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Operations Management
Chapter A
Operations and Productivity
Operations management – definition and history
Operations management (often referred to as just “operations”)is the set of activities that
relate to the creation of goods and services through the transformation of inputs to
outputs. Although this process is not always obvious, like in many service industries, it
takes place in all organizations.
Productivity variables
Productivity increases depend on three variables
1. Labor gives about 10% of annual increase in productivity. It has key points for
improving labor productivity are:
a. Basic education appropriate for an effective work force
b. Health of the labor force
c. Social factors making labor available (such as transport and sanitation)
d. Maintaining and enhancing the skills of workforce
e. More effective allocation of jobs and stronger commitment
2. Capital – provides tools for work. The cost of capital, as well as trade-off between
capital and labor are important issues.
3. Management – ensures the effective use of technology, education and knowledge in
order to increase productivity. Monitor the effective utilization of capital as opposed
to increase in investment of additional capital.
Chapter C
Operations in a Global Environment
Reasons why a domestic company would decide to get involved in any form of
international operation are numerous. The most important of them are mentioned below
in an order from tangible to intangible.
1. Reduce costs
Can be achieved by means of
- lower wages in foreign countries
- less strict government regulations
- trade agreements cut the cost of taxes and tariffs
- Examples:
- NAFTA(North American Free Trade Agreement) – Canada, Mexico and the US.
- APEC – the Pacific rim countries
- SEATO – Australia, New Zealand, Japan, Hong Kong, South Korea, New Guinea,
and Chile
- MERCOSUR – Argentina, Brazil, Paraguay, Uruguay
- other organizations assisting free trade
- maquiladoras ( free trade zones) located along US-Mexican border;
- WTO (World Trade Organization) - international organization helping to promote
world trade by lowering barriers to the free flow of goods across the borders
- shifting low-skilled jobs to other countries
Advantages:
▪ reducing costs
▪ freeing higher cost workers for more valuable tasks
▪ reducing wage costs allows to invest savings in improved products and
facilities at home location
Establishment
Globalization is as important for services as for manufacturing.
International service provider – a firm that transforms resources into a service-creating
utility for its global customers ( examples: Arthur Andersen, IBM, Air France).
Procedures for setting up global service operations typically consist of four steps:
1. Find out if sufficient people or facilities are present to maintain the service.
2. Choose foreign markets that are open, that is not protected by foreign legislation.
3. Determine services most needed and demanded by foreign customers.
4. Decide the ways to reach global customers.
Management
A different prospective might have to be taken in case of (partly) moving operations
overseas.
- Capacity planning can be challenging if a new and unique service is introduced in a
foreign country.
- Location planning. Local issues such as attitude to commuting and housing may
influence location decisions.
- Facility design and layout is frequently devised carefully in order to look domestic
or blend with a local culture.
- Scheduling operations must meet customers’ needs ( for example, flying times of
planes so that people still have a part of working day free for working).
The examples of the companies using those strategies can be found in a chart below.
High
Global Strategy
Transnational strategy
(Texas Instruments,
( Coca-Cola, Nestle)
Caterpillar, Otis Elevator)
Cost Reduction
Chapter D
Learning curves
Learning curves - the premise that people and organizations get better at their tasks as
the tasks are repeated; also called experience curves.
- The time needed to produce a unit decreases as the number of units increases, thus
following a negative exponential curve.
- It is based on doubling of productivity. For example, for a learning curve with an 80%
rate, the second unit takes 80% of the time of the first unit, the fourth unit takes 80%
of the time of the second unit etc.
- The formula is
T*Ln = time required for the nth unit,
Where T= unit cost or unit time of the first unit
L = learning curve rate
n = number of times T is doubled.
- Traditionally, learning curves are defined in terms of the complements of their
improvement rates; for example, a 70% learning curve implies a 30% decrease in
time each time the number of unit produced is doubled, this is 30% rate of
improvement
Areas of application
Learning curves are applied in both services and industry, specifically for:
- Internal labor forecasting, scheduling, establishing costs and budgets
- External purchasing and subcontracting
- Strategic evaluation of company and industry performance, including costs and
pricing
Failure to consider the effects of learning can lead to overestimating labor needs and
underestimating of material needs.
1. Arithmetic approach
Knowing the time it takes to produce first unit ( for example, 100 hours) and a rate of a
learning curve (e.g. 80%), we calculate each subsequent doubled element. The shortage
of this approach is that we can only calculate doubled values.
2. Logarithmic approach
For any unit, TN,
TN = T1 ( Nb),
where
TN = time for the Nth unit
T1 = hours to produce first unit
b = (log of the learning rate)/(log2) = slope of the learning curve
TN = T1C
Where
TN = number of labor-hours required to produce the Nth unit
T1 = number of labor-hours required to produce the first unit
C = learning curve coefficient found in special tables (Table E.3 in the book), and which
depends on both the learning rate and the unit of Interest.
Normally tables also show cumulative values, which allow us to calculate accumulated
number of hours needed to complete a specified number of units. The only difference in
computation is that we take not the ‘unit time’, but the ‘total time’ from the table into
calculation.
Chapter E
Inventory management
Low-cost strategy implies good inventory management, which is a balance between
inventory investment and customer service.
Functions of inventory
1. To decouple different parts of production process.
Types of inventory
Four types of inventory ensure the fulfillment of inventory functions:
Raw material inventory are materials that are purchased but not yet processed.
Work-in-process (WIP) inventory is incomplete products or product components that are
no longer considered raw material but have yet to become finished goods.
Maintenance/repair/operating (MRO) are supplies necessary to keep machinery and
processes productive.
Finished goods inventory is completed product waiting to be shipped.
Inventory management
ABC analysis
ABC analysis is a method for dividing on-hand inventory into three classifications based
on annual dollar volume. The concept allow the firm to concentrate on the few critical
inventory parts and instead of many less important ones.
Annual dollar volume = annual demand * cost per unit.
Normally, inventory items are classified as follows:
Class Percentage of total inventory Percentage of annual dollar volume
A 15% 70-80%
B 30% 15-25%
C 55% 5%
However, other factors than annual dollar volume ( e.g. expected engineering changes,
delivery problems, quality problems, high unit cost) can determine classification and lead
to up- or downgrading the item.
Record accuracy
If inventory is not accurately recorded, there is no point in good inventory policies. To
ensure record accuracy:
1. Both incoming and outgoing records should be adequate
2. Ensure stockroom security
3. Limited access to stockroom
4. Accurate labeling in the storage space
Cycle counting
To record inventory accurately, records must be checked through continuing inventory
audit. Cycle counting is a continuing reconciliation of inventory with inventory records.
On the basis of ABC analysis, firm creates a cycle counting policy for each inventory
class (e.g., 20 days for A, 60 days for B etc. ), and determines number of items counted
per day by dividing the quantity of the class items by the amount of days in cycle
counting policy.
Ordering cost – the cost of ordering process. Includes cost of supplies, order processing,
clerical support etc.
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Setup cost – the cost to prepare machine or process for production. In many cases setup
cost is heavily dependent on setup time, which is the time required to prepare a machine
or process for production.
The objective is to minimize costs. Thus, having the cost of inventory constant,
minimizing setup/ordering and holding costs would minimize total cost. As quantity
ordered increases, setup/ordering cost decreases, and holding cost increases. Note that
reduction in either holding or setup cost reduces the total cost, thus reducing the optimal
order quantity (lot size). Smaller lot sizes also positively influence quality and production
flexibility.
The optimal quantity Q* minimizes total cost. In the EOQ model, Q* occurs when total
setup costs equal total holding cost.
Q* = 2 DS / H
N = D/Q*
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EOQ model is considered to be robust, which is giving satisfactory results even with
substantial variation in its parameters. It is very convenient because demand and cost
forecasts are never perfectly accurate.
Although the EOQ model is based on the assumption that firm reorders when inventory
level for an items becomes zero and receives the order instantaneously, this is not the
case in practice. Due to the presence of a lead time, we must calculate the reorder point (
ROP) – amount of inventory reached when the reorder should be placed.
ROP = d*L
This equation is valid under the assumption that demand during lead time and lead time
itself are constant. In case it is not, a safety stock ( extra stock to allow for unexpected
demand) should be added into calculation.
Production order quantity model does not assume instantaneous receipt and is used in two
cases: (1) when inventory continuously builds up after an order has been placed; (2) when
units are produced and sold at the same time. This is especially suitable for production
companies.
The difference from the EOQ model is that the equation for holding costs.
2 DS
Qp* = ,
H [1 − (d / p )]
where Qp* is the optimum order or production quantity when inventory is consumed at
the same time it is produced.
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2 DS
Qp*= ,
da
H (1 −
pa
where da is annual demand rate;pa is annual production rate
This model assumes a quantity discount – a reduced price for an item purchased in large
quantities. With an objective to minimize total cost, we should keep in mind that when
discount quantity rises, the product cost goes down but holding cost increases. Normally,
firms have discount schedules which gives higher discounts for larger orders.
Note that holding cost (I) is expressed of unit price (P) instead of a constant holding cost
(H).
2. For any discount, if the order quantity is too low to qualify for the discount, adjust the
order quantity upward to the lowest quantity that will be possible for discount ( this
adjustments has to do with the total cost curves).
3. Compute the total cost for every Q* found in steps 1 and 2.
TC = DS/Q + QH/2 + PD
Uncertain demand makes management put standards on service level. Service level is the
complement of the probability of the stockout. To reduce stockouts, we use safety stock
(ss) and include it in the reorder point calculation:
ROP = d*L + ss
Amount of safety stock depends on the stockout cost as opposed to extra inventory
holding cost.
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Annual stockout cost = sum of the units short * probability*stockout cost per unit*
number of orders per year
In case it is not possible to determine the stockout cost, we might assume a policy of
keeping safety stock on hand. Supposing that demand during the reorder period follows a
normal curve, we only need mean and standard deviation to determine the inventory
requirements for any given service level.
Fixed-period systems
All inventory models mentioned before are fixed-quantity systems. In contrast, fixed-
period system assume reorder at the end of specific period rather than when a certain
inventory level is reached.
Advantages:
- physical inventory counting only when the new order arrives
- administratively convenient procedure
- Disadvantages:
- possibility of stockout during the review period
Chapter F
Process Strategy and Capacity Planning
Process strategy – organization’s approach to transform resources into goods and
services. The objective is to find a way of production such that meet the customer
requirements and product specifications within cost and management constraints.
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3.Product focus – a facility organized around products, with high-volume, low –variety
process.
Characteristics:
- Process – continuous because of long production runs.
- Standardization and quality control
- Fixed cost – high (thus profitable only in case of high facility utilization)
- Variable cost – low
Examples: glass, paper, light bulbs, beer
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stored
Scheduling Complex, Based on Simple, Sophisticated
orders trade-off building concerned with
between various models rate of output to
inventory from modules meet forecasts
availability,
capacity and
customer
service
Fixed costs Low Dependent on High High
facility’s
flexibility
Variable costs High Dependent on Low Low (dynamic)
facility’s
flexibility
Cost estimates Prior to the job, Known due to Dependent on challenging
actual cost experience capacity
known after utilization
Every process, if matched to the volume and variety, can produce low cost advantage.
Equipment utilization, especially in industries with tendency to low utilization, should
also be taken into account.
Change in process strategy may mean the transformation for an extended period of time,
and therefore is a critical decision.
Tools:
1.Flow diagrams – a drawing used to analyze movement of people or materials. Allows
to see the large view of the entire picture.
2.Time-function mapping – a flow diagram with time added on horizontal axis. This is
more rigorous tool than flow diagrams since it takes time into account.
3. Process charts – charts using symbols to analyze movement of people or materials.
Allow to see the more detailed picture of the process with elements like delay, distance,
storage etc. and to determine the percent of value-adding activities.
4. Service blueprinting - a technique focusing on customer and the provider’s
interaction with the customer.
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Degree of customization
High Low High
Mass
service
(e.g. Professional
commercial service
banking, (e.g. general-
personal purpose law
Degree banking, firms)
of labour retailing,
intensity boutiques
Service
factory
(warehouse
Service shop
and
(e.g. hospitals,
catalogue
fine-dining
stores,
restaurants)
airlines,
fast-food
restaurants)
Low
1. In quadrants where labor intensity is high and the service is very personalized, human
resources are a crucial issue
2. In quadrants with low customization it is possible to standardize, restrict, automate or
remove some features of the service. Because customer response is relatively low,
operations must have strict quality control.
3. In quadrants with low labor intensity it may be successful to introduce innovations in
process technology and scheduling
Another aspects that offer opportunities for service process improvement are:
- Layout is an integral part of any service process, but especially important in retailing,
dining and banking
- Human resources is an important issue not only in a labor-intensive service process,
but also in cases when flexible and cross-trained personnel for part-time replacement
is needed.
- Technology helps through automation, specialized software, enhanced computer
control systems etc.
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2. Environmental friendliness
Production processes have a lot of opportunities for reducing negative impact on the
environment, from socially responsible to legally required activities. Taking these
opportunities does not reduce the possibility to achieve competitive advantage.
4.Capacity
The decision about the facility capacity is critical because (1) it affects a large part of
fixed costs; (2) determines if demand will be met or facilities will be underutilized.
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Choice of alternative may be relatively easy and be based on the lowest cost among
alternatives. However, there are some factors which are hard to quantify and therefore,
measure. These are (1) technological options; (2) competitor strategies; (3) building
restrictions; (4) cost of capital; (5) human resource options; (6) laws and regulations.
Sometimes there is a mismatch between the actual demand and available capacity:
1. If demand exceeds capacity , a firm can drive demand down by raising prices,
scheduling long lead times and discouraging marginally profitable business.
However, the long-term solution is to increase capacity not to lose the demand.
2. If capacity exceeds demand, firm can stimulate demand by cutting prices, aggressive
marketing or product changes.
3. If demand is seasonal or cyclical , a firm might introduce products with
complementary demand patterns.
Tactics for matching capacity to demand are:
- Staffing changes
- Adjustment of equipment and processes
- Improvement of methods to increase throughput
- Product redesign for throughput facilitation
The tactics are used to adjust the demand; however, the strategy is to choose the right
facility size.
Break even-analysis
Break-even analysis is a mean to find the point, in dollars or units , at which costs equal
revenue.
Fixed costs are costs that continue even if no output is produced.
Variable costs are costs that vary with volume of units produced.
Contribution – difference between selling price and variable cost.
Revenue function – function that increases by the selling price of each unit.
Break-even point (BEP) can be found using both graphic and algebraic approach.
Graphically, costs and revenue functions are plotted on the axis, and the point at which
total cost and total revenue intersect is the BEP.
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Thus ,
BEP in units = Total fixed cost/ ( Price – Variable cost)
BEP in dollars = Total fixed cost/ (1 – Variable cost/Selling price)
A crossover chart is a chart of costs at the possible volumes for more than one process.
At any given volume, only one process will have the lowest cost.
The aforementioned formulas are fro single product case. For multiproduct firm, when
each product has different price and variable cost we must reflect the proportion of sales
for each product. The formula then is:
F
BEP in dollars =
Vi
∑ 1 − Pi x(Wi )
where V = variable cost per unit
P = price per unit
F = fixed cost
W = percent each product if of total dollar sales
i= each product
Strategy-driven investments
In order to build competitive advantage, not only the financial returns should be looked at
when making investment decisions, but also strategic considerations as:
- Choose investment as a part of the strategic plan
- Choose investments yielding the competitive advantage
- Consider product life cycles
- Include different operating factors in the financial return analysis
- Look at the investments from the point of view of several revenue projections
Analysis of process alternatives include six major factors: (1) cost; (2) volume; (3) human
resource constraints; (4) technology; (5) quality; ( 6) reliability. The analysis should also
show the capital investment, variable costs, cash flows and net present value for each
alternative.
Net present value (NPV) is a means of determining the discounted value as a series of
future cash receipts. In general,
F
P= ,
(1 − i ) N
where F – future value
P – present value
i – interest rate
N – number of years of investment
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Interest-rate tables of present value facilitate the calculation reducing the formula till P =
FX, where X = 1/(1+i)N
The procedure for selecting the investment is to compute NPV of each investment and to
choose the investment with the highest NPV.
The limitations of the net present value approach are:
- Investments with the same NPV may have different projected lives and salvage
values.
- Investments with the same NPV may have different cash flows.
- Knowledge of future interest rates is only assumed.
- Payments are made at the end of the period, which is not always the case.
Chapter G
Layout strategy
Layout can help organization to achieve competitive advantage. The objective is to
develop a layout that will meet firm’s competitive requirements.
Layout design is set to achieve:
- Higher utilization of space, equipment and people
- Better flow of information, materials and people
- Improved employee morale and safe working conditions
- Better customer/client interaction
- Flexibility
Types of layout
1.Fixed-position layout
2.Process-oriented layout
3.Office layout
4. Retail layout
5.Warehouse layout
6.Product-oriented layout
Fixed-position layout
In a fixed-position layout, which is meant for large and bulky projects, the project
remains in one place and workers and equipment come to that one work area(e.g. ships,
houses).
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Possible solutions:
- “meeting of trades” to assign space for different time periods
- completion of as many parts as possible off-site
Process-oriented layout
A process-oriented layout deals with low-volume, high-variety products; machines and
equipment are grouped according to the product (e.g. hospital, college, library).This is a
classic way for product differentiation strategy.
Advantages:
- flexibility in equipment and labor assignment
- good for handling job lots – groups or batches of parts processed together
- allows production in variety of sizes and forms
Disadvantages:
- general purpose equipment
- difficult scheduling
- changing setups
- unique material handling
- high labor skills
- high work-in-process inventory
Most common tactics in designing a process layout is arranging work centers so that costs
are minimized. Material handling costs depend on (1) number of loads ( or people) to be
moved between work centers; (2) distance-related costs of moving loads (people)
between work centers. We can use graphical tools such as interdepartmental flow graphs
to solve the problems. However, for complicated decisions, special software has been
developed (e.g. CRAFT, SPACECRAFT, CRAFT 3D, MULTIPLE, CORELAP,
ALDEP, COFAD). There are also expert systems (e.g. FADES) which develops designs
for unstructured situations and includes the element of human judgment together with
mathematical expertise.
Special case of process-oriented layout are work cells. Work cell is a temporary product-
oriented arrangement of machines and personnel in normally process-oriented facility.
Thus, it reorganizes people and equipment which would normally be in different
departments and arranges them in a group to work on particular product. Advantages are:
- reduced work-in-process inventory
- less floor space
- reduced raw material and finished goods inventory
- reduced direct labor cost
- increased sense of employee participation
- increased use of equipment and machinery
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In case a firm has a family of similar products with stable demand, it may organized a
focused work center, which is a permanent or semi-permanent product-oriented
arrangement of machines and personnel.
Office layout
Office layout is grouping of workers, their equipment, and spaces/offices to provide for
comfort, safety and movement of information.
A useful tool or analysis of communication patterns, separation needs and other
conditions affecting employee effectiveness is a relationship chart. There are two trends
influencing office layout: (1) technology increases flexibility by electronic movement of
information; (2) virtual companies create less need for employees on-site.
Retail layout
Retail layout addresses flow, allocates space , and responds to customer behavior. Studies
show that greater rate of customer exposure to products lead to higher sales and return on
investment.
Helpful ideas for overall management of stores are:
- locate the high-draw items on the periphery of the store
- use prominent locations for high-impulse and high-margin products
- Place “power items” on both sides of an aisle and disperse them to increase viewing
of other products
- End-aisle locations have very high exposure rate
- Convey the mission of the store by positioning the leading products.
The main objective of retail store is to maximize profitability per square foot of floor
space. However, services cape – the physical surroundings in which a service takes place,
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and how they affect customers and employees – should also be taken into account. In
order to provide good service, the firm has to look at:
- Ambient conditions
- Spatial layout and functionality
- Sighs, symbols and artifacts
Variety of items stored and number of items “picked” have influence on warehouse
layout. The more items are stored, the less warehouse’s density. In modern warehouses
there are automated storage and retrieval systems (ASRS).
Disadvantages:
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Chapter H
Waiting-Line Models
1. Arrival characteristics
25
Limited (finite) population – a queue in which there are only a limited number of
potential users of the service (e.g. copying shop with 7 copiers).
e − λ λx
P( x) =
x!
where P(x) – probability of x arrivals
x – number of arrivals per unit of time
λ – average arrival rate
e = 2.7183
Random arrivals may follow other distributions than Poisson, and should, therefore,
be carefully examined.
2. Waiting-line characteristics
2.1. Length
Limited queue is the one that cannot increase to infinity due to physical restrictions
(e.g. barber shop with limited number of waiting chairs).
Unlimited queue has an unrestricted size (e.g. cars arriving at tollbooth).
3. Service characteristics
3.1. Design
3.1.1. By number of channels
Single-channel queuing system – a service system with one line and one server
(e.g. drive-in bank with one teller)
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Multi-channel queuing system – a service system with one line and several
servers (e.g. post office)
3.1.2. By phase
Single-phase system – a system in which customer receives the service from only
on station and then leaves the system.
Multi-phase system – a system in which customer receives services from several
stations and then leaves the system.
There is a trade-off between cost of providing good service and a cost of waiting time (
which means lost productivity or sales). One way to evaluate it is to look at the total
expected cost, which is a sum of expected service and waiting costs. Service costs
increase with attempts to raise level of service, and waiting line costs decrease in the
same time. Sometimes it is possible to vary capacity by extra personnel or equipment,
thereby not keeping waiting line too long, and consequently, waiting cost too high.
Queuing models
The four most commonly used models are introduced below. All of them assume
unlimited queue length. All of them assume
- Poisson distribution of arrivals
- FIFO discipline
- A single-service phase
- Arrival and service rate are stable during analysis
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λ2 λ
Lq = Wq =
µ (µ − λ ) µ (µ − λ )
λ 1
Ls = Ws =
µ −λ µ −λ
k +1
λ λ λ
ρ= P0 = 1 − Pn > k =
µ µ µ
Once we know the characteristics of the queue, and if we know the waiting costs, we can
perform an analysis of economic impact of the queue.
λ 1 Lq
Lq = Ls − Wq = W s − =
µ µ λ
λµ (λ / µ ) M λ µ (λ / µ ) M 1 L
Ls = P + Ws = P + = s
( M − 1)!( Mµ − λ ) 2 0
µ ( M − 1)!( Mµ − λ ) 2 0
µ λ
1
P0 = for Mµ > λ
M −1 1 λ n 1 λ M Mµ
∑ + 28
n=0 n! µ M ! µ Mµ − λ
λ2 λ
Lq = Wq =
2µ ( µ − λ ) 2µ ( µ − λ )
λ 1
L s = Lq + W s = Wq +
µ µ
4. Limited population model
Since this model has a limited arrival population, there is a dependent relationship
between the length of the queue and the arrival rate. As the waiting line increases, the
arrival rate drops.
Note that different notation is used in formulae for this model.
D - probability that a unit will have to wait in a queue
F – efficiency factor
H – average number of units being served
J – average number of units not in a queue or in service bay
L – average number of units waiting for the service
M – number of service channels
N – number of potential customers
T – average service time
U – average time between unit service requirements
W – average time a unit waits in line
X – service factor
T L(T + U ) T (1 − F )
X = L = N (1 − F ) W = =
T +U N −L XF
J = NF (1 − X ) H = FNX N = J +L+H
For simpler calculations, tables for D and F have been established. We first need to find
X, find it in the table, then look up the value for M, and note the corresponding F and D.
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These are 4 basic models of waiting lines. Other models have been developed to deal
with more complex situations. For example, service times distributed as normal
probability rather than exponential; preemptive priority queue discipline instead of FIFO;
multi-phase systems etc.
Chapter I
Just-In-Time Systems
Just-In-Time (JIT) – a philosophy of continuous and forced problem solving that drives
out waste.
Characteristics of JIT:
1. Waste reduction
Anything that does not add value ( including products stored, inspected, delayed,
waiting in queues and defective) is considered 100% waste. By eliminating non-
adding value activities, JIT reduces waste.
2. Variability reduction
Variability – any deviation from the optimum process that delivers perfect product on
time, every time. Variability is caused by:
- producing units not according to standards, late, or poor quality
- inaccurate specifications
- producing before specifications are complete
- demand unknown
Variability is unseen when inventory exists. With JIT, it can be noticed and
eliminated.
JIT requirements
1. Suppliers
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Concerns of suppliers
1. desire for diversification of buyers
2. poor customer scheduling
3. engineering changes
4. quality assurance
5. small lot sizes
6. proximity
2. JIT layout
The JIT layout reduces the waste caused by movement of material. The reduced
distance saves space and gets rid of potential areas for inventory.
3. Inventory
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e. performing to schedule
f. reducing setup time, which reduces setup costs ( also important in offices)
g. using group technology
4. Scheduling
Effective scheduling supports JIT, improves the ability to meet orders, reduces
inventory by using smaller lot sizes, and drives down work-in-process.
Kanban system moves parts through production via a “pull” from a signal ( comes from
a Japanese word for “card”). The card is an authorization for the next container of
material to be produced.
5. Quality
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6. Employee empowerment
“No one knows the job better than those who do it” is the motto of JIT in terms of
employee policy. Cross-training, training and job enrichment engage mental and physical
capacities of employees to improve workplace.
Lean production
JIT in services
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Chapter J
Aggregate Planning
34
inventory,
subcontracting levels
Short-range - “disaggregate” Operations personnel
production plan
- loading
- sequencing
- expediting
- dispatching
‘Aggregate’ implies combining appropriate resources into general terms. Aggregate plans
are made in terms of families of products rather than individual products. The output rate
for facility is selected given
- demand forecasts
- facility capacity
- inventory level
- workforce size
- related inputs
1. Capacity options
This type of strategies does not try to change the demand, but to absorb its
fluctuations.
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2. Demand options
By these strategies firms try to smooth out changes in the demand during the planning
period.
Some combinations of above mentioned options provide better results than individual
ones. Manufacturers may assume that demand options are already built into demand
forecast. Operations managers than set up aggregate plan using capacity options at hand.
There are two distinctive strategies in this case:
a. Chase strategy – achieving output rates equal to production demand.
Widely used in service organizations
b. Level scheduling – maintaining constant output rate, production rate, or
workforce level over the planning horizon. Finished good inventory
fluctuates, and alternative work for employees is found. This strategy is
good when demand is reasonably stable.
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When firms pursue a mixed strategy – a planning strategy that uses two or more
controllable variables to set a feasible production plan, it often must investigate a
combination of eight options for a minimum cost. Several techniques are:
1. Graphical and charting methods – aggregate planning techniques that work with few
variables at a time to allow planners compare projected capacity with existing
capacity. Steps are:
- determine demand in each period
- determine capacity for regular time, overtime, and subcontracting for
each period
- find labor, hiring, layoff, and inventory holding costs
- consider company policy applying to workers or stock levels
- develop alternative plans and examine their total costs
These techniques only evaluate strategies, not generate them. Their advantages are
simplicity of understanding and use. However, they offer many solutions and one
chosen is not necessarily optimal.
Some service organizations use aggregate planning as well. Especially crucial is the
controlling of labor costs, which involves:
- close scheduling of labor-hours
- on-call labor resource for unexpected demand
- labour’s flexibility of skills for reallocation of available labor
- labour’s output rate flexibility to meet expanded demand
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d. Airline industry
Concerns are:
- number of flights in and out of each hub
- number of flights on all routes
- number of passengers on all flights
- number of air and ground personnel in each hub and airport
Planning complicated by large number of sites.
Yield management – capacity decisions that determine the allocation of classes of
resources in order to maximize profits (e.g. number of seats with various fare classes).
e. Hotel industry
Also use yield management
f. Hospitals
Problems allocating money, staff, supplies.
Chapter K
Material requirements planning (MRP)
Benefits of MRP
Dependent inventory scheduling system – system whereby demand for every component
is related to the demand of another component. For any item which can be scheduled,
dependent demand techniques should be used.
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However, MRP is not only applied in production, but also in services, because the
demand for many service items is classified as dependent.
Types of BOM
a. Modular bills – BOM organized by major subassemblies or product options.
Production scheduling is often facilitated by organizing around few modules
rather than a lot of final assemblies.
b. Planning bills – a material grouping created in order to assign an artificial
parent to the bill of material. It is used in two cases: (1) when subassemblies
have to be grouped to reduce the number of items for scheduling; (2) when
“kits” for the production department need to be issued (in this case planning
bill can be called kitted material or kit).
c. Phantom BOM – BOM for components (usually subassemblies) that exist
only temporarily. These parts go directly to another assembly and are not
inventoried; consequently, their lead time is zero and they are treated as part
of their parent item.
BOM define the product by presenting a product structure, which is leveled. Items
above any level are parents, items below any level are children, or components.
Low-level coding – item is coded at the lowest level it occurs. It ensures that an
item is at the lowest level of usage and allows computing requirements for the
item easily.
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MRP structure
Having all the above mentioned data on hand, first step is to construct the gross material
requirements plan, which is a schedule showing total demand for an item (before
subtraction of on-hand inventory and scheduled receipts) and telling when it should be
ordered from suppliers and when production must be started in order to meet the demand
on a particular date.
MRP management
When master production plan is altered, material requirements change. The replanning
capability of MRP allows us to take those changes into account. However, frequent
altering causes system nervousness – havoc in production and purchasing departments
when changes in MRP schedules are implemented. Tools to reduce system nervousness
are:
1. Time fences – a way of allowing a segment of master schedule to be designated as
“not to be rescheduled”.
2. Pegging – tracing upward in the BOM from component to parent item in order to
determine the cause of requirement for a component.
It is common nowadays to use a combination of MRP and JIT. The complication may
occur because in MRP schedules lead times are fixed, unlike JIT. However, this
combination provides good master schedule, accurate view of requirements, and reduced
work-in process inventory. There are two approaches for MRP and JIT integration:
1. Small bucket approach
Bucket – time unit in MRP system.
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Bucketless system – time-phased data are referenced using dated records rather than
defined time periods.
This technique is useful in the job shop environment, where schedules are mostly
driven by work orders.
Steps are:
- reduce time buckets to daily or hourly
- planned receipts are used to sequence production
- inventory moved on JIT basis
- completed products moved to inventory in a normal way
- use of back flushing – system to reduce inventory balances by using BOM for
deducting component quantities upon completion of the unit
Lot-sizing techniques
3. Part Period Balancing (PPB) – balances setup and holding costs by changing lot size
to reflect requirements of the next lot size in the future.
Economic part period (EPP) – ratio of setup costs to holding costs. PPB adds
requirements until the number of part periods approximates EPP.
4. Wagner – Whitin algorithm – technique assuming finite time horizon beyond which
there are no additional net requirements.
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In general, because of system nervousness, frequent changes in MRP are not made, and
all lot sizes are wrong. However, the guidelines for lot-sizing decisions are:
- using lot-for-lot whenever economical
- modification of lot sizes ( e.g. for scrap allowances, process constraints or
raw material purchase lots) should be made carefully because it may
cause distortion of actual requirements at lower levels of MRP
- PPB, Wagner-Whitin, and EOQ provide good results when demand is
smooth and setup costs are significant
Extensions of MRP
3. Material requirement planning II ( MRP II) – a system that allows, with MRP in
place, inventory data to be augmented by other resource variables; MRP becomes
material resource planning. Other resource variables include labor-hours, machine-
hours and accounts payable.
When dependent techniques are used in distribution environments, it is called DRP. DRP
is a time-phased stock replenishment plan for all levels of a distribution network.
Requirements of DRP are:
1. Gross requirements
2. Minimum inventory level
3. Accurate lead time
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The goal of DRP is small and frequent replenishment within ordering and shipping costs.
Traditional DRP pulls inventory through the system, initiated by the top (retail) level
ordering more stock. Problems with pull system are:
- pulls are distorted at subsequent levels
- each ordering location ignores replenishment requirements are other
locations
- ordering locations ignore stock status at supplying location
Alternative DRP adds allocations to the systems. It combines information from both
using and supplying locations.
Chapter L
Short-term scheduling
Capacity planning
Aggregate planning
Master schedule
Short-term scheduling
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Types of scheduling
Because jobs compete simultaneously for the same resources, there are two types of
planning jobs:
Scheduling criteria
The objective of scheduling is to optimize the resources so that production objectives are
met.
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2. Control files track progress against the plan for each work order.
Loading – assigning jobs to processing centres. There are two types: one is oriented to
capacity (point 1), another deals with assigning specific jobs to work centres (points 2
and 3).
1. Input-output control - a system that allows managing facility work flows by tracking
work added to a work centre and its work completed.
Options to manage facility work flow:
1.1. correcting performance
1.2. increasing capacity
1.3. increasing or reducing input by
1.3.1. routing work to or from other centres
1.3.2. increasing/decreasing subcontracting
1.3.3. producing less/more
(Producing less has its advantages: (1) improved customer service; (2)
improved efficiency due to less WIP and lower overhead costs; (3) improved
quality due to less WIP hiding fewer problems.)
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2. Gantt charts – planning charts used to schedule resources and allocate time.
2.1. Gantt load charts show the loading and idle times of several departments,
machines or facilities. Seeing the relative workloads in the system, the manager
can adjust wok flow more efficiently. However, it does not take into account
unexpected breakdowns or human errors, so it has to be updated regularly to
reflect new jobs and revised time estimates.
2.2. Gantt schedule charts monitor jobs in progress. Indicates which jobs are on,
ahead or behind schedule.
Sequencing - indicates the order in which jobs should be done in each centre.
1. Priority rules – rules that are used to determine the sequence of jobs in process-
oriented facilities. Most popular are:
FCFS – first come, first served
SPT – shortest processing time
EDD – earliest due date
LPT – longest processing time
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SPT procedure is often the most efficient for minimizing job flow and average
number of jobs in the system. However, long-duration jobs are constantly pushed
back, which can result in lower customer satisfaction.
FCFS system is not the most efficient, but it appears “fair” to customers, therefore is
important in service sector.
2. Critical ratio – a sequencing rule that gives priority to the jobs that must be done to
keep shipping on schedule.
CR – rule helps to
- find out status of a specific job
- find relative priority among jobs
- relate stock and make-to-order jobs
- adjust priorities for changed in demand and job progress
- track job progress
3. Johnson’s rule (N/2 problem) – an approach that minimizes processing time for
sequencing a group of jobs through two work centres while minimizing total idle time
in the work centres. Practically, job with the shortest activity time on the first
machine is scheduled first, if it is the second machine – the last.
Theory of constraints
Theory of constraints (TOC) – body of knowledge that deals with the factors that limit
organization’s ability to achieve its goals. Constraints can be physical ( process or
personnel availability, raw materials, supplies) or non-physical (procedures, training,
morale). Five steps lay the base to the TOC:
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Repetitive producers often use level material-use – the use of frequent, high-quality,
small lot sizes that contribute to just-in-time production. The advantages of it are:
- lower inventory level → released capital
- shorter lead times
- improved quality
- reduced floor-space requirements
- improved employee communication
- smoother production process
To develop the lot size for the level material-use we analyse process, transportation time
and containers used for transport. Then the POQ production order quantity model can be
used to determine the desired setup time:
2 DS
Q* =
H [1 − (d / p )]
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