Customer Focused
 Team work
 Fail-safing – incorporating design elements that prevent incorrect problems
 Continuous Improvement – philosophy that seeks to make never-ending
improvements to the process of converting inputs into outputs
 Quality at the Source – the philosophy of making each worker responsible for the
quality of his or her work
 Six Sigma – a business process for improving quality, reducing costs, and
increasing customer satisfaction
o Less than 3.4 defects per million opportunities in any process
o Management Components
 Providing strong leadership
 Defining performance metrics
 Selecting projects likely to achieve business results
 Selecting and training appropriate people
o Technical Components
 Improving process performance
 Reducing variation
 Utilizing statistical methods
 Designing a structured improvement strategy involving definition,
measurement, analysis, improvement, and control
o Well defined rolls
 Black Belt – a leader of a project team
 Green Belt – member of a project team
Operations Management 20: The Environment

Sustainability
 Life Cycle Assessment (LCA) – the assessment of the environmental impact of a
product or service throughout its useful life
 Reduce
o Value Analysis – examination of the function of parts and materials in an
effort to reduce cost and/or improve product performance
 Reuse
o Remanufacturing – refurbishing used products by replacing worn-out or
defective components
o Design for Disassembly (DFD) – design so that used products can easily be
taken apart
 Recycle
o Recycling – recovering materials for future use (cost savings, environmental
concerns, environmental regulations
o Design for Recycling (DFR) – Design that facilitates the recovery of materials
and components in used products for reuse
 Environmentally Friendly Production
o Efficient use of resources
o Reduction of waste by-products
o Control of emissions

Product or Service Profiling – linking key product or service requirements to process


capabilities
 Range of products that will be processed
 Expected order size
 Pricing strategies
 Expected frequency of schedule changes
 Order-winning requirements

Lean Process Design


 Guided by principles of waste reduction and variance reduction
 Reduces inventory and floor space
 Quicker response times and shorter lead times
 Reduces defects, rework, and scrap
 Increases productivity

Automation – machinery that has sensing and control devices that enables it to operate
automatically
Quality Certification
 ISO 9000 – a set of international standards on quality management and quality
assurance, critical to international business
o System requirements
o Management requirements
o Resource requirements
o Realization of requirements
o Remedial requirements
 ISO 14000 – a set of international standards for assessing a company’s
environmental performance
o Management systems – systems development and integration of environmental
responsibilities into business planning
o Operations – consumption of natural resources and energy
o Environmental Systems – measuring, assessing, and managing emissions,
effluents, and other waste streams
 ISO 24700 – a set of international standards that pertain to the quality and
performance of office equipment that contains reused components

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