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Introduction to Operations

Management (Session 6)

Prof. (Dr.) Kaustav Kundu,


Assistant Professor (QT and OM area),
Office No. 306
Measuring product yield and productivity

 Product yield is a measure of output used as an indicator of productivity.


 It can be computed for the entire production process (or for one stage in the process) as follows:
Yield = (total input)(% good units) + (total input)(1-% good units)(% reworked)
Y = (I)(%G) + (I)(1-%G)(%R)

Where
I = planned number units of product started in the production process
%G = percentage of good units produced
%R = percentage of defective units that are successfully reworked

In this formula, yield is the sum of the percentage of products started in the process (or at a stage)
that will turn out to be good quality plus the percentage of the defective (rejected) products that are reworked.
Computing product yield

The H&S Motor Company starts production for a particular type of motor with a steel motor
housing. The production process begins with 100 motors each day. The percentage of good
motors produced each day averages 80% and the percentage of poor-quality motors that can be
reworked is 50%. The company wants to know the daily product yield and the effect on
productivity if the daily percentage of good-quality motors is increased to 90%.
Measuring product cost per unit
𝑑𝑖𝑟𝑒𝑐𝑡 𝑚𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑖𝑛𝑝𝑢𝑡
+(𝑟𝑒𝑤𝑜𝑟𝑘 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡)(𝑟𝑒𝑤𝑜𝑟𝑘𝑒𝑑 𝑢𝑛𝑖𝑡𝑠)
 Product cost =
𝑦𝑖𝑒𝑙𝑑

Or
𝐾𝑑 𝐼 +(𝐾𝑟 )(𝑅)
Product cost =
𝑌

Where
𝐾𝑑 = direct manufacturing cost per unit
𝐼= input
𝐾𝑟 =rework cost per unit
𝑅=reworked units
𝑌= yield
Measuring product cost per unit

The H&S Motor Company has a direct manufacturing cost per unit of $30, and motors that are
of inferior quality can be reworked for $12 per unit. 100 motors are produced daily, 80% (on
average) are of good quality and 20% are defective. Of the defective motors, half can be
reworked to yield good-quality products. Through its quality management program, the
company has discovered a problem in its production process that, when corrected (at a
minimum cost), will increase the good-quality products to 90%. The company wants to assess
the impact on the direct cost per unit of improvement in product quality.
Measuring product yield for a multistage
process
 Product quality would be monitored throughout the production process at various stages.
Each stage would result in a portion of good-quality, “work-in-process” products. For a
production process with n stages, the yield, Y (without reworking), is

Y= (𝐼)(%𝑔1 )(%𝑔2 )…(%𝑔𝑛 )

Where I = input of items to the production process that will result in finished products
𝑔𝑖 = good-quality, work-in-process products at stage i.
Computing product yield for a multistage
process
 At the H&S Motor Company, motors are produced in a four-stage process. Motors are inspected
following each stage, with percentage yields (on average) of good-quality, work-in-process units
as follows.

Stage Average Percentage Good Quality


1 0.93
2 0.95
3 0.97
4 0.92

The company wants to know the daily product yield for product input of 100 units per day.
Furthermore, it would like to know how many input units it would have to start with each day to
result in a final daily yield of 100 good-quality units.
The Quality-Productivity Ratio

 Another measure of the effect of quality on productivity combines


the quality index numbers and product yield. Called the quality-
productivity ratio (QPR), it is computed as follows:
 QPR =
𝑔𝑜𝑜𝑑 𝑞𝑢𝑎𝑙𝑖𝑡𝑦 𝑢𝑛𝑖𝑡𝑠
(100).
𝑖𝑛𝑝𝑢𝑡 𝑢𝑛𝑖𝑡𝑠 𝑢𝑛𝑖𝑡 𝑝𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 +(𝑟𝑒𝑤𝑜𝑟𝑘𝑒𝑑 𝑢𝑛𝑖𝑡𝑠)(𝑟𝑒𝑤𝑜𝑟𝑘 𝑐𝑜𝑠𝑡)

 This is actually a quality index number that includes productivity


and quality costs. The QPR increases if either processing cost or
rework costs or both decrease.
 It increases if more good-quality units are produced relative to total
product unit.
Computing the Quality-Productivity Ratio

 The H&S Motor Company produces small motors at a processing cost of $30 per unit.
Defective motors can be reworked at a cost of $12 each. The company produces 100
motors per day and averages 80% good-quality motors, resulting in 20% defects, 50% of
which can be reworked prior to shipping to customers. The company wants to examine the
effects of
(1) increasing the production rate to 200 motors per day;
(2) Reducing the processing cost to $26 and the rework cost to $10;
(3) Increasing through quality improvement, the product yield of good-quality products to
95%;
and (4) the combination of 2 and 3.
Quality Awards

 Malcolm Baldrige Award


- It is given annually to up to 18 organizations in six categories: manufacturing, services,
small businesses, nonprofits, healthcare and education
- It was created by law in 1987 to
(1) Stimulate US companies to improve quality
(2) Establish criteria for businesses to use to evaluate their individual quality improvement
efforts
(3) Set as examples those companies that are successful in improving quality
(4) Help other US organizations learn how to mange quality by disseminating information
about the awards winners programs
ISO 9000

 Standards
- Standards are documented agreements that include technical specifications or other precise
criteria to be used consistently as rules, guidelines, or definitions to ensure that materials,
products, processes, and services are fit for their purpose.
- For example, the format for credit cards and phone cards was derived from ISO standards that
specify such physical features as the cards thickness so that they can be used worldwide.
 Certification
- Many companies around the world require that companies they do business with (e.g.,
suppliers) have ISO 9001 certification.
- ISO 9001:2008 primarily serves as a basis for benchmarking a company’s quality
management system.
Problem 2-3

 The Omega Shoe Company manufactures a number of different styles of athletic shoes. Its
biggest seller is the X-Pacer running shoe. In 2008 Omega implemented a quality-
management program. The company’s shoe production for the past three years and
manufacturing costs are as follows:
Years
2008 2009 2010
Units 32,000 34,600 35,500
produced/input
Manufacturing cost $278,000 $291,000 $305,000
Percent good 78% 83% 90%
quality
 Only one-quarter of the defective shoes can be reworked, at a cost of $2 a piece. Compute
the manufacturing cost per good product for each of the three years and indicate the annual
percentage increase or decrease resulting from the quality-management program.
Solution

 2008
Y = (I)(%G) + (I)(1-%G)(%R) = (32,000)(0.78) + (32,000)(1-0.78)(0.25) = 26,720 units.
𝐾𝑑 𝐼 +(𝐾𝑟 )(𝑅) 278,000+ 2 (32,000)(0.22)(0.25)
Product cost = = = $10.54 per unit.
𝑌 26,720

 2009
Y = (I)(%G) + (I)(1-%G)(%R) = (34,600)(0.83) + (34,600)(1- 0.83)(0.25) = 30,188.5 units.
𝐾𝑑 𝐼 +(𝐾𝑟 )(𝑅) 291,000+(2)(34,600)(0.17)(0.25)
Product cost = 𝑌
= 30,188.5 = $9.74 per unit.

 2010
Y = (I)(%G) + (I)(1-%G)(%R) = (35,500)(0.90) + (35,500)(1- 0.90)(0.25) = 32,837.5 units.
𝐾𝑑 𝐼 +(𝐾𝑟 )(𝑅) 305,000+(2)(35,500)(0.10)(0.25)
Product cost = = = $9.34 per unit.
𝑌 32,837.5
From 2008 to 2009, decrease in cost by 7.59% and from 2009 to 2010, decrease in cost by
4.11%.
Problem 2-6

 The total processing cost for producing the X-pacer running shoe is $18. The Omega Shoe
Company starts production of 650 pairs of the shoes weekly, and the average weekly yield
is 90%, with 10% defective shoes. One quarter of the defective shoes can be reworked at a
cost of $3.75.
 a. Compute the quality-productivity ratio (QPR).
 b. Compute the QPR if the production rate is increased to 800 pairs of shoes per week.
 c. Compute the QPR if the processing cost is reduced to $16.50 and the rework cost to
$3.20.
 d. Compute the QPR if the product yield is increased to 93% good quality.
Quality measures: Attributes and Variables

 Attributes  Variables
- A product characteristic such as - A product characteristic that is
color, surface texture, cleanliness, measured on a continuous scale
or perhaps smell or taste. such as length, weight, time.
- A qualitative measure - A quantitative measure
- Can be determined quickly, with - Can be determined using specified
discrete response, such as yes or no. scales.
- Not much information - Much more informative
Statistical process control applied to services

 Hospitals: Timeliness and quickness of care, etc.


 Grocery Stores: Waiting time to check out, etc.
 Airlines: Waiting time to ticket counters and check-in, etc.
 Fast-food restaurants: Waiting time for service, etc.
 Catalog-order companies: Delivery time, etc.
 Insurance companies: Agent availability and response time, etc.
Usage of control charts

 Control charts are frequently used at the beginning of a process to


check the quality of raw materials and parts, or supplies and
deliveries for a service operation.
 They are also used before a costly or irreversible point in the
process, after which the product is difficult to rework or correct;
before and after assembly or painting operations that might cover
defects; and before the outgoing final product or service is shipped
or delivered.
Project
 You need to do in a group of 6 people
 The project should be carried out by collecting information from the organizations
 First of all, you need to select two different organizations in the same sector, for example
two banks, two restaurants, two hospitals or two manufacturing companies, etc.
 You need to study the operations of each organization
 Then, you need to apply different topics covered in the lectures to compare the operations
strategy of the two organizations.
 Before starting the project, you need my approval.
 There should be no similarity in the projects of different groups (sections D, E and F).
 You need to present your project at the end of the semester.

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