Notes Lecture on MBA 657
Managing Service and Manufacturing Operations
Dr. Dooyoung Shin Department of Management College of Business Minnesota State University, Mankato Mankato, MN 56001
Topic 1
Introduction: What is OperationsManagement?
1.1 What is operations?
Operations is concerned with transforming inputs into useful outputs, and thereby adding value to some entity; this constitutes the primary activity of virtually every organization.
Eg: Walmart was focusing on Operations Mngmt where as K mart was doing Marketing.
Four major ways of transformation
1. 2. 3. 4.
Alter : physical change Transport: flower, garbage, etc. Store: Inspect: medical exams, jewelry appraisals, elevator
certifications, etc.
Value: the perception of the benefits associated with a good, service, or bundle of goods and service. Perceived Benefits Value = --------------------------------Price
Value-chain approach emphasizes the organization as a system of
interdependent activities that create value for the customer. 1.2 Why operations should be considered the heart of every organization?
Fundamentally, organizations exist to create value, and operations involve tasks that create value. Operational innovation can provide organizations with long-term strategic advantagesover their competitors. Eg: Apple, iPod, popularizing the concept called mp3. Operational innovation is the key component.
1.3
What is OperationsManagement (OM )?
OM is the systematic direction and control of the processesthat transform (value-adding) inputs into products and services for internal, as well as external customers. i.e., the inputs get transformed at operations into outputs.
Value added: the net increasecreated during the transformation of
inputs into final outputs
Efficiency: being able to perform activities well, and at the lowest
possible cost
Effectiveness doing the right thing to create the most value for the :
company 1.3.1 Three Different Perspectiveson OM
OperationsManagement as a function: How does Operations differ from other functions? OperationsManagement as a set of decisions What types of : decisions are involved in managing operations? OperationsManagement as a Competitive Weapon: What are companies doing to make operations a competitive weapon? Japanese technique: better service at lower cost. Why Study OM ?
Operations Function lies at the heart of the businessactivity. Operations Management is one of the most strategically vital areas
1.3.1.1
of managerial concern.
The underlying theory of OM is common to both goodsand services production. e.g., theseare applicable to the management of hospital or airline operations as it is to the manufacture of automobiles. Why do we include Service?
1.4
The U.S. is shifting from a manufacturing-based economy to a service-based economy. Service industries already employ more than 80 % of the nation's workers (transportation, communication, medical, financial, information technology, etc.).
Many manufacturing companies now realize they can create more value for their customers with services. Service is becoming a key differentiating factor in the eyes of customers for many manufacturing firms.
Example: Average Customer Perception on Ford Cars
Vehicle (product features and performance): 52% Sales Process: 21% Maintenanceand repair processes: 27%
1.5.1 Service Industries
Health care, Hospitality, Financial Services, Professional Services, Retail, Transportation, Janitorial Services, Security, Food Services, etc.
1.6 Characteristicsof Services
1) Services are intangible.
2) Service output is variable.
3) Services have higher customer contact.
The physical presenceof the customer is not required in manufacturing but the customer is often present during the actual delivery of the service.
4) Services are perishable.
Service capacity that is not used immediately and remains idle cannot be saved for use in the future.
5) The service and the service delivery are inseparable.
6) Services can be easily emulated. DifferencesBetween Manufacturing and Service Characteristic Manufacturing Service __________________________________________________________________ __________________ Output Tangible Intangible Customer Contact Low High Variability of Input Low High Labor content Low (Capital-intensive) High (Labor-intensive) Uniformity of output High Low Measurement of Productivity Easy, Straightforward Difficult - Opportunity to correct Quality Problemsbefore Delivery to customers High Low - Inventory Much Little - Evaluation Easier More difficult ___________________________________________________________________ __________________ -
1.7 What Makes a Firm Competitive? Five Key Principles
1.7.1 Quality
quality that improves constantly quality that is characterized by continuousinnovationsthat create
a loyal customer
from top to bottom, from board room to the factory floor Total Quality
1.7.2 Low Cost
not instead of quality but as a result of quality
1.7.3 Customer-driven
the customer is part of the process not merely to satisfy the customer's needstoday but to anticipate their
needsof tomorrow 1.7.4 EmployeeInvolvement & Empowerment
considers employeesnot as a cost of production but as a resource for
production
must be recognized that long term commitment of and to workers is
at least important than machinery or technology 1.7.5 ContinuousImprovement
meansnever being satisfied never-ending improvement change America's traditional attitude from
"If it ain't broke, don't fix it" to "If it ain't perfect, don't leave it."
1.8 Differencesin Japaneseand Western Approachesto OperationsManagement (Manufacturing)
Japanesecompanies are more active about processimprovement
and simplification than their Western counterparts.
The Japanesehave a more enlightened attitude toward employees . The Japaneseappreciate the power of continuous improvement. Japanesecompanies have a better understanding of the pervasiveness
of invisible waste - and how to eliminate it . waste of producing defects waste of transportation waste of overproduction waste of waiting waste of occurring in processing itself waste of movement waste of inventory
Waste = Anything that prevents us from achieving
maximum quality, minimum price, and prompt delivery to our customers constitute waste.
Resistanceto Change = Waste
1.8.1.1
The Goal of Production/OperationsActivities
in the right quantity, with the highest quality, at the lowest cost, and with the shortest delivery time.
To produce/provide the right product/service at the right time,
2 Operations Strategy
1.10.1 Three Key Componentsof a BusinessStrategy (1) monitoring and adjusting to changesin the businessenvironment (environment scanning) (2) identifying and developing the firms (distinctive) core competencies
Core competencies (core capabilities)
- The collective knowledge, skills, organizational practices, and business processesthat distinguish an organization from its competition. In effect, core capabilities provide the basis for developing new products and services and are primary factor in determining an
organizations long-term competitiveness. (3) developing the firms core processes(key mission customer ): relationship, new service/product development, order fulfillment, and supplier relationship
1.10.2 What is OperationsStrategy?
Operations Strategy deals with the effective useof operations
resources reflects the goalsand strategiesof the business and , , enables operations function to contribute to the long-term competitivenessand the performance of the business.
1.10.3
Three Key QuestionsTo be Addressedin Formulating an
Operations Strategy
Q1. What businessare we in, and who are the customers and competitors? Q2. How can Operations function produce " Order Winners"?
Order Winners: the thing that can actively stimulate customers
to buy the product (attractive and fascinating characteristics)
Qualifying Criteria (Order Qualifiers): characteristics
necessary to be considered for the order (necessary, must-be-in characteristics) Q3. How can we coordinate Strategy, System design, and day-to- day Operations?
1.10.4 Developing (formulating) an Operations Strategy?
Competitive Priorities: the critical dimensions that a firms production system must possessto satisfy its internal or external customers, both now and in the future. Cost (low cost)
Quality (High-performance design, consistent quality)
Time (Fast delivery time, On-time delivery, Development speed) Flexibility (Customization, Volume flexibility)
1.10.4.1.1.1 Time-based Competition (Strategy)
The goal is not to devise the best way to perform a task, but to
either eliminate the task altogether or perform it in parallel with other tasks so that overall responsetime is reduced. Example: Projection TV (Japanesespend 1/3 of U.S.), Auto Industry (1/2), Custom plastic injection molding (1/3 time, 1/3 cost), etc. The Rationale: Time Cost Productivity Quality Product innovations appear on the market earlier Customer service
Which Times ?
Planning time, Product/service design time, Processing time, Changeover time, Delivery time, Responsetime for complaints, etc.
How can we reduce times ?
Over-the-Wall Approach vs. Concurrent (Simultaneous) Engineering
Over the wall approach: Sequential design: walls between functional areas. Problem is if there are any disconnects which needsrework then the processgets delayed. Concurrent approach: Concurrent design: Walls broken down. Framework is developed and concurrent design is done by all functional areas together. FORD was able to use concurrent approach called Taurus which enabled them to design in a better way.
2
Productivity (Read article given in the class)
a measure of how well the resourcesof a firm are used in producing goods and
services
Output Productivity = ------------Input
1.12.1 Measuring Productivity (Why?) to evaluate an individual or an organization to learn, as an organization, what methods work to improve
Example: Auto Industry Productivity = No. of cars produced per day per worker GM 0.2 Chrysler 0.23 Ford 0.29 Japanese 0.33
Productivity in the current period Productivity Index = ---------------------------------------------Productivity in a baseperiod
Example 1: - Base period: produces4 units using 2 labor hours
4/2=2 - Current period: produces6 units using 2.5 labor hours 6/2.5=2.4 - Productivity Index?=2.4/2=1.2(20% Improvement) Single resources: labor productivity Multiple resources: Total Productivity Example 2: Calculate the productivity for the following operations. a. Three employeesprocess600 insurance policies in a week. They work 8 hours per day, 5 days per week. Labor productivity=policies processed/Employee hours=600/3(40)=5 policies/hr
b. A team of workers make 400 units of product, which is valued by its standard cost of $10 each (before markups for other expenses and profit). The accounting department reports that for this job the actual costs are $400 for labor, $1000 for materials, and $300 for overhead. Multifactor productivity=Quantity at Standard cost/Labor cost+Material cost+overheadcost=(400units)($10/unit)/$400+$1000+$300=$4000/$1700=2.35
1.12.2
Improving Productivity (How to Improve?) What are the key factors that affect productivity?
a. Motivation and teamwork: Change the attitude of managers,
workers and government
b. Investment: Invest in properly selected technology and
equipment, and in improving the organizations human resource base
c. Manage day-to-day operations more effectively: rely on
optimization techniques, allocate limited resourcesmore effectively, improve resource utilization, etc.
1.12.3
Productivity increaseswhen firms: Become more efficient: output increaseswith little or no increase in input, Downsize: output remains the sameand input is reduced, Expand: both output and input grow with output growing more rapidly, Retrench: both output and input decreasewith input decreasing faster, or Achieve breakthrough: output increaseswhile input decreases.
1.13 Contemporary Issuesand Trends in Todays OperationsManagement Intensecompetition Global markets, global sourcing, and global financing Importance of strategy (Operations)
Product variety and customization Management of supply chains More services Emphasis on quality Flexibility Advancesin technology (e-commerce, the Internet, etc.) Worker involvement and empowerment Environmental and ethical concerns
Topic 2
Design of an OperationsSystem
2.1
Product Design
Product Design is concerned with how the product will be made. Recommendedapproachesto Product Design
Simplification: attempts to reduc4e the number of parts, subassemblies, and
options in a product
Standardization: makes possible the interchangeability of parts among
products, resulting in higher-volume production and purchasing, lower investment in inventory, easier purchasing and material handling, fewer quality inspection, and fewer difficulties in production
Modular design: consist of combining standardized building blocks or
modules, in a variety of ways to create unique finished products
Design For Manufacturability (DFM): the processof designing a product
so that it can be produced easily and economically. When successful, DFM not only improves the quality of product design but also reducesboth time and cost of product design and manufacture 2.1.1 Problemswith the Traditional Design (Sequential Design) Process: Cost of getting new products to market
Number of revisions on late stages Slownessof sequential decision making Segregation into functional areas Distancing between design and manufacturing Designs too complicated for workers to make Designs too complicated for customers to use
Lax application of effective design procedures
Invented here, made elsewhere
2.1.2
Effective Design (Concurrent Design) A Contemporary Approach
- Effective designsprovide a competitive edge by: Bring new ideas to the market quickly Doing a better job of satisfying customer needs
Making new products easier to manufacture, use, and repair than existing products
Concurrent Design Process
2.2
Also known as simultaneousor concurrent engineering The purposeis to achieve product designs that reflect customer wants as well as manufacturing capabilities Simultaneousdecision making by design teams Integrates product design and processplanning
Details of design more decentralized Encouragesprice-minus instead of cost-plus pricing Requires careful scheduling becausemany tasks are performed in parallel * Example: Team Taurus (Ford) $400 M. under budget, Team Viper, Neon (Chrysler), 3 months, $2 M. reduction, etc.
2.3
Design For M anufacture (Manufacturability) (DFM ) Designing a product so that it can be produced easily and economically. The concept of DFM begins with the view that product design is the first step in manufacturing a product. DFM identifies product design characteristics that are inherently easy to manufacture, focuseson the design of component parts that are easy to fabricate and assemble, and integratesproduct design with process planning. DFM Guidelines (Simplification, Standardization, Modular Design) : 1. Minimize the number of parts 2. Develop a modular design 3. Design parts for many use 4. Avoid separate fasteners 5. Eliminate adjustments 6. Make assembly easy and foolproof. If possible, design for top-down assembly 7. Design for minimal handling and proper presentation 8. Avoid tools 9. Minimize subassemblies 10. Use standard parts when possible 11. Simplify operations 12. Design for efficient and adequatetesting and replacement of parts 13. Use repeatable, well-understood process 14. Design of robustness
15. Analyze failures (e.g., IBMs Proprinter: 65% fewer parts, 90% faster for assembly than Japanesecompetitors, Fords front bumper had ten parts to GMs 100) 2.4 Design for Assembly (DFA)
A set of proceduresfor reducing the number of parts in an assembly, evaluating methods for assembly and determining an assembly sequence. (DFM Guidelines: 1,4,6,7)
To minimize cost of assembly within constraints imposed by other design requirements 2.5
Failure Mode and Effectsand Analysis(FMEA) A systematic approach to analyzing the causesand effectsof product failures The objective of FMEA is to anticipate failures and design them out of the system .
It begins with listing the functions of the product and each of its parts. Failure modes, such as fatigue, leakage, buckling, binding, or excessive force required, are then defined. All failure modesare ranked in order of their seriousnessand likelihood of failure. Failures are addressedone by one (beginning with the most catastrophic), causesare hypothesized, and design changesare made to reduce the chanceof failure.
2.6
Value Analysis(VA)/ Value Engineering (VE) VA is a method for improving the usefulnessof a product without increasingits cost or reducing the cost without reducing the usefulnessof the product. Obtaining the maximum performanceper unit cost is the basic objective of VA.
Value: the ratio of function or performance (usefulness) to the cost
the relative value of individual components
VA helps eliminate unnecessary featuresand functions . VA can result in great cost savingsor a better product for the customer or both. Every material, every part, and every operation is subjected to a rigorous analysis that includes questions such as these:
Can we do without it? Does it do more than is required? Does it cost more than it is worth? Can something else do a better job?
Can it be made by a less costly method? With less costly tooling? With less costly material?
Can it be made cheaper, better, or faster by someoneelse? Is it made of recyclable or biodegradable material? Will it use more energy than it is worth? Does the item or its by-product harm the environment?
2.7
Design for Environment (DFE) DFE meansdesigning a product from material that can be recycled or easily repaired rather than discarded. Minimize materials and energy used in production, consumption, and disposal. Using recycled materials
Recycling consumed product Longer product life Easy to repair Easy to disassemble Elimination of waste Reduced packing
2.8 ProcessDesign/Facility Layout
Choosing a set of relative locations of all machines, equipment, work stations, utilities, etc., for which the cost (transportation) with location are a minimum. The main objective is to ensure a smooth flow of work, material, people, and information through the system.
2.8.1
Major Factors Affecting Choice of ProcessDesigns nature of product/service demand: patterns of demand and price-volume relationship
degreeof vertical integration: forward and backward integration product flexibility: product and volume flexibility degreeof automation product quality Others: Safety, Environmental/legal requirements, etc. JapaneseApproach?
2.8.2
Trends in U.S. Manufacturing Layouts Group Technology(Cellular Manufacturing) layouts within larger processlayouts Automated materials-handling layouts
o
U-shaped production lines that allow workers to seethe entire line and easily travel between work stations More open work areaswith fewer walls that obstruct views of adjacent work stations Smaller and more compact layouts Lessspaceprovided for inventories Typesof Facility Layout
2.8.2.1
a. Product Layouts (Assembly Line) b. ProcessLayouts (Job shop Layout)
c. Fixed-Position Layouts d. Group Technology (GT) Layouts (or Cellular Layout) 2.9 Product Layout (Line Layout) Assembly Line
Equipment/Machines are arranged according to the sequenceof operations to be performed on the product. Good for high volume (mass production), standardized products (make-tostock) Characteristics:
a. Operations are often routine and highly repetitive. b. Special purpose equipment is needed.
c. Fixed-path material handling systems(conveyors) are used.
d. A high rate of output and low unit cost e. Labor and machines/equipment have a high degree of utilization. f. Work-In-Process(WIP) inventory is low. g. Fairly inflexible in responseto changesin the production rate, or product
or processdesign changes
h. Highly vulnerable to machine breakdowns or high absenteeism i. Preventive maintenance is essential. j. Group incentive schemesmust be used. k. e.g., automobile assembly, food processing, automatic car wash, food
cafeteria, etc.
2.9.1
What is Lean Production System? Key Principles * Team Work * Communication * Efficient use of resources and elimination of wastes * Continuous improvement Requirements * 1/2 the human efforts in the factory * 1/2 the manufacturing space * 1/2 the investment tools * 1/2 the time to develop new products * 1/2 the engineering hours
2.10 ProcessLayout (Functional or Job Shop Layout)
Machines, equipment and processof the samefunctional type are grouped together. Good for a manufacturing facility which producesa variety of nonstandard products(make-to-order) in relatively small batches . Characteristics: a. Utilization of machines and labor is low. b. Routing and scheduling of jobs are difficult. c. WIP inventory is high. d. Can handle a variety of processing requirements (flexibility). e. Not particularly vulnerable to equipment failures.
f. General-purposeequipment is needed. g. Variable-path material handling equipment (fork lift, trucks) is used. h. Individual incentive plans are possible. i. e.g. custom machine shops, hospitals or medical clinics, departments, colleges and universities, etc. 2.11 Fixed-Position (Project) Layout
The product is stationary while resources(men, machines and materials) are brought to it. Characteristics:
a. The product is large and complex. b. Good for construction and industrial project.
c. Variable-path material handling equipment is used. d. Cost of layout/re-layout is moderate. e. Labor and equipment have a moderate degreeof utilization.
f. e.g., ship building, heavy construction (buildings, bridges, dams, roads),
aircrafts manufacturing. 2.12 Group Technology(GT) or Cellular Layout
Machines are grouped into a cell and the cell acts like a product layout island within a large processlayout environment. Advantages: a. WIP inventory is low. b. Material Handling is reduced.
c. Set-up costs are reduced. d. Product quality is improved. e. Queuing, set-up and throughput times are reduced. f. Operator mobility and responsibility are increased . g. Example:
Disadvantages: o investment b. Rearrangement of existing facilities can be disruptive and costly. One-time heavy capital
Topic 3
Capacity Planning
3.1 What is a Capacity Planning?
Long-term strategic decision that establishesa firms overall level of resources .
3.2 Why is Capacity Planning important?
It determines the ability of a firm to meet future demands, and also affects a firms ability to compete. It affects product lead times, customer responsiveness, etc. It is the major determinant of the initial cost and has an impact on the operating costs. Once implemented, decisions are very expensive to modify. Inadequate capacity can lose customers and limit growth. excesscapacity can drain a companys resourcesand prevent investments in more lucrative ventures.
When to increasecapacity and how much to increasecapacity are
critical decisions.
3.3 Measuring Capacity
Capacity is an upper limit on the output rate.
Measuring capacity dependson the particular situation. Examples are machine hours, man hours, tons of steel/day, hospital beds, etc. There are 3 different definitions of capacity.
Design Capacity (Peak Capacity): Maximum possible output under ideal conditions. Effective Capacity: Maximum possible output given the need for maintenance, changing product mix (set-ups), rest periods, scheduling problems, etc. Actual Output: Rate of output actually achieved. This is less than Effective Capacity becauseof machine breakdowns, absenteeism, defective output, material shortages, etc.
Theseare useful in defining system effectiveness.
Actual Output
Efficiency
= Effective Capacity Actual Output
Utilization
= Design Capacity
- Example: Design capacity = 50, Effective capacity = 40,
Actual Output = 36
BecauseEffective Capacity acts as a lid on actual output, the real key to improving capacity utilization is to increaseEffective Capacity.
3.4 Meeting Capacity Requirements
Long-term: expansion related to overall level of capacity (e.g., facility size) ; Short-term: overtime, 3rd shift, subcontracting; variations in capacity requirement created by seasonal, random, and irregular fluctuations Long-term capacity planning is crucial to a firms successbecauseit often involves large investments in facilities and equipment and because such decisions are not easily reversed.
For long-term considerations the following aspects should be ,
considered. 1) Flexibility should be designed into systemsto facilitate future expansion, if necessary. 2) Interrelationshipsbetween different parts of the system. e.g., Increasein hospital beds should be accompanied by more operating rooms, physicians offices, parking space, etc. 3) Capacity increments can only be made in lumps (chunks). 4) Product Mix should be chosen so as to have stable capacity requirements (number of products (variety), new products vs. mature one).
5) (Dis) Economiesof Scale * Economiesof Scale: A concept that statesthat the averageunit cost of a good or service can be reduced by increasing its output rate. * Benefits of Economiesof Scale - Fixed costs can be spread over a larger number of units. - Construction costs do not increaselinearly with output levels. - Quantity discounts are available for material purchases. - Production efficiency increasesas workers gain experience. * Best Operation L evel (BOL): an annual volume of outputs that results in the least averageunit cost. * Diseconomiesof Scale: a concept that statesthat the averageunit cost increasesas the firms output increases This happenswhen the . firms output passesthe BOL.
3.5 Evaluating Capacity Planning Alternatives Cost Volume Analysis (Break-Even Point Analysis )
$
TR
TC
FC Q BEP
FC: Fixed Costs VC : Variable unit cost TC : Total Costs Rev.: Revenueper unit Q: Quantity of Output BEP: Break-Even Point TR : Total Revenue P: Profit = TR-TC SP: Specified Profit
Total Cost (TC) = FC + VC x Q Total Revenue(TR) = Rev. x Q
Profit (P) = TR TC = Rev. x Q (FC + VC x Q ) = Q(Rev. VC) FC FC
BEP (Q) = Rev. VC
Volume (Q) neededto generate a specified profit (SP): SP + FC Q= Rev. VC
Example 1. The owner of the Old-fashioned Berry Pies Co. is contemplating adding a new line of pies, which will require leasing new equipment for a monthly payment of $ 6000. Variable costs would be $2 per pie, and pies would retail for $7 each. a. How many pies must be sold in order to break even? b. What would the profit (loss) be if 1000 pies are made and sold in a month? c. How many pies must be sold to realize a profit of $4000?
Example 2: Make or Buy Analysis A firms manager must decide whether to make or buy a certain item used in the production of vending machines. Cost and volume estimatesare as follows:
Make Buy
Annual Fixed Cost
$150,000
None
Variable cost/unit Annual Volume (units)
$60 12,000
$80 12,000
a. Given thesenumbers, should the firm buy or make this item? b. There is a possibility that volume could change in the future. At what volume would the manager be indifferent between making and buying?
3.6 Capacity Strategies a. Sizing Capacity Cushions How much capacity cushion is best :
for various processes?
Capacity Cushion: the amount of reserve capacity that a firm maintains to handle sudden increasesin demand or temporary lossesof production capacity. It measuresthe amount by which the average utilization falls below 100 %. Capacity Cushion = 100% - Utilization rate (%)
Large cushion: when future demand is uncertain, when high customization is needed, or maintaining high customer service is important Small cushion: when unused capacity cost is high (e.g., capital-intensive firms, airline industry (?))
b. Timing and Sizing Expansion: Expansionist Strategy and
Wait and Seestrategy
Expansionist Strategy
Expansion may result in economies of scale and a faster rate of learning, thus helping a firm reduce its costs and compete on price.
Stays aheadof demand (aggressive, proactive)
Large, infrequent jumps in capacity
Minimizes the chancesof sales lost to insufficient capacity Provides superior level of service during peak demand
Wait-and-seeStrategy
lags behind demand (conservative strategy)
Smaller, more frequent jumps
It relies on short-term options such as use of overtime, temporary workers, subcontractors, stock-outs, and postponement of preventive maintenanceto meet any shortfalls. It reducesthe risks of overexpansion basedon overly optimistic demand forecasts, obsolete technology, or inaccurate assumptions regarding the competition.
Higher return on investment but may lose customers
Topic 4
Location Planning
4.1
Why is Location Planning important? The location of a facility has a significant impact on costs and revenues.
Once implemented, it is very costly to changethe decision. 4.2 Options
Expansion of an existing facility
Adding a new location Relocating: Closing down an existing facility and opening up a new one.
4.3
Types
a. Plant Location b. WarehouseLocation (distribution oriented; minimize distribution cost)
To determine warehouselocation within the constraints of demand in customer zonesin such a way that distribution cost is minimized for a given customer service level. distribution cost = transportation cost + customer service cost + warehouseoperating cost
4.4
Factors which affect Location Decisions Location of raw materials Location of markets Labor Living facilities and services Taxes state and local Environmental regulations Utilities water, electricity, waste disposal, etc. Land cost, size, development Transportation road, rail, air, costs Zoning restrictions (environmental and legal) others
4.5
Evaluating Location Alternatives
4.5.1 Break-Even Point (BEP) Analysis
Determine the fixed costs and variable costs for each location, and plot the total cost as a function of production volume for all locations on the same graph. Example 1. Minnesota Manufacturing Co. (MMC) must select a location for its new product from among three different alternatives. The following cost data have been gathered:
Location A Location B Location C __________________________________________________________ _____________ Fixed Cost $ 10,000 $20,000 $50,000 Variable cost $5/unit $4/unit $2/unit ___________________________________________________________ ____________
a. Supposethat a desired production volume (Q) is 5,000. Which
location is the best? Why? Explain by showing all your work.
b. (Sensitivity Analysis Supposethat the company projects an )
increasingcustomer demand in a few years which can be much higher than the current operating volume of 5,000. Will the current optimal decision remain best in such case?Why or why not? Justify your answer carefully by showing all your work including a graph.
What is the Sensitivity Analysis ?
It investigatesthe sensitivity of the current optimal solution to the changesof the future customer demand by determining the rangesof production volumes under which each alternative becomesthe best.
Example 2. Location A B C Fixed Costs 100,000 150,000 125,000 Var. Cost $20 $15 $18 Total Cost 100,000+ 20Q 150,000+ 15Q 125,000+ 18Q
a. Supposethat a desired production volume (Q) is 12,000. Which location is the best? Why? Explain by showing all your work b. Find the range of production volume under which each process becomesthe best alternative. Explain clearly by showing all your work including a graph.
Example 3. Location A B C D Fixed Costs 150,000 300,000 500,000 600,000 Var. Cost $62 $38 $24 $30 Total Cost 150,000+ 62Q 300,000+ 38Q 500,000+ 24Q 600,000+ 30Q
a. Supposethat a desired production volume (Q) is 15,000. Which location is the best? Why? Explain by showing all your work b. Find the range of production volume under which each location becomesthe best alternative. Explain clearly by showing all your work including a graph. 4.5.2 Factor Rating Method A general approach to evaluating a wide variety of quantitative and qualitative factors objectively.
It provides a rational basis for evaluation and facilitates comparison among alternatives by establishing a composite value for each alternative that summarizes all related factors. Procedure: Step1. Determine the factors that are relevant in choosing a location, and assign weights (importance) to them. Step 2. For each location, assign points against each factor (on a 10 point, 100 point, or other scale). Step 3. Multiply the weights by the points for the various factors and sum up for each alternative. Step 4. The location with the highest sum is chosen. * Example 1. (Steps1 and 2 are given) Factor Weight A 1. Proximity to Raw Materials
2. Transportation costs($ 000) 3. Labor supply 4. Environmental Regulations 5. Utilities .2 .15 .3 .15 .2 80 $70 70 80 90
Points B
60 $55 90 85 95
Weighted Points A B
Which location (A or B) would you recommend? Why? Show all your work. * * Conversion of $ into a scaled point? Example 2.
A large computer research center laboratory is investigating three alternative locations for a new facility. The rating scale and economic information for the locations are:
Location Rating Factors Annual Operating costs($ mil.) Housing availability Ability to recruit scientists Degree of unionization of hourly workers Urban transportation system Proximity to customers Zoning restrictions Recreation Educational and health services Miami 76.5 4 4 5 3 1 3 4 4 Seattle 68.5 5 4 3 4 4 4 5 5 New York Weight 82.5 2 3 4 4 5 4 4 3 .25 .05 .3 .05 .05 .05 .1 .05 .1
Note: A five-point rating scale is used: 5 = excellent, 1 = poor Which location would you recommend?Why? Explain clearly by showing all your work.
Topic 5
Quality Management
5.1 Introduction to Quality
5.1.1 What is Quality?
The totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs - American Society for Quality
5.1.2 Why Quality? It is the nature of competition in businesstoday that if you are not getting better, you are getting behind. Becausesomebody, somewhere will have discovered another breakthrough that will drive the industrys quality standard to yet a higher level. That is the quality challengethat every competitive business
faces. It is the challenge that every successful company will have to meet.
5.1.3
Two Different Perspectives Producer (Manufacturer)-basedDefinition:
Conformance to specifications: How close a part conforms to specifications (tolerance)
Reflects both consistent quality and high-performance design
Customer-Oriented Definition:
Value: How well the product or service serves its intended purpose at a price that customers are willing to pay? Fitness of use: How well the product performs? Dimensionsof Customer Perceptionson Quality
5.1.3.1.1.1.1.1
Performance Reliability and Durability Conformance/Response
Serviceability Appearance(Aesthetics) Reputation Features Others: Safety, etc. 5.1.4 Why is quality important? Companys reputation
BusinessPerformanceMeasures(costs, market share, productivity, profitability, etc.)
Improved customer satisfaction Employee morale Product liability & lawsuits International implications
Value to society and community Others:
5.2
Quality as a Competitive Advantage
5.2.1 The Relationship between Quality and Productivity
A positive correlation between Quality and Productivity Less rework means more time devoted to manufacturing acceptable products Productivity goes up.
Less scrap means fewer wasted materials
Elimination of " Hidden Plant" Different Views on Quality
5.3
5.3.1 Traditional Views: Must-be-quality, Necessary Quality
Quality elements that have to be present in the product/service in
order to prevent dissatisfaction taken for granted adding features an army of inspectors picking out defectives
The previous processis a troublemaker. The next processis a policeman.
Product-Out Approach
5.3.2
Contemporary Views: Attractive Quality, Fascinating Quality, Emphasison Customer Satisfaction
Quality elements that are unique to a product and cause customer
satisfaction, which may lead to repurchases, brand loyalty, and
even the acceptance of premium pricing
Designing products that customers want, producing them according to specifications, and controlling quality by constantly and continuously improving standards and their maintenance with a pull from the market; products are designed and specified based on input from the market. Next processesare our customers. What is TOTAL QUALITY MANAGEMENT (TQM)?
Market-In Approach: The production processshould start
5.4
5.4.1 Definition
Managing the entire organization so that it excels in all dimensions
of products and services that are important to the customer
Quality extends throughout the organization in everything it does ,
and that quality is ultimately defined by the customer.
TQM is a multidisciplinary approach to organizational excellence
that encompassestechnical, physical, behavioral, and leadership elements. 5.4.2 What is Total?
Total dedication to the customer: An intense and ongoing
dedication to improving everything that could result in a better product or service produced in less time
Total Participation (involvement) and Commitment from
everybody
Total Communication, Coordination and Cooperation among All
departments, at All levels
Total Responsibility
5.4.3 TQM Principles
Customer-first orientation
Top management leadership of the quality improvement
Focus on continuous improvement Respect for employees and their knowledge; employees are actively
involved in the improvement process Reduction of product and processvariation Provision of ongoing education and training of employees
Familiarity with a statistical way of thinking and the use of statistical
methods throughout the organization (Factual approach to decision making Management By The Fact)
View of vendors as long-term partners
Performance measuresthat are consistent with the goals of the organization Standardization: the development of and adherence to the best known ways to perform a given task
Emphasis on product and service quality in design Cooperation and involvement of all functions within an organization Awarenessof the needs of internal customers Substantial cultural change
5.4.4 Possible Outcomesand Major Results of TQM
Loyal customers (satisfied, excited, delighted customers) A culture (climate) that supports and encouragesteamwork and leads to more satisfying, motivating, and meaningful work for employees A general ethic of continuousimprovement
Reduction of costs, increasein productivity, market share, profitability, competitiveness, and time to respond to problems, needs and opportunities Value to community and society 5.4.5 Key SuccessFactors for Implementation of TQM Long-term perspective Customer Focus Top management commitment and strong leadership Systems thinking Ongoing and intense education and training with proper tools Measurement and reporting systems And the Totality
5.5 New Emerging Concepts, Tools and Techniquesfor Quality Improvement
5.5.1.1.1.1.1.1 of the
Quality F unction D eployment ( QFD ) Translating the Voice
Customer A systematic procedure for taking essentially verbal customer requirements(needs, wants, demands) and converting them into
operationally meaningful technical conceptsthat product designers can use as basis for their work Listening, understanding, interpreting, and translating what the customer says form the philosophical heart of QFD.
QFD facilitates product design decisions by giving focus to what is really
important to the customer ( true quality) , with lower cost and with better
customer acceptance.
QFD is a planning, communication, and documentation tool that
determines where energy, efforts, quality improvement tools, and technology need to be applied in order to sustain the overall product plan.
QFD helps develop products or services that go beyond customer
expectations, that delight or excite customers in addition to meeting their basic needs.
QFD maps out what the customer wants and how the company will meet
those wants in the following way: Comparing a product or services current level of performance to the competition (Competitive Analysis ) Prioritizing the importance of customer requirements Analyzing potential sales points Determining the most important items to improve upon or control to meet customer requirements Developing an initial product/service plan based on data about customer preferencesand current competitive status Example 5.5.1.1.1.1.1.2
Benchmarking: The Search of Industry Best Practices
What is Benchmarking?
The processof continually comparing a companys performance on critical customer requirements against the best in the industry (direct competitors) or the class (companies recognized for superiority in performing certain functions) in order to determine which areasshould be targeted for improvement.
Why Benchmarking?
1) Todays competitive world does not allow time for gradual improvement in areasin which a company lags way behind. 2) Benchmarking can tell a firm where it stands relative to bestin-class practices and processes and which processesmust , be changed. 3) Benchmarking provides a best-in-class model to be adopted, or even improved upon. 4) Modern customers are better informed and demand the highest quality and lowest prices. 5) Benchmarking supports total quality by providing the best means for rapid, significant process/practice improvement. o The Benchmarking Process 1) Identify a critical processthat needsimprovement. 2) Identify an organization that excels in the process, preferably the best. 3) Contact the benchmark organization, visit it, and study the benchmark activity. 4) Analyze the data. 5) Improve the critical processat your own organization.
o Examples: Xerox: R&D (AT&T), Billing Process(American Express), Employee Suggestion System (Milliken & Co.), Warehouse& Distribution System (L.L. Bean) Boeing: manufacturing cycle time (from 18 months to 10 months) General Mills: machine changeover (from 3 hours to 17 minutes)
5.6
Six Sigma
5.6.1 What is Six Sigma ?
Businessprocessimprovement approach that seeks to find and eliminate
causesof defects and errors, reduce cycle times and cost of operations, improve productivity, better meet customer expectations, and achieve higher asset utilization and returns on investment in manufacturing and service processes.
Six Sigma is driven by closeunderstanding of customer needs disciplined ;
useof facts, data, and statistical analysis and diligent attention to ; managing, improving, and reinventing businessprocesses .
5.6.2
PrinciplesUnderlying the Six Sigma Philosophy
A genuine focus on customers and customer satisfaction Participation and teamwork by everyone in the organization A processfocus supported by continuous improvement and learning Reducing cycle time and defects 5.6.3 Examples:
Motorola:
Quality improvement leading to total customer satisfaction is the key. Six Sigma is an organization-wide, leadership-driven, process-oriented,
middle manager-led and employee-owned initiative Six Sigma is not just a quality standard but the guiding force of Motorolas work philosophy There is only one ultimate goal: Zero defects in everything we do. Robert Galvin 1981: launched an ambitious and innovative quality drive for a ten-fold improvement to the quality of its products and services Quality target aimed at not more than 3.4 defects ppm.
To achieve total customer satisfaction by providing the best quality products and service Jan 15, 1987: Bob Galvin, CEO of Motorola launched a long-term quality program, The Six Sigma Quality Program that has three critical goals of (1) reducing defects, (2) reducing cycle time, and (3) Improving customer satisfaction. Sigma Quality Levels
Sigma Levels 2 3 4 5
Defectsper Million 308,537 (Noncompetitive companies) 66,807 (0.27%) 6,200 233 3.4 (world class)
Cost of Quality Not applicable 25 40 % of sales 15 25% of sales 5 15 % of sales < 1% of sales
6
*
Note: * Six Sigma assuresthat 99.9999998% of the items are within the specification
Benefits (1987 1994): Reduced manufacturing costs by $1.4 billion. Reduced in-processdefect levels by a factor of 200.
Fourfold increasein stockholders share value. Increased employee production on a dollar basis by 126 percent. By 1999: Eliminated 99.7% of all in-processdefects. Cost of poor quality was reduced by more than 84%. Cumulative manufacturing cost savings: over $18 billion 5.6.4 Next Generation Six Sigma
By 2002, Motorola transformed Six Sigma from a tool for improving product quality to an overall businessimprovement methodology. The new approach combined good businessapplication of statistics with the elements of effective businessstrategy. It is an overall business improvement program to improve Motorolas ability to realize its strategic objectivesof quality and customer satisfaction.
5.6.5 General Electric
Mid 1990: trained 30,000 employeesat a cost of $200 million. Return: $150 million savings 1996-1997: increasedSix Sigma projects from 3000 to 6000. Return: $320 million productivity gains and profits 1998: $750 million savings over and above their investments 1999: $1.5 billion savings
5.6.6
The Core Conceptsof Six Sigma Philosophy
Critical to Quality (CTQ ) the attributes that are most important to the
customer. Needs, as defined by customers, which meet their basic requirements and standards are critical to the delivery of a quality product.
Defects failure to deliver what the customer wants. Six Sigma is a vision
of quality which equateswith only 3.4 defects per million opportunities for each product or service transaction. Strives for perfection.
Process capabilities is what your processcan deliver. Six Sigma focuses
on reducing processvariation and then on improving the processcapability
Variation what the customer seesand feels. Customers value consistent,
predictable businessprocessesthat deliver world class levels of quality.
Stable operations is to ensure consistent, predictable processesto improve
what customers see and feel.
Design for Six Sigma (DFSS) is a systematic methodology utilizing tools,
training and measurements to enable the design of products and processes that meet customer expectations and can be produced at Six Sigma quality levels
5.6.7
Implementing a Successful Six Sigma Program
Top-down commitment Measurement systemsto track progress Tough goal setting
Education: Employeesmust be trained in the whys and the how-tos of
quality and what it meansto customers both internal and external. , Communication
Customer priorities: Never lose sight of customers priorities, which are translated into competitive priorities for the firms processes
5.6.8 Fundamental Differencesbetween TQM and Six Sigma
Six Sigma is much more cost-reduction oriented than traditional continuous improvement, which goes against, for example, Demings 14 points (e.g., setting targets and goals for cost reduction). But that is the strength of a Six Sigma approach (focus on profits).
TQM is focused on improvement with little financial accountability; Six Sigma requires a verifiable return on investment and focus on the bottom line. TQM training is generally limited to simple improvement tools and concepts; Six Sigma focuseson a more rigorous and advanced set of statistical methods and a structured problem-solving methodology DMAIC Define, Measure, Analyze, Improve, and Control.
5.7 Malcolm Baldrige National Quality Award (MBNQA) Based on Public Law 100-107 signed on August 20, 1987
Representsthe US government's endorsement of quality as an essential part of successful businessstrategy in the 1980s and beyond. The purpose 1) To promote quality awarenessand practices : 2) To recognize quality achievements , 3) To publicize successful quality strategiesand programs
Seven Criteria (http://www.quality.nist.gov), 2009-2010
1) 2) 3) 4) 5) 6) 7) Leadership (120 pts.) Strategic Planning (85 pts.) Customer Focus(85 pts.) Measurement, Analysis, and KnowledgeManagement (90 pts.) Workforce Focus(85 pts.) ProcessManagement (85 pts.) Results(450 pts.) 7.1. Product and Service Outcomes (100 pts.) 7.2. Customer-FocusedOutcomes (70 pts.) 7.3. Financial and Market Outcomes (70 pts.) 7.4. Workforce-FocusedOutcomes (70 pts.) 7.5. ProcessEffectivenessOutcomes (70 pts.) 7.6. Leadership Outcomes (70 pts.)
Applicationsof the Baldrige Quality Criteria As a practical tool for assessing operations, the Baldrige guidelines can be used: 1) To help define and design a total quality system 2) To evaluate ongoing internal relationship among and functional units within an organization 3) To assessand assist outside suppliers of goods and services 4) To assesscustomer satisfaction 5.8 ISO 9000: Say What you do and Do What you Say 5.8.1 Background
The set of quality standards offered by the International Standards Organization (ISO)
It focuseson the process, procedures, activities, operations, controls, and management of operations, and only secondarily on the product
The product itself is not certified as having high quality; only the processfor making the product is certified.
The ISO 9000 series provides guidance for suppliers of products who want to implement which a customer can evaluate the adequacy of a suppliers quality system. A quality manual and careful record keeping is usually required as part of the documentation Early: Conformance quality, Later: Design quality 5.8.2 Benefits
A catalyst for management change
Registration project createsthe momentum to initiate changes (areasto be improved, procedure writing, etc.)
A control mechanism
Improvements are achieved through the standardization of approaches,proceduresand methods
The basis for TQM
provides a sound basis from which to progresstoward TQM Within the context of TQM, it could create a valuable weapon for those company personnel who are trying to institutionalize a processof continuous improvement
5.8.3
ISO 9000: 2000/2008 It representsa fundamental changein approach, and is a major and needed improvement over the two earlier versions. (I ncreasedfocuson Top Management Commitment, Customer satisfaction, Emphasison processes and Continual improvement) The standard now incorporates eight quality management principles that come directly from TQM. 1) Customer focus: understanding their needs, striving to exceed their expectations. 2) Leadership: establishing direction, unity of purpose, and a supporting work environment. 3) Involvement of People: ensuring that all employees at all levels are able to fully use their abilities for the organizations benefit. 4) ProcessApproach: recognizing that all work is done through processes,and managedaccordingly
5) System Approach to Management: expandson the previous principle in that achieving any objective requires a system of interrelated processes 6) Continual improvement: as a permanent organizational objective, recognizing and acting on the fact that no processis so good that further improvement is impossible. 7) Factual approach to decision making: acknowledgement that sound decisions must be basedon analysis of factual data and information. 8) Mutually beneficial supplier relationships synergy can be found in : such relationships. 5.8.4 Summary
It should be considered as a series of minimum quality system
requirements lowest common denominator of quality system requirements for all industry 5.9 Quality Gurus
5.9.1 W. Edwards Deming (1900-1993) www.deming.org
Everyone doing his best is not the answer. It is necessary that people know what to do. Drastic changes are required. The responsibility for change rests on management. The first step is to learn how to change. The Deming Philosophy
The Deming philosophy focuseson continual improvements in
product and service quality by reducing uncertainty and variability in design, manufacturing, and service processes, driven by the leadership of top management.
Management must accept the responsibility for building good systemsthat
produce quality products; don't build quality through inspection. Goal: to change perspectives in management and often radically.
Recognizes quality as continuous improvement of a stable system.
a. The major causeof poor quality is variation. To reduce variation, the systemsshould be continuously improved. b. All systemsmust be stable in a statistical sense . Demings 1950 Tokyo Lectureson Quality 1) Quality would be the basis of future international industrial competition. Key Competitive Advantage 2) Quality and productivity improvements go hand-in-hand. Higher quality equals less scrap and rework 3) To effectively managefor quality, quality must become everyones job and it is therefore a distinct and explicit senior management responsibility 4) To improve quality effectively, it is essential to advance beyond the trial and error methods of the past. advocate scientific methods for solving quality problems
The Deming Prize is the QC Award of Japan. Demings 14 Points: convey important insights for traditional managers 5.9.2
Joseph Juran (1904 - 2008) http://www.juran.com Like Deming, Juran taught quality principles to the Japanesein the 1950s and was a principal force in their quality reorganization. Juran echoed Demings conclusion that U.S. businessface a major crisis in quality due to the huge costs of poor quality and the loss of sales to foreign competition.
Like Deming, he believes strongly in top management commitment, support,
and involvement in the quality effort.
Zero-Defects is not a practical goal.
New thinking about quality that includes all levels of the managerial
hierarchy. Upper management in particular requires training and experience in managing for quality.
Unlike Deming, however Juran did not propose a major cultural change in
the organization, but rather sought to improve quality by working within the system familiar to managers.
Proposed a simple definition of quality: fitness for use. Advocated the use of quality cost accounting and analysis to focus attention
on quality problems. Quality Trilogy
Quality Planning the processof preparing to meet quality goals. Quality control the processof meeting quality goals during
operations.
Quality improvement the processof breaking through to
unprecedented levels of performance. 5.9.3 Similarities between Deming and Juran
The focus on top management commitment The need for continuousimprovement The use of quality control techniques(statistical tools) The importance of training
5.9.3 Philip B. Crosby (1926 2001)
Quality means conformance to requirements, not elegance. Requirements must be clearly stated so that they cannot be misunderstood. Setting responsibility is the responsibility of management.
There is no such thing as the economics of quality; doing the job right the first time is always cheaper. Quality is free. What costs money are all actions that involve not doing jobs right the first time. The only performance measurement is the cost of quality, which is the expenseof non-conformance. The only performance standard is Zero Defects (ZD). The theme of ZD is do it right the first time. Unlike Juran and Deming, Crosbys approach is primarily behavioral. He emphasized using management and organizational processesrather than statistical techniques to change corporate culture and attitudes.
5.9.4 Armand V. Feigenbaum
Best known for coining the phrase T otal Quality Control (TQC) Views quality as a strategic businesstool that requires involvement from everyone in the organization, and promoted the use of quality costs as a measurement and evaluation tool. Responsibility for TQC must be shared and should not rest with the quality assurance(QA) or quality control (QC) function alone. Defines "hidden plant" as the proportion of plant capacity that exists in order to rework unsatisfactory parts.
5.9.5 Ishikawa Kaoru AcknowledgesDeming's and Juran's influence on his thinking. Instrumental in the development of the broad outlines of Japanesequality strategy.
Influenced the development of a participative, bottom-up view of quality, which became the trademark of the Japaneseapproach to quality management.
Originated quality control (QC) circlesin both concept and practice, and "FishboneDiagram (Causeand Effect Diagram)".
In 1968, he began using the term company-wide quality control (CWQC) to differentiate the Japaneseapproach to TQC from Feigenbaum's views.
Key Elements of Ishikawas Philosophy 1) Quality begins with education and ends with education. 2) The first step in quality is to know the requirements of customers. 3) The ideal state of quality control occurs when inspection is no longer necessary. 4) Remove the root cause, not the symptoms. 5) Quality control is the responsibility of all workers and all divisions. 5.9.6 Genichi Taguchi
Manufacturing-baseddefinition of quality as conformance to specification limit is inherently flawed. Quality: loss imparted to society during product use as a result of functional variation and harmful effects. Measured quality as the variation from the target value of a design specification, and then translated that variation into an economic loss function that expressesthe cost of variation in monetary terms. Quality LossFunction Quality Robustness products can be produced uniformly and consistently in : a variety of adversemanufacturing and environmental conditions.
Advocated certain techniques of experimental design to identify the most important design variables in order to minimize the effects of uncontrollable factors on product variation. Quality is a virtue of design.
5.10 Quality Measuresin Services 5.10.1 Evaluating the Service Quality
More difficult for customer to measure than quality of manufactured goods. Customers perceptionsof servicequality result from a comparison of their expectations(expected quality) before they receive and their actual experience(actual quality) with the service. It is judged on the basis of whether it meets expectations. Quality perceptions are derived from the service processas well as from the serviceoutcome .
5.10.2 Dimensionsof Service Quality
a. Time and Timeliness How long a customer must wait for service, :
and if it is completed on time?
b. Completeness Is everything the customer asked for provided? : c. Courtesy How customers are treated by employees. : d. Consistency Is the same level of service provided to each :
customer each time?
e. Accessibility and Convenience How easy it is to obtain the service. : f. Accuracy: Is the service performed right every time? g. Responsiveness How well the company reacts to unusual situations, :
which can happen frequently in a service company.
5.11
Quality as a Competitive Advantage:
Why is Quality considered the issueof the survival? Why should Quality be recognized as a competitive weapon? How doesQuality improve the firms competitive position?
5.11.1 Market Implications
Market share increaseswith high quality level improving quality, even if at low levels Increasein profit margin from charging premium for high quality level
reducing cost through high conformanceto quality in manufacturing
5.11.2 Cost Implications: The relationship between Quality and Cost?
The costs of poor quality often go beyond the obvious costs of
scrap or rework.
5.12 The Effect of Quality Management on Productivity
5.12.1 Measuring Product yield and Productivity Y = I Q + I (1 Q) W, Where I = Planned number of units of product started in the production process, Q = percentage (%) of Good units produced (Quality Level), W = percentage (%) of Defective units that are successfully reworked, Y = yield. Example 1: The Colonial Furniture Co. manufactures two-drawer oak file cabinets that are sold unassembled through catalogs. The company initiates
production of 150 cabinet packages each week. The percentage of good-quality cabinets averages 83 percent per week, and the percentage of poor-quality cabinets that can be reworked is 60 %. a. Determine the weekly product yield of file cabinets. b. If the company desires a product yield of 145 units per week, what increase in the percentage good-quality products must result? Example 2: A manufacturing company has a weekly product input of 1700 units. The average percentage of good-quality product is 88 %. Of the poorquality products, 60 % can be reworked and sold as good-quality products. Currently, the company has a goal of maintaining a product yield of 1650. Can the company achieve this goal with the current quality level? If not, what should be the proper quality level if the company wants to achieve this goal?
5.12.2 Measuring the Impact of Quality Improvement on Cost
Kd I + Kr R C = -----------------------, Y where K d = direct manufacturing cost per unit, K r = rework cost per unit, R = number of reworked units, (i.e., R = I (1 Q) W) I = input, Y = yield, and C = unit product cost. Example 1 Burger Doodle is a fast-food restaurant that processes an average of 700 food orders each day. The average cost of each order is $6.15. Four percent of the orders are incorrect and only 30 percent of the defective orders can be corrected with additional food items at an average cost of $1.75. The remaining defective orders have to be thrown out.
a. Compute the average unit product cost.
b. In order to reduce the number of wrong orders, the company is going to invest in
a computerized ordering and cash register system. The cost of the system will increase the average order cost by $.05 and will reduce defective orders to 1 percent. What is the annual total net cost effect of this quality-improvement initiative?
5.13 Costs of Poor Quality (Economics of Quality)
5.13.1 Classification 1) Prevention Costs a. Costs of all activities specifically designed to prevent poor quality in products and services b. Costs incurred to keep failure and appraisal costs to a minimum c. Costs associated with quality planning activities, quality improvement councils, design of quality systems, and supplier evaluation (e.g., product design, process design, employee training and vendor programs, etc.) 2) Appraisal Costs a. Costs associated with measuring, evaluating, or auditing products or services to assure conformance to quality standards and performance requirements b. Costs of incoming inspection, in-process inspection, outgoing inspection, test instrument maintenance, and costs associated with gathering and analyzing product and process measurement data - Inspections and inspectors reduce defectives shipped. They do not reduce defectives made. c. By implementing Quality at the Source, appraisal costs can be avoided *** Quality at the Source ***
Aims to put the production worker in the drivers seat in controlling
product quality
The worker is responsible for inspecting his own work, identifying any
defects and reworking them into non-defectives, and correcting any causes of defects.
SQC techniques and other basic tools are used to monitor the quality of
parts produced at each work station
Each worker is given the right to stop the production line to avoid
producing defective parts.
Workers and managers are organized into QC circles, small groups of
employees who analyze quality problems, work to solve the problems, and implement programs to improve product quality. 3) Internal Failure Costs a. Costs resulting from products or services not conforming to requirements or customer/user needs which occur prior to delivery or shipment to the customer b. Costs associated with scrap and rework, costs of determining the causes of nonconformance and necessary corrective actions to prevent their recurrence, and costs of lost production time due to nonconforming products and services 4) External Failure Costs a. Costs resulting from products or services not conforming to requirements or customer/user needs which occur after delivery or shipment of the product, and during or after furnishing of a service, to the customer b. Costs associated with servicing products under warranty, costs of returned products, liability costs associated with defective products or services, and costs associated with recalls of potentially defective product c. e.g., Firestone Fiasco has resulted in over 270 deaths and more than 800 injuries. In 2001, in one the biggest recalls in U.S. history, Ford spent $3
billion to replace 13 million Firestone tires.
5.13.2 Contemporary View on COQ:
5.14 Continuous Improvement (o
, KAIZEN)
must never stop questioning, never stop challenging and never satisfy. We must develop an attitude for betterment and act upon it. There will be no progress if you keep on doing things exactly the same way all the time. 5.14.1 What is Continuous Improvement (CI)?
A management philosophy that approaches the challenge of product and process improvement as a never-ending process of achieving small wins. (Big wins: technological and theoretical innovations) CI (Continuous Improvement) programs were conceived, developed, and brought to maturation in the US. e.g., NCR(1894), Lincoln Electric (1915), Proctor and Gamble (1960s), Japan (1950s)
KAIZEN is a customer-driven strategy for improvement and assumes that all activities should eventually lead to increased customer satisfaction. KAIZEN emphasizes on process and a process-oriented way of thinking.
e.g., Matsushita Electric Waitresses formed a QC circle and studied tea consumption of participation the QC circle demonstrated.
More important than money is the attitude of pride and the sense
Good suggestions and improvements should be well rewarded. A suggestion is worth much more than the monetary savings it offers.
Do not cash in on improvements in a way that penalizes workers. 5.14.2 Why Continuous Improvement? Because of its strategic implications, the effects of significant quality improvement will be readily felt by competitors. Some of them will respond by meeting or exceeding the new quality standard, making continuous improvement imperative for maintaining a competitive edge. Customers expectations are continuously increasing. Experience shows that it is difficult to maintain a given quality level to plateau without backsliding.
5.15 The Seven Basic Quality Control (QC) Tools
1) Flowchart: A flowchart is a pictorial summary of the flow of the various operations (e.g., tasks, decisions, and flows) of a process. 2) Cause-and-Effect Diagram (Fishbone Diagram) - Used to organize the causes of a process or product problem in a logical format. Very useful in identifying the root cause of a problem. 3) Check Sheet - Used to collect data about a product or process in an organized manner so the data can be analyzed with a statistical tool; e.g., a Pareto diagram, histogram, run chart, or control chart. 4) Histogram - A histogram constructs a pictorial representation of a frequency distribution for a measurable process or product characteristic. 5) Pareto Diagram - A Pareto diagram separates the "significant few" product or process problems from the "trivial many (useful many)" product or process problems.
used to establish priorities in respect to process or product problems. 6) Run Chart and Control Chart - A run chart is usually a time-sequenced plot of a quality characteristic and a control chart is used to distinguish special causes of variation from system causes of variation. 7) Scatter Diagram - It graphically depicts the strength and direction of the relationship between two process/products characteristics.
Topic 6
Statistical ProcessControl (SPC)
6.1 What is SPC?
It is a good on-line quality control technique that eliminatesthe variability in a process .
SPC monitors quality characteristics during the production process , so as to measure the current quality of good or services and to detect whether the processitself has changed in a way that will affect quality. 6.2 Objectives:
The objective of SPC is not to achieve a state of statistical control as an end in itself but to reduce variation. To quickly detect the occurrence of assignable (non-random) causes of processshifts so that investigation of the processand corrective action may be undertaken before many nonconforming units are manufactured. To determine when to take action to adjust a processthat has fallen out of control, and to determine when to leave a processalone
6.3 Reasonsfor Using Control Charts Helps reduce variability Monitors performance over time Allows processcorrections to prevent rejections Trends and out-of-control conditions are immediately detected. Control charts provide diagnostic information. Control charts provide information about processcapability (parameters, stability). 6.4. Two Kinds of Variability in the Output
Stable system of chance cause (Random, Inherent): (natural variability, background noise: humidity, temperature, dust in air, vibration of the building, etc.) The cumulative effect of many small, essentially unavoidable cause
the
A processthat is operating with only chance (Random) cause of variation present is said to be in statistical control.
Random Pattern In Control Stable System:
Most of the points are near the centerline. A few of the points spread out and approach the control limits. None of the points exceed the control limits, and there is no abnormal non-random pattern.
Assignable (Non-Random) causes (e.g., tool wear and tear, improperly
adjusted machines, machine/equipment malfunction or misalignment, operator errors, or defective raw materials, etc.)
Generally large when compared to the background noises An unacceptable level of processperformance
A processthat is operating in the presenceof assignable (Non-random) causes is said to be out of control. Examples of Non-random Pattern
6.5 Procedure 1) Define (obtain) the upper control limit (UCL) and lower control limit (LCL) of the control chart. (e.g., 1-sigma (68.26%), 2-sigma (95.44%), 3-sigma (99.74%), etc.) 2) The number of samples (subgroups) and a sample size (n) per sample are determined. And, periodic samples of processoutputs are examine and each appropriate measure (e.g., average, range, etc.) is plotted in a chart. 3) If all points are within the acceptable control limits and there is no non-random pattern in the control chart, the processis permitted to continue (i.e., the processis in control ). If any point falls outside the control limits, and/or any significant non-random pattern exists, then the processis out of control . The processshould be stopped, the causeshould be investigated and corrective actions should be taken, if necessary. 6. 6 Control Charts for Variables (measured) 6.6.1 Range (R) Charts
The primary objective of Range charts is to monitor the variability in the range.
Control Limits: UCL = D 4 R LCL = D 3 R , where D 4 and D 3 are obtained from the table. Note: UCL stands for Upper Control Limit, and LCL standsfor Lower Control Limit.
6.6.2 Sample Mean ( X ) Charts
_
The primary objective of Sample Mean charts is to monitor the central tendency of data set.
Control Limits: UCL = LCL = + A2 R - A2 R ,
where A 2 is obtained from the table and = mean of sample means.
Example: Control charts (variable charts) The Goodman Tire and Rubber Company periodically tests its tires for treaded wear under simulated road conditions. To study and control its manufacturing processes,the company uses X and R charts. Twenty samples, each containing three radial tires, were chosen from different shifts. The results are shown below (in hundredths of an inch). Is the processin control? Explain carefully by constructing a 3-sigma (99.74%) control chart. --------------------------------------------------------------------------- Sample Tread Wear Average ( X i ) Range ( R i ) ---------------------------------------------------------------------------1 31 42 28 33.67 14 2 26 18 35 26.33 17 3 25 30 34 29.67 9 4 17 25 21 21.00 8 5 38 29 35 34.00 9 6 41 42 36 39.67 6 7 21 17 29 22.33 12 8 32 26 28 28.67 6 9 41 34 33 36.00 8 10 29 17 30 25.33 13 11 26 31 40 32.33 14 12 23 19 25 22.33 6 13 17 24 32 24.33 15 14 43 35 17 31.67 26 15 18 25 29 24.00 11 16 30 42 31 34.33 12
17 28 36 32 32.00 8 18 40 29 31 33.33 11 19 18 29 28 25.00 11 20 22 34 26 27.33 12 --------------------------------------------------------------------------R1 + R2 + ... R20 14 + 17 + ... + 12 R = --------------------- = ------------------------- = 11.4 20 20
+ X 2 + ... + X 20 33.67 + 26.33 + ... + 27.33 R = --------------------------- = ------------------------------------- = 29.17 20 20
X
1
6.7 Control Charts for Attributes (discrete or countable data)
Theseattribute charts are used when the characteristics of the process are counted rather than measured.
6.7.1 P - Charts
Theseare for the proportion (%) of defectivesin a sample. P - charts are most appropriate when both defectivesand nondefectivescan be counted. (i.e., when observations can be placed into one of two categories; good or bad, passor fail, operate or dont operate, etc.) Based on the Binomial distribution, but for large samples, the normal distribution gives a good approximation.
Control Limits: P (1 - P )
UCL = P + Z
-----------n
P (1 - P )
LCL = P - Z
-----------n
where P = average% defective in the sample, n = sample size and Z = sigma. Example 1. A sportswear firm has set up for automated production of a line of sweaters. Twenty samples of size n = 50 are to be withdrawn randomly during the first week of production in order to establish control limits for the process. Defects remain in the shipment but bring less revenue, for they eventually sell as "seconds." The defectives detected in the 20 samples are shown below. Construct a 3 sigma (99.74 %) control chart for this process. Is the production process in control? Explain. ----------------------------------------------------------------------------Sample Number of Percentageof Number Defective items Defective items(P i ) ----------------------------------------------------------------------------1 2 .04 2 3 .06 3 4 .08 4 1 .02 5 0 .00 6 2 .04 7 4 .08 8 1 .02 9 1 .02 10 3 .06 11 0 .00 12 1 .02 13 2 .04 14 1 .02 15 0 .00 16 3 .06 17 7 .14 18 2 .04 19 1 .02 20 2 .04
___________________________________________________ total 40 Example 2. The Western JeansCompany producesdenim jeans. The company wants to establish a control chat to monitor the production processand maintain high quality. The company has taken 20 samples (one per day for 20 days), each containing 100 pairs of jeans, and inspected them for defects, the results of which are as follows.
Sample Number of Defectives Sample Number of Defectives
1 2 3 4 5 6 7 8 9 10
6 2 4 10 6 4 12 10 8 10
11 12 13 14 15 16 17 18 19 20
12 10 14 8 6 16 12 14 18 16
Which control chart is most appropriate for this problem? Why? Is the production processin control? Explain by showing all your work including a control chart with 95% control limit. 6.7.2 C - Charts
Theseare used for the number of defectsin a sample. It is most appropriate
when we can count only the number of defects (occurrences); nonoccurrences cannot be counted . (e.g., scratches, chips, dents or errors per item, calls, complaints, failures, equipment breakdowns per unit of time, etc.)
Based on a Poisson distributions for the sample. Normal approximation to the
Poisson is used.
Control Limits:
UCL = C + LCL = C
Z - Z
C C
Where C = a mean (average) number of defects in each unit, and Z = sigma. Example. The Mankato Transit System (MTS) usesthe number of written passenger complaints per day as a measureof its service quality. For 20 days, the number of complaints received was as follows:
---------------------------------------------------------------------------------------------------------------------------------Day (sample) No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Total ---------------------------------------------------------------------------------------------------------------------------------No. of 656545343 0 2 1 2 2 110 1 0 0 51 Complaints ----------------------------------------------------------------------------------------------------------------------------------
Construct a 99 % control chart. Plot the values on a control chart. Is MTS providing a quality service for its customers?Explain carefully.
How can we determine a corresponding sigma for a 99 % Control
Limit? An equivalent sigma from the Appendix A
A Decreasing Trend Pattern in P and C- Charts?
6.8 ProcessCapability Analysis
It measuresthe relationship between the natural variation of a processand the design specification. It is measured by the proportion (%) of output that can be produced within design specifications.
6.8.1 ProcessCapability vs. ProcessControl
ProcessCapability: the ability of the processto produce parts that conform to engineering (design) specification.
ProcessControl: the ability (stability) of the processto maintain a state of good statistical control.
6.8.2 Benefits of the ProcessCapability Analysis
It creates uniformity of output.
The level of quality is maintained or improved. It facilitates product and processdesign. Information obtained from processcapability analysis provides vital feedback from manufacturing to design. It assists in vendor selection and control. It reducesthe total cost by lowering the internal and external failure costs. 6.8.3 ProcessCapability Index The calculation of the processcapability index has no meaning if the processis not under statistical control. It requires a sufficiently large sample to get a meaningful estimate.
It provides an easily understood aggregate measure of the goodnessof the processperformance.
1) ProcessCapability Index (Ratio), C p
Use C p when the processmean is centered. (It does NOT take centering into account.) UTL + LTL That is, ProcessMean ( X ) = --------------2
Cp
Tolerance Width UTL - LTL = ----------------------- = ------------------Natural Variation 6
where UTL = upper tolerance (specification) limit, LTL = lower tolerance (specification) limit and = processstandard deviation
Rule of Thumb: A lower limit of C p = 1.5 or higher would be safe. It would be possible to have any percentage of parts outside the specification limits with a high C p by merely locating the process mean sufficiently close to a specification limit. Motorolas Six Sigma: It recognizes the shifts in the processaverage (up to 1.5 sigma) and makes use of a variety of quality engineering techniques to change the product, the processor both in order to achieve C p of at least 2.0; i.e., It tries to shrink the processvariation to half of the design tolerance (C p = 2.0) while allowing the mean to shift as much as 1.5 sigma from the target, becausein many cases, controlling the processto the target is less expensive than reducing the processvariability.
2) ProcessCapability Index, C pk
It reflects both variation and the location of the processmean. If the processmean is not centered, then compute the following
C pu and C pl as follows. UTL X = Upper ProcessCapability Index = --------------3
X LTL
C pu
C pl = Lower ProcessCapability Index = -------------3
Then, C pk = Min { C pl , C pu }, the worst case between the upper and
lower capacity indexes.
If the processmean is centered at (UTL + LTL)/2, then C pk = C p . If the processis not centered (i.e., C pk < C p ), then the use of C p
would be quite misleading becauseC p is not a function of the processmean. Use C pk . 6.8.4 Interpretation of C pk
Practical Impact of ProcessCapability
Index (C pk )
Sigma
Meaning Costsof Poor Quality (defective rate)
Typical Actionsto be taken
0.5 0.67 1.00 1.33 2 sigma 3 sigma 4 sigma
13.36% 4.56% 0.26% 6 in 100000 30-40 % of sales 2030 % of sales 15-20 % of sales (Industry Average) reduced inspection, selected use of heavy processcontrol, sorting, inspection, rework, etc.
control charts 1.5 6 sigma 3.4 ppm < 10% of sales (World Class) spot checking and inspection, selected use of control charts (Motororlas Six Sigma) 1.63 2 1 ppm 0
Note: ppm = defective parts per million Example 1
Supposethat a processis normally distributed and that the following sample means and ranges have been computed for eight samples of size 5. Determine the process capability index and interpret it. If specifications are determined to be 46 5, what percentage will be out of specification?
Sample 1 2 3 4 5 6 7 8
X
R 5.2 7.1 5.4 5.0 6.3 3.9 4.8 5.9
51.6 40.1 42.3 48.9 36.5 53.1 47.3 49.6
Example 2 Samples of four units were taken from a manufacturing processat regular intervals. The width of a slot on a part was measured, and the average and range were computed for each sample. After 25 samples of four, the following coded results were obtained:
Averages ( X ) Upper Control Limit Average Value Lower Control Limit UCL = 626 = X = 614 LCL = 602
Ranges(R) UCL = 37.5 R = 16.5 LCL = 0
All points on the X and R charts fell within control limits and no significant nonrandom patterns were observed. The specification requirements are 610 15. Find an appropriate process capability index. Briefly comment on the value you obtained. What percentage of output would you expect to fall outside the specification limits? Show all your work.
Topic 7
Supply Chain Management
Today, companies no longer compete on products they compete
through supply chains.
What is a supply chain? Why is it important? What are the most important reasonsfor the adoption of supply chain management? What is the right supply chain for your product? 7.1 Definitions
Supply Chain is the network of facilities and activities that performs the functions of product development, procurement of materials from vendors, the movement of materials between facilities, the manufacturing of products, the distribution of finished goods to customers, and after-market support for sustainment. Supply Chain Management (SCM): is concerned with the effective management and optimization of procurement, manufacturing, distribution, logistics, and customer service activities and the linkages existing among them, regardless of whether these activities are performed internally or externally to the firm.
SCM comprises a wide variety of activities. Forecasting and scheduling product and material flows, inventory management, identifying resources of supply and procuring materials, supplier management, production and assembly, order capture and scheduling, billing accounts receivable, order consolidation, picking and packing, transportation, dealing with returns and allowances, financial planning, information systems, performance measurement, customer relationship management, etc. Objective of Supply Chain Management To synchronize the requirements of the final customer with the flow of materials and information along the supply chain in order to reach a balance between high customer service and cost. Examples :
7.2
7.3
Fords service-parts supply chain
600, 000 different parts in inventory 5000 suppliers Serves 15,000 dealers Generates120 million orders per year Utilize 63 distribution centers
Wal-Mart s Key Secret: Innovative Information Sharing across
the supply chain Started in 1962
No. 1 global sales of over $300 billion
3500 discount stores and Sams club Over 1200 stores in most major countries of the world 40 U.S. distribution centers
65000 suppliers
The super-efficiency of Wal-Marts supply chain is one of the major reasons it has achieved such market dominance and leadership status in the global retail industry In 1985, Wal-Mart invested $700 million in a satellite system so that Wal-Mart could communicate between their stores, distribution centers, home office, and suppliers. The result was: improved forecasting, more reliable and faster order processing, and lower inventoriesat Wal-Mart warehouses. Supply chain that offers a wide range of goods and services at low prices in the shortest possible time drives Wal-Marts phenomenal growth. An integrated supply chain information system allows Wal-Mart to replenish its stores within 2 days while competitors take at least 5 days. Wal-Marts shipping costs are about 3 % of sales whereasit is 5 % for competitors. Supplier partnershipsallow Wal-Mart to understand the cost structure of each good or service provided by the supplier, and they work together to drive out costs. Huge order quantities allow extraordinary price discounts . Distribution centers run on a real-time information system where handheld devices, barcodes, and radio-frequency chips (RFID) embedded in each good or pallet allow Wal-Mart to run a very efficient distribution center.
Most supplier factories are tied directly into Wal-Marts store information system so companies such as GE know exactly how many light bulbs by type are sold in each store each day.
Benefits: faster inventory turnover, lesswarehousespace
needed, better working capital and cash flow management, fast responseto salessurgesand fads, lesssafety stock, and pricesthat average 14% lower than competing stores . Dell Computer Co. 1996: sales - $ 1 million/day Today: sales $ + 30 million/day
No distributors and no retailers (?) What is Dells Secret? - Speed and Trimming the supply
chain
A customers order for a customized computer can be on a delivery truck in 36 hours.
Dells inventory: 5 days of sales (Compaq, Gateway, etc. 50 90 days) Dells Price: 10 to 15% below those of competitors
Dells manufacturing processis flexible enough to postpone the ordering of components and the assembly of computers until an order is booked. Dells warehousing plan calls for the bulk of its components to be warehoused within 15 min. of its Austin, Limerick (Ireland), and Penang (Malaysia) plants.
Dells top 33 suppliers, which supply 90% of its goods, use a Web site for data on how they measure up to Dells standards, what orders they have shipped, and the best way to ship. Dells focus is on how fast the inventory moves, not on how much is there.
Dells suppliers restock the warehouseand manage their own inventories (VMI ).
Dell uses the components as needed and is not billed for them until they leave the warehouse.
The Lessonsfrom Wal-Mart and Dell
Used innovative SCM as a strategic weapon: executives are increasingly viewing SCM as a significant opportunity area Heavily utilized up-to-date information technology
7.4
Four Characteristicsof Supply Chain Management
1) Treats the supply chain as a single entity, not a series of
autonomous functions or segments.
2) Supply is considered the shared objective of every function or
segment in the chain, and SCM relies on strategic decision making.
3) It views inventories as last resorts for resolving imbalances
between various segments of the supply chain.
4) It embracesthe integration of systemsthroughout the chain,
which goes beyond the superficial contact that is traditional.
7.5
Negative Aspect of SCM: The Bullwhip (Whiplash) Effect It refers to the phenomenon where orders to the suppliers tend to have larger variance than sales to the buyer (i.e., demand distortion), and the distortion propagatesupstream in an amplified form (i.e., variance amplification)
The bullwhip effect increasesas the supply chain becomesmore complex and lead-time increases.
The farther one moves up the supply chain away from the retail customer, the greater is the variability in demand observed. For example, small increasesin demand by customers cause distribution centers to increasetheir inventory. This leads to more frequent or larger orders to be placed with manufacturing. Manufacturing in turn, increasesits purchasing materials and components from suppliers. Becauseof lead-time in ordering and delivery between each element of the supply chain, by the time the increased supply reachesthe distribution center, customer demand may have leveled off or even dropped, resulting in an oversupply. This triggers a reduction in orders back through the supply chain, resulting in undersupply later in time. Essentially, the time lags associated with information and material flow causesa mismatch between the actual customer demand and the supply chains ability to satisfy that demand as each component of the supply chain seeks to manage its operations from its own perspective. This results in large oscillations of inventory in the supply chain network. Four Major Causesof the Bullwhip Effect
7.6
1) Demand Forecast Updating: forecasts readjustments made at each supply chain (demand signal processing) contribute to the bullwhip effect. 2) Order Batching Companies batch or accumulate demands before issuing an order (periodic ordering and push ordering) - amplify variability and regular surges in demand. 3) Price fluctuations: Special promotions (price discounts, quantity discounts, coupons, rebates, etc.) and trade deals (e.g., special discounts, price terms, and payment terms) create forward buying. As a result, the customers buying pattern does not reflect its consumption pattern, and the variation of the buying quantities is much bigger than the variation of the consumption rate.
4) Rationing and shortage gaming- result when demand exceeds supply, and products are rationed to members of the supply chain, and when overreacting customers anticipating shortage give the supplier inaccurate information on the real demand. 7.6.1 How to Counteract the Bullwhip Effect a. Change the way suppliers forecast product demand by making this information from the final seller level available to all levels of the supply chain. b. Eliminate Order batching c. Stabilize prices d. Eliminate gaming
The best way to improve the supply chain is to reduce the total
replenishment time and to feed back actual demand information to all levels. 7.7 Factors Impacting the Supply Chain
Reduced number of suppliers a few, highly reliable vendors
Increasein competition the emergence of a global economy has dramatically increased the number of competitors that offer similar products.
Shorter Product Life Cycles
Increasein Vendor-Managed Inventories (VMI)
An extreme application of the forward placement tactics which involves locating the inventories at the customer.
ContinuousReplenishment Program (CRP) by Campbell Soup Co.
- A VMI method in which supplier monitors inventory levels at the Customer and replenishes the stock as needed to avoid shortages Advances in Technology 7.8
Requirementsfor a Successful Supply Chain Trust between vendor and customer Long-term Relationships evergreen contracts
Information Sharing
Individual strength of organizations
Topic 8
Inventory Management
8.1.1.1
Why is Inventory Management important? Inventory represents the largest investment in assetsfor most manufacturers and merchandisers. Inventories affect customer service, utilization of facilities and equipment, capacity, and efficiency of labor. Therefore, the plans concerning the acquisition and storage of materials, or inventories are vital to the production system. Inventory carrying (holding) costs normally represent one of the highest costs of the logistics system. The ultimate objective of any inventory system is to make decisions regarding the level of inventory that will result in a good balance between the purposesfor holding inventories and the costs associated with them.
8.2
Why do we want to hold inventories? Traditional Perspectives
Protection against uncertainties
High stockout costs (lost sales and dissatisfied customers)
Delay in the order cycle (replenishment cycle)
Costly setups or high ordering cost
Interruptions in the distribution channel, transportation, or production Large quantity discounts are available To provide a safeguard for variation in supply Seasonal availability
8.3
Reasonsfor Large Inventories People in charge of procurement are often rewarded for acquiring low-unit-cost supplies and raw materials. Production managers are normally rewarded for achieving the lowest possible per-unit production costs and they also like to manufacture large lot sizes. Marketing personnel like to have large quantities of all items on hand stored as close to the customer as possible. Transportation managerswant to ship products by truckload or by railcar to obtain lower rates. Why we do not want to hold inventories? Costs !
8.4
Carrying costs interest on debt, interest income foregone, : warehouserent, cooling, heating, lighting, cleaning, repairing, protecting, shipping, receiving, material handling, taxes, insurance, and so on.
Large in-process(WIP) inventories could clog production systems. Cost of coordinating production is high: more people and efforts are needed to unsnarl traffic jams, solve congestion-related production problems, and coordinate schedules. Cost of diluted return on investment (ROI): inventories are assets, and large inventories reduce return on investment.
Reduced-capacity costs: materials that are ordered, held, and produced before they are needed waste production capacity. Large-lot quality cost: large production lots results in large inventories.
Cost of production problems: higher in-processinventories camouflage underlying production problems (machine breakdowns, poor quality, material shortage, etc.) Inventory hidesProblems. - Japanese Perspectives
9
Poor quality (defects, scrap and rework) In-transit delays and poor transportation performance
Machine breakdowns and many other unnecessary interruptions and downtime
Long and expensive setups and changeovers Large lot sizes Employee absenteeism Large number of work order changesand inaccurate engineering changes Poor inventory management and product obsolescence Unreliable suppliers
Capacity imbalance 9.1.1.1.1.1.1.1 Typesof Inventories
Raw Materials Work-In-Process(WIP) Finished Goods Tools and Supplies (maintenance, repair and operating supplies) 9.1.1.1.1.1.1.2 Main Objectivesof Inventory Management
Maximize Customer Service Level Minimize the total costs associated with inventory
9.2
Inventory Decisions(3 Key Questions)
1) How often should the inventory status be determined? (i.e., What is the review interval?) 2) When should a replenishment order be placed?- Timing (i.e., Reorder Level or Reorder Point (ROP)) 3) How large should the replenishment order be? (i.e., Optimal Order Quantity (EOQ) or Optimal Production Quantity (EPRS)) 9.3 Inventory Review System
Periodic Review - Inventory levels are monitored at regular intervals
of time. At the end of every period, inventory levels are computed using, Ending Balance = Beginning Balance - Demand. If ending balance < reorder point (ROP), a new order is placed. Advantages: Cheaper, easier to operate Disadvantages: Riskier (greater chance of stockout)
This system is more appropriate when it is difficult to keep track of inventory levels and the cost of stockouts or safety stock is not excessive.
Continuous Review - Inventory levels are constantly monitored. New
levels are computed each time a transaction takes place. New Balance = Old Balance + Supply, or New Balance = Old Balance - Demand. Whenever the balance falls below the reorder point (ROP), an order is placed. Advantages: Safer (smaller chance of stockout) Disadvantages: More expensive to operate. This system is best where a continuing watch of inventory levels is feasible and stockouts or safety stock would be expensive. 9.4
Priority Inventory Management System (ABC Classification System) The logic behind this approach is that about 20% of the companys products account for about 80% of the salesand possibly an even larger percentageof the profits.
The first step is to rank products by sales or contribution to company profitability, and classify products as follows: ClassA: very important, (15 20 % of items but 70-80% of dollar value) ClassB: moderately important, ClassC: least important (low-volume or low contribution items: 60 70 % of items but about 15% of dollar value)
Pay most attention to A and B items, especially A items (e.g., increase stocking rates and safety stocks) and least attention to C items.
9.5
Main CostsConsidered in Inventory Models
Ordering Cost, S ($/order), if used in EOQ model
Ordering costs writing the orders, processing the order through : the purchasing system, postage, processing invoices, processing accounts payable, and the work of receiving department, such as handling, testing, inspection, and transporting
Setup Cost, S ($/setup), if used in EPRS model
Setup costs writing orders and processing for the internal production : system, setup labor, machine downtime due to a new setup (e.g., cost of an idle, non-producing machine), parts damaged during setup (e.g., actual parts are often used for test during setup), and costs associated with employees learning curve (e.g., the cost of early production spoilage and low productivity immediately after a new production run is started).
Inventory Holding (Carrying) Cost,
H ($/unit/year, or % of unit
cost)
Capital costs interest on money invested in inventory and in the land, : buildings, and equipment necessary to hold and maintain the inventory Storage costs rent taxes, and insurance on buildings; depreciation of : buildings; maintenance and repairs; heat, power light; salaries of security personnel; labor costs of handling inventory, clerical costs for keeping records, etc. Risk costs obsolete inventory, insurance on inventory, physical : deterioration of the inventory, and lossesfrom pilferage Sometimes, holding costs are given as annual percentage(%) of a given unit value of the item.
e.g.,
H = I U,
where I = annual % estimate of inventory holding cost and U = unit cost.
Shortage (stockout) Cost
Costs associated with processing back orders, lost profit (opportunity cost of not making a sale), loss of customer goodwill
9.6
Four Primary Inventory Models 1) Economic Order Quantity (EOQ) Model 2) Economic Production Run Size (EPRS) Model 3) Quantity Discount Model 4) Probabilistic Inventory Model
9.6.1.1
The
Economic Order Quantity (EOQ) Model
8.13.1 Underlying Assumptionsof the EOQ Model 1) Demand occurs at a constant rate, and is known with certainty. 2) Lead time is constant, and is known with certainty. 3) Each order is received in a single batch. 4) Stockouts (shortages) are not permitted. 5) Costs are assumedto remain stationary. 6) No quantity discounts. 7) Only one product. 8.13.2.1.1.1.1.1 Notations
Q = Order Quantity (Qo = Optimal Order Quantity, i.e., EOQ) D = Annual Demand S = Ordering Cost Per Order H = Inventory Holding Cost ($/unit/year) or H = I U 8.13.2.1.1.1.1.2 Derivation of Annual Ordering Cost (AOC), Annual Holding Cost (AHC), Annual Total Cost (TC) and EOQ D Annual Ordering Cost (AOC) = ----- S Q Q Annual Holding Cost (AHC ) = ------ H 2 D Q Annual Total Cost (TC ) = AOC + AHC = ---- S + ----- H Q 2
At what order quantity the TC becomes the minimum?
What is the key logic behind the EOQ model?
8.13.3 EOQ (Economic Order Quantity/Optimal Order Quantity)
EOQ, Qo =
2DS ----------H
1 year 365 days Order Cycle, t = ----------------------------- = ---------------no. of orders per year (D/Q) Qo Reorder Point (ROP) = ---- LT where LT = a constant lead time. t
8.13.4 Remarks
In an optimal solution (i.e., EOQ),
1) the order quantity will remain the same over time. 2) the order will be received just when the inventory level is zero. 8.13.6 Understanding the Effects of Changes: How often should demand estimates, cost estimates, and lot sizesbe updated? Subjecting the EOQ formula to sensitivity analysis can yield insights into the management of inventories.
A change in the demand rate: when demand rises, the lot size also should rise, but more slowly than actual demand A change in the setup costs increasing S increasesthe EOQ and, : consequently, the average cycle inventory. Conversely, reducing S reduces the EOQ, allowing smaller lot sizes to be produced economically. This relationship explains why manufacturers are so concerned about cutting setup time and costs.
A change in the holding costs The EOQ declines when H increases, and : when H declines, the EOQ increases. Errors in estimating D, H , and S: Total cost is fairly insensitive to errors, even when the estimates are wrong by a large margin. The reasons are that errors tend to cancel each other out and that the square root reduces the effect of the error. Thus, the EOQ lies in a fairly large zone of acceptable lot sizes, allowing managers to deviate somewhat from the EOQ to accommodate supplier contracts or storage constraints.
8.13.6 Examples: 1. ABC TV manufacturing Co. uses2000 10-inch CRT tubes a year. Those CRT tubes are purchasedfrom a supplier located in New York at $10 each Annual carrying cost per CRT tube is estimated to be 20 % of the unit cost, and ordering cost is $ 20 per order. Mr. John Doe, Production Manager of the company is trying to develop an inventory planning by determining an optimal order quantity of CRT tubes so that he can minimize an annual total cost. Currently, however,
without having any training in the area of inventory management, he simply orders 500 tubes per order (i.e., 4 times a year). a. Find the annual total cost of the current ordering policy by computing annual ordering cost (AOC) and annual inventory holding cost (AHC ). b. From the cost calculation in (a), Mr. John Doe noticed that his companys current AHC is unusually high, compared with AOC. Thus, he decided to changehis order quantity from 500 to 100. Compute the annual total cost of this new policy (Q = 100). What changesin AOC, AHC and TC can you observe?What recommendations do you want to make for Mr. John Doe if he wants to balance his AHC and AOC? c. If he usesthe EOQ approach, what will be the optimal order quantity, and how much can he save annually? d. What will happen to the annual total cost (TC) if the annual carrying cost rate I is doubled? Explain carefully by using the solution obtained in (c). 2. Garden Variety Flower Shop uses800 clay pots a month. The pots are purchasedat $2 each. Annual carrying costs are estimated to be 25 % of cost, and ordering costs are $30 per order. Currently the manager orders once a month. a. What is the total cost of current ordering policy? b. How much could the shop save annually if they use the EOQ approach?
8.14 Economic Production Run (Lot) Size (EPRS) Model (or EOQ with Non-instantaneousReplenishment)
8.14.1 Notationsand Definitions Let p = a daily production rate (P = an annual production rate) d = a daily usage(demand) rate. (D = an annual demand rate)
Note: p > d or P > D, and (p - d) = a daily inventory build-up rate. Qo The length of production run = ------ or -------p I max The pure consumption period = -------d
Maximum Inventory,
I max p- d
max
=
2DS p- d ------- ------H p
2DS p EPRS, Qo = -------- ------H p-d Qo Production Cycle = ------d
D
Annual Setup Cost (ASC) = ----- S
Q
I MAX Annual Holding Cost (AHC) = ------ H
2
Annual Total Cost (TC) = ASC + AHC
8.14.2 Examples Example 1
Energy Sol Corp. producesa certain energy-saving device. The demand for the device, D, is 1,800 units per year (or 6 units each day (i.e., d = 6), assuming 300 working days in a year). The company can produce at an annual rate, P, of 7,200 units (or 24 per day, i.e., p = 24). Setup cost, S, is $300. There is an inventory holding cost, H , of $36 per unit, per year. Mr. Sharp, Operations Manager of the company wants to determine the economic production run size (optimal production quantity) that will minimize the annual total cost. But without knowing any quantitative techniques, Mr. Sharp just produces72 units per setup (i.e., Q = 72). a. How long does it take to produce 72 units? The length of the production run. b. What is the maximum possible inventory (I max ) when they complete the production of 72 units? c. What is the length of pure consumption period? d. What is the production cycle? e. What is the annual total cost of the current policy? f. Determine the optimal production quantity using the EPRS approach?What is the minimum total cost? How much can Mr. Sharp save by using the EPRS approach instead of the current policy? Example 2 A company is about to begin production of a new product. The manager of the department that will produce one of the components for the product wants to know how often the machine used to produce the item will be available for other work. The machine will produce the item at a rate of 200 units a day. Eighty units will be used daily in assembling the final product. Assembly will take place five days a week, 50 weeks a year. The manager estimatesthat it will take almost a full day to get the machine ready for a production run, at a cost of $60. Inventory holding costs will be $2 a year. a. What is the optimal production quantity (EPRS)? b. What is the length of a production run in days?
c. During the production, at what rate will inventory build up? d. If the manager wants to run another job between runs of this item, and needsa minimum of 12 days per cycle for the other work, will there be enough time? Explain carefully by showing all your work.
8.15The Relationship between EOQ and EPRS:
8.15.1 Make or Buy Analysis A Key Application of EOQ & EPRS
In order to determine which option is more economical, we compute the annual total costs(TC) of the two options, and select the one that has the lowest total cost.
Buy Option (EOQ):
Total Cost = Annual Ordering Cost + Annual Holding Cost + Annual Purchasing Cost D Q TC = ----- S + ----- (I U) + U D Q 2
Make Option (EPRS):
Total Cost = Annual Setup Cost + Annual Holding Cost + Annual M anufacturing Cost + Additional costs, if any D I max TC = ----- S + ------ (I U) + U D + Additional costs Q 2 8.15.2 Examples : 1. Zak's Zippers is contemplating manufacturing their own zippers rather than distributing the zippers it receives from ZZZ, Inc. Zak's figures it must sell the zipper at the sameprice or else the yearly demand of 4,000 dozen zippers will be
greatly affected. Presently the purchasecost per dozen zippers is $10, whereasthe proposed manufacturing cost for labor and raw materials is estimated at $8 per dozen. In any event, the holding costs are estimated at 20% of the purchaseor manufacturing cost of the item. Reorder costs are currently $40 per order. However, set-up costs for each production cycle are estimated at $400. If Zak's can leasea machine with production capacity of 8,000 dozen zippers per year at an annual cost of $5,000, which policy (Make or Buy) would you recommend to management and why? Explain carefully by showing all your work. 2. One decision faced by many manufacturing firms is whether to make or buy a particular component of the manufacturing process. Harrison Sound Corporation manufactures stereo systems. The company has a choice of either manufacturing the digital display unit for their Model 243 receiver themselves or purchasing the unit from Allied Electronics. Allied will charge Harrison $7.50 per unit and Harrison estimatesthe cost of placing a single order with Allied is $48. If Harrison manufactures the units themselves there will be a set-up cost for production of $1,600, an annual production rate of 50,000 units a year possible, and a per unit production cost of $7. SupposeHarrison expects to have an annual demand for these display units equal to 10,000, and the holding cost rate is 20%. Which policy (Make or Buy) would you recommend to management and why? Explain carefully by showing all your work.
Topic 9
Lean Production System/JapaneseProduction System
9.1 To Understand Japan and the Japanese
The lack of natural resourcesmakes it necessary to import vast amounts of materials. - To overcome this handicap, it is essential for the Japaneseindustries to put forth their best efforts in producing better quality goodshaving higher added value and at an even lower production cost than those of the other countries.
Japanesetraits
Group consciousness,senseof equality, desire to improve, and diligence born from a long history of a homogeneousrace High degreeof ability resulting from higher education brought by desire to improve Centering their daily living around work
JapaneseManagement Characteristics
Lifetime employment system Labor unions by companies Little discrimination between shop workers and white-collar staff Chancesavailable to workers for promotion to managerial positions
9.2 Lean Production - Underlying Philosophy
Reduction of cost through elimination of waste and
non-value-added activities
This involves making up a system that will thoroughly eliminate waste by assuming that anything other than the minimum amount of equipment, materials, parts, and workers (working time) which are absolutely essential to production are merely surplus that only raisesthe cost.
Toyotas Seven Wastes
Waste from producing defects Waste in transportation Waste from inventory Waste from overproduction Waste of waiting time Waste in processing Waste of motion
People Preparation Respect-for-humanity system
People are the most significant corporate asset, and investments in their knowledge and skills are necessary to build competitiveness. Toyota
Discipline (enforce safety and quality-critical standards) Flexibility (job rotation, remove barriers) Creativity (aim of job, responsibility, incubation time, encourage ideas to grow) Equality (remove unfair policies; single status) Quality of Work Life (involvement, security, enjoyment) Personal development (develop intelligent people) Autonomy (delegate, line stop)
Total Quality
Management leadership Integration of efforts Customer is the next process break down barriers Continuous improvement Habits of never-ending improvement
Pursueperfection Ownership Culture Correct your own errors Line stop authority Visibility of problems Error-proofing Prevention rather than detection Quality at the source SPC
9.3 Major Tenets of Lean Operations
Quick Changeover/Setup Reduction
Developing a production system that manufactures only what customer wants and when the customer wants it, leading to a strong, flexible manufacturing system adaptable to changes
Workplace Organization 5S System
implies thoroughnessand attention to detail Canons Workplace Improvement Program: Five Ss
1) (Seiri) Proper Arrangement and Organization.
Do things in the proper order; eliminate unnecessary things
2) (Seiton) Orderliness .
Specify a location for everything; designate location by number, color coding, name, etc.; put things where they belong.
3) (Seiso) Cleanup.
Specify recommendedproceduresfor cleanup; follow the procedures; check over all work.
4) (Seiketsu) Cleanliness
Dust, wash, and maintain equipment; keep equipment and the workplace in the best possible condition.
5) (Shitsuke) Discipline.
Scrutinize practices; exposethe wrong ones; learn correct practices and be careful to use them. Value Stream Mapping Mapping the production path of a product visually to recognize waste and identify its causes Pull/Kanban Systems
allows the efficient transfer of parts from one department to another and automatically put a purchaseorder for products using minimum/maximum inventory levels
Total Productive Maintenance(TPM) An initiative that optimizes the effectivenessof manufacturing equipment
TPMs goal is to make the production systemsprofitable and TPM requires organizations prevent breakdowns and defects in efficient and economical ways.
Cellular Manufacturing
Both equipments and workstations are arranged in a sequenceto support the flow of materials and components with minimal transport or delay
Quality at the Source Unlike in traditional manufacturing companies where quality checks are done during the receipt of goods and through sampling at the final assembly line, the inspection and product rework in Lean Operations are done at any point in the production. EmployeeInvolvement/Empowerment
When implementing lean manufacturing strategies, the management must ensure that the people are fully trained and empowered to accept and implement the changes. The management should ensure the presenceof a widespread orientation about quality and continuous improvement and should also create a common understanding about the need to changeto lean.