Midterm OM-323 Study Guide
Fall 2009
By: Jin Why are there seven empty Red Bulls next to me? Zhou
Disclaimer: This study guide will not, I repeat, will NOT guarantee you an A on the
exam. If you are sufficiently retarded, I cant even guarantee that this study guide will
help you pass the godforsaken exam. But hopefully, what this guide can do is to help you
study more efficiently so that you can go into the exam with a little more confidence-and
have more time to memorize the 400+ Marketing terms we have. :D
Good luck. Lets get started.
Beginning Note: The OM midterm is composed of 50 multiple-choice questions, half
calculation, half terms. This makes the OM midterm an unpleasant midway point
between the IS Midterm and the Finance Midterm-you have to do calculations on the fly
as well as memorize terms and theories. However, it IS all multiple choice, so worst
comes to worst, you can always throw obviously fucked up answer choices out the door
and then go with your best guess. Hopefully, however, you wont have to do that.
OM 01: Intro to OM/New Product Development Process (NPD)
Ch. 4, Pages 3-9, Which Product? Case, Pages 511-515
What Does Product/Service Design do?
1. Transform customer wants/needs into product/service requirements.
2. Refine existing products/services.
3. Develop new products/services.
4. Formulate quality goals.
5. Formulate cost targets.
6. Construct and test prototypes.
7. Document specifications.
8. Translate product/service specifications into process specifications.
-Typically, product/service design has strategic implications for the success of an
organization.
-Factors that create market opportunities or threats
1. Economic conditions/changes
2. Social/Demographic
3. Political/Legal
4. Liability issues
5. Competitors
6. Cost/Availability (refers to materials used in production/cost of production)
7. Technological
-Product Development: Its hard to do, it involves every part of the business, it costs a
shitload of resources and time, and there is absolutely no guarantee that it will actually
work as planned.
-4 Key Questions for Product Development:
1. Is there a demand for the product? (No shit.)
2. Can we actually proceed with it?
a. Manufacturability: Can your firm make the item at an acceptable profit?
b. Serviceability: Can your firm provide the service at an acceptable profit?
3. What level of quality is appropriate?
a. The Level of Quality will change according to shifting target markets,
changing consumer tastes/demands, capability of the firm, etc.
4. Does it make sense from an economic standpoint?
a. As in Can we make money off of this shit? If the answer to this is a no,
then congratulations-you just wasted the first three steps. Seriously, why
the fuck is this not the first step?
Which Product? Case:
The CORE product case we did in the beginning, where NONE of the products
actually got approved. Remember that, as well as some rough reasons for why they didnt
get approved. i.e. B2B selling, convenience combo, been done before, insufficient
demand, and some pure WTF ones that just make you go what the hell was he smoking
when he wrote that one up???
*New Product Development Funnel:
Stages of the NPD Funnel:
Stage One
Stage Two
Stage Three
Stage Four
Identify target
market; customer
input
Preliminary supply
chain design (make /
buy, suppliers, etc.)
Detailed designs:
Integration: final
information systems,
business plan
promotion, & financial plan
Develop product
concept & design
Estimate sales &
Presentation to
Location, layout, job design,
margins; investment &
investors &
capacity, production plan
expense plan
management
OM 02: Target Costing
-Pages 517-520, Braun AG Case
-Target Cost is not built bottom up, as in working from your actual COGS up to what
you think your retail price should be, but rather top-down, working from the cost you
find that consumers will be willing to pay for your product down to a target
manufacturing cost to be within.
-Puts the challenge of meeting market demands back on the designers. You are not going
to design what YOU think is gonna be cool. You are going to design what the
CONSUMERS want to buy.
6 Principles of Target Costing:
1. Price-led costing: Market Price required profit margin other costs = target
cost. Working back from the price consumers are willing to pay.
2. Focus on Customers: Make a product that the end-users want, not what YOU
think is cool.
3. Focus on Design: Striking the balance between quality of the product and the cost
to make it.
4. Cross-Functional Involvement: Bringing together all parts of the business (MK,
OM, IS, AC, FE, LA, etc) to form specific teams that oversee a product from the
initial stage all the way until launch and recap.
5. Value-chain involvement: Include everyone in the value chain, from the raw
materials suppliers to your end-users, in the target costing process. I.e. account for
potential costs at every link in the chain.
6. Life-Cycle Orientation: Minimize overall cost of buying and then operating the
product, such as designing/producing a car well so that the customer doesnt have
to have the engine replaced every 10,000 miles.
Target Costing: Start-Up Companies
1. Estimate retail target price in the target market.
2. Estimate manufacturers target price.
3. Estimate profit requirements/company internal expenses. Typical Manufacturing
industry averages:
a. Profit: 10% of Sales
b. G&A Expenses: 20% of Sales.
c. Sales and Marketing: 20% of Sales
4. Compute operations target cost:
a. Target Retail Price Channel Margin Profit S&M G&A.
5. Identify actual operations costs (material, labor, overhead).
6. Design Challenge: Compare actual Operational Costs with target operational costs
and work to get actual operational costs to or below the level of your target
operational costs.
7. More research into market. More interviews with customers. More redesign of
product. More information on how to design the product. Then go back to Step 1
and repeat until your fucking brains explode.
Braun AG Case:
Key Points (From Review Powerpoint)
1. Good Design, according to Braun, is:
a. Functionality
b. Aesthetics
c. Manufacturability
d. Profitability
e. Strategic Fit (with company goal/vision)
2. Link your product design to your overall company strategy. Ex. Braun wanted to
be perceived as being of the highest quality, so all of their products are designed
to look flawless.
3. Have your design conflicts early vs. late, so that you have time to negotiate and
work out design trade-offs and challenges.
4. Cross-functional interaction is key-You may want to design something one way,
but Finance will tell you that you cant make $$ at that price, and Marketing will
tell you that your design is not what the customer wants.
5. Challenge people to be creative. Again, NO SHIT. We really needed to read an
entire case to understand this point?
A few Braun facts, just in case:
-Name of the coffee machine in question: KF 40.
-Materials debated: Traditional Polycarbonate vs. New: Polypropylene.
-Issue: Polypropylene will create sink marks along the surface, while traditional Braun
products are perfectly smooth.
Three Core Tenets of Braun:
1. First-Class Design
2. Superior Quality
3. Functions and Features ahead of the competition.
OM 03: Product Development Concepts
Product And Service Design, Pages 15-28. Braun Case was covered in previous pages.
-Product Life Cycle: If you dont know this by now.. seriously, WTF? In any case,
remember: Introduction Growth Maturity- Decline.
-Standardization: Extent to which there is absence of variety in a product, service, or
process. Standardized products can be made in very fucking big quantities.
1. Advantages: Fewer parts to deal with, reduced training time for workers,
procedures become more routine, production can be automated, more justification
for perfecting base design.
2. Disadvantages: Designs hard to change without fucking the manufacturing
process up, designs become very costly to change/update, variety goes into the
shitter and may decrease customer appeal.
-Mass Customization: Producing basically standardized goods, but incorporating a degree
of customization in the final product/service.
1. A. Delayed Differentiation: Postponement tactic. Producing a product, but not
quite completing it, allowing the customer to make final touches on product. Ex.
HP laptops coming in one base model, but DVD drives, software, accessories, and
even outer skin can be picked by customer and finished in store.
2. Modular Design: Components are grouped into modules that can be easily
replaced/interchanged. Ex. certain car manufacturers offer ability to pick base
chassis for car, engine, horsepower, interior materials, etc. Disadvantage is that in
general, modules decrease variety vs. individual components, and that modules, if
broken, usually have to be replaced as a module vs. an individual part.
-Reliability: Measure of the ability of a product, part, service, or system to perform its
intended function under a prescribed set of conditions.
-Failure: Situation in which a product, part, or system does not perform as intended.
-Normal Operating Conditions: Set of conditions under which an items reliability is
specified. Beyond these Normal Op. Conditions, all bets on reliability are off.
-Improving Reliability:
1. Improve component design
2. Improve production and/or assembly techniques
3. Improve testing
4. Use backups
5. Improve preventive maintenance procedures
6. Improve user education
7. Improve system design
-Robust Design: Products that will perform as designed over a much broader range of
conditions. Ex. Regular sneakers/boots that are also waterproof and can climb mountains
as well.
-Degrees of Newness (From Small to Large)
1. Modifying existing product/service.
2. Expansion of existing product line/service offering.
3. Clone of competitors product/service.
4. New product/service.
-Cultural Differences create different products. Ex. Hamburger in India is lamb, not
beef, and forget about finding cheeseburgers in Israel.
-Global Product Design: Obviously, designing a product that can be sold worldwide.
*Phases in Product Design and Development:
1. Idea Generation
2. Feasibility Analysis
3. Product Specifications
4. Process Specifications
5. Prototype Development
6. Resign Review
7. Market Test
8. Product Introduction
9. Follow-up evaluation
-Prototype: Approximation of the product used for learning/communication. Allows you
to see what it might be like and make decisions to either keep design, redesign, or modify
based on information.
-Idea Generation can be:
1. Supply-Chain based
2. Competitor based
3. Research based
-Research and Development (R&D): Organized efforts to increase scientific knowledge
or product innovation. Can be Basic Research, Applied Research, or Development. Pg.24
-Reverse Engineering: Dismantling and inspecting competitors products to discover what
they do well and how they do it.
-Concurrent Engineering: Bringing engineering design and manufacturing personnel
together early in the design phase. Allows for excellent collaboration and design-tosucceed, but flexibility/compatibility problems between two departments can bring
problems.
-Computer-aided Design (CAD): Product design using computer graphics and programs
to simulate modifications, tests, etc.
-Design for Manufacturing (DFM): Designing a product so that it can be easily
manufactured with the current capabilities/capacity of the firm.
-Design for Assembly (DOA): Designing to reduce the number of parts in a product, as
well as making it easier to assemble by machines/people.
-Manufacturability: Ease of fabrication and/or assembly. Overarching goal, contains both
DOM and DOA concepts.
-Quality Function Deployment (QFD): Product design approach that uses the House of
Quality to integrate the voice of the customer into the design of the product/service.
Remember how the left side of the House of Quality is made up of customer-given
attributes and the relative importance each of them has based on customer surveys? There
you go.
OM 04: House of Quality
Pages 28-32, Contadina Pizza Case
-HOUSE OF QUALITY: First cross-matrix (and the only one relevant to them exam
so far) is Customer Attributes (Left) vs. Design/Engineering Characteristics (Top).
Below are target values for your product in terms of Design Characteristics, as well
as competitor values. Right are competitive evaluations based on customer
requirements. Top is correlation grid between the engineering characteristics.
-See Page 30 for an example.
Kano Model: Theory developed by Japanese professor. Separates product qualities into
three categories: Excitement, Performance, and Basic.
1. Excitement: Aspects that make you go Holy fuck, I did not expect that. Thats
fucking awesome!!! Ex. finding out that your hotel reservation includes VIP
treatment at 10 different clubs and free drinks from the bar for as long as you stay
at the resort.
2. Performance: Aspects that make you happy if there is more, and angry if there is
less. Ex. the battery life on an iPod.
3. Basic: If its there, good, but if it aint there, theres gonna be hell to pay. Ex. an
Ethernet cable cant be too short, but increasing its length beyond a certain point
doesnt really help make it more appealing.
Contadina Case:
-Harvard Review Case.
-Pizza brand is owned by Nestle.
-Previously made only Pasta, now trying to branch into pizza as well.
-Primary Competitor: DiGiorno, by Kraft.
-Design Decision: Pizza with topping packages sold separately, or just a basic pizza?
-Skim case summary to have a good idea of what it is about, and just remember that this
case was what brought up the House of Quality.
OM 05: Product Design Workshop
Not Applicable.
OM 06: Supply Chain Management
Pages 289-296, 303-308, 166-168, Sports Obermeyer Case
SCM, Pg. 289-296, 303-308
-Supply Chain: Sequence of organizations, including their facilities, functions, and
activities, that are involved in producing and delivering a product/service.
-Supply Chain Management: Strategic coordination of the supply chain for the purpose of
integrating supply and demand management.
-Logistics: Part of a supply chain involved with the forward and reverse flow of goods,
services, cash, and information.
-SEE PAGE 290 FOR SUPPLY CHAIN EXAMPLES.
-Cash flows in reverse of the supply chain: i.e. products go from beginning to end, but the
cash paid goes from end to beginning.
SCM Issues
1. Determining appropriate level of outsourcing.
2. Managing procurement.
3. Managing suppliers
4. Managing customer relationships.
5. Ability to quickly ID issues and respond.
6. Managing risk the along chain.
-Flow Management: Three types of flows
1. Product/Service Flow
2. Information Flow
3. Financial ($$$) Flow.
-Simplified down, a supply chain is just a very fucking complex supply network.
-Trends in SCM:
1. Reevaluation of Outsourcing: Letting illiterate chinks make your shit is not
always the best idea. :D
2. Risk Management: Will our shit get us in trouble if somehow we fuck it up? Ex.
toys, baby food, etc.
3. Inventory Management: Its usually a good idea to keep track of how much you
have and how much you need, eh?
4. Lean Supply chains: Eliminating non-value-added links in the supply chain and
only keep the essential links.
5. Sustainability: Environmental issues. Personally, I could give less of a shit, but
just know this is one of the trends.
-Strategic Responsibilities:
1. Supply Chain Strategy Alignment: Making sure that your supply chain strategy is
in line with your overall business strategy.
2. Network Configuration: Determining number of suppliers, warehouses,
manufacturing centers, retailers, etc.
3. IT: Integrating the supply chain using Information Technology to track stuff,
update requirements, etc.
4. Products/Services: Making decisions on what to pursue and how to pursue it.
5. Capacity Planning: Assessing and anticipating long-term needs in
inventory/demand.
6. Strategic Partnerships: Partnership choices, level of partnering, degree of
formality.
7. Distribution Strategy: Centralized vs. Distributed, and whether to do it in house or
to outsource to 3rd parties.
8. Uncertainty/risk reduction: Self-explanatory.
Pg. 303-308
-Vendor Analysis: Evaluating the sources of supply in terms of price, quantity, reputation,
and service.
-Certified suppliers are sometimes referred to as world class suppliers. (Obscure shit that
might make for a perfect test question)
-Supplier forums: Gatherings used to educate potential suppliers about firms
policies/requirements.
-Supplier Code of Conduct: Agreement that some firms make suppliers sign that enforces
good working conditions, fair wages, environmentally friendly practices, etc at the
supplier end.
-Factors in Choosing a supplier: Quality, flexibility, location, price, response to
product/service changes, reputation//stability, lead-times/on-time delivery, etc.
*CPFR: Collaborative Planning, Forecasting, and Replenishment
1. A supply chain initiative that focuses on information sharing among supply chain
trading partners in planning, forecasting, and inventory replenishment:
2. In Simple Terms: A process that improves efficiency and effectiveness in the
supply chain by having everyone in the supply chain agree to any and all changes
made to the supply chain so no one is caught off-guard. In addition, planning the
supply chain out together allows for the design of the supply chain to be
accommodating to everyone.
-Strategic Partnering: Two or more business organizations that have complementary
products/services join so that both gain a benefit.
-Inventory Velocity: Speed at which goods move through a supply chain. Time-based.
-Bullwhip effect: Inventory oscillations become progressively larger as you move back
through the supply chain. Ex. a small, small change in demand turns into a huge change
in need for raw materials back at the ass end of the supply chain. See pg. 308.
-Vendor Managed Inventory (VMI): Vendors monitor the amount of goods and
replenish from the manufacturer when supplies are low. Decreases operating costs for the
manufacturing company and reduces overhead.
Pg. 166-168 GLOBAL LOCATIONS
Facilitating Factors:
1. Trade Agreements: Ex. NAFTA cuts down on red tape surrounding flow of
goods from Mexico or Canada to the U.S.
2. Technology: Improved communications, inventory tracking, etc help to make
global locations feasible.
BENEFITS:
1. Markets-expand into other countries
2. Cost Savings-cheaper materials/labor/bribes/etc.
3. Legal/Regulatory-You CAN force unpaid overtime in some places.
4. Financial: Dont have to convert product values into foreign currencies to sell
them anymore
5. Other: Ideas for products/services, etc.
DISADVANTAGES
1. Higher transportation costs.
2. Security Costs, especially in rough places.
3. Unskilled Labor: Herro, so sowwy, what this part?
4. Import Restrictions
5. Criticism: Sweatshops are unethical!!! Then take off everything you own, you
hypocritical bastard, because my cousin Ching-Ching made all of it.
RISKS:
1. Political: What if Chairman Jin decides to take your shit over?
2. Terrorism
3. Economic: Wild inflation/deflation in different countries.
4. Legal: What do you mean, I cant bribe anymore?
5. Ethical: Yes, you do have to blackmail, bribe, and kidnap to establish yourself.
6. Cultural: What is alright for Chinks may not be ok for Beaners, which may not be
acceptable for Frogs, etc.
SPORTS OBERMEYER CASE
-Read Key Points slide from OM midterm review. They sum it up a bit better than I
can.
-Know that the case is an application of inventory forecasting and management practices
in action.
-PARKAS!!! :p
OM 07: Inventory Management I
First one on serious calculations. Will list formulas and required info.
-Read Inventory Key Points for overview. (In midterm review slides)
-Inventory: Stock or store of Goods
-Inventory Includes: Raw Materials, Work-In-Process, Finished Goods.
-Littles Law: Average amount of inventory in a system is equal to the product of the
average demand rate and the average time a unit is in the system.
-Inventory Turnover: Avg. COGS/Avg. Inventory
-Periodic System: Physical count of items in inventory made at periodic time intervals.
-Perpetual System: System keeps continuous track of how much inventory there is.
-Two-bin system: Two containers of inventory, replenish when first is empty.
-UPC: BAR CODE.
-Lead Time: Time Interval b/t ordering and receiving order.
-Point-of-sale (POS) System: Records items at time of sale. Ex. Supermarkets.
-Holding (Carrying) Cost: Cost to carry an item in inventory for a length of time, usually
a year.
-Ordering Costs: Costs of ordering and receiving inventory. No shit.
-Shortage Costs: Costs resulting when demand exceeds the supply of inventory. Usually
measured as the unrealized PROFIT per unit. Also known colloquially as the Oh, shit
cost. :p
Pg. 337-342: EOQ
-Economic Order Quantity (EOQ): Order size that minimizes total annual cost.
-Six Assumptions:
1. Only one product involved
2. Annual demand requirements are known
3. Demand is spread evenly through year-so demand rate is constant
4. Lead time does not vary
5. Each order is received in a single delivery
6. No quantity discounts
TERMS:
Q=Order Quantity in Units
H=Holding Cost per unit
*Annual Carrying Cost=
(Q/2)H
D=Annual Demand (in Units)
S=Ordering Cost
*Annual Ordering Cost=
(D/Q)S
TOTAL COST= [(Q/2)H] + [(D/Q)S]
Optimal Order Quantity (Q-Opt.) =
Pg. 359-361: Single Period Model (SPM)
-Single Period Model: Model for ordering of perishables and other items with limited
useful lives.
-Shortage Cost: Unrealized profit per unit. Labeled .
*Revenue Per Unit Cost per Unit.
-Excess Cost: Difference between purchase cost and salvage value at the end. Labeled .
*Original Cost Per Unit Salvage Value per Unit.
Service Level :
CS/(CS+CE)
OM 08: Inventory Management II
-Basically all about Quantity Discounts/Re-order Points
-Quantity Discounts: Price reductions for larger orders.
NEW TOTAL COST FORMULA
TC= [(Q/2)H] + [(D/Q)S] + PD
P = Price per Unit
D = Demand
STEPS TO FIND OPTIMAL ORDER QUANTITY
1. Calculate common minimum quantity using
2. Plug the found Q into the TC formula at the first available level to get a initial
cost.
3. Using the TC formula, check the rest of the available quantity ranges at their
lowest respective breaks to find the optimal order quantity.
MORE DETAILED INSTRUCTIONS ON PAGE 347 OF THE TEXTBOOK
REORDER POINT
-ROP: When the quantity on hand of an item drops to this amount, reorder the shit.
Simple:
ROP = d x LT (Demand Rate x Lead Time)
Extended:
ROP = Expected Demand during Lead time + Safety Stock
-Safety Stock: Stock that is held in excess of expected demand due to variable demand
and/or lead time.
-Service Level: Probability that demand will not exceed supply during lead time.
EQUATION: SL = 100% - Stockout Risk
ROP Formulas:
Will be given on test, so dont worry too much.
Brief explanation of how z-scores work:
-Using the acceptable stockout risk you are given, look down the .01 column of the
table. Usually, you will only have to use the right side of the table.
-Look for the value that comes closest to the difference if you subtracted your acceptable
risk from 100%.
-Ex. for three percent stockout risk, 1.00 0.03 = .97. The closest z-score for that column
is between 1.9 and 1.8, angling more towards 1.9. Well estimate that to around 1.88 as
our z-score and use it as such.
-Keep your head on straight. Youve done z-scores before in Stats. Here is just a very
simple rehash.
SAFETY STOCK FORMULA (IMPORTANT, WILL NOT BE GIVEN ON EXAM
Safety Stock = z-score x Standard Deviation x
OM 09: Financial Impact of Operations Decisions
-A shit-ton of formulas. All from the cases for this class. I will list them. Good luck.
1. Raw Materials Investment = Raw Materials Units x Cost/Material
2. Finished Goods Investment = Finished Goods Units x COGS/Unit
3. WIP Investment = WIP Units x [(Direct materials + COGS/Unit)/2]
4. Raw Materials Cycle Stock = Q/2 (Q=Optimal Quantity)
5. Raw Materials Safety Stock = Pg. 365, Formula 12-15, with only the z part.
6. Raw Materials In-Transit Stock = Average Demand x Average Transit Time.
7. Work In Process Units = Average Demand x Average Production Lead Time (Assume
one week)
8. Finished Goods Cycle Stock = (Average Demand per week)/2
9. Finished Goods Safety Stock = Z-score x Standard Deviation x Square Root of Lead
Time (Assume Lead Time = 2 weeks for finished goods.)
10. Finished Goods pre-build Stock: Assume zero for now.
11. Service Level-non perishable goods. Still Cs/(Cs + Ce), but now Ce is calculated as:
(COGS/Unit x Annual Carrying Cost Rate)/52
12. Mean Demand (PERT Distribution): (Best Case + 4 x Most Likely + Worst Case)/6
13. Demand Standard Deviation: (Best Case - Worst Case)/6
14. Mean demand per week = (year mean)/52
15. Standard Deviation per week = (Standard Deviation per year)/
16. Safety Stock for n product varieties= (safety stock without variety) x
17. Mean Raw Materials demand = Bill Of Materials quantity x mean demand for
product.
18. Standard Deviation of demand for RM = BOM quantity x standard deviation for
product.
*Carrying Cost Rate is usually around 30-35% of your business. Look in the first case for
OM09 if you want more info.
-Income statement will be affected in two areas by Operation decisions: S,G&A
expenses, and COGS.
OM 10: Capacity Planning
Pages 43-64, Sensormatic Electronics Case
-Capacity- The upper limit/ceiling on the load that an operating unit can handle. Can be
in terms of units produced or services provided.
Key Capacity Questions
1. What kind of capacity is needed?
2. How much is needed to meet demand?
3. When is it needed?
-Design Capacity- The maximum designed service capacity or output rate
-Effective Capacity- Design Capacity minus allowances for personnel issues,
maintenance, contingencies, etc.
-Actual Output: Usually lower that both DC and EC. What you are actually capable of
producing using the machine.
-Efficiency = X 100%
-Utilization = X 100%
-Capacity Cushion- Extra capacity used to offset demand uncertainty
-Determinants of Effective Capacity
1. Facilities: What kind of factories do we have?
2. Product/Service Factors: Are our products close enough that the production
lines can easily make them all?
3. Process Factors: How well, and how many, can we make?
4. Human Factors: How well have I trained my people?
5. Policy Factors: Are we going to allow multiple shifts?
6. Operational Factors: Standardization, hardware/software compatibility,
different people know different shit, etc.
7. Supply Chain Factors
8. External Factors: Standards to live up to, regulations to comply with, etc.
-Bottleneck Operation- An operation in a sequence of operations whose capacity is lower
than that of the other operations
-Machine Capacity =
-Machines Needed =
-Remember to multiply hours needed/unit by total number of units to get total time
needed to produce desired quantity of units.
-In-House vs Outsource Criteria
1. Available Capacity
2. Expertise
3. Quality Considerations
4. Nature of the Demand-High and Steady, Fluctuating, or else?
5. Cost vs. Benefits
6. Risks Associated
-Developing Capacity Alternatives
1. Design flexibility into your system.
2. Take account of which stage of the life cycle you are at.
3. Take a big-picture approach to capacity changes.
4. Prepare to deal with Capacity chunks, i.e. orders coming in bits, pieces, and
large chunks rather than smoothly.
5. Attempt to smooth out capacity requirements-try for the optimal point.
6. Identify the optimal operating level
7. Choose a strategy if expansion is involved.
-Economies of Scale- If the output rate is less than the optimal level, increasing the
output rate results in decreasing average unit costs
-Diseconomies of Scale- If the output rate is more than the optimal level, increasing the
output rate results in increasing average unit costs
-Constraint- Something that limits the performance of a process or system in achieving its
goals. Can be:
1. Market
2. Resource (workers, equipment, etc)
3. Material
4. Financial
5. Supplier
6. Knowledge/Ability
7. Policy
COST-VOLUME ANALYSIS
Some relevant formulas:
Total Cost = Fixed + Variable Costs
TC = FC + VC
(And if you didnt know that. How the hell did you make it through AC-221/222????)
Total Revenue = R x Q
R = Revenue per Unit
Q = Output Volume
Profit = Q(R-VC) FC
R-V = Contribution Margin
Break-Even Quantity =
Note: Fixed Costs are always in terms of total Fixed Cost. FC is never divided up
between individual units, as it would change from quantity to quantity.
-Break-even point (BEP) the volume of output at which the total costs and total revenue
are equal
-Cash Flow- The difference between cash received from sales and other sources and cash
outflow for labor, material, overhead, and taxes
-Present Value- The sum, in current value, of all future cash flows of an investment
proposal
OM 11: Make/Buy
-See Slide from Midterm Review Presentation.
-Know how to do a side-by-side comparison chart that evaluates the attractiveness of
each alternative.
-Ex. Sensormatic make-buy analysis excel file. Find it in OM11.
-Very basic question: Is it better for us to make ourselves, or to buy this shit from
someone else?
END
Good luck, see yall on the other side.