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# Operations Management MD 707

BC

GPA 3.76

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This 22 page Class Notes was uploaded by Mr. Warren Lang on Saturday October 3, 2015. The Class Notes belongs to MD 707 at Boston College taught by Staff in Fall. Since its upload, it has received 46 views. For similar materials see /class/218049/md-707-boston-college in Operations,Information & Strategic Mgmt at Boston College.

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Date Created: 10/03/15

Lean Systems De nition A lean system is one which minimizes the cost of buffering ie best buffer Implementation cgt Reduce the need for buffers cgt Reduce excess buffers ef ciency uncertainty principle principle gt Address dysfunctional uncertainty gt More ef cient responses to e g poor quality poor planning strategic uncertainty e g cross processes training mass customization gt Lowerbuffer practices in stable and predictable environments e g J IT If buffers are needed it is often possible to swap buffers inventory capacity time to minimize the disruption to the processcustomer and provide the slack to address and eliminate problems 131 JustinTime JIT Production De nition Justintime JIT is a production control system designed to produce goods or services as needed and minimize inventories and waste Environments for Effective JIT gt Manufacturing Firms that tend to have highly repetitive manufacturing processes wellde ned material ows and reasonably high volumes use JIT systems because the pull method allows closer control of inventory and production at the work stations gt Services Firms that tend to have repetitive operations reasonably high volumes and deal with tangible items can bene t om JIT systems gt In general JIT works well in stable and predictable environments because there is little forward visibility 132 Characteristics of JIT and Lean Operations gt Standardization of components and work methods gt Setup time reduction gt Small lot sizes and level loading cgt Pull system gt Quality focus gt Close supplier ties cgt Flexible work force cgt Preventive maintenance 133 Customization Product Variety with Standardized Operations Mass Customization Since customization product variety creates uncertainty in operations and uncertainty requires extra resources customization is more resourceintensive than standardization However it is sometimes possible to increase operational ef ciency even with customization using standardization strategies ie mass customization Standardization strategies include Egt Part standardization Maximize component commonality across products gt Process standardization Delay customization as late as possible gt Product standardization Carry a limited number of products in inventory 134 Types of Inventory cgt Cycle inventory gt Safety stock cgt Anticipation inventory cgt Pipeline inventory WIP nished goods goodsintransit gt Replacement parts tools and supplies llO Functions of Inventory gt To meet anticipated customer demand gt To smooth seasonal requirements gt To decouple operations gt To protect against stockouts gt To take advantage of order cycles gt To hedge against price increases gt As a result of operations cycle and throughput times gt To take advantage of quantity discounts lll Managing Independent Demand Inventory Managing independent demand inventory involves answering two questions gt How much to order gt When to order When answering these questions a manager needs to consider costs holding or carrying costs ordering costs shortage costs unit costs and the tradeoff between costs and customer service Inventory management efforts may be allocated based on the relative importance of an item determined through a classi cation system such as an ABC approach Customer satisfaction and inventory turnover ie the ratio of annual cost of goods sold to average inventory investment are two measures of inventory management effectiveness 112 EOQ Assumptions gt Item independence cgt Demand is known and constant cgt Lead time does not vary cgt Each order is received in a single delivery gt There are no quantity discounts gt Only two relevant costs holding and ordering costs 113 Total Annual Cost a Annual carrying cost Annual carrying cost 3H b Annual ordering cost Annual ordering cost 55 c Total annual cost 2 Q TC 2 HQS Derivation of Economic Order Quantity EOQ 114 and Time Between Orders TBO Total annual cost C E H g S T H D Take the rst der1vat1ve of cost W1th respect to quant1ty d7C 7 7 S dQ2 Q2 Setting 62 0 and solving for Q EOQQ0 225 Q Time between orders TBOQ 7 D 115 Overland Motors Example Overland Motors uses 25000 gear assemblies each year ie 52 weeks and purchases them at 340 per unit It costs 50 to process and receive each order and it costs 110 to hold one unit in inventory for a whole year Assume demand is constant The purchasing agent has been ordering 1000 gear assemblies at a time but can adjust his order quantity if it will lower costs a What is the annual cost of the current policy of using a 1000 unit lot size b What is the order quantity that minimizes cost c What is the time between orders for the quantity in part b d If the lead time is two weeks what is the reorder point 116 Economic Production Quantity EPQ Similar to the EOQ but used for batch production A complete order no longer received at once and inventory is replenished gradually ie non instantaneous replenishment gt Maximum Cycle Inventory u maXQpuQp P P gt Total cost Annual holding cost Annual ordering cost Q Q p u 9 TC 2 HQS 2 p HQS gt Economic Production Quantity EPQ P Q0 H pu ll7 EPQ Example A domestic automobile manufacturer schedules 12 two person teams to assemble 46 liter DOHC V8 engines per work day Each team can assemble ve engines per day The automobile nal assembly line creates an annual demand for the DOHC engine at 10080 units per year The engine and automobile assembly plants operate Six days per week 48 weeks per year The engine assembly line also produces SOHC V8 engines The cost to switch the production line from one type of engine to the other is 100000 It costs 2000 to store one DOHC V8 for one year a What is the economic production quantity b How long is the production run c What is the average quantity in inventory d What are the total annual costs associated with the EPQ 118 Quantity Discounts In the case of quantity discounts price incentives to purchase large quantities the unit price P is relevant to the calculation of total annual cost since the price is no longer xed Total cost Annual holding cost Annual ordering cost Annual cost of materials 2 Q TC 2 HQSPD ll9 Step 1 Step 2 Quantity Discounts TwoStep Procedure Beginning with lowest price calculate the EOQ for each price level until a feasible EOQ is found It is feasible if it lies in the range corresponding to its price If the first feasible EOQ found is for the lowest price level this quantity is best Otherwise calculate the total cost for the rst feasible EOQ and for the larger price break quantity at each lower price level The quantity With the lowest total cost is optimal 120 Quantity Discounts Example Order Quantity Price Per Unit 099 50 100 or more 45 If the ordering cost is 16 per order annual holding cost is 20 of the per unit purchase price and annual demand is 1800 items What is the best order quantity Step 1 E0Q4500 EOQsooo Step 2 TC TC 121 Perpetual Continual Inventory Review System A perpetual continual inventog review system tracks the remaining inventory of an item each time a Withdrawal is made to determine if it is time to reorder Decision rule Whenever a Withdrawal brings the inventory down to the reorder point ROP place an order for Q xed units 122 Variations of the Perpetual Inventory System Based on the characteristics of the lead time demand and the lead time the perpetual inventory system is implemented by ordering the EOQ Q0 at the ROP as follows Lead time demand dLT Lead time LT Approach Known and constant Known and constant Order Q0 when ROP is equal to the lead time demand Variable normally distributed average lead time demand and 0d known Variable normally distributed 0d known Calculate the safety stock for a given service level zadLT using the table on p569 or pp8845 to determine z Unknown but average daily or weekly demand and 0d known normally distributed Known and constant Calculate the expected lead time demand by multiplying the average daily or weekly demand by the lead time Calculate the safety stock for a given service level ZxLTUd with 2 determined as above Unknown but daily or weekly demand known and constant Variable normally distributed average lead time and 0LT known Calculate the expected lead time demand by multiplying the daily or weekly demand by the average lead time Calculate the safety stock for a given service level zd 0LT with 2 determined as above Unknown but average daily or weekly demand and 0d known normally distributed Variable normally distributed average lead time and 0LT known Calculate the expected lead time demand by multiplying the average daily or weekly demand by the average lead time Calculate the safety stock for a given service level 7 72 2 LTO39 d GET With 2 determined as above Order Q0 when ROP is equal to the expected lead time demand plus safety stock 123 Shortages and Service Levels The ROP calculation relates the probability of being able to satisfy demand during the lead time for ordering In order to determine the expected amount of units to be short during this period calculate 307 EZ5dLT Where E n 2 Expected number of units short per order cycle E z Standardized number of units short obtained from Table 123 on p 5 69 G dLT Standard deviation of lead time demand To calculate the expected number of units short per year EN E009 Q Where EN Expected number of units short per year D Yearly demand Q Order size 124 Perpetual Inventory System Example You are reviewing the company s current inventory policies for its perpetual inventory system and began by checking out the current policies for a sample of items The characteristics of one item are Egt Average demand 10 unitswk assume 52 weeks per year Egt Ordering cost S 45order Egt Holding cost H 12unityear Egt Mean lead time demand 30 units Egt Standard deviation of lead time demand 17 units Igt Servicelevel 70 a What is the EOQ for this item b What is the desired safety stock c What is the desired reorder point d What is the eXpected number of units short each cycle and per year If instead of the above situation suppose the lead time is known and constant at 2 weeks and the standard deviation of lead time demand is unknown However we do know the standard deviation of weekly demand to be 10 units How do your answers change 125 The SinglePeriod Model Used to handle ordering of perishables and items that have a limited useful life Analysis of singleperiod situations generally focuses on two costs shortage costs ie unrealized pro t per unit and excess costs the cost per unit less any salvage cost 1 Calculate the shortage and excess costs C shortage C s 2 Revenue per unit Cost per unit C excess 2 C e 2 Original cost per unit Salvage value per unit 2 Calculate the service level Which is the probability that demand Will not exceed the stocking level S Cs Ce Service level 3 Determine the optimal stocking level SO using the service level and demand distribution information 126 SinglePeriod Problem The concession manager for the college football stadium must decide how many hot dogs to order for the next game Each hot dog is sold for 225 and makes a pro t of 075 Hot dogs left over after the game are sold to the student cafeteria for 050 each Based on previous games the demand is normally distributed with an average of 2000 hot dogs sold per game and a standard deviation of 400 Find the optimal stocking level for hot dogs 127

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