Chapter 1 - Introduction to

Operations Management
Operations Management
by
R. Dan Reid & Nada R. Sanders
4th Edition

1
 Learning Objectives

• Define and explain OM

• Explain the role of OM in business
• Describe the decisions that operations managers make
• Describe the differences between service and manufacturing operations
• Identify major historical developments in OM

2
 Learning Objectives – con’t

• Identify current trends in OM

• Describe the flow of information between OM and other business
functions

3
Operations Management is:

The business function responsible for planning, coordinating, and

controlling the resources needed to produce products and services
for a company

4
Operations Management is:

• A management function

• An organization’s core function

• In every organization whether Service or Manufacturing, profit or Not

for profit

5
Typical Organization Chart

6
What is Role of OM?

• OM Transforms inputs to outputs

• Inputs are resources such as
• People, Material, and Money

• Outputs are goods and services

7
OM’s Transformation Process

8
OM’s Transformation Role

• To add value
• Increase product value at each stage
• Value added is the net increase between output product value and
input material value

• Provide an efficient transformation

• Efficiency – means performing activities well for least possible cost

9
Manufacturers vs Service
Organizations
•Services: •Manufacturers:
• Tangible product
• Intangible product
• Product is inventoried
• Product cannot be
inventoried • Low customer contact
• High customer contact • Longer response time
• Short response time • Capital intensive
• Labor intensive

10
Similarities for Service/Manufacturers

• Both use technology

• Both have quality, productivity, & response issues
• Both must forecast demand
• Both can have capacity, layout, and location issues
• Both have customers, suppliers, scheduling and
staffing issues

11
Service vs Manufacturing

• Manufacturing often provides services

• Services often provides tangible goods
• Some organizations are a blend of service/manufacturing/quasi-
manufacturing Quasi-Manufacturing (QM) organizations
• QM characteristics include
• Low customer contact & Capital Intensive

12
Growth of the Service Sector

• Service sector growing to

50-80% of non-farm jobs
• Global competitiveness
• Demands for higher
quality
• Huge technology changes
• Time based competition
• Work force diversity

13
OM Decisions

• All organizations make decisions and follow a similar path

• First decisions very broad – Strategic decisions
• Strategic Decisions – set the direction for the entire company; they are broad in scope
and long-term in nature

14
OM Decisions

• Following decisions focus on specifics - Tactical

decision
• Tactical decisions: focus on specific day-to-day issues like
resource needs, schedules, & quantities to produce
• are frequent
• Strategic decisions less frequent
• Tactical and Strategic decisions must align

15
OM Decisions

16
Plan of Book-Chapters link to Types of OM
Decisions

17
Historical Development of OM

• Industrial revolution Late 1700s

• Scientific management Early 1900s
• Human relations movement 1930s-60s
• Management science 1940s-60s
• Computer age 1960s
• Environmental Issues 1970s
• JIT & TQM* 1980s

*JIT= Just in Time, TQM= Total Quality Management

18
Historical Development con’t

• Reengineering 1990s
• Global competition 1980s
• Flexibility 1990s
• Time-Based Competition 1990s
• Supply chain Management 1990s
• Electronic Commerce 2000s
• Outsourcing & flattening of world 2000s

For long-run success, companies must place much importance on their operations

19
Today’s OM Environment

• Customers demand better quality, greater speed,

and lower costs
• Companies implementing lean system concepts – a
total systems approach to efficient operations
• Recognized need to better manage information
using ERP and CRM systems
• Increased cross-functional decision making

20
OM in Practice

• OM has the most diverse organizational function

• Manages the transformation process
• OM has many faces and names such as;
• V. P. operations, Director of supply chains, Manufacturing
manager
• Plant manger, Quality specialists, etc.
• All business functions need information from OM in
order to perform their tasks

21
Business Information Flow

22
Chapter 2 - Operations
Strategy and
Competitiveness
Operations Management
by
R. Dan Reid & Nada R. Sanders

4th Edition

23
Learning Objectives

• Define the role of Business Strategy

• Explain how a Business strategy is developed
• Explain the role of Operations Strategy in the
organization
• Explain the relationship between business strategy
and operations strategy
• Describe how an operations strategy is developed

24
Learning Objectives

• Identify competitive priorities for of the operations function

• Explain the strategic role of technology
• Define productivity and identify productivity measures
• Compute productivity measures

25
The Role of Operations Strategy

• Provide a plan that makes best use of resources which;

• Specifies the policies and plans for using organizational resources
• Supports Business Strategy as shown on next slide

26
Business/Functional Strategy

27
Importance of Operations Strategy

• Essential differences between operational efficiency and strategy:

• Operational efficiency is performing tasks well, even better than competitors
• Strategy is a plan for competing in the marketplace
• Operations strategy ensures all tasks performed are the right tasks

28
To Develop a Business Strategy

• Consider these factors and strategic decisions:

• What business in the company in (mission)
• Analyze and understand the market (environmental scanning)
• Identify the company strengths (core competencies)

29
Three Inputs to a Business Strategy

30
Key Examples

• Mission: Dell Computer- “to be the most

successful computer company in the world”
• Environmental Scanning: political trends, social
trends, economic trends, market place trends,
global trends
• Core Competencies: strength of workers, modern
facilities, market understanding, best technologies,
financial know-how, logistics

31
Developing an Operations Strategy

Operations Strategy: a plan for the design and management of

operations functions
• is developed after the business strategy
• focuses on specific capabilities which give it a competitive edge –
competitive priorities

32
Operations Strategy – Designing the
Operations Function

33
Competitive Priorities- The Edge
• Four Key Operations Questions:
Will you compete on –
Cost?
Quality?
Time?
Flexibility?
• All of the above? Some? Tradeoffs?

34
Competing on Cost

• Offering product at a low price relative to competition

• Typically high volume products
• Often limit product range & offer little customization
• May invest in automation to reduce unit costs
• Can use lower skill labor
• Probably uses product focused layouts
• Low cost does not mean low quality

35
Competing on Quality

• Quality is often subjective

• Quality is defined differently depending on who is defining it
• Two major quality dimensions include
• High performance design:
• Superior features, high durability, & excellent customer service

• Product & service consistency:

• Meets design specifications
• Close tolerances
• Error free delivery
• Quality needs to address
• Product design quality – product/service meets requirements
• Process quality – error free products

36
Competing on Time

• Time/speed one of most important competition priorities

• First that can deliver often wins the race
• Time related issues involve
• Rapid delivery:
• Focused on shorter time between order placement and delivery
• On-time delivery:
• Deliver product exactly when needed every time

37
Competing on Flexibility

• Company environment changes rapidly

• Company must accommodate change by being flexible
• Product flexibility:
• Easily switch production from one item to another
• Easily customize product/service to meet specific requirements of a
customer

• Volume flexibility:
• Ability to ramp production up and down to match market demands

38
The Need for Trade-offs

• Decisions must emphasize priorities that support business strategy

• Decisions often required trade offs
• Decisions must focus on order qualifiers and order winners
• Which priorities are “Order Qualifiers”?
Must have excellent quality since everyone expects it

• Which priorities are “Order Winners”?

Dell competes on all four priorities
Southwest Airlines competes on cost
McDonald’s competes on consistency
FedEx competes on speed
Custom tailors compete on flexibility

39
Translating to Production Requirements

• Specific Operation requirements include two

general categories
• Structure – decisions related to the production process, such as
characteristics of facilities used, selection of appropriate technology, and the
flow of goods and services
• Infrastructure – decisions related to planning and control systems of
operations

40
Translating to Production Requirements

• Dell Computer example – structure & infrastructure

• They focus on customer service, cost, and speed
• ERP system developed to allow customers to order
directly from Dell
• Product design and assembly line allow “make to order”
strategy – lowers costs, increases turns
• Suppliers ship components to a warehouse within 15
minutes of the assembly plant - VMI
• Dell set up a shipping arrangement with UPS

41
Strategic Role of Technology

• Technology should support competitive priorities

• Three Applications: product technology, process technology,
and information technology
• Products - Teflon, CD’s, fiber optic cable
• Processes – flexible automation, CAD
• Information Technology – POS, EDI, ERP, B2B

42
Technology for Competitive Advantage

• Technology has positive and negative potentials

• Positive
• Improve processes
• Maintain up-to-date standards
• Obtain competitive advantage
• Negative
• Costly
• Risks such as overstating benefits

43
Technology for Competitive Advantage

• Technology should:
• Support competitive priorities
• Can require change to strategic plans
• Can require change to operations strategy
• Technology is an important strategic decision

44
Measuring Productivity

• Productivity is a measure of how efficiently inputs are converted

to outputs
Productivity = output/input

• Total Productivity Measure

Total Productivity = $sales/inputs $

• Partial Productivity Measure

Partial Productivity = cars/employee

• Multifactor Productivity Measure

Multi-factor Productivity = sales/total $costs

45
 Productivity Example - An automobile manufacturer has presented the following
data for the past three years in its annual report. As a potential investor, you are
interested in calculating yearly productivity and year to year productivity gains as
one of several factors in your investment analysis.

2003 2002 2001

2003 2002 2001

Unit car 2,700,000 2,400,000 2,100,000 Partial Prod. Measure

sales
Unit Car Sales/Employee 24.1 21.2 18.3
Employees 112,000 113,000 115,000
Year-to-year Improvement 13.7% 15.8%

$ Sales $49,000 $41,000 $38,000 Multifactor Prod. Measures

(billions$)
Total Cost Productivity 1.26 1.24 1.19

Cost of $39,000 $33,000 $32,000

Sales Year-to-year Improvement 1.6% 4.2%
(billions)
Which is the best measurement?

46
Interpreting Productivity Measures

• Productivity measures must be compared to something, i.e.

another year, a different company
• Raw productivity calculations do not tell the complete story
unless there are no major structure differences.
• In the prior automobile business example, it is obvious that
some major changes were taking place to yield 15.8% and
13.7% year-to-year cars/employee productivity
improvements. What changes could improve car sales per
employee? Automation? Out sourcing? Major re-design?

47
Interpreting Productivity Measures

• Other productivity measure questions:

• Is this partial productivity measurement enough to make
an investment decision?
• Is the Total Cost Productivity measure a better reflection
of year to year productivity at 4.2% and 1.6%. Why?
• Should you also look at productivity measures for the two
major competitors for comparison?
• Productivity measure provides information on how
the firm is doing relative to what is critical to the
firm

48
Productivity, Competitiveness, and the
Service Sector

• Productivity is a scorecard on
effective resource use
• A nation’s Productivity effects its
standard of living
• US productivity growth averaged
2.8% from
1948-1973
• Productivity growth slowed for
the next 25 years to 1.1%
• Productivity growth in service
industries has been less than in
manufacturing

49
Productivity and the Service Sector con’t

• Measuring service sector productivity is a unique challenge

• Traditional measures focus on tangible outcomes
• Service industries primarily produce intangible outcomes
• Measuring intangibles is challenging

50
Operations Strategy Across the Organization

• Business strategy defines long-term plan

• Operations strategy support the business strategy
• Marketing strategy needs to fully understand operations capability
• Financial plans in effect support operations activities.

51
Chapter 3 - Product Design &
Process Selection

Operations Management
by
R. Dan Reid & Nada R. Sanders

4th Edition

© 2010 Wiley 52
Learning Objectives

• Define product design and explain its strategic impact on

organizations
• Describe steps to develop a product design
• Using break-even analysis as a tool in selecting between alternative
products
• Identify different types of processes and explain their characteristics

© 2010 Wiley 53
 Learning Objectives – con’t

• Understand how to use a process flowchart

• Understand how to use process performance metrics
• Understand current technology advancements and how they impact
process and product design
• Understand issues impacting the design of service operations

© 2010 Wiley 54
 Product Design & Process Selection - defined

Product design – the process of defining all of the companies product

characteristics
• Product design must support product manufacturability (the ease
with which a product can be made)
• Product design defines a product’s characteristics of:

•appearance, •tolerances, and

•materials,
• performance
standards.
•dimensions,

Process Selection – the development of the process necessary to

produce the designed product.

© 2010 Wiley 55
Design of Services versus Goods

• Service design is unique in that the service and

entire service concept are being designed
• must define both the service and concept
- Physical elements, aesthetic &
psychological benefits
e.g. promptness, friendliness, ambiance
• Product and service design must match the needs and
preferences of the targeted customer group

© 2010 Wiley 56
The Product Design Process

Idea development: all products begin with an idea whether from:

• customers,
• competitors or
• suppliers

Reverse engineering: buying a competitor’s product

© 2010 Wiley 57
Product Design Process

• Idea developments selection affects

• Product quality
• Product cost
• Customer satisfaction
• Overall manufacturability – the ease with which the product can be made

© 2010 Wiley 58
The Product Design Process
Step 1 - Idea Development - Someone thinks of a need and a
product/service design to satisfy it: customers, marketing, engineering,
competitors, benchmarking, reverse engineering
Step 2 - Product Screening - Every business needs a formal/structured
evaluation process: fit with facility and labor skills, size of market,
contribution margin, break-even analysis, return on sales
Step 3 – Preliminary Design and Testing - Technical specifications are
developed, prototypes built, testing starts
Step 4 – Final Design - Final design based on test results, facility,
equipment, material, & labor skills defined, suppliers identified

© 2010 Wiley 59
Product Screening Tool – Break-Even Analysis

• Computes the quantity of goods company needs to sell to cover its

costs
QBE = F/ (SP - VC)
• QBE – Break even quantity
• F – Fixed costs
• SP – selling price/unit
• VC – Variable cost

© 2010 Wiley 60
Product Screening Tool – Break-Even Analysis
con’t
• Break-even analysis also includes calculating
• Total cost – sum of fixed and variable cost
Total cost = F + (VC)*Q

• Revenue – amount of money brought in from sales

Revenue = (SP) * Q

Q = number of units sold

© 2010 Wiley 61
Break-Even Analysis: Graphical Approach

• Compute quantity of goods that

must be sold to break-even
• Compute total revenue at an
assumed selling price
• Compute fixed cost and variable cost
for several quantities
• Plot the total revenue line and the
total cost line
• Intersection is break-even
• Sensitivity analysis can be done to
examine changes in all of the
assumptions made

© 2010 Wiley 62
Break-Even Example:

A company is planning to establish a chain of movie theaters.

It estimates that each new theater will cost approximately
$1 Million. The theaters will hold 500 people and will have 4
showings each day with average ticket prices at $8. They
estimate that concession sales will average $2 per patron.
The variable costs in labor and material are estimated to be
$6 per patron. They will be open 300 days each year. What
must average occupancy be to break-even?

© 2010 Wiley 63
Break-Even Example Calculations

• Break-Even Point
Total revenues = Total costs @ break-even point Q
Selling price*Q = Fixed cost + variable cost*Q
($8+$2)Q= $1,000,000 + $6*Q
Q = 250,000 patrons (42% occupancy)
• What is the gross profit if they sell 300,000 tickets
Profit = Total Revenue – Total Costs
P = $10*300,000 – (1,000,000 + $6*300,000)
P = $200,000
• If concessions only average $.50/patron, what is break-even Q now?
(sensitivity analysis)
($8.50)Q = 1,000,000 - $6*Q
Q = 400,000 patrons (67% occupancy)
© 2010 Wiley 64
 Factors Impacting Product Design

• Must Design for Manufacturing –

DFM
• Guidelines to produce a product
easily and profitably
• Simplification - Minimize parts
• Standardization
• Design parts for multiply
applications
• Use modular design
• Simplify operations

© 2010 Wiley 65
 Factors In Product Life Cycle

• Product life cycle – series of

changing product demand
• Consider product
life cycle stages
• Introduction
• Growth
• Maturity
• Decline
• Facility & process investment
depends on life cycle

© 2010 Wiley 66
 Concurrent Engineering

Old “over-the-wall” sequential design process

should not be used

• Each function did its work and passed it

to the next function

Replace with a Concurrent Engineering

process

• All functions form a design team that

develops specifications, involves
customers early, solves potential
problems, reduces costs, & shortens
time to market
© 2010 Wiley 67
Remanufacturing

Uses components of old products in the production of new ones and

has:
• Environmental benefits
• Cost benefits
Good for:
• Computers, televisions, automobiles

© 2010 Wiley 68
Types of Processes

• Intermittent processes:
• Processes used to produce a variety of products with different processing
requirements in lower volumes. (such as healthcare facility)
• Repetitive processes:
• Processes used to produce one or a few standardized products in high
volume. (such as a cafeteria, or car wash)

© 2010 Wiley 69
Process Selection

• Product design considerations must include the process

• Differences between Intermittent & Repetitive Ops:
(1) the amount of product volume produced, and
(2) the degree of product standardization.

© 2010 Wiley 70
Intermittent and Repetitive Operations

© 2010 Wiley 71
Process Selection Types

• Process types can be:

• Project process – make a one-at-a-time product exactly to
customer specifications
• Batch process – small quantities of product in groups or
batches based on customer orders or specifications
• Line process – large quantities of a standard product
• Continuous process – very high volumes of a fully
standard product
• Process types exist on a continuum

© 2010 Wiley 72
Underlying Process Relationship Between
Volume and Standardization Continuum

© 2010 Wiley 73
Process Selection Considerations

• Process selection is based on five considerations

1. Type of process; range from intermittent to repetitive or continuous
2. Degree of vertical integration
3. Flexibility of resources
4. Mix between capital & human resources
5. Degree of customer contact

© 2010 Wiley 74
 Process Design Tools

Often stages in
the production
process can be
performed in
parallel, as shown
here in (c) and (d).
The two stages can
produce different
products (c) or the
same product (d).

© 2010 Wiley 75
Designing Processes

• Process design tools include

• Process flow analysis
• Process flowchart
• Design considerations include
• Make-to-stock strategy
• Assemble-to-order strategy
• Make-to-order strategy
See flowcharts for different product strategies at
Antonio’s Pizzeria (next slide)

© 2010 Wiley 76
Flowchart for Different Product Strategies
at Antonio’s Pizzaria

© 2010 Wiley 77
 Process Flowchart of Customer Flow at
Antonio’s Pizzeria

A basic process performance

metric is throughput time. A
lower throughput time means
that more products can move
through the system. One goal of
process improvement is to
reduce throughput time.

© 2010 Wiley 78
Process Performance Metrics

Process performance metrics – defined: Measurement of different process

characteristics that tell us how a process is performing
• Determining if a process is functioning properly is required
• Determination requires measuring performance

© 2010 Wiley 79
Process Performance Metrics

© 2010 Wiley 80
Linking Product Design & Process Selection

• Product design and process selection are directly

linked
• Type of product selected defines type of operation
required
• Type of operation available defines broader
organizational aspects such as
• Equipment required
• Facility arrangement
• Organizational structure

© 2010 Wiley 81
 Linking Design & Process Selection

• Organizational Decisions appropriate for different types of operations

© 2010 Wiley 82
Linking Product Design & Process Selection
con’t
Product Design Decisions:
Intermittent and repetitive operations typically focus on producing
products in different stages of the product life cycle. Intermittent is
best for early in product life; repetitive is better for later when
demand is more predicable.

© 2010 Wiley 83
Linking Product Design & Process Selection,
con’t
• Competitive Priorities: decisions of how a company will compete in
the marketplace. Intermittent operations are typically less
competitive on cost than repetitive operations. (Think “off the rack”
vs. custom tailored clothing.)

© 2010 Wiley 84
Intermittent VS. Repetitive Facility
Layouts

© 2010 Wiley 85
Product and Service Strategy

• Type of operation is directly related to product and service

strategy
• Three basic strategies include
1. Make-to-stock; in anticipation of demand
2. Assemble-to-order; built from standard components on order
3. Make-to-order; produce to customer specification at time of order

© 2010 Wiley 86
Product and Service Strategy Options

© 2010 Wiley 87
 Degrees of Vertical Integration & Make or
Buy
• Vertical integration refers to the degree a firm chooses to do
processes itself- raw material to sales
• Backward Integration means moving closer to primary operations
• Forward Integration means moving closer to customers

• A firm’s Make-or-Buy choices should be based on the following

considerations:
• Strategic impact
• Available capacity
• Expertise
• Quality considerations
• Speed
• Cost (fixed cost + variable cost)make = Cost (fixed cost + Variable cost)buy
© 2010 Wiley 88
Technology Decisions

Information Technology
• Simplify first then apply appropriate technology
ERP, GPS, RFID
Automation
Automated Material Handling: Automated guided vehicles (AGV),
Automated storage & retrieval systems (AS/RS)
Flexible Manufacturing Systems (FMS)
Robotics & Numerically-Controlled (NC) equipment

© 2010 Wiley 89
E-manufacturing

• Web-based environment creates numerous

business opportunities to include;
• Product design collaboration
• Process design collaboration
• Computer-aided design – uses computer graphics to
design new products
• Computer-integrated manufacturing – integration
of product design, process planning, and
manufacturing using an integrated computer
system

© 2010 Wiley 90
Designing Services: How do they
Differ from Manufacturing?
• Services are different from manufacturing as they;
• Produce intangible products
• Involve a high degree of customer contact
• Type of service is classified according to degree of customer contact

© 2010 Wiley 91
 Designing Services

• Service Characteristics
• Pure services
• Quasi-Manufacturing
• Mixed services
• Service Package
• The physical goods
• The sensual benefits
• The psychological benefits
• Differing designs
• Substitute technology for
people
• Get customer involved
• High customer attention
© 2010 Wiley 92
Product Design and Process Selection
Across the Organization
• Strategic and financial of product design and process selection
mandates operations work closely across the organization
• Marketing is impacted by product that is produced
• Finance is integral to the product design and process selection issues due to
frequent large financial outlays

© 2010 Wiley 93
Product Design and Process Selection
Across the Organization – con’t
• Strategic and financial of product design and
process selection mandates operations work closely
across the organization
• Information services has to be developed to match the
needs of the production process
• Human resources provides important input to the process
selection decisions for staffing needs

© 2010 Wiley 94
Chapter 4 – E-Commerce and
Supply Chain Management
Operations Management
by
R. Dan Reid & Nada R. Sanders
4th Edition © Wiley 2010

© 2010 Wiley 95
Learning Objectives

• Describe the structure of supply chains

• Describe the bullwhip effect
• Describe supply chains for service orgs
• Describe the major issues that affect supply chain management
• Describe electronic commerce
• Describe global issues in supply chain management

© 2010 Wiley 96
Learning Objectives con’t

• Describe government regulation issues that affect supply chains

• Describe green supply chain management
• Describe the role of purchasing in SCM
• Describe sourcing issues
• Describe strategic purchasing partnerships

© 2010 Wiley 97
Learning Objectives con’t

• Describe the ethics of supplier management

• Describe supply chain distribution
• Describe how to implement SCM
• Describe supply chain performance metrics
• Describe trends in supply chain management

© 2010 Wiley 98
 Supply Chains & SCM Defined

A supply chain is the network of all the activities involved in

delivering a finished product/service to the customer
• Sourcing of: raw materials, assembly, warehousing, order
entry, distribution, delivery
Supply Chain Management is the vital business function that
coordinates all of the network links
• Coordinates movement of goods through supply chain from
suppliers to manufacturers to distributors
• Promotes information sharing along chain like forecasts, sales
data, & promotions

© 2010 Wiley 99
Components of a Supply Chain for a
Manufacturer
• External Suppliers – source of raw material
• Tier one supplier supplies directly to the processor
• Tier two supplier supplies directly to tier one
• Tier three supplier supplies directly to tier two
• Internal Functions include – processing functions
• Processing, purchasing, planning, quality, shipping

© 2010 Wiley 100

Components of a Supply Chain

External Distributors – transport finished products to appropriate

locations
• Logistics managers are responsible for managing the movement of products
between locations. Includes:
• traffic management – arranging the method of shipment for both incoming and
outgoing products or material
• distribution management – movement of material from manufacturer to the customer

© 2010 Wiley 101

A Traditional Supply Chain Information Flow

© 2010 Wiley 102

The Bullwhip Effect - defined

Bullwhip effect - the inaccurate or distorted demand

information created in the supply chain
• Causes are generated by:
• demand forecasting updating,
• order batching,
• price fluctuations,
• rationing and
• gaming

© 2010 Wiley 103

The Bullwhip Effect

Counteracting the Effect:

• Change the way suppliers forecast product demand by making this information
available at all levels of the supply chain
• Share real demand information (POS terminals)
• Eliminate order batching
• Stabilize pricing
• Eliminate gaming

© 2010 Wiley 104

Supply Chains for Service Orgs

• Internal Operations
• External Distributors

© 2010 Wiley 105

Major Issues Affecting SCM

• Information technology – enablers include the Internet,

Web, EDI, intranets and extranets, bar code
scanners, and point-of-sales demand information
• E-commerce and e-business – uses internet and web to
transact business

© 2010 Wiley 106

 Major Issues con’t

 Business-to-business (B2B) E-commerce – businesses selling to and

buying from other businesses
• Business-to-Business (B2B) Evolution:
• Automated order entry systems started in 1970’s
• Electronic Data Interchange (EDI) started in the 1970’s
• Electronic Storefronts emerged in the 1990’s
• Net Marketplaces emerged in the late 1990’s

© 2010 Wiley 107

Major Issues con’t

Benefits of B2B E-Commerce

• Lower procurement administrative costs,
• Low-cost access to global suppliers
• Lower inventory investment due to price transparency/reduced response time
• Better product quality because of increased cooperation between buyers and sellers,
especially during the product design and development

© 2010 Wiley 108

 Types of E-Commerce

Business-to-Consumer (B2C) E-Commerce - on-line businesses sell to

individual consumers:
• Advertising Revenue Model – Provides users w/information on services & products;
provides opportunity for suppliers to advertise
• Subscription Revenue Model – Web site charges a subscription fee for access to the
site
• Transaction Fee Model – Company receives a fee for executing a transaction

© 2010 Wiley 109

Types of E-Commerce con’t

• Sales Revenue Model – A means of selling goods,

information, or service directly to customers
• Affiliate Revenue Model – Companies receive a referral
fee for directing business to an affiliate
• Intranets – An organization’s internal networks
• Extranets – Intranets linked to the Internet for
suppliers and customers to interact within their
system.

© 2010 Wiley 110

Major Issues con’t

• SCM must consider the following trends, improved

capabilities, & realities:
• Consumer Expectations and Competition – power has
shifted to the consumer
• Globalization – capitalize on emerging markets
• Government Regulations and E-Commerce – issues of
Internet government regulations
• Green Supply Chain Management – recycling,
sustainable eco-efficiency, and waste minimization

© 2010 Wiley 111

 Global SCM Factors

• Managing extensive global supply chains introduces many complications

• Infrastructure issues like transportation, communication, lack of skilled labor, &
scarce local material supplies
• Product proliferation created by the need to customize products for each market

© 2010 Wiley 112

Sourcing Issues

• Which products to produce in-house and which are

provided by other supply chain members
• Vertical integration – a measure of how much of the
supply chain is owned by the manufacturer
• Backward integration – owning or controlling of sources of
raw material and component parts
• Forward integration – owning or control the channels of
distribution
• Vertical integration related to levels of insourcing or
outsourcing products or services
© 2010 Wiley 113
The Role of Purchasing

• The purchasing dept plays important role in SCM and

is responsible for:
• Selecting suppliers
• Negotiating and administering long-term contracts
• Monitoring supplier performance
• Placing orders to suppliers
• Developing a responsible supplier base
• Maintaining good supplier relations

© 2010 Wiley 114

The Traditional Purchasing Process

© 2010 Wiley 115

The E-purchasing Process

© 2010 Wiley 116

Insourcing vs. Outsourcing

Questions to ask before sourcing decisions are made:

• Is product/service technology critical to firm’s success?
• Is product/service a core competency?
• Is it something your company must do to survive?

© 2010 Wiley 117

Make or Buy Analysis

• Analysis will look at the expected sales levels and

cost of internal operations vs. cost of purchasing
the product or service

Total Cost of Outsourcin g :

TCBuy  FCBuy  VCBuy  Q 
Total Cost of Insourcing :
TCMake  FCMake  VCMake  Q 
Indifferen ce Point :
FCBuy  VCBuy  Q   FCMake  VCMake  Q 
© 2010 Wiley 118
Make or Buy Example

Mary and Sue decide to open a bagel shop. Their first

decision is whether they should make the bagels on-site or
buy the bagels from a local bakery. If they buy from the local
bakery they will need airtight containers at a fixed cost of
$1000 annually. They can buy the bagels for $0.40 each. If
they make the bagels in-house they will need a small kitchen
at a fixed cost of $15,000 annually. It will cost them $0.15
per bagel to make. They believe they will sell 60,000 bagels.

© 2010 Wiley 119

 Make or Buy Computation

• Mary and Sue wants to know if they should make or buy the bagels.
• FCBuy + (VCBuy x Q) = FCMake + (VCMake x Q)
• $1,000 + ($0.40 x Q) = $15,000 + ($0.15 x Q)
• Q = 56,000 bagels

© 2010 Wiley 120

The Role of Purchasing

Purchasing role has attained increased importance

since material costs represent 50-60% of cost of
goods sold
• Ethics considerations is a constant concern
• Developing supplier relationships is essential
• Determining how many suppliers to use
• Developing partnerships

© 2010 Wiley 121

Developing Supplier Relationship

A strong supplier base is critical to the success of many organizations

• Top three criteria for choosing suppliers are:
• Price
• Quality
• On-time delivery

© 2010 Wiley 122

 Critical Factors in Successful Partnership
Relations

• Critical factors in successful partnering include:

• Impact – attaining levels of productivity and
competitiveness that are not possible through normal
supplier relationships
• Intimacy – working relationship between two partners
• Vision – the mission or objectives of the partnership

© 2010 Wiley 123

 Win-Win Factors in Partnership
Relations
Have a long-term orientation Share a common vision
Are strategic in nature Share short/long term plans
Share information Driven by end-customer needs
Share risks and opportunities
• Benefits of Partnering
• Early supplier involvement (ESI) in the design process
• Using supplier expertise to develop and share cost
improvements and eliminate costly processes
• Shorten time to market

© 2010 Wiley 124

Ethics in Supply Management

Global Standards of Supply Management Conduct from ISM:

• Loyalty to your organization
• Justice to those with whom you deal
• Faith in your profession

© 2010 Wiley 125

Supply Chain Distribution

• Warehouses involved in supply chain distributions

and include
• Plant warehouses
• Regional warehouses
• Local warehouses
• Warehouses can either be
• General – used for long-term storage
• Distribution – used for short-term storage, consolidation,
and product mixing

© 2010 Wiley 126

Supply Chain Distribution con’t

• Transportation consolidation – warehouses consolidate less-than-

truckload (LTL) quantities into truckload (TL) quantities
• Product mixing – warehouse value added customer service of
grouping a variety of products into a direct shipment to the customer

© 2010 Wiley 127

Supply Chain Distribution con’t

• Services are offered can improve customer service by moving goods

closer to the customer and thus reducing replenishment time
• Crossdocking or movement of material without storage and order-
picking material while still performing the receiving and shipping
functions.

© 2010 Wiley 128

Supply Chain Distribution con’t

• Radio Frequency Identification Technology (RFID) –

automated data collection technology which relies
on radio waves to transfer data between reader and
RFID tag
• Third-party Service Providers – ease of developing
an electronic storefront has allowed the discovery
of suppliers from around the world

© 2010 Wiley 129

Integrated SCM

• Implementing integrated SCM requires:

• Analyzing the whole supply chain
• Starting by integrating internal functions first
• Integrating external suppliers through partnerships

 Supplier’s Goals
 Increase sales volume
 Increase customer loyalty
 Reduce cost
 Improve demand data
 Improve profitability

© 2010 Wiley 130

Integrated SCM con’t

• Manufacturer’s Goals
• Reduce costs
• Reduce duplication of effort
• Improve quality
• Reduce lead time
• Implement cost reduction program
• Involve suppliers early
• Reduce time to market

© 2010 Wiley 131

Leveraging SCM: A List

1. Regularly assess your SC network to ensure continued suitability

to your needs
2. Maintain a global view of demand.
3. Decide how to get products to your customers
4. Improve asset productivity.

© 2010 Wiley 132

Leveraging SCM: A List con’t

5. Expand your visibility.

6. Know what happens, when it happens.
7. Design to deliver.
8. Track performance to allow for continuous improvements.
Implementing these strategies should reduce operating expenses and result
in benefits for members of chain.

© 2010 Wiley 133

 Eliminating Sources of Waste in Supply Chain

• Overproduction: don’t build product before needed

• Delay between activities in chain: eliminate them
• Unnecessary transport or conveyance of product: includes both internal
and external movement

© 2010 Wiley 134

Eliminating Sources of Waste in Supply Chain
con’t
• Unnecessary movement of people: includes travel
or reaching due to poorly designed work space
• Excess inventory ready and in position: includes
early deliveries, excess inventory, etc.
• Suboptimal use of space: trailer loads, warehouses,
etc.
• Errors that cause rework: billing errors, inventory
discrepancies, etc.

© 2010 Wiley 135

Supply Chain Metrics

• Measuring supply chain performance

• Traditional measures include:
• Return on investment
• Profitability
• Market share
• Revenue growth
• Additional measures
• Customer service levels
• Inventory turns
• Weeks of supply
• Inventory obsolescence

© 2010 Wiley 136

 Supply Chain Performance Metrics con’t

• Customer demands for better-quality requires company’s to develop ways to

measure improvements
• Some measurements include:
• Warranty costs
• Products returned
• Cost reductions allowed because of product defects
• Company response times
• Transaction costs

© 2010 Wiley 137

 Current Trends in SCM

Increased use of electronic marketplace such as:

• E-distributors – independently owned net marketplaces having
catalogs representing thousands of suppliers and designed for
spot purchases
• E-purchasing – companies that connect on-line MRO suppliers to
business who pay fees to join the market, usually for long-term
contractual purchasing

© 2010 Wiley 138

 Current Trends in SCM – con’t

• Value chain management – automation of a firm’s purchasing or

selling processes
• Exchanges – marketplace that focuses on spot requirements of
large firms in a single industry
• Industry consortia – industry-owned markets that enable buyers
to purchase direct inputs from a limited set of invited suppliers
• Decreased supply chain velocity due to greater distances
with greater uncertainty and generally less efficient.
• Greening of the supply chain: packaging, distribution,
carbon footprints, etc.

© 2010 Wiley 139

Chapter 5 - Total Quality
Management
Operations Management
by
R. Dan Reid & Nada R. Sanders
4th Edition

140
Learning Objectives

• Explain the meaning of TQM

• Identify the costs of Quality
• Describe the evolution of TQM
• Identify Quality leaders and their contributions

141
Learning Objectives con’t

• Identify key features of the TQM philosophy

• Describe tools for identifying and solving quality problems
• Describe quality awards and quality certifications

142
Defining Quality

• Definition of quality is dependent on the people defining it

• There is no single, universal definition of quality
• 5 common definitions include:
(See next slide)

143
Defining Quality – 5 Ways

1. Conformance to specifications
 Does product/service meet targets and tolerances defined by
designers?
2. Fitness for use
 Evaluates performance for intended use
3. Value for price paid
 Evaluation of usefulness vs. price paid
4. Support services
 Quality of support after sale
5. Psychological
 Ambiance, prestige, friendly staff

144
Manufacturing Quality vs. Service Quality

• Manufacturing quality focuses on tangible product features

• Conformance, performance, reliability, features
• Service organizations produce intangible products that must be
experienced
• Quality often defined by perceptional factors like
courtesy, friendliness, promptness, waiting time,
consistency

145
Cost of Quality

• Quality affects all aspects of the organization

• Quality has dramatic cost implications of:
• Quality control costs
• Prevention costs
• Appraisal costs
• Quality failure costs
• Internal failure costs
• External failure costs

146
Cost of Quality – 4 Categories

Early detection/prevention is less costly

• (Maybe by a factor of 10)

147
Evolution of TQM – New Focus

148
Quality Gurus

149
TQM Philosophy

 TQM Focuses on identifying quality problem root

causes
 Encompasses the entire organization
 Involves the technical as well as people
 Relies on seven basic concepts of
 Customer focus

 Continuous improvement

 Employee empowerment

 Use of quality tools

 Product design

 Process management

 Managing supplier quality

150
TQM Philosophy - concepts

• Focus on Customer
• Identify and meet customer needs
• Stay tuned to changing needs, e.g. fashion styles
• Continuous Improvement
• Continuous learning and problem solving, e.g. Kaizen, 6
sigma
• Plan-D-Study-Act (PDSA)
• Benchmarking
• Employee Empowerment
• Empower all employees; external and internal customers
151
TQM Philosophy– Concepts con’t

• Team Approach
• Teams formed around processes – 8 to 10 people
• Meet weekly to analyze and solve problems

• Use of Quality Tools

• Ongoing training on analysis, assessment, and correction, & implementation
tools
• Studying practices at “best in class” companies

152
Ways of Improving Quality

• Plan-Do-Study-Act Cycle (PDSA)

• Also called the Deming Wheel after originator
• Circular, never ending problem solving process
• Seven Tools of Quality Control
• Tools typically taught to problem solving teams
• Quality Function Deployment
• Used to translate customer preferences to design

153
PDSA Details

• Plan
• Evaluate current process
• Collect procedures, data, identify problems
• Develop an improvement plan, performance objectives
• Do
• Implement the plan – trial basis
• Study
• Collect data and evaluate against objectives
• Act
• Communicate the results from trial
• If successful, implement new process

154
PDSA con’t

• Cycle is repeated
• After act phase, start planning and repeat process

155
Seven Tools of Quality Control

1. Cause-and-Effect Diagrams
2. Flowcharts
3. Checklists
4. Control Charts
5. Scatter Diagrams
6. Pareto Analysis
7. Histograms

156
Cause-and-Effect Diagrams

• Called Fishbone Diagram

• Focused on solving identified quality problem

157
Flowcharts

• Used to document the detailed steps in a process

• Often the first step in Process Re-Engineering

158
 Checklist

Simple data check-off sheet designed to identify type of

quality problems at each work station; per shift, per
machine, per operator

159
Control Charts

• Important tool used in Statistical Process Control –

Chapter 6
• The UCL and LCL are calculated limits used to show
when process is in or out of control

160
Scatter Diagrams

• A graph that shows how two variables are related to one

another
• Data can be used in a regression analysis to establish
equation for the relationship

161
Pareto Analysis

• Technique that displays the degree of importance for each element

• Named after the 19th century Italian economist; often called the 80-20
Rule
• Principle is that quality problems are the result of only a few problems
e.g. 80% of the problems caused by 20% of causes

162
Histograms

• A chart that shows the frequency distribution of observed

values of a variable like service time
at a bank drive-up window

• Displays whether the distribution is symmetrical (normal) or

skewed

163
Product Design - Quality Function
Deployment

• Critical to ensure product design meets customer expectations

• Useful tool for translating customer specifications into technical
requirements is Quality Function Deployment (QFD)
• QFD encompasses
• Customer requirements
• Competitive evaluation
• Product characteristics
• Relationship matrix
• Trade-off matrix
• Setting Targets

164
 Quality Function Deployment
(QFD) Details

Process used to ensure that the product meets customer specifications

 Voice of the
engineer

Voice

 Customer-bas
benchmark
of the

customer
165
 QFD - House of Quality

 Trade-offs Technica
Benchmar

 Targets

Adding trade-offs, targets & developing product specifications

166
Reliability – critical to quality

• Reliability is the probability that the product, service or part will function
as expected
• No product is 100% certain to function properly
• Reliability is a probability function dependent on sub-parts or components

167
Reliability – critical to quality

• Reliability of a system is the product of component reliabilities

RS = (R1) (R2) (R3) . . . (Rn)
RS = reliability of the product or system
R1 = reliability of the components
• Increase reliability by placing components in parallel

168
Reliability – critical to quality

• Increase reliability by placing components in parallel

• Parallel components allow system to operate if one or the other fails

RS = R1 + (R2* Probability of needing 2nd component)

169
Process Management & Managing Supplier
Quality

• Quality products come from quality sources

• Quality must be built into the process
• Quality at the source is belief that it is better to uncover source of quality
problems and correct it
• TQM extends to quality of product from company’s suppliers

170
Quality Awards and Standards

• Malcolm Baldrige National Quality Award (MBNQA)

• The Deming Prize
• ISO 9000 Certification
• ISO 14000 Standards

171
MBNQA- What Is It?

• Award named after the former Secretary of

Commerce – Reagan Administration
• Intended to reward and stimulate quality initiatives
• Given to no more that two companies in each of
three categories; manufacturing, service, and small
business
• Past winners; Motorola Corp., Xerox, FedEx, 3M,
IBM, Ritz-Carlton

172
The Deming Prize

• Given by the Union of Japanese Scientists and Engineers

since 1951

• Named after W. Edwards Deming who worked to improve

Japanese quality after WWII

• Not open to foreign companies until 1984

• Florida P & L was first US company winner

173
ISO Standards

• ISO 9000 Standards:

• Certification developed by International Organization for
Standardization
• Set of internationally recognized quality standards
• Companies are periodically audited & certified
• ISO 9000:2000 QMS – Fundamentals and
Standards
• ISO 9001:2000 QMS – Requirements
• ISO 9004:2000 QMS - Guidelines for Performance
• More than 40,000 companies have been certified
• ISO 14000:
• Focuses on a company’s environmental responsibility

174
Why TQM Efforts Fail

•Lack of a genuine quality culture

•Lack of top management support and
commitment
•Over- and under-reliance on SPC
methods

175
TQM Within OM

• TQM is broad sweeping organizational change

• TQM impacts
• Marketing – providing key inputs of customer information
• Finance – evaluating and monitoring financial impact
• Accounting – provides exact costing
• Engineering – translate customer requirements into specific
engineering terms
• Purchasing – acquiring materials to support product development
• Human Resources – hire employees with skills necessary
• Information systems – increased need for accessible information

176
Chapter 6 - Statistical Quality
Control
Operations Management
by
R. Dan Reid & Nada R. Sanders
4th Edition

177
Learning Objectives

• Describe categories of SQC

• Explain the use of descriptive statistics in measuring quality
characteristics
• Identify and describe causes of variation
• Describe the use of control charts
• Identify the differences between x-bar, R-, p-, and c-charts

178
Learning Objectives –con’t

• Explain process capability and process capability

index
• Explain the concept six-sigma
• Explain the process of acceptance sampling and
describe the use of OC curves
• Describe the challenges inherent in measuring
quality in service organizations

179
 Three SQC Categories

Statistical quality control (SQC): the term used to describe the set of
statistical tools used by quality professionals; SQC encompasses
three broad categories of:
1. Statistical process control (SPC)
2. Descriptive statistics include the mean, standard deviation, and
range
 Involve inspecting the output from a process
 Quality characteristics are measured and charted
 Helps identify in-process variations
3. Acceptance sampling used to randomly inspect a batch of goods to
determine acceptance/rejection
 Does not help to catch in-process problems

180
Sources of Variation

• Variation exists in all processes.

• Variation can be categorized as either:
• Common or Random causes of variation, or
• Random causes that we cannot identify
• Unavoidable, e.g. slight differences in process variables like
diameter, weight, service time, temperature
• Assignable causes of variation
• Causes can be identified and eliminated: poor employee training,
worn tool, machine needing repair

181
 Descriptive Statistics

• Descriptive Statistics include:

n
• The Mean- measure of central
tendency
x i
• The Range- difference between x i 1
largest/smallest observations in a
set of data
n

 x 
• Standard Deviation measures the n
2
amount of data dispersion around
mean i X
• Distribution of Data shape σ i 1

• Normal or bell shaped or n 1

• Skewed

182
Distribution of Data

• Normal distributions • Skewed distribution

183
 SPC Methods-Developing Control Charts

Control Charts (aka process or QC charts) show sample data plotted on a graph
with CL, UCL, and LCL
Control chart for variables are used to monitor characteristics that can be
measured, e.g. length, weight, diameter, time
Control charts for attributes are used to monitor characteristics that have
discrete values and can be counted, e.g. % defective, # of flaws in a shirt, etc.

184
 Setting Control Limits

• Percentage of values under • Control limits balance

normal curve risks like Type I error

185
 Control Charts for Variables

• Use x-bar and R-bar charts

together
• Used to monitor different
variables
• X-bar & R-bar Charts reveal
different problems
• Is statistical control on one
chart, out of control on the
other chart? OK?

186
Control Charts for Variables

• Use x-bar charts to monitor the changes in the mean of a

process (central tendencies)
• Use R-bar charts to monitor the dispersion or variability of
the process
• System can show acceptable central tendencies but
unacceptable variability or
• System can show acceptable variability but unacceptable
central tendencies

187
 Constructing an X-bar Chart: A quality control inspector at the Cocoa Fizz soft drink company
has taken three samples with four observations each of the volume of bottles filled. If the
standard deviation of the bottling operation is .2 ounces, use the below data to develop
control charts with limits of 3 standard deviations for the 16 oz. bottling operation.

Center line and control limit

Time 1 Time 2 Time 3 formulas
Observation 1 15.8 16.1 16.0

Observation 2 16.0 16.0 15.9

x  x 2  ...x n σ
x 1 , σx 
k
Observation 3 15.8 15.8
n
15.9
where (k ) is the # of sample means and (n)
is the # of observatio ns w/in each sample
Observation 4 15.9 15.9 15.8
UCL x  x  zσ x
Sample LCL x 15.875
x  zσ x 15.975 15.9
means (X-bar)
Sample 0.2 0.3 0.2
ranges (R)

188
Solution and Control Chart (x-bar)

• Center line (x-double bar):

15.875  15.975  15.9

x  15.92
3
• Control limits for±3σ limits:

 .2 
UCL x  x  zσ x  15.92  3   16.22
 4
 .2 
LCL x  x  zσ x  15.92  3   15.62
 4

189
X-Bar Control Chart

190
 Control Chart for Range (R)

• Center Line and Control Limit formulas: • Factors for three sigma control limits
 Factor for x-Chart  Factors for R-Chart
 Sample Size
 (n) A2
 D3 D4
2
 1.88 0.00 3.27
0.2  0.3  0.2 3 1.02 0.00 2.57
R  .233 4 0.73 0.00 2.28
3
5 0.58 0.00 2.11

6 0.48 0.00 2.00

UCL R  D4 R  2.28(.233)  .53 7 0.42 0.08 1.9

8 0.37 0.14 21.86



LCL R  D3 R  0.0(.233)  0.0 9 0.34 0.18 1.82

10 0.31 0.22 1.78

11 0.29 0.26 1.74

12 0.27 0.28 1.72

13 0.25 0.31 1.69

14 0.24 0.33 1.67

15 191
0.22 0.35 1.65
R-Bar Control Chart

192
Second Method for the X-bar Chart Using
R-bar and the A2 Factor

• Use this method when sigma for the process

distribution is not know
• Control limits solution:

0.2  0.3  0.2

R  .233
3

UCL x  x  A 2 R  15.92  0.73.233  16.09

LCL x  x  A 2 R  15.92  0.73.233  15.75

193
Control Charts for Attributes –P-Charts & C-
Charts

Attributes are discrete events: yes/no or pass/fail

• Use P-Charts for quality characteristics that are discrete and involve
yes/no or good/bad decisions
• Number of leaking caulking tubes in a box of 48
• Number of broken eggs in a carton

• Use C-Charts for discrete defects when there can be more than one
defect per unit
• Number of flaws or stains in a carpet sample cut from a production run
• Number of complaints per customer at a hotel

194
 P-Chart Example: A production manager for a tire company has inspected
the number of defective tires in five random samples with 20 tires in each
sample. The table below shows the number of defective tires in each
sample of 20 tires. Calculate the control limits.

Sample Number Number of Proportion Solution:

of Tires in Defective
Defective each
Tires Sample
1 3 20 .15 # Defectives 9
CL  p    .09
2 2 20 .10 Total Inspected 100
3 1 20 .05 p(1  p ) (.09)(.91)
σp    0.64
4 2 20 .10 n 20
5 2 20 .05 UCL p  p  z σ   .09  3(.064)  .282
Total 9 100 .09 LCL p  p  z σ   .09  3(.064)  .102  0

195
P- Control Chart

196
 C-Chart Example: The number of weekly customer complaints
are monitored in a large hotel using a
c-chart. Develop three sigma control limits using the data table
below.

Week Number of Solution:

Complaints
1 3
2 2 # complaints 22
3 3 CL    2.2
# of samples 10
4 1
5 3 UCL c  c  z c  2.2  3 2.2  6.65
6 3
LCL c  c  z c  2.2  3 2.2  2.25  0
7 2
8 1
9 3
10 1
Total 22 197
C- Control Chart

198
 Process Capability

Product Specifications
• Preset product or service dimensions, tolerances: bottle fill might be 16 oz. ±.2 oz.
(15.8oz.-16.2oz.)
• Based on how product is to be used or what the customer expects
Process Capability – Cp and Cpk
• Assessing capability involves evaluating process variability relative to preset product or
service specifications
• Cp assumes that the process is centered in the specification range
specificat ion width USL  LSL
Cp  
process width 6σ
• Cpk helps to address a possible lack of centering of the process
 USL  μ μ  LSL 
Cpk  min  ,  199
 3σ 3σ 
Relationship between Process
Variability and Specification Width
• Three possible ranges for Cp

• Cp = 1, as in Fig. (a), process

variability just meets specifications

• Cp ≤ 1, as in Fig. (b), process not capable of

producing within specifications

• Cp ≥ 1, as in Fig. (c), process

exceeds minimal specifications

• One shortcoming, Cp assumes that the

process is centered on the specification
range

• Cp=Cpk when process is centered

200
 Computing the Cp Value at Cocoa Fizz: 3 bottling machines are being
evaluated for possible use at the Fizz plant. The machines must be capable
of meeting the design specification of 15.8-16.2 oz. with at least a process
capability index of 1.0 (Cp≥1)

The table below shows the information gathered Solution:

from production runs on each machine. Are they
all acceptable? • Machine A

USL  LSL .4
Cp   1.33
6σ 6(.05)
Machine σ USL-LSL 6σ • Machine B

A .05 .4 .3
Cp=
B .1 .4 .6
• Machine C
C .2 .4 1.2
Cp=

201
Computing the Cpk Value at Cocoa Fizz

• Design specifications call for a target

value of 16.0 ±0.2 OZ.
(USL = 16.2 & LSL = 15.8)
• Observed process output has now
shifted and has a µ of 15.9 and a
 16.2  15.9 15.9  15.8 
Cpk  min  ,  σ of 0.1 oz.
 3(.1) 3(.1) 
.1
Cpk   .33
.3

• Cpk is less than 1, revealing that the

process is not capable
202
 ±6 Sigma versus ± 3 Sigma

• PPM Defective for ±3σ versus ±6σ

• In 1980’s, Motorola coined “six-sigma” quality
to describe their higher quality efforts
Six-sigma quality standard is now a
benchmark in many industries
• Before design, marketing ensures
customer product characteristics
• Operations ensures that product design
characteristics can be met by controlling
materials and processes to 6σ levels
• Other functions like finance and
accounting use 6σ concepts to control all
of their processes

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Acceptance Sampling

Defined: the third branch of SQC refers to the process of randomly

inspecting a certain number of items from a lot or batch in order to
decide whether to accept or reject the entire batch
• Different from SPC because acceptance sampling is performed either
before or after the process rather than during
• Sampling before typically is done to supplier material
• Sampling after involves sampling finished items before shipment or
finished components prior to assembly
• Used where inspection is expensive, volume is high, or inspection is
destructive

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Acceptance Sampling Plans

Goal of Acceptance Sampling plans is to determine the criteria for acceptance or

rejection based on:
• Size of the lot (N)
• Size of the sample (n)
• Number of defects above which a lot will be rejected (c)
• Level of confidence we wish to attain

• There are single, double, and multiple sampling plans

• Which one to use is based on cost involved, time consumed, and cost of passing on a
defective item

• Can be used on either variable or attribute measures, but more commonly used for
attributes

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 Operating Characteristics (OC) Curves

• OC curves are graphs which show the

probability of accepting a lot given various
proportions of defects in the lot
• X-axis shows % of items that are defective
in a lot- “lot quality”
• Y-axis shows the probability or chance of
accepting a lot
• As proportion of defects increases, the
chance of accepting lot decreases
• Example: 90% chance of accepting a lot
with 5% defectives; 10% chance of
accepting a lot with 24% defectives

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 AQL, LTPD, Consumer’s Risk (α) &
Producer’s Risk (β)
• AQL is the small % of defects that
consumers are willing to accept; order of
1-2%
• LTPD is the upper limit of the percentage
of defective items consumers are willing to
tolerate
• Consumer’s Risk (α) is the chance of
accepting a lot that contains a greater
number of defects than the LTPD limit;
Type II error
• Producer’s risk (β) is the chance a lot
containing an acceptable quality level will
be rejected; Type I error

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 Developing OC Curves

• OC curves graphically depict the discriminating power of a sampling plan

• Cumulative binomial tables like partial table below are used to obtain probabilities of
accepting a lot given varying levels of lot defectives
• Top of the table shows value of p (proportion of defective items in lot), Left hand column
shows values of n (sample size) and x represents the cumulative number of defects found

Table 6-2 Partial Cumulative Binomial Probability Table (see Appendix C for complete table)
Proportion of Items Defective (p)
.05 .10 .15 .20 .25 .30 .35 .40 .45 .50
n x
5 0 .7738 .5905 .4437 .3277 .2373 .1681 .1160 .0778 .0503 .0313
Pac 1 .9974 .9185 .8352 .7373 .6328 .5282 .4284 .3370 .2562 .1875
AOQ .0499 .0919 .1253 .1475 .1582 .1585 .1499 .1348 .1153 .0938
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 Example: Constructing an OC Curve

• Lets develop an OC curve for a sampling

plan in which a sample of 5 items is drawn
from lots of N=1000 items
• The accept /reject criteria are set up in such
a way that we accept a lot if no more that
one defect (c=1) is found
• Using Table 6-2 and the row corresponding
to n=5 and x=1
• Note that we have a 99.74% chance of
accepting a lot with 5% defects and a
73.73% chance with 20% defects

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 Average Outgoing Quality (AOQ)

• With OC curves, the higher the quality of the lot,

the higher is the chance that it will be accepted
• Conversely, the lower the quality of the lot, the
greater is the chance that it will be rejected
• The average outgoing quality level of the product
(AOQ) can be computed as follows: AOQ=(Pac)p
• Returning to the bottom line in Table 6-2, AOQ
can be calculated for each proportion of defects
in a lot by using the above equation
• This graph is for n=5 and x=1 (same as c=1)
• AOQ is highest for lots close to 30% defects

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Implications for Managers

• How much and how often to inspect?

• Consider product cost and product volume
• Consider process stability
• Consider lot size
• Where to inspect?
• Inbound materials
• Finished products
• Prior to costly processing
• Which tools to use?
• Control charts are best used for in-process production
• Acceptance sampling is best used for inbound/outbound

211
SQC in Services

• Service Organizations have lagged behind manufacturers in the use of

statistical quality control
• Statistical measurements are required and it is more difficult to measure
the quality of a service
• Services produce more intangible products
• Perceptions of quality are highly subjective
• A way to deal with service quality is to devise quantifiable measurements
of the service element
• Check-in time at a hotel
• Number of complaints received per month at a restaurant
• Number of telephone rings before a call is answered
• Acceptable control limits can be developed and charted

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 Service at a bank: The Dollars Bank competes on customer service and is
concerned about service time at their drive-by windows. They recently installed
new system software which they hope will meet service specification limits of 5±2
minutes and have a Capability Index (Cpk) of at least 1.2. They want to also design a
control chart for bank teller use.

They have done some sampling recently (sample size: 4 customers) and
determined that the process mean has shifted to 5.2 with a Sigma of 1.0
minutes.
USL  LSL 7-3
Cp   1.33
6σ  1.0 
6 
 4
 5.2  3.0 7.0  5.2 
Cpk  min  , 
 3(1/2) 3(1/2) 
1.8
Cpk   1.2
1.5
Control Chart limits for ±3 sigma limits
 1 
UCL x  X  zσ x  5.0  3   5.0  1.5  6.5 minutes
 4
 1 
LCL x  X  zσ x  5.0  3   5.0  1.5  3.5 minutes
 4
213