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Operations Management Exam 1 Study Guide

by: Ann Hopkins

Operations Management Exam 1 Study Guide BUSMGT 3230

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exam study guide
Intro to Operations Management
Dr. Rungtusanatham
Study Guide
Ops, Operations Management, intro to ops, intro to operations management, business, Supply Chain Management
50 ?




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This 27 page Study Guide was uploaded by Ann Hopkins on Thursday February 25, 2016. The Study Guide belongs to BUSMGT 3230 at Ohio State University taught by Dr. Rungtusanatham in Spring 2016. Since its upload, it has received 282 views. For similar materials see Intro to Operations Management in Business, management at Ohio State University.

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Date Created: 02/25/16
Operations Management Midterm Study Guide Chapter 1 Operations Management: the systematic design, direction and control of processes that transform inputs into services and products for internal, as well as external customers  Study it so that companies can learn the best, cheapest, most efficient ways to make customers  happy  To provide products and/or services with The Right 6: with right level of quality, to right  customer, at right time, at right place, in right quantity, for right cost or price while seeking to  avoid waste (inefficiency)  Outputs can either be products (tangible goods with less customer interaction) or services  (intangible with more customer interaction) A Process View Process: any activity or group of activities that takes one or more inputs, transforms them, and provides one or more outputs for its customers Operation: a group of resources performing all or part of one or more processes Shows the role of operations in an organization  Coordination among different business functions is  necessary and key to developing a common strategy Supply Chain: an interrelated series of processes within and across firms that produce a service or product to the satisfaction of customers Supply Chain Management: the synchronization of a firm’s processes with those of its suppliers and customers to match the flow of materials, services, and information with customer demand -all processes have inputs and outputs and then provide outputs to customers  ex. Of a firm, dept., small group or even and individual  circles=operations through which services,  products or customers pass and where processes  are performed  arrows=flows  dotted line= participation by customers and  information on performance from both internal  and external sources Nested Processes: a process within a process Customer-Supplier Relationships in terms of:  External Customers: customer who is either an end user or intermediary (financial institutions,  manufacturers, retailers) buying the firm’s finished services or products  Internal Customers: one or more employees or processes that rely on inputs from other  employees or processes in order to perform their work  External Suppliers: the businesses or individuals who provide the resources, services, products  and materials for the firm’s short term and long term needs  Internal Suppliers: employees or processes that supply important information or materials to a  firm’s processes  Two Major Processes  Services and Manufacturing o Differ:  The nature of their output ­ manufacturing gives physical products and can be  produced, stored, and transported, services are intangible and perishable  The degree of customer contact ­ services much higher and customers have an  active role  Manufacturing: capital intensive, quality easily measured, long response time  Services: labor intensive, quality not easily measured, have short response time o Similar:   Service providers don’t just offer services and manufacturing providers don’t just offer products ex. Restaurant­ good food and good service wanted  Do keep inventory The Supply Chain View Core Processes: a set of activities that delivers value to external customers   Supplier­Relationship Process:  selects the suppliers of services, materials, and information and  facilitates the timely and efficient flow of these items into the firm ex. Negotiating fair prices  New Service/Product Development Process: designs and develops new services or products  from inputs received from external customer specifications or from the market in general through  the customer relationship process  Order Fulfillment Process: a process that includes the activities required to produce and deliver  the service or product to the external customer  Customer Relationship Process: identifies, attracts and builds relationships with external  customers, and facilitates the placement of orders by customers, marketing could be a part of this  process Support Process: a process that provides vital resources and inputs to the core processes and therefore is essential to the management of the business, allow core processes to function ex. Budgeting, recruiting, scheduling Operations Strategy: the means by which operations implements the firm’s corporate strategy and helps to build a customer-driven firm, links long and short term operations decisions to corporate strategy and develops the capabilities the firm needs to be competitive  Translates service or product plans and competitive priorities for each market segment into  decisions affecting the supply chains that support those market segments,   The pattern of decisions that have been made for a company’s processes and supply chains  Any gap between a competitive priority and the capability to achieve that priority must be  closed by and effective operations strategy Corporate Strategy: coordinates the firm’s overall goals with its core processes, specifies businesses it will pursue, isolates threats, and identifies growth objects  Environmental Scanning: process by which managers monitor trends in the environment for potential opportunities or threats in order to stay ahead of competition ex. Economic trends,  new entrants into the market, social changes, political conditions  Developing Core Competencies: unique resources and strengths that and organization’s  management considers when formulating strategy, reflects the collective learning of the  organization­how to coordinate processes and integrate technologies o Workforce o Facilities o Market and Financial Know­How o Systems and Technology  Developing Core Processes: should drive its core processes­customer relationship, new  service/product development, order fulfillment, and supplier relationship­ some companies  have all 4 while others focus on only a few; want to provide the greatest competitive strength  Global Strategies: ex. Buying foreign services or parts, combating threats from foreign  competitors, planning ways to enter markets beyond traditional national boundaries,  o Strategic Alliance: an agreement with another firm that may take one of 3 forms:  o Collaborative Effort: arises when one firms has core competencies that another needs but is unable to duplicate o Joint Venture: 2 firms agree to produce a service or product jointly­often to gain access  to foreign markets o Technology Licensing: one company licenses its service or production methods to  another o Locate abroad in another country ­ must recognize customs, preferences, and economy in  other countries Market Analysis: divides the firm’s customers into market segments and then identifies the needs of each segment  Market Segmentation: process of identifying groups of customers with enough in common  to warrant the design and provision of services or products that th wants and needs,  must determine characteristics that clearly differentiate each segment and then can develop a  sound marketing program  Needs Assessment: identifies the needs of each segment and assesses how well competitors  are addressing needs, then incorporates needs into design of product or service o Service or product needs: price, quality, degree of customization o Delivery system needs: delivery availability, convenience, courtesy, safety, accuracy, speed, reliability, dependability o Volume needs: high or low volume, variability, degree of predictability o Other needs: ex. Reputation and number of years in business, legal services, ability to invest in international financial markets Competitive Priorities and Capabilities Competitive Capabilities: the cost, quality, time, and flexibility dimensions that a process or supply chain actually possesses and is able to deliver Competitive Priorities: the critical dimensions that a process or supply chain must possess to satisfy its internal or external customers, both now and in the future, to be successful, changes and evolves over time along with changing business conditions and customer preferences Time-Based Competition: a strategy that focuses on the competitive priorities of delivery speed and development speed Capabili Priority Definition Example ty Cost Low-Cost Delivering a service or a product Costco designs all processes for Operations at the lowest possible cost to theefficiency so it is low cost satisfaction of the external or internal customers of the process or supply chain Quality Top Quality Delivering an outstanding Rolex delivering precision time product or service pieces Consistent Producing services or products McDonald’s standardizes work that meet design specifications methods and training processes Quality on a consistent basis to achieve consistent products and quality at all sites Time Delivery Quickly filling a customer’s orderDell delivers reliable and Speed inexpensive computers in short times On-Time Meeting delivery time promises UPS-uses logistics and expertise Delivery in warehousing to deliver large volume shipments on time Developmen Quickly introducing a new Zara brings fashionable clothing t Speed service or product designs from the runway to market quickly Flexibility Customizatio Satisfying the unique needs of Ritz Carlton customizes to n each customer by changing individual guest preferences service or product designs Handling a wide assortment of uses information Variety services and products efficiently technology and customer relationships and order fulfillment processes to reliably deliver a variety of items Volume Accelerating or decelerating the USPS has severe demand peak Flexibility rate of production of services orfluctuations at large facilities products quickly to handle large where processes are flexibly fluctuations in demand numerous locationsng mail to Order Winner: a criterion consumers use to differentiate the services or products of one firm from those of another ex. Price, quality, time, flexibility, reputation, after sale support  Derived from the considerations customers use when deciding which firm to purchase from in a given market segment Order Qualifier: minimal level required from a set of criteria for a firm to do business in a particular market segment, doesn’t ensure competitive success, only positions firm to compete in the market Trends in Operations Productivity: basic measure of performance, the value of outputs (services and products) produced divided by the values of input resources (wages, costs of equipment) Productivity= Outputs Inputs 2 approaches:  Labor Productivity: an index of the output per person or per hour worked  Multifactor Productivity: index of the output provided by more than 1 of the resources used in production; may be the value of the output divided by the sum of labor, materials, and  overhead costs ­ want it high Global Competition  Firms can increase their market penetration by locating in foreign countries because it gives  them a local presence that reduces customer aversion to buying imports  Allows firms to balance cash flows from other regions of the world when economic  conditions are less robust in home country  5 developments have stimulated the need for sound global strategies: o Improved transportation and communications technologies o Loosened regulations on financial institutions o Increased demand for imported services and goods o Reduced import quotas and other international trade barriers due to formulation of  regional trade blocks ex. NAFTA o Comparative cost advantages ex. In China (known for manufacturing) and India  (known for service, software companies, technology companies) cheaper cost of  labor  Disadvantages of globalization: o Political risks o Nationalization­government may take over a firm’s assets without paying  compensation o May have to relinquish proprietary technology o Employee skills may be lower  Ethical, Workforce Diversity and Environmental Issues o Ethical dilemmas have been intensified by increased global presence and rapid  technology change o Some countries are more sensitive to conflicts of interests, bribery, discrimination against minorities and women, unsafe workplaces  o Need to be environmentally conscious, taking sustainability initiatives Operations Management as a Set of Decisions Strategic decisions: development of new and maintenance of existing capabilities, supply chain, cost and quality, support firms goals and objectives Tactical decisions: support strategic, process improvement and performance measurement, managing and planning projects, generating productions and staffing plans, managing inventory and scheduling resources Service Package Supporting Facilities: physical resources wherein services are produced and consumed by customers Facilitating Goods: physical products that are provided during the consumption of services by customer Information Explicit Services: observable, tangible benefits customers expect to receive as part of service Implicit Services: psychological benefits customers sense as part of service Noodles and Company Example Supplement A Breakeven quantity: volume at which total revenues equal total cost Breakeven analysis: the use of the breakeven quantity; it can be used to compare processes by finding the volume at which 2 different processes have equal total costs F = fixed cost Q = F P = revenue per unit sold P – C C = variable costs Sensitivity Analysis: a technique for systematically changing parameter in a model to determine the effects of such changes Chapter 3 Process Strategy: the pattern of decisions made in managing processes so that the processes will achieve their competitive priorities  Processes need to add customer value 3 important principles: 1. Key to successful process decisions is to make choices that fit the situation and that make sense  together; they should not work at cross­purposes, with one process optimized at the expense of  other processes, a more effective process is one that matches key process characteristics and has a close strategic fit 2. Individual processes are building blocks that create the firm’s whole supply chain 3. Whether processes in the supply chain are performed internally or by outside suppliers and  customers, management must pay particular attention to the interfaces between processes; dealing with these interfaces underscores the need for cross functional coordination Supply chain processes: business processes that have external customers or suppliers 4 common process strategies:  Process Structure: determines the process type relative to the kinds of resources needed, how  resources are partitioned between them, and their key characteristics o Layout: physical arrangement of operations created from the various processes­ puts  these decisions into tangible form  Customer Involvement: reflects the ways in which customers become a part of the process and the extent of their participation  Resource Flexibility: the ease with which employees and equipment can handle a wide variety of products, output levels, duties and functions  Capital Intensity: the mix of equipment and human skills in a process, the greater the relative cost of equipment, the greater the capital intensity Process Structure in Services Nature of Service Processes (dimensions of Customer Contact: extent to which the customer is present, is actively involved, and receives personal attention during the service process) High Contact Low Contact -Physical Presence Present Absent -What is Processed People Possessions or Information -Contact Intensity Active, Visible Passive, out of site -Personal Attention Personal Impersonal -Method of Delivery Face-to-Face Regular mail or email (moment of truth) Elements of Customer-Contact Matrix Customer Contact and Customization  Horizontal dimension ­ represents the service provided to customers in terms of customer  contact and competitive priorities (a key one is how much customization is needed)  Left side: high customer contact and highly customized services, customer is present and  active and receives personal attention, process more visible to customer  Right side: low customer contact, passive involvement, less personalized attention, process  out of customer’s sight Process divergence and flow  Vertical dimension  Process divergence: extent to which the process is highly customized with considerable  latitude as to how its tasks are performed, if the process changes with each customer, every  performance of the service is unique ex. High ­ law, architecture, low ­ standardized  telephone services  Flow: how the customer, object, or information being processed flows through the service  facility o Flexible flow: the customers, materials or information move in diverse ways, with  the path of one customer or job often crisscrossing the path that the next one takes­  goes with high process divergence o Line flow: the customer, materials, or information move linearly from one operation  to the next, according to a fixed sequence  cannot be a top performer if here 3 process structures: a. Front Office: process with high customer contact where the service provider interacts directly with the internal or external customer, high divergence and flexible flow b. Hybrid Office: process with moderate levels of customer contact and standard services with some options available c. Back Office: a process with low customer contact and little service customization, standardized and routine work, line flows, low divergence Process Structure in Manufacturing  Manufacturing processes convert materials to goods that have a physical form Elements of Product-Process Matrix  Volume: depends on first and foremost  horizontal (both)  Product Customization ­ higher customization means lower volumes   Process Characteristics -Vertical: still process divergence and flow 4 Process Structures (form a continuum): a. Job Process: process with the flexibility needed to produce a wide variety of products in significant quantities, with considerable divergence in the steps performed, customization high, volume for any one product is low b. Batch Process: most common, a process that differs from the job process with respect to volume, variety, and quantity, volumes a little higher c. Line Process: process that lies between batch process and continuous processes on the continuum; volumes are high and products are standardized, which allows resources to be organized around particular products, divergence and variability low d. Continuous Flow Process: the extreme end of high-volume standardized production and rigid line flows, with production not starting and stopping for long intervals Production and Inventory Strategies  Make­to­order: strategy that makes products to customer specifications in low volumes, high  divergence, job or small batch process  Assemble­to­order: strategy for producing a wide variety of products from relatively few  subassemblies and components after the customer orders are received o Postponement: final activities in the provision are delayed until the orders are received  o Mass Customization: uses highly divergent processes to generate a wide variety of  customized products at reasonably low costs   Make­to­stock:  strategy that involves holding items in stock for immediate delivery, thereby  minimizing customer delivery times, has high volumes o Mass Production: line process that uses the make­to­stock strategy Layout  3 steps: 1. Gather information 2. Develop a block plan: allocates space and indicates placement of each operation 3. Design a detailed layout  Gather Information on: o Space requirements o Available space o Closeness factors ­ closeness matrix: gives a measure of the relative importance of each  pair of operations being located close together Customer Involvement Possible disadvantages - Can be disruptive and less efficient - Quality measurement can be difficult - Requires interpersonal skills - May need to revise layout - Multiple locations may be necessary - Managing timing and volume of customer demands is more challenging Possible Advantages - Increased net value to the customer - Can mean better quality, faster delivery, greater flexibility, and lower cost - May reduce product, shipping and inventory costs - May help coordinate across the supply chain - Processes may be revised to accommodate the customers’ role Resource Flexibility - Managers must account for process divergence and diverse process flows when making resource flexibility decisions - Workforce - Must decide whether to have a flexible workforce: workforce whose members are capable of doing many tasks either at their own workstations or as they move from one workstation to another- need greater skills, more training and education, one of the best ways to get reliable customer service - Conditions have smooth steady output = full time workforce - Hourly, daily or seasonal peaks in demand = use of part time or temporary employees as a supplement to full time employees - Equipment -low volumes= process designers should select flexible, general-purpose equipment -high volumes and low customization= special purpose equipment Capital Intensity - The mix of equipment and human skills in the process; the greater the relative cost of equipment, the greater is the capital intensity - Have to choose between little automation or tasks requiring specific equipment and little human intervention - Automation: a system, process or piece of equipment that is self-acting and self- regulating - Automating manufacturing processes - Advantage: works best when volume is high - Disadvantage: prohibitive investment cost for low volume operations, doesn’t always align with companies’ competitive priorities, must have high utilization - Fixed Automation: a manufacturing process that produces one type of part or product in a fixed sequence of simple operations, high volume, stable product design, long product life cycles - Flexible (programmable) automation: a manufacturing process that can be changed easily to handle various products- good for low and high customization -Automating service processes -using capital inputs as a labor-saving device is also possible for service processes ex. Learning online instead of in class -volume is essential -Economies of Scope: economies that reflect the ability to produce multiple products more cheaply in combination than separately, customization and low price become more compatible -How 4 processes tie together example -Service: Front Office ----vice versa for back office Process Structure: high divergence, flexible flows Customer involvement: customer present and involved, unique service Resource Flexibility: high Capital Intensity: depends on volume -Manufacturing: Job Process Process Structure: high divergence, flexible flows Customer involvement: not a big factor except for choices made on customization & variety Resource Flexibility: high Capital Intensity: low -Process Reengineering: the fundamental rethinking and radical redesign of processes to improve performance dramatically in terms of cost, quality service and speed King Sooper’s Bakery- continuous flow? Chapter 2 -Project: an interrelated set of activities with a definite starting and ending point, which results in a unique outcome for a specific allocation of resources ex. Planning a wedding, creating an ad campaign -3 main goals: -complete project on time -do not exceed budget -meet the specifications to the satisfaction of the customer -can be used to: -facilitate the implementation of a strategy -implement changes to processes and supply chains etc. -Program: an interdependent set of projects that have a common strategic purpose - Project Management: a systemized, phased approach to defining, organizing, planning, monitoring, and controlling projects, all departments benefit from this and all should be involved Defining and Organizing Projects Define the scope and objectives of a project:  Project objective statement: a thorough statement of a project’s scope, time frame, and  allocated resources, essential to managing the project  Scope provides a succinct statement of project objectives and captures the essence of the desired  project outcomes in the form of major deliverables, which are concrete outcomes of the project,  how broad is project, scope creep: changes to scope, primary causes of failed projects  Select Project Manager and project team Project manager:  Roles: o Facilitator: resolve conflicts, good leadership, have a systems view­encompasses the  interaction of the project, its resources, and its deliverables o Communicator: communicate project progress, request for additional resource,  communicate frequently to get best performance o Decision­Maker: ready to make tough decisions, organize meetings, specify how team  with make decisions, determine reports o Characteristics: technical competence, sensitivity, dedication - Project Team and projects managers relationship is determined by firm’s organizational structure Organizational Structure  Functional: project housed in a specific department or functional area­ one with most interest in  the project, get assistance from personnel in other areas, project manager has less control over  project timing than if entire scope of the project fell within the purview of the department  Pure Project: team members work exclusively for the project manager on a particular project,  simplifies lines of authority, effective for large projects with enough work for each member   Matrix:  compromise between functional and pure project, project managers all report to a  program manager who coordinates resources and technological needs across functional  boundaries, each functional area maintains control over who works on project and the technology  used ­ 2 bosses: project manager and department manager Planning Projects Work breakdown Structure (WBS): a statement of all work that has to be completed  Most important contributor to delay is omission of work that is germane to the successful  completion of the project  Activity: smallest unit of work effort consuming both time and resources that the project manager can schedule ad control  Activity Ownership: each activity in the WBS has an owner responsible for the work o Ex. Diagram with main goal branched into the main ideas to complete branched into  exact steps on how to complete those ideas Diagramming the Network Network Diagram: a network planning method, designed to depict the relationships between activities, which consist of nodes (circles) and arcs (arrows) Program Evaluations and Review Technique (PERT): network-planning method created for the U.S. Navy’s Polaris missile project in the 1950’s, which involved 3,000 separate contractors and suppliers Critical Path Method (CPM): a network planning method developed in the 1950’s as a means of scheduling maintenance shut downs at chemical processing plants Precedence Relationship: determines a sequence for undertaking activities; it specifies that one activity cannot start until a preceding activity has been completed  Estimate activity times with stat methods, learning curve models, and managerial opinions based  on prior experiences  Using Activity­on­Node Approach: used to create a network diagram, in which nodes represent activities and arcs represent the precedence relationships between them  Make diagram by putting nodes in order given with activity time in the  circle with the letter it represents  Always need time, cost and resources no matter which you use Developing the Schedule  Estimate completion time, calculate slack time, identify start and finish times  Path: The sequence of activities between a project’s start and finish.  Critical Path: the sequence of activities between projects start and finish that takes the longest  time to complete, activities on this path have zero slack  Activity slack is calculated from 4 times for each activity activity  Earliest start time (ES): the earliest finish time of the immediately preceding activity, the latest time if there is more than 1 preceding A activities  ES EF  Earliest finish time: EF = ES + t t = estimated duration  Latest Start time: LS = LF ­ t 7 LS LF  Latest finish time: latest start time of the activity that immediately duratio follows, for activities with more than one activity that immediately n follow, LF is the earliest of the latest start times of those activities   Activity Slack: maximum length of time an activity can be delayed without delaying the entire  project = LF ­ EF or LS ­ ES Gantt Chart: creates the project schedule by superimposing project activities, with their precedence relationships and estimated duration times on a time line - Analyzing cost-time trade-offs - Want to keep costs at manageable levels - There will always be cost-time trade-offs ex. project can be finished early if hire more workers - Total project costs: sum of direct costs, indirect costs and penalty costs - Direct costs: labor, materials, any other costs directly related to project activities - Indirect costs: administration, depreciation, financial, and other variable overhead costs, decrease duration, the lower the costs - Penalty costs: incur if extends beyond specific date - May consider crashing (expediting) some activities to lower costs - Normal time (NT): time necessary to complete an activity under normal conditions - Normal cost (NC): activity cost associated with normal time - Crash time (CT): shortest possible time to complete an activity - Crash cost (CC): activity cost associated with crash time - If crash time = 0 then can’t be crashed - Crash cost per week = CC - NC NT-CT Minimum-cost schedule: a schedule determined by starting with the normal time schedule and crashing activities along the critical path, in such a way that the costs of crashing do not exceed the savings in indirect and penalty costs - Step 1: Determine the project’s critical path(s). - Step 2: Find the activity or activities on critical path(s) the lowest cost of crashing per week. - Step 3: Reduce the time for this activity until… a. It cannot be further reduced or b. Until another path becomes critical, or c. The increase in direct costs exceeds the savings that result from shortening the project (which  lowers indirect costs). - Step 4: Repeat this procedure until the increase in direct costs is larger than the savings generated by shortening the project*** Assessing Risk Project Risk: a measure of the probability and consequence of not reaching a defined project goal ex. Could be caused by weather, labor shortage, supply delays Risk Management plan: a plan that identifies the key risks to a projects success and prescribes ways to circumvent them - Can be assessed be examining 4 categories: 1. Strategic Fit: project may not be a good strategic fit- may not be linked to the strategic goals of the firm 2. Service/Product Attributes: ex. if the project involves the development of a new service or product, there may be a market, technological, or legal risks 3. Project team capability: may not be able to complete the project because of the size or technology involved 4. Operations: ex. Poor information accuracy, lack of communication, bad activity time estimates Monitoring and Controlling Projects Monitoring project status  Effective tracking systems collect info on 3 topics: 1. Open issues: issues that get raised during a project that need to be resolved in a timely  fashion­ system should remind of due dates and who is responsible for resolving 2. Risks: the status should be provided and reviewed 3. Schedule Status: provide periodic monitoring of slack time in order to control activities  on the critical path­ can recalculate activity slacks and see which are behind schedule so  they can be helped Monitoring project resources  Project life cycle­ 4 major phases: o Definition and organization o Planning o Execution ­ most resources needed, activities with deliverables  o Close out ­ writing final reports, completing remaining deliverables, compiling team’s recommendations o Options for managing resource problems  Resource Leveling: attempt to reduce peaks and valleys in resource needs by shifting the  schedule of conflicting acts within their earliest and latest start dates  Resource Acquisition: addition of more of an overloaded resource to maintain the schedule  of an activity  Resource Allocation: assignment of resources to the most important activities Watched 6 flags video of engineering roller coasters Chapter 6 Capacity: the maximum rate of output of a process or a system  Managers are responsible for ensuring that the firm has the capacity to meet current and  future demand or the organization will miss out on opportunities for growth and profit  Changing capacity impacts other processes in the chain, need to make sure its designed for  effectiveness  Long ­term capacity planning­ deal  with investments in new facilities and equipment at the organizational level and require top  management participation and approval because they are not easily reversed­ at least 2 years  in the future   Measures of capacity ­ no single measure is best for all situations o Output measures: best utilized when applied to individual processes within the firm  or when the firm provides a relatively small number of standardized services and  products ex. High volume process like the ones in a car manufacturing plant= #cars  produced/day, less useful when customization and variety in the product mix  increases o Input measures: used for low volume, flexible processes, such as those associated  with a custom furniture maker (ex. # of workers), more customization and variety,  problem is that demand is invariably expressed as an output rate Utilization: degree to which a resource such as equipment, space or work force is currently being used-indicates need for adding extra capacity or eliminating unneeded capacity Utilization= Average Output Rate Maximum Capacity X 100%  Maximum capacity ­ greatest level of output that a process can reasonably sustain for a longer period of time ­ operating at this can sometimes lead to low customer satisfaction, minimal  profits, losing money (because overtime, overstaffing, decreased maintenance etc.) Economies of scale: average unit cost of a good or service can be reduced by increasing its output rate, why?  Spreading fixed costs over more units  Reducing construction costs­ doubling facility doesn’t double costs  Cutting costs of purchased materials­ bargaining and discounts because higher volume  Finding process advantages Diseconomies of scale: average cost per unit increases as the facility’s size increases why?         Excessive size can bring: o Complexity o Loss of focus o Inefficiencies  o Lose touch with employees Capacity Timing and Sizing Strategies Sizing capacity cushions  Average utilization rate near 100% indicates to increase capacity or decrease order acceptance to  avoid declining productivity Capacity Cushion: the amount of reserve capacity a process uses to handle sudden increases in demand of temporary losses of production capacity- measures amount by which the average utilization falls below 100%  = 100% ­ Average Utilization Rate (%)  Factors leading to large capacity cushions: o Demand varies ex. Grocery shopping different days at different times o Demand is uncertain o Supply uncertainty  Factors leading to small capacity cushions: o Unused capacity costs money o Can uncover inefficiencies that were difficult to detect when it was larger ex.  Absenteeism, unreliable suppliers Timing and sizing expansions (3 strategies) - when to adjust capacity levels and by how much expanding can be done, in response to changing market trends  Expansionist strategy: large, infrequent jumps in capacity o Stays ahead of demand  o Minimizes chance of sales lost to insufficient capacity o Can result in economies of scale and faster rate of learning, thus helping a firm reduce its costs and compete on price o By announcing expansion, the firm can preempt the expansion of other firms  Wait and See Strategy: small, more frequent jumps in capacity o Lags behind demand o To meet shortfall, relies on short­term options ex. Overtime o Expand in smaller increments o Reduces risk of overexpansion based on overly optimistic demand forecasts, obsolete technology, inaccurate assumptions o Risks ­ being preempted, unable to respond to unexpectedly increased demand o Short term  Follow the leader: expanding when others do and no one gains a competitive advantage Systematic Approach to Long-Term Capacity Decisions 1. Estimate future capacity requirements Capacity requirement: what a process capacity should be for some future time period to meet the demand of customers, given the firm’s desired capacity cushion- output or input measure  Forecasts need to be made for several time periods in a planning horizon: set of consecutive time  periods considered for planning purposes  Simplest way to express capacity requirements is as an output rate o High volume, less variety o Demand forecasts for future years are used as a basis for extrapolating capacity  requirements in the future o Ex. Demand is expected to double in next 5 years, capacity requirements also double D=50, D in 5 years=100, capacity cushion=20%  [100/(1 - 0.2)]=125 customers  Output measures may be insufficient when: o High variety and process divergence o Product or service mix is changing o Productivity rates are expected to change o Significant learning effects are expected o When just one service or product is processed at an operation and the time period is a  particular year the capacity requirement is… Capacity Requirement = Processing hours required for year’s demand Hours available from a single capacity unit (such as an employee/machine) per year, after deducting desired cushion M= Dp . where… M= Capacity requirement N[1-(C/100)] D= demand forecast for the year (units produced) P= processing time (hrs/units produced) N= total number of hours per year during which the process operates C= desired capacity cushion (%) Setup time: time required to change a process or an operation from making one service or product to making another , equation with this added in below ­ M=   [  Dp  + ( Dproduct 1] +  [  Dp  + ( Dproduct 1] + … +  [  Dp  + ( D product n N[1-(C/100)] Where… Q= number of units in each lot S= setup time (in hrs.) per lot 2. Identify gaps Capacity gap: and difference between projected capacity requirements (M) and current capacity  Complications when multiple operations and several resource inputs are involved 3. Develop alternative plans for reducing the gaps Base case: act of doing nothing and losing orders from any demand that exceeds current capacity, or incur costs because capacity is too large  Many alternatives possible­ short term, expanding, decrease capacity, layoffs etc. 4. Evaluate each alternative  Qualitative concerns: looks at how each alternative fits the overall capacity strategy and other  aspects of the business is not covered by the financial analysis­ particular concern= uncertainties  with demand, competitive reaction, technology change, strategic fit  Quantitative concerns: estimates change in cash flows for each alternative over the forecast time horizon compared to base case Capacity management decisions:  Where? Facility location? Offshore? Reshore?  When? 3 expanding strategies  How? Chapter 7 Managing Constraints across the Organization Constraint: any factor that limits the performance of a system and restricts its output Capacity: maximum rate of output of a process or a system, when constraints exist at any step, capacity can become imbalanced  3 types of constraints: o Physical (machine, labor, workstation capacity, material shortages) o Market (demand less than capacity) o Managerial (policy, metrics, or mind sets that create constraints that impede work flow)  Have to manage capacity choices at the individual process level and the organization level Bottleneck: a capacity constraint resource (CCR) whose available capacity limits the organization’s ability to meet the product volume, product mix, or demand fluctuation required by the marketplace ex. Loan dept. not processing enough loans  Capacity is only as large as its slowest step (bottleneck) Theory of Constraints (TOC): a systematic management approach that focuses on actively managing those constraints that impede a firm’s progress toward its goal  Focus on making materials flow rapidly through system, increase profit, look at big picture  Performance measures in TOC: o Inventory (I): all the money invested in a system in purchasing things that it intends to sell,  as inventory lessens, profit increases o Throughput (T): rate at which a system generates money through sales, increase throughput, profit increases o Operating Expenses (OE): all the money a system spends to turn inventory into throughput,  decrease in operating expenses, net profit increases o Utilization (U): degree to which equipment, space, or work force is currently being used,  increase in utilization at bottleneck, net profit increases  5 steps: 1. Identify the system bottleneck(s) 2. Exploit the bottleneck(s) - create schedules that maximize the throughput of the bottlenecks 3. Subordinate all other decisions to step 2 - nonbottleneck resources should be scheduled to support the schedule of the bottleneck ad not produce more than the bottleneck can handle 4. Elevate the bottleneck(s) - after scheduling improvements in steps 1-3 have been exhausted and the bottleneck is still a constraint to throughput, management should consider increasing the capacity of the bottleneck ex. Add another machine 5. Do not let inertia set in- system constraint(s) may shift and then all steps have to be repeated to do the new constraint  Key Principles of TOC: o The focus should be on balancing flow, not on balancing capacity. o Maximizing the output and efficiency of every resource may not maximize the throughput of  the entire system. o An hour lost at a bottleneck or constrained resource is an hour lost for the whole system. o An hour saved does not make the system more productive. o Inventory is only needed in front of bottlenecks and in front of assembly and shipping points. o Work should be released into the system only as frequently as needed by the bottlenecks.   Bottleneck flows = market demand o Activating a nonbottleneck resource is not the same as utilizing a bottleneck.  It doesn’t increase throughput or promote better performance. o Every capital investment must be viewed from the perspective of the global impact on  throughput, inventory and operating expense. Identification and Management of Bottlenecks Throughput time: the total elapsed time from the start to the finish of a job or a customer being processed at one or more work centers Where can bottlenecks occur?  Internal or external, where it lies can be identified in 2 ways: o It has the highest total time per unit processed, takes the longest o It has the highest average utilization and total workload Setup time: time it takes to change from one service or product to the next, affect size of the lots traveling through the job or batch processes  When setup time in length and degree of divergence is greater, identifying bottlenecks is harder Relieving Bottlenecks  Carefully monitor short­term schedules and keep bottleneck busy  Long­term investments in new equipment and facility expansions, operating more  Can reengineer process Product mix decisions:  Managers might be tempted to produce the products with the highest contribution margin or unit  sales  Contribution margin: amount each project contributes to profits and overhead, no fixed costs  considered traditional approach (previous bullet too)  Select the best product mix according to contribution margin at the bottleneck station bottleneck approach Know how to identify bottlenecks, solve with both approaches and make decision (math problems) Drum-Buffer-Rope system:  A planning and control system that regulates the flow of work­in­process materials at the  bottleneck of the capacity constrained resource in a productive system  Drum = bottleneck schedule because it sets the beat/ production rate for the plant  Buffer = time buffer that plans early flows to the bottleneck and protects it from disruption and is  never starved for work  Rope = tying of material release to the drum beat, rate at which the bottleneck controls the  throughput of the entire plant, ensures material is not introduced at a rate faster than can handle  Effective when the product is simple and there are line flows  Strives to improve throughput by better utilizing bottleneck resources & protecting it from  disruption  Chapter 9 Inventory Management across the Organization Inventory: a stock of materials used to satisfy customer demand or to support the production of services or goods Inventory management: the planning and controlling of inventories in order to meet the competitive priorities of the organization, needs to be effective and efficient  Too much inventory on hand reduces profitability  Too little on hand creates shortages in the supply chain and damages customer confidence  Inventory involves tradeoffs Lot size: the quantity of an inventory item management either buys from a supplier or manufactures internally Pressures for small inventories:  Inventory holding cost (carrying cost): sum of the cost of capital plus the variable costs of  keeping items on hand, such as taxes, insurance  Cost of Capital: opportunity cost of investing in an asset relative to the expected return on assets  of similar risk, largest component of holding costs ex. w/ inventory use the weighted average cost of capital (WACC)  Storage and Handling: ex. Rent space­ holding cost incurred when a firm could use the space in  another way   Taxes, insurance, and shrinkage:  taxes increase when inventory increases, shrinkage: (pilferage (theft)), obsolescence (cannot be sold in full value), deterioration through spoilage or damage ­  lost values) Pressures for large inventories:  Customer service: high inventory reduces the possibility of stockout and backorders which upset customers and they take their business elsewhere o Stockout: order that can not be satisfied=loss of sale  o Backorder: cant be filled when promised or demanded but filled later  Ordering cost: cost of preparing a purchase for a supplier or a production order for  manufacturing, for the same item­the ordering cost is the same no matter what size  Set­up cost: cost involved with changing over a machine or workspace to produce a different  item, independent of order size  Labor and equipment utilization: creating more inventory= reduces number of unproductive  setups, holding inventory reduces costly rescheduling of production orders when components are  not in inventory, stabilizes output rate when demand is cyclical or seasonal, this approach  minimizes the need for overtime, layoffs, extra shifts and hiring  Transportation cost: outbound cost can sometimes be reduced with larger inventory, minimizes  the need to expedite shipments, placing several orders at the same time can lead to discounts for  inbound shipping  Payments to suppliers: can often reduce total payments with increased inventory levels, price  per unit drops when quantity is large­incentive to order a lot Types of Inventory  Raw Materials (RM): inventories needed for production of services or goods, inputs  Work­in­Process (WIP): items, such as components or assemblies, needed to produce a final  product in manufacturing, or service operations, also in services ex. Repair shop   Finished Goods:  items in manufacturing plants, warehouses, and retail outlets that are sold to the firm’s customers­ could be raw materials for another firm Classify inventory by how it is created:  Cycle Inventory: portion of total inventory that varies directly with lot size (Q)  o Lot sizing: determining how frequently and in what quantity to order inventory o Q varies directly with elapsed time between orders o The longer the time between orders for a given item, the greater the cycle inventory must  be o Average cycle inventory = Q/2  Safety Stock inventory: surplus inventory that protects against uncertainties in demand, lead  time, and supply changes, place the order earlier than when item is needed  Anticipation Inventory: inventory used to absorb uneven rates of demand or supply  Use predictable, seasonal demand patterns to do this o May do this when you often have uneven demand o Can help when suppliers are threatened with a strike  Pipeline Inventory: inventory that is created when a order for an item is issued but not yet  received, firm must commit to enough inventory to cover lead time for the order o Longer lead times or higher demands per week create more pipeline inventory o Pipeline inventory = dL (d=avg demand, L=number of lead time periods) Inventory reduction tactics:  Levers = tactics, primary ­ must be activated if inventory is to be decreased, secondary ­  decreases the penalty cost of applying the primary level and the need for having inventory in the  first place  o Cycle inventory  Prim: Reduce lot size  Sec: Reduce ordering and setup costs and allow Q to be reduced  Sec: Increase repeatability (degree to which the same work can be done again) to  eliminate the need for changeover o Safety Stock inventory:   Prim: Place orders closer to the time when they must be received  Sec: Improve demand forecasts  Sec: Cut lead times  Sec: Reduce supply chain uncertainty  Sec: Rely more on equipment and labor buffers o Anticipation inventory:  Prim: Match demand rate with production rates  Sec: Add new products with different demand cycles   Sec: Provide off­season promotional campaigns  Sec: Offer seasonal pricing plans o Pipeline inventory:  Prim: Reduce lead times  Sec: Find more responsive suppliers and select new carriers  Sec: Change Q in those cases where the lead time depends on the lot size ABC Analysis Stock-Keeping Unit (SKU): an individual item or product that has an identifying code and is held in inventory somewhere along the supply chain Goal of ABC analysis:  The planning and controlling of inventories in order to meet the competitive priorities of the  organization  Process of dividing SKUs into 3 classes, according to their dollar usage, so that managers can focus on the items that have the highest dollar value  o  Class A SKUs:  ~20% of SKUs but ~80% of the total dollar usage, need to maintain high inventory turnover of these o Class B SKUs: ~30% of SKUs but ~15% of the total dollar usage, intermediate level of  control, less frequent monitoring o Class C SKUs: ~50% of SKUs but ~5% of total dollar usage, loose control, low holding cost * Goal = identify the class A SKUs so management can control their inventory levels * Multiply annual demand rate for an SKU by the cost of one unit of that SKU to determine dollar usage, rank SKUs by dollar usage and create chart and look for natural changes in slope - not exact - and calculate the % it is of the total dollar usage Economic Order Quantity (EOQ): the lot size (Q) that minimizes total annual inventory holding and ordering costs 5 assumptions:  Demand rate is constant and known with certainty.  No constraints are placed on the size of each lot.  Only two relevant costs are inventory holding cost and fixed cost per lot for ordering or setup.  Decisions for one item can be made independently of decisions for other items.  The lead­time is constant and known with certainty. Don’t use the EOQ if:  Using make to order strategy  Ord


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