Comm

225 Notes

Chapter 12

Fixed Order Quantity/Reorder Point Model: Determining the Re-Order Point

Reorder Point (ROP) When the inventory position drops to or below this amount, the item
should be reordered.
ROP = d x LT
Where
o D demand rate (units per day or week or month)
o LT lead time (in days or weeks or months)

Safety stock stock that is held in excess of expected demand due to variability of demand
and/or lead time.

ROP = Expected demand during a lead time + Safety Stock

Lead Time Service Level probability that demand will not exceed inventory on hand during a
lead time.

Annual Service Level The percentage of annual demand filled (from stocks on hand), i.e, fill
rate.

Safety Stock =
Z safety factor; number of standard deviations above the expected demand


Reorder point under:
Constant Demand and Lead Time =
Variable Demand = + [ ]
Variable Lead Time and Demand
o = + [ @ + @ @ ]

The Single Period Model
Single Period Model Model for ordering perishables and other items with limited useful lives.

= Cs = Revenue Per Unit Purchase Cost Per Unit

Excess Cost Difference between purchase cost and salvage value of an item left at the end of
the period.

= Ce = Purchase cost per unit Salvage value per unit

EF
Service level SL =

EFGEH

Comm 225 Notes

Chapter 10
Statistical Quality Control (384-408)

Statistical Quality Control Uses of statistical techniques and sampling in monitoring and
testing of quality of goods and services.

Inspection Appraisal of a good or service against a standard.

Statistical Process Control Statistical evaluation of the product in the production process.

Types of Variations
1. Random Variation Natural variation in the output of a process, created by countless
minor factors.
2. Assignable Variation Nonrandom variability in process output; a variation whose cause
can be identified.

Central Limit Theorem the distribution of sample averages tends to be normal regardless of
the shape of the process distribution.

Control Chart A time ordered plot of a sample statistic with limits.

Control Limits The dividing lines between random and assignable deviations from the mean of
distribution.

Type I Error concluding that a process has shifted (an assignable variation is present) when it
has not (only random variation is present)

Type II Error Concluding that a process has not shifted (only random variation present) when
it has (an assignable variation is present).

Designing Control Charts
1. Determine a sample size n (usually between 2 and 20). The choice of n depends on the
cost of inspection versus the expected cost of Type II error. The large n is, the smaller
the probability of Type II error.
2. Obtain 20 to 25 samples of size n. Compute the appropriate sample statistic for each
sample (establish the mean).
3. Establish preliminary control limits using appropriate formulas and graph them.
4. Plot the sample statistic values on the control chart, and note whether any points fall
outside the control limits.
5. If you find no points outside control limits, assume that there is not assignable cause
and therefore the process is stable and in control.

Comm 225 Notes

Sample Mean and Range Control Charts

Sample Mean (x bar) control chart the control chart for sample mean, used to monitor the
process mean.
The first approach to calculate the control limits is to use the standard deviation of the
process.
o Upper Control Limit (UCL) = +
o Lower Control Limit (LCL) = +
A second approach to calculate the control limits is to use the sample range (max min
value) as a measure of the process variability. The appropriate formulas for sample
mean control limits in this case are: (Usually use this one)
o UCL = + 2
o LCL = 2

Sample Range (R) Control Chart the control chart for sample range, used to monitor process
dispersion or spread
UCL = D4(R)
LCL = D3(R)

Individual Unit and Moving Range Control Charts

Individual Unit (X) control chart control chart for individual unit, used to monitor single
observations (n=1)
Control limits determined by:
o UCL = +
o LCL =

Moving range (MR) control chart Control chart for the moving range, i.e., the difference
between consecutive observations, used to monitor the dispersion or spread when n=1
Control limits determined by:
o UCL= 3.27R
o LCL = 0

Other Control Charts
Use a p-chart
Use a c-chart
1. When observations can be placed into one of two
categories. Examples include items (observations) that can
be classified as:
a. good or bad
b. pass or fail
c. operate or dont operate.

2. When the data consist of multiple samples of n

observations each

When only the number of occurrences per unit of measure

can be counted; nonoccurrences cannot be counted.
Example:
a. scratches, chips, dents, errors per item
b. cracks or faults per unit of distance
c. Breaks or tears, per unit of area
d. Bacteria or pollutants per unite of volume
e. Calls, complaints, failures, equipment breakdowns,
or crimes per unit of time.

Comm 225 Notes

P-Chart control chart for sample proportion of defectives, used to monitor the proportion of
defective items generated by a process.
The center line on a p-chart is the average proportion of defective in the population, p.
The standard deviation of the sampling distribution of the sample proportion, when p is
known, is:
o =

M NOM
P

o Control limits for p charts are calculated using the formulas:

UCL= +
LCL =

C-Chart control chart for sample number of defects per unit product, used to monitor the
number of defects per unit product
For practical reasons, the normal approximation to the Poisson is used. Control limits:
o UCL = +
o LCL =

Process Capability
Design Specification a range of acceptable values established by engineering design or
customer requirements.

Process Variability actual variability in a process for a product

Process Capability the ability of a process to meet the design specification

Cp = to express the capability of a machine or process, some companies use the ration of the
design specification width to the process width (= 6sigma). This can be calculated using the
following formula:
Process Capability Ration, Cp =
QHFRSP FTHURVRUWXRYP ZR[X\
= [ )]/6
M]YUHFF ^R[X\
Must be greater than 1 to be capable

CpK = if a process is not centered between design specification limits, or if there is no design
specification limit on one side, a slightly different measure is used to calculate its capability.
This ratio is represented by the symbol Cpk. It is calculated by finding the difference between
each of the specification limits and the process mean, dividing that difference by three standard
deviations of the process, and identifying the smaller ration. Thus, Cpk, is equal to the smaller
of:
eTTH] [HFRSP FTHURVRUWXRYPOM]YUHFF fHWP

g FRShW
M]YUHFF fHWPOiYZH] [HFRSP FTHURVRUWXRYP
g FRShW

Six Sigma Quality the gold standard

Comm 225 Notes

Chapter 18
Waiting-Line Analysis

Queuing Theory Mathematical approach to the analysis of waiting lines.

Infinite Source The potential number of customers greatly exceeds system capacity.

Finite Source The number of potential customers is limited.

Poisson Distribution A one-parameter discrete probability distribution of a number of events
occurring in an interval of time, provided that these events occur with a known average rate
and independently of the time since the last event.

Exponential Distribution The continuous probability distribution of the times between events
that happen continuously and independently at a constant average rate.

Queue Discipline the order in which customers are served

Performance Measures
Operations managers typically look at four measures when evaluating existing or proposed
queueing systems. Those measures are:
1. The average number of customers waiting, either in line (not counting those being
served) or in the system (including those being served).
2. The average length of time customers wait, either in line or in the system.
3. Server utilization, the proportion of time a server will be busy.
4. The probability that an arriving customer will have to wait for service or will have to wait
more than specified length of time before being served.

Basic Relationships
Symbol
Represents


Lq
Ls

Wq
Ws
1/


M
r

Average arrival rate

Average service rate
Average # of customers waiting in line for service
Average # of customers in the system (waiting and being served)
Server utilization
Average length of time customers wait in line
Average length of time customers spend in the system
Average service duration
Probability of zero customers in the system
Probability of n customers in the system
Number of servers
Average number of customers being served at any time

Comm 225 Notes

Server utilization (rho), is equal to the ration of demand (as measured by the average arrival
rate) to capacity (as measured by the product of the number of servers, M, and the average
service rate, :
n
=
fo

The average number of customers being served (at any point in time), r, is equal to each
servers utilization times the number of servers = , or:
n
=
o

The average number of customers

waiting in line for service Lq
in the system (line + being served) Ls
The average length of time customers
wait in line Wq
spend in the system Ws

Single Server Models

Model 1 Single Server, Exponential Service Durations
The simplest model involves a system that has one server (or a single crew/team), the queue
discipline is FCFS, and customer arrival rates can be approximated by a Poisson distribution and
service durations by an Exponential distribution. The length of queue is not a constant.













Model 2 Single Server, Constant Service Durations
Think banks (atm) or automatic carwashes. Something thats consistent in time to complete a
task

Comm 225 Notes

Model 3 Basic Multiple-Server Model
Assumptions:
1. Poisson Arrival Rate
2. Exponential Service Time
3. All M servers work at the same average
4. Customers form a single waiting line

Comm 225 Notes

Chapter 13
Aggregate Operations Planning

Supplement 1
Introduction and Linear Programming Model
A linear programming model is a mathematical representation of a constrained optimization
problem. Four components provide the structure of a linear programming model:
1. Decision Variables
2. Objective
3. Constraints
4. Parameters

Decision Variables Choices in terms of amounts of either inputs or outputs

Objective Function A mathematical expression involving the decision variables that represent
the objective, e.g., profit, cost.

Constraints represent the requirements or limitations that restrict the available choices.

Feasible solution space the set of all feasible combinations of values of decision variables as
defined by the constraints.

Parameters coefficients of decision variables in the objective function and constraints.

In order for a linear programming model to be used effectively, certain assumptions must be
satisfied. These are:
1. Linearity the impact of decision variables is linear in constraints and in the objective
function
2. Divisibility noninterger values of decision variables are acceptable
3. Certainty values of parameters are known and are constant
4. NON NEGATIVITY DONT FORGET THIS SHIT, JUST SAY ALL VARIABLES > 0

Slack and Surplus

Surplus When the optimal values of decision variables are substituted into the left side of a >
constraint, surplus is the amount the left side exceeds the right side.

Slack when the optimal values of decision variable are substituted into the left side a <
constraint, slack is the amount the left side is less than the right side.

Comm 225 Notes

Advanced Sales and Operations Planning AKA Supplement 2
Linear Programming
There are many linear programming formulations for the aggregate production planning
problem. The objective is to typically find the lowest cost plan, considering when to hire and
fire, how much inventory to hold, when to use overtime and under time, and so on, while
always meeting the sales forecast. Example below

Minimize: + + + + +
Subject to:
1. Inventory Constraint
a. I(t-1) + Xt + Ot It = Dt
i. It > Bt
2. Regular time production constraint
a. Xt A1tWt + Ut = 0
3. Overtime production constraint
a. Ot A2tWt + St = 0
4. Workforce level change constraint
a. Wt - W(t-1) - Ht + Ft = 0
5. Initializing constraints
a. Wo = A3
b. Io = A4
c. Wm = A5
Where:
Ch cost of hiring
Cf cost of firing
Cr cost per labor hour of regular time production
Co cost per labor hour of overtime production
Ci the cost per month of carrying one labour hour of work
Cu the cost per labor hour of idle regular time production
Ht # of employees hired in month t
Ft # of employees fired in month t
Xt regular time production hours scheduled in month t
Ot the overtime productions hours scheduled in month t
It the hours stored in inventory at the end of month t
Ut the # of ideal time regular production hours in month t
Bt the min number of hours to be stored in inventory in month t
A1t the max # of regular rime hours to be worked per employee per month
Wt the # of people employed in month t
A2t the max # of overtime hours to be worked per employee per month
St the # of unused overtime hours per month per employee
A3 the initial employment level
A4 the initial inventory level
A5 desired # of employees in month m
m the # of months in the planning horizon

Comm 225 Notes

Basic Strategies:
Level output
o Maintain steady rate of output
o Meeting variations in demand with inventories and back-orders
o Only for durable goods
Chase demand strategy
o Matching capacity to demand
o Planned output set at forecasted demand
o Meeting variations in demand with overtime and part-time/temporary workers


Aggregate Planning Relationships

Comm 225 Notes

Chapter 11
Supply Chain Management

Supply Chain Sequence of organizations their facilities and activities that are involved in
producing and delivering a product.

Supply Chain Management collaboration of supply-chain companies and coordination of their
activities so that market demand is met as effectively and effectively as possible.

Outsourcing buying goods or services instead of producing or providing them in-house (called
in sourcing)

Bullwhip effect demand/order variability gets progressively larger the further back in a supply
chain the company is.

Risk Pooling holding (safety) stocks in one central location rather than in multiple locations

Delayed Differentiation/Postponement waiting until late in the process to add differentiating
features to standard components and products.

Cross-docking loading goods arriving at a warehouse from a supplier directly onto outbound
trucks, thereby avoiding warehouse storage.

Quick Response just in time replenishment system used in retailing where orders are based
on actual sales, not periodic orders by retailers.

Efficient consumer response (ECR) an expanded version of quick response, used in the grocery
industry, which includes further collaboration.

Vendor managed inventory (VMI) an agreement in which the supplier has access to the
customers inventory and is responsible for maintaining the inventory levels requires by the
customer.

Distribution Requirements Planning (DRP) starts with the forecast demand at the end of the
distribution network (retail stores), and works backward through the network to obtain timephased replenishment schedules for moving goods from the factory through each level of the
distribution network.

Electronic Data Interchange (EDI) the direct transmission of inter-organizational transaction
and information, computer-to-computer, including purchase orders, sales data, advance
shipping notices, involves, and engineering drawings.

Radio Frequency Identification (RFID) A technology that uses radio waves to identify objects
such as goods in a supply chain.

Comm 225 Notes

Supply Chain Visibility a member can connect to any part of the supply chain to access data in
real time.

Event management the ability to detect and respond to unplanned events.

Strategic supplier/customer partnership a buyer and a supplier agree to collaborate so that
each may realize a strategic benefit

CPFR A process for communicating and agreeing on forecasts and orders between the
manufacturer and the customer (distributor/retailer).

Inventory turnover the rate at which inventory (material) goes through the supply chain

Item fill rate percentage of demand for an item filled from stocks on hand

Purchasing cycle a series of steps that begins with a request for purchase and ends with
paying the supplier

Value analysis examination of the function and design of a part/product in an effort to reduce
its cost.

Centralized purchasing purchasing is handled by a central purchasing department

Decentralized purchasing individual departments or separate locations handle their own
purchasing requirements

Spend analysis collecting, cleansing, classifying, and analyzing expenditure data with the
purpose of reducing procurement costs, improving efficiency, and monitoring compliance with
purchasing policies

E-Commerce the use of computers and Internet to conduct buying and selling

Order fulfillment involves order processing, scheduling, inventory management, warehousing,
packaging, billing, and delivery.

Supplier analysis evaluating a supplier in terms of factors such as price, quality, delivery and
service

Logistics the movement and warehousing of materials/products and information

Traffic management involved in planning and overseeing the delivery of incoming and
outgoing goods.

Comm 225 Notes

Modes of transportation the equipment used for delivery, including pipelines, ships, trains,
trucks, and airplanes.

Reverse Logistics backward flow of goods returned by consumers or retailers

Gate keeping screening returned goods at the point of entry into the system to prevent
inappropriate acceptance of goods

Avoidance Preventing returns by dealing with their causes

Chapter 9
Management of Quality

Quality the ability of a good or service to consistently meet or exceed customer expectations

Quality control monitoring, testing, and correcting quality problems after they occur.

Quality assurance providing confidence that a products quality will be good by preventing
defects before they occur

Continuous improvement never-ending improvements to key processes as part of total
quality management

Dimensions of quality of goods performance, aesthetics, special features, conformance,
reliability, durability, perceived quality and serviceability

Performance
Main characteristics or function of the product
Aesthetics
Appearance, feel, smell, taste
Special Features
Extra characteristics or secondary features
Conformance
How well a product corresponds to design specifications
Reliability
Consistency of performance over time (not failing for a certain length
of time)
Durability
Long life
Perceived Quality Subjective evaluation of quality (reputation, image)
Serviceability
Handling of complaints or repairs

Conformance to design specifications during production the degree to which produced goods
or services conform to the specifications of the designers.

Failure costs costs caused by defective parts or products

Internal Failures failures discovered during production

Comm 225 Notes

External failures failures discovered after delivery to the customer

Appraisal (defection) costs costs of inspection and testing

Prevention costs costs of preventing defects from occurring

Quality at the source every employee is responsible for his own work

Zero defects the philosophy that any level of defects is too high

ISO 9001 the international standard for a quality management system, critical to international
business

ISO 14000 a set of international standards for assessing a companys environmental
performance

HACCP A quality management system designed for food processors

Total Quality Management (TQM) an approach to quality management that involves everyone
in an organization in quality management and continual effort to improve quality and customer
satisfaction

Poka-Yoke (Fail-Safeing) incorporating process design elements that prevent mistakes

Plan-Do-Study-Act (PDSA) cycle the problem-solving and quality improvement methodology
used in the continuous improvement

Six Sigma a more sophisticated statistical approach to problem solving and quality
improvement than used in the PDSA cycle of the continuous improvement

Process flow diagram a diagram of the steps in a process

Check Sheet a sheet of paper that provides a format for recording and organizing data in a
way that facilitates collection and analysis

Histogram a chart of the frequency distribution of observed values

Pareto Analysis technique for focusing on the most important problem (or opportunity for
improvement).

Scatter Diagram a plot of pairs of observations of two variables that can show the correlation
between the two variables

Control chart a line plot of time-ordered values of a sample statistic with control limits

Comm 225 Notes

Cause-and-effect diagram a diagram used to organize (categorize) the (possible) causes of a
problem (the effect); also called a fishbone diagram

Brainstorming technique for generating a free flow of ideas on finding causes and solutions,
and implementing the solutions in a group of people

Quality circle a group of workers who meet to discuss ways of improving the products or
processes

Benchmarking process of measuring an organizations performance against the best in the
same or another industry

5W2H approach a method of asking questions about a problem that begin with what, why,
where, when, who, how and how much