OM 6th Edition Collier Solutions Manual by Ace Test Banks

OM 6th Edition Collier Solutions Manual

richard@qwconsultancy.com

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OM 6 C1 IM OM6 Chapter 1: Operations Management and Value Chains Discussion Questions 1. Explain how the seven differences between goods and services would be applied to a major airline service. Provide airline examples that illustrate each difference. 1. Goods are tangible, whereas services are intangible. Fuel, airline cabin food, paper tickets, pillows, magazines, sodas and coffee, and so on are the only physical goods. Ask your students: “When you pay say $300 for a ticket, how much is for “place utility” and how much for the physical goods?” Goods are consumed, but services are experienced. A senior executive of the Hilton Corporation stated, “We sell time. You can’t put a hotel room on the shelf.”3 2. Customers participate in many service processes, activities, and transactions. Oh! Yes. At boarding, while in flight, leaving the plane, at the baggage terminal, and so on. Many services require that the customer be present either physically, on a telephone, or online for service to commence. In addition, the customer and service provider often co-produce a service, meaning that they work together to create and simultaneously consume the service, as would be the case between a bank teller and a customer, to complete a financial transaction. The higher the customer participation, the more uncertainty the firm has with respect to service time, capacity, scheduling, quality performance, and operating cost. 3. The demand for services is more difficult to predict than the demand for goods. Airline routes are complicated with weather, other carrier schedules and reschedules, takeoff and landing delays, etc. making demand highly variable with no way to “store in inventory the seat’ (see #4) Once the plane takes off, the revenue from an empty seat is lost forever! Customer arrival rates and demand patterns for such service delivery systems as banks, airlines, supermarkets, call centers, and courts are very difficult to forecast. The demand for services is timedependent, especially over the short term (by hour or day). This places many pressures on service firm managers to adequately plan staffing levels and capacity. 4. Services cannot be stored as physical inventory. Service capacity is the substitute for physical inventory such as the number of pilots, flight attendants, fuel trucks, seats, etc. In goods-producing firms, inventory can be used to decouple customer demand from the production process or between stages of the production process and ensure constant availability despite fluctuations in demand. Service firms do not have physical inventory to absorb such fluctuations in demand. For service delivery systems, availability depends on the system’s capacity. For example, a hospital must have an adequate supply of beds for the purpose of meeting unanticipated patient demand, and a float pool of nurses when things get very busy. Once an airline seat, a hotel room, or an hour of a lawyer’s day is gone, there is no way to recapture the lost revenue. 5. Service management skills are paramount to a successful service encounter. Flight attendants, for example, must deal with many complex situations that require “service management” skills. Employees who interact with customers

OM 6 C1 IM require service management skills such as knowledge and technical expertise (operations), cross-selling other products and services (marketing), and good human interaction skills (human resources). Service management integrates marketing, human resources, and operations functions to plan, create, and deliver goods and services, and their associated service encounters. OM principles are useful in designing service encounters and supporting marketing objectives. 6. Service facilities typically need to be in close proximity to the customer. Airport location is critical to minimize total distance travelled by all customers. When customers must physically interact with a service facility—for example, post offices, hotels, and branch banks—they must be in a location convenient to customers. A manufacturing facility, on the other hand, can be located on the other side of the globe, as long as goods are delivered to customers in a timely fashion. In today’s Internet age many services are only a few mouse clicks away. 7. Patents do not protect services. Any airline could copy Southwest Airlines boarding process and patent law would not protect SW process. A patent on a physical good or software code can provide protection from competitors. The intangible nature of a service makes it more difficult to keep a competitor from copying a business concept, facility layout, or service encounter design. For example, restaurant chains are quick to copy new menu items or drive-through concepts. 2. Explain why a bank teller, nurse, or flight attendant must have service management skills. How do the required skills differ for someone working in a factory? What are the implications for hiring criteria and training? Service-providers need technical/operations skills plus human interaction and marketing skills (i.e., service management skills). A bank teller, for example, must be able to complete many types of financial transactions and operate the computer and associated software. The teller must also interact with the customer in a pleasant way and market other financial services (cross-sell, up sell, etc.). A factory worker can focus on technical/operations/production skills since they have no or little interaction with customers. The training for front-room service-providers is more interdisciplinary compared to backroom factory employees. 3. Why is process thinking important in operations management? Thinking of yourself as an “operations manager” for your education, how could process thinking improve your performance as a student? Process thinking is important since processes describe “how work gets done and performance objectives are achieved” in all functional areas such as finance and human resource management, and industries such as government, health care, forestry, manufacturing, and education. Regardless of function, once you are promoted, you must manage a PROCESS! Get promoted again and you have several process managers reporting to you, not to mention all types of labor, equipment, and information resources.

OM 6 C1 IM At this early point in the course students know only a little bit about primary, support, and general management processes so you may have to do a tutorial using the student’s example. However, students perform many processes, such as studying for an exam and managing multiple reading and homework assignments on a daily basis. Getting them to think of the process they use to accomplish such tasks helps them to understand the role of process thinking. 4. Do you think you will be working in manufacturing or services when you graduate? What do you think will be the role of manufacturing in the U.S. economy in the future? This question is designed to get students to explore job opportunities and industries in both goods-producing and service-providing industries. Use the Exhibit 1.11 of “where are the jobs in the USA?” to enhance this discussion. The location of your institution may have some bearing on the answers, as some schools might be located in a more manufacturing- or service-intensive locale than others. One topic that will come up is will there be jobs in the U.S. in manufacturing? Will all US manufacturing jobs be moved to other countries? Why? What new industries are developing? Are sustainability strategies going to create new industries and jobs? Business Week (Oct. 2009) has several issues that addressed the role of manufacturing in the US economy including the wisdom of outsourcing and off-shoring. Another issue is that the average U.S. college graduate will change industries and/or jobs about seven times during their careers. Thus, it is very important to be flexible and develop a good set of skills including OM!! If the student is promoted in future jobs they will be managing resources and processes with many OM challenges regardless of functional area. Chapter 1 provides several examples of non-OM majors needing OM skills in the workforce especially as they are promoted and are responsible for more and more processes and associated resources. OM is useful in all functional areas if you have to design and manage a process. 5. Select one of the OM challenges and investigate it in more detail. Be ready to present to the class in a less than 10-minute class presentation what you found. Students will focus on one of the following and hopefully go into more depth and understanding. •

Customers. Consumers demand an increasing variety of high-quality goods with new and improved features that are delivered faster than ever—along with outstanding service and support. Being first to market means more now than ever before, and OM plays a vital role.

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Technology. Technology continues to evolve at a rapid pace, Applications in design and manufacturing as well as the use of information technology in services have provided the ability to develop innovative products and more effectively manage and

OM 6 C1 IM control extremely complex operations. OM needs to continue to leverage and exploit technology advances such as 3D printing and nanotechnology. •

Workforce. Today’s workforce requires new skills, continual learning, more diversity, and better management. These tasks often fall on the shoulders of operations managers. Organizations will need to become more flexible with how and where their workforces operate in global value chains.

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Globalization. Globalization no longer means just an opportunity for organizations to enter new markets. We now live in an era of the “borderless marketplace.” Today, firms have to contend with a growing number of competitors and sources of lowercost labor. For example, labor costs are far cheaper outside the U.S. (where manufacturing labor averages about $40 per hour); in Asia, Mexico, and South America, labor costs range from $3 to $10 per hour. In addition, managing operations in countries with vastly different cultures can be problematic.

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Sustainability. Performance in global operations and supply chains use to mean a focus on cost, quality, and time. Today, sustainability is a fourth major performance area. Global sourcing managers, for example, must qualify suppliers on at least these four performance areas. A global supplier that is best at cost, quality, and delivery performance but uses child labor or pollutes community drinking water is not going to do business with the modern companies of today.

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Optimizing supply chains. Value chains now span across many continents. Companies today face many challenges in designing and optimizing their supply chains. These include determining where to best source raw materials, components, and finished goods. Sourcing abroad, of course, requires efficient transportation and scheduling, and also incurs risks related to intellectual property and supply chain disruptions from natural disasters and other factors. Coordinating this entire process for minimizing total costs is a continuing challenge. The objective of this type of question is for the student to describe what they know and you, the instructor, help put it into the OM framework or context. This question is also designed to help students internalize the concept of customer satisfaction and dissatisfaction, and potential operations management activities and decisions that can influence their experiences. For undergraduates, these experiences focus on what they know best such as restaurants, airlines, bookstores, automobile sales or repair, retail stores, and university processes. Graduate students may also include their work and business experiences, and personal experiences such as home mortgages, vacations, and child care. As the instructor focus on the role of OM and its processes, training requirements, product and service quality, and tie to Chapter 1 ideas.

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Problems and Activities 1. Describe a customer experience you have personally encountered where the good or service or both were unsatisfactory (e.g., defective product, errors, mistakes, poor service, service upsets, etc.). How might the organization have handled it better, and how could operations management have helped? The objective of this type of question is for the student to describe what they know and you, the instructor; help put it into an OM context or framework. This question is also designed to help students internalize the concept of customer satisfaction and dissatisfaction, and potential operations management activities and decisions that can influence their experiences. For undergraduates, these experiences focus on what they know best such as restaurants, airlines, bookstores, automobile sales or repair, retail stores, and university processes. Graduate students may also include their work and business experiences, and personal experiences such as home mortgages, vacations, and child care. As the instructor focus on the role of OM and its processes, training requirements, product and service quality, and tie to Chapter 1 ideas. 2. Interview a manager at a local company about the work he or she performs. Identify (a) the aspects of the job that relate to OM (like the OM activities in the box “What Do Operations Managers Do?”) and (b) example primary, support, and general management processes. Some of the key activities that operations managers perform include • • • • • • • • •

Forecasting: Predict the future demand for raw materials, finished goods, and services. Supply Chain Management: Manage the flow of materials, information, people, and money from suppliers to customers. Facility Layout and Design: Determine the best configuration of machines, storage, offices, and departments to provide the highest levels of efficiency and customer satisfaction. Technology Selection: Use technology to improve productivity and respond faster to customers. Quality Management: Ensure that goods, services, and processes will meet customer expectations and requirements. Purchasing: Coordinate the acquisition of materials, supplies, and services. Resource and Capacity Management: Ensure that the right amount of resources (labor, equipment, materials, and information) is available when they are needed. Process Design: Select the right equipment, information, and work methods to produce high quality goods and services efficiently. Job Design: Decide the best way to assign people to work tasks and job responsibilities.

OM 6 C1 IM • • •

Service Encounter Design: Determine the best types of interactions between service providers and customers, and how to recover from service upsets. Scheduling: Determine when resources such as employees and equipment should be assigned to work. Sustainability: Decide the best way to manage the risks associated with products and operations to preserve resources for future generations.

Try to help students identify primary, support, and general management processes in their example(s). The Human Resource Management functions, for example, are good situations to discuss support services. Primary processes, for example, are key manufacturing and engineering design activities. CFOs and CIOs, for example, are examples of general management processes that integrate and oversee things. 3. Evaluate how the activities described in the box “What Do Operations Managers Do?” can be applied to a student organization or fraternity to improve its effectiveness. See the answer to P&A question #2 except applied to a student organization. 2. Select an organization you are familiar with and draw and describe its value chain using one of the three value chain frameworks (i.e., the input-output, pre- and postservices or the hierarchical model) described in this chapter. Some of the more interesting ones are for services such as high schools, churches, relief agencies like the Red Cross, criminal investigations, police work, trash pickup and disposal, car dealerships, and so on. If time permits, allow a few students to show their diagrams and explain to the class. 5. Interview a working friend or family member as to how they use operations management principles in their job and write a short paper summarizing your findings (maximum two pages). Student responses range from family members that work in manufacturing and logistics to financial and health care organizations. A good place to begin is “What Do OM Managers Do?” plus many of the other concepts in Chapter 1 (See the answers to P&A Question #1 to #3). For example, a family member may work in global sourcing, backroom credit card processing, or as an airline attendant. Help students understand the OM content of these jobs including service management skills. 6. Choose one of the following services and explain, using specific examples, how each of the ways that services differ from manufactured goods apply. a. a family practice medical office b. a fire department c. a restaurant

OM 6 C1 IM d. an automobile repair shop Generic differences between goods and services include: • • • • • • •

Goods are tangible while services are intangible. Customers participate in many service processes, activities, and transactions. The demand for services is more difficult to predict than the demand for goods. Services cannot be stored as physical inventory. Service management skills are paramount to a successful service encounter. Service facilities typically need to be in close proximity to the customer. Patents do not protect services.

Services especially in the “front office” (at points of contact with the customer) require different skills than producing physical goods, and therefore, it is difficult for firms to do both well. Yes, for example, physical inventory can compensate for poor demand forecast accuracy while service capacity is a surrogate for inventory. Therefore, services must be better at forecasting and demand/capacity planning than goods-producing firms or they will miss a sale. Another good contrast is pure production (backroom) skills versus service management (front room) skills, and how they differ and which is more difficult for employees to do successfully. All of these differences, issues, and more can be discussed for each of the four example service organizations. 7. Explain how the customer benefit package is enhanced from the customer's viewpoint by adding digital content to a physical good such as an automobile, cell phone, or appliance? Exactly how is value increased? A search of “Internet of Things” (IoT) reveals over 270 million hits so students have plenty of information on this emerging and innovative topic. Wikipedia begins describing the IoT as follows: The Internet of Things (IoT) is the network of physical objects—devices, vehicles, buildings and other items—embedded with electronics, software, sensors, and network connectivity that enables these objects to collect and exchange data.[1] The IoT allows objects to be sensed and controlled remotely across existing network infrastructure,[2] creating opportunities for more direct integration of the physical world into computer-based systems, and resulting in improved efficiency, accuracy and economic benefit;[3][4][5][6][7][8] when IoT is augmented with sensors and actuators, the technology becomes an instance of the more general class of cyber-physical systems, which also encompasses technologies such as smart grids, smart homes, intelligent transportation and smart cities. Each thing is uniquely identifiable through its embedded computing system but is able to interoperate within the existing Internet infrastructure. Experts estimate that the IoT will consist of almost 50 billion objects by 2020.[9]

OM 6 C1 IM General Electric, IBM, Siemens, Toyota, Dell, and a host of other equipment manufacturers are all focused on this next generation of connected devices. 8. Draw the customer benefit package (CBP) for one of the items in the following list and explain how your CBP provides value to the customer. Make a list of a few example processes that you think would be necessary to create and deliver “each good or service” in the CBP you selected and briefly describe issues that must be considered in designing these processes. a trip to Disney World • a new personal computer • a credit card • a fast-food restaurant • a wireless mobile telephone • a one-night stay in a hotel • The objectives of this exercise are for the student to define a CBP (a bundle of goods and services a customer buys) and its features (like in Exhibit 1.2 and then recognize and define the process that creates and delivers each good or service to customers. How are these goods and services created and delivered? For example, if a student defines a peripheral service as "friendly service-providers with service management skills" then ask the student -- What processes create this type of capabilities and skills? Answer: Hiring, training, recognition, and reward processes. Human resource managers need to understand and know how to improve their processes using OM too! Get the students participating – use their examples to illustrate key OM concepts. Help them “see OM” in their examples. 9. One of our students, who had worked for Taco Bell, related a story of how his particular store developed a “60-second, 10-pack club” as an improvement initiative and training tool. The goal was to make a 10-pack of tacos in a minute or less, each made and wrapped correctly, and the total within one ounce of the correct weight. Employees received recognition and free meals for a day. Employees strove to become a part of this club, and more importantly, service times dropped dramatically. Techniques similar to those used to improve the taco-making process were used to improve other products. Explain how this anecdote relates to process thinking. What would the employees have to do to become a part of the club? At a business like Taco Bell, consistency in food quality and service are vital to customer satisfaction. By focusing on a goal such as this, employees were forced to think in terms of the process in order to shave off time and meet the weight requirement. This led to not only a better understanding of the job but also to improved job and process designs. Employees would have to learn the job tasks and their sequence and learn how to do them efficiently. Making it a competitive activity with recognition and tangible rewards not only gave employees an incentive to do well, but also made their work more enjoyable. 10. Geoff Colvin of Fortune magazine discussed the concept of a ""friction-free economy" in which labor, information, and money move cheaply and quickly through

OM 6 C1 IM the firm's global supply chains (ENDNOTE: Geoff Colvin, "Every Aspect of Your Business is About to Change," Fortune.com, November 1, 2015, pp. 103-112). (The term was actually coined by Bill Gates in 1997 and is now becoming a reality). Research this concept, and write a two-page paper that describes the impacts and challenges that a friction-free economy would have on operations management. A search of the web reveals over 1.6 million hits on this topic. First, we provide a few of many definitions of a friction less economy as follows: • • •

An extremely efficient market in which buyers and sellers can find each other easily, can interact directly, and can perform transactions with only minimal overhead costs. In economic theory a frictionless market is a financial market without transaction costs.[1] Friction is a type of market incompleteness. A "friction-free market" refers to a market in which there is little differentiation between competing products, so that the customer has exceptional choice.

In his book The Road Ahead, Bill Gates made a statement that I found so apt that it appears in my standard marketing presentation on electronic commerce: "[The Internet] will carry which market information will be plentiful and transaction costs low." That phrase sums up the essence of T.G. Lewis's breezy, slapdash book, The Friction-Free Economy: Marketing Strategies for a Wired World. It is also echoed in the book's title. That should give a clue about one of the book's problems: Many of its ideas are borrowed. Of those that aren't, some are clever and illuminating, while others are half-baked. Since information (bits) is basically an unlimited resource, supply can always exceed demand, and challenge traditional economic theory such as Adam Smith. With more distributed "knowledge" in the marketplace, markets for goods could clear faster and inventory buildups could be avoided, thus smoothing out the "boom-and-bust" cycles that are typical of market economies. Also, consider publishing paper books and how that might change including OM textbooks. Students will discuss the impacts of a friction less economy on labour markets, job displacement and shift, consumer choice, how to make a profit, performance metrics, lower (higher) wages, no middlemen in the value (supply) chain, and suppliercustomer relationships. Netflix is a good example that changed the value chains it participates in. Testa is another good example of immediate software updates to its vehicle software. Have FUN with your student’s answers! One story is as follows: Say you want to buy a new refrigerator. Instead of driving to nearby stores and looking at the various models and prices or scouring newspaper ads for sales, you'll just whip up a special little software program (web crawler) and send it off to scour the global Net for refrigerators that match your needs, dimensions, warranty, color, and price range. When it finds sources that match your requirements,

OM 6 C1 IM it'll let you know where they are. You might wind up buying a refrigerator directly from a manufacturer in northwest China. 11. Search the Web for either (a) an organization that has defined its sustainability strategy and policy, and give examples of how they are implementing it, or (b) an organization that has received negative or controversial media coverage for its ethical or sustainability practices. Write a paper describing what you found (maximum of two typed pages). Almost all organizations are now on the sustainability bandwagon so students will find a rich discussion of sustainability focused on everything ranging from setting carbon standards to government policy to individual organization strategy. The following firms have extensive sustainability strategies: McDonalds, Federal Express, UPS, Hilton Hotels, SW Airlines, General Electric, and so on. This is an opportunity to sell OM via sustainability to students so make the most of this topic. On the flip side, there have been many reports that deal with issues such as unsafe clothing factories (e.g. the case of Nike) or manufacturing facilities (particularly in foreign countries, such as Foxconn and Apple). Students are most likely aware of these issues, but many are not. This brings up questions like a company’s commitment and ability to monitor what goes on in its supplier factories. For example, did companies address the problems proactively? 12. Describe new ways for how your college or university can apply the sustainability practices in Exhibit 1.12. Summarize your results in a short paper. Students must take the topics below and apply them to their college or university. Exhibit 1.12 Examples of Sustainability Practices Environmental Sustainability • Waste management: Reduce waste and manage recycling efforts • Energy optimization: Reduce consumption during peak energy demand times • Transportation optimization: Design efficient vehicles and routes to save fuel • Technology upgrades: Improvements to save energy and clean and reuse water in manufacturing processes • Air quality: Reduce greenhouse gas emissions • Sustainable product design: Design goods whose parts can be recycled or safely disposed of Social Sustainability • Product safety: Ensure consumer safety in using goods and services

OM 6 C1 IM • Workforce health and safety: Ensure a healthy and safe work environment • Ethics and governance: Ensure compliance with legal and regulatory requirements and transparency in management decisions • Community: Improve the quality of life through industrycommunity partnerships Economic Sustainability • Performance excellence: Build a high-performing organization with a capable leadership and workforce • Financial management: Make sound financial plans to ensure longterm organizational survival • Resource management: Acquire and manage all resources effectively and efficiently • Emergency preparedness: Have plans in place for business, environmental, and social emergencies. Operations management plays an important role in all three of these sustainability perspectives. 13. Discuss how the three perspectives of sustainability influence (or perhaps, should influence) your personal purchasing decisions. For example, do you consider whether apparel is made in safe and ethical factories? Should companies exploit their sustainability efforts for marketing purposes? Why or why not? Environmental responsibility is often conveyed in packaging (for example, “made from 100% recycled materials…”). However, social responsibility is not that easy to identify. As one news report stated, “It’s nearly impossible to make sure the clothes you buy come from factories with safe working conditions.” Many students probably are not sensitive or even aware of such issues. Yet, they have serious implications for OM with respect to purchasing and managing supplier relationships. The question is whether consumers actually change their behavior. Their attitudes will eventually influence how they act in their future business careers. 14. Research and write a short paper describing how business analytics have been applied to problems and decisions in operations management. Use the information in the box “What do Operations Managers Do?” to help your search process. There are many examples for students to write a paper on such as • sports analytics (Moneyball, etc.) • credit card approval • yield management decisions • hedging and price-break and discount count purchasing and pricing models • waiting line (queue) analysis and models • Clinical trials for medicines

OM 6 C1 IM • • •

IBMs “Smarter Planet” examples UPS and Fed Ex vehicle routing and scheduling models (driver training too) Sourcing decisions (Procter & Gamble, Nike, Victoria Secrets)

15. Search recent articles in your local newspaper and business magazines such as Fortune, Business Week, Fast Company, and so on and identify OM concepts and issues that are discussed. How do these fit into the classification in the box “What Do Operations Managers Do?” in this chapter? Please see C1 Discussion Question #2 for generic OM topics. The objective of this question is simply to show how OM ties to company success and begin to identify key OM topics and areas of study. Remember the students are in Chapter 1; some have no idea what OM is; others think it’s all about manufacturing; and others think it has nothing to do with other functional areas or their career; so its time to sell OM! OM applies to ALL functional areas and types of organizations!

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Case Teaching Notes: Zappos Case Study The objective of this case is to introduce students to a web-based firm where the motto is “Deliver WOW through service” and the student can begin to understand issues such as: (1) How goods and services are bundled together (i.e., the customer benefit package) to create value. (2) What primary, support and management processes might be needed to create and deliver each good or service. (3) What might be the focus of OM topics as shown in Exhibit 1.1 to the application of Zappos business such as technology, physical goods and service quality, inventory and warehousing, process design, and service encounter design. You might also want to put up the Zappos web page during the classroom discussion and browse through it pointing out OM related issues and topics. The case is an introductory case so the discussion should focus on what the student might know from reading Chapter 1 only. Therefore, keep things simple, focus on (a) goods and services and their differences, (b) three types of processes, (c) OM activities like forecasting, and scheduling, and (d) Zappo’s requires BOTH goods and services (a CBP) to be a viable business (and the processes to create and deliver all). Make use of Exhibits 1.1 and the box “What Do Operations Managers Do?” Students in your class will almost always have ordered something from Zappos so let them tell their story to begin class. Also, the quote that follows from the case highlights the importance of the service center, service encounters, and customer service. Amazon has recently acquired Zappos. Over 95 percent of Zappo’s transactions take place over the Web, so each actual customer phone call is a special opportunity. “They may only call once in their life, but that is our chance to wow them,” Hsieh says. Sometime during the class point out that the CEO, Jeffrey Bezos, wants to “establish an emotional connection” will all Zappos customers. Case Questions for Discussion 1. Draw and describe the customer benefit package that Zappos provides. Goods? Services? Digital Content? Who manufactures the physical goods? Who is responsible for the quality and delivery of the physical goods? Students may draw something like below but expect them to not be clear on what is a good versus a service so if you grade this assignment be open-minded. Go over the definitions of goods and services in Section 3 of Chapter 1 as you discuss the case. Remember information of any type is a service so a call center interacts with customers and exchanges information, the Web site and pages itself are informationintensive and therefore are best defined as a service, not a physical good, etc. Some

OM 6 C1 IM students will draw this as a “dual CBP” with goods and services at the center, and this is okay. The lesson is Zappo’s sells a “bundle of goods and services via a virtual platform.” Also, read the customer benefit section carefully as the CBP fills customer wants and needs so no wants and needs in the CBP; only what management decides to use to fulfill those needs. Example: Want and need in a hotel-safety; Management decides to fulfill those needs by – parking lot lights, keyless entry, deadbolt locks, in room safety lock vault, fire alarm, sprinkler system, and so on. Remind the student that Zappos is an “on-line retailer” with a “virtual store.” It is simply a virtual platform that produces zero physical goods!

Peripheral Goods Peripheral Service Packaging Free shipping in both directions Primary Goods Shoes, handbags, sunglasses, etc. Peripheral Service Information Services & Web Design

Peripheral Service Call Center

More on Zappos can be found on their web site such as http://about.zappos.com/zappos-story/in-the-beginning-let-there-be-shoes. Some students may want to draw a “dual CBP with primary goods and primary services” like the McDonald’s CBP drawn in Chapter 3. This is fine and brings goods and services more in balance. The key for OM is what processes and supply chains create and deliver each good and/or service? Note: One reason we do the CBP framework is to identify key primary and peripheral goods and services (i.e., the bundle of goods and services customers buy) and then make the point that each and every one of these goods or services requires a process to create and deliver it to customers. And OM skills are needed to design and manage processes.

OM 6 C1 IM Who manufactures the physical goods? Contract manufacturers mostly in Asia! Who is responsible for the quality and delivery of the physical goods? Zappo Global Sourcing Agents (GSA) who have accounting, negotiation, quality management, logistic, human and cultural, and operations knowledge and skills. Remind your students that the (GSA) is often on the other side of the world negotiating contracts, sometimes alone! So, they are highly skilled people! 2. Identify and describe the primary, support, and general management processes needed to execute a customer order at Zappos. Primary processes

Support Processes

Call center, order entry, fulfillment, picking, inbound and outbound shipping. inventory mgt., global sourcing and purchasing, billing, returns

Training, hire, medical, salary, child care

General Mgt. Process VPs of OPNS, IT, Mktg, HRM, Finance,

Also, you will have to help them with issues such as what processes create the OM capability to provide free shipping in both directions. For example, primary processes might be order entry, warehousing and order picking, outbound shipping, purchasing, and return shipping and receiving. Support processes might include salary payments, dental insurance, job training, and day care services for employees provided by other functional areas. General management processes might be the VP of Human Resource management who oversees all HRM functions and processes. Other integrative management processes include VP Customer Service and Call Centers, VP of Shipping, VP of Marketing, Warehouse Manager, VP of Information Systems, etc. These three headings on the board help students see that processes are creating value for customers. Notice that at Zappo’s goods are outsourced and offshored; services are mostly done in-house! Ask the student, “Who ensures the physical goods are of high quality?” This question leads you into a discussion of global quality control, purchasing, inspections, sourcing, design and manufacturing engineers, etc. Also, ask, “What good is Wow Service if the physical goods are of inferior quality?” These questions create a lively class discussion! 3. Describe how any three of the OM activities in the box “What do Operations Managers Do?” impacts the management of both the goods that Zappos sells and the services that it provides.

OM 6 C1 IM Students might build a table somewhat as below but at this early point in the course it will not be too detail. Below are some ideas for the table. OM Activity Forecasting Forecasting difficulty Facility Location Facility Location Facility Layout Facility Layout corporate Technology

Technology Product Quality Service Quality Inventory/Capacity Inventory/Capacity Process Design

Process Design claims Scheduling

Scheduling

Good or Service Goods – demand for a multitude of physical goods, many of which are fashion items Services – call center volume by hour of the day (illustrates customer participation and predicting service demand – see Section 3) Goods – warehouses Services – accounting, finance, etc. central functions, call center sites Goods – inbound and outbound flow and layout of warehouses Services – call center layouts and cubicles, offices, etc. Goods – factory technology for a wide variety of physical goods to keep costs low and quality high, etc. Service – web design, search technology, call center technology, etc. Goods -- Shoes – outsourced but must be of high quality Service -- Call center processes, service encounters, etc. Goods – Genghis system to manage warehouses, inventory, etc. Service – Services can’t be stored as physical inventory; call center staffing levels (see Section 3) Goods – outsourced manufacturing processes, physical goods quality audits, warehousing physical goods, etc. Services – inbound and outbound free shipping, processing, server capacity, etc. Goods – global outsourced shipments to Zappos central warehouses; coordinate factory, shipping, and advertising schedules, etc. Services – call center staff, server downtime and maintenance, etc.

You can also query the students on whether Zappo’s has initiatives on sustainability such as reducing their carbon footprint, green supply chains, remanufacturing, global sourcing, and so on. What is their sustainability responsibility if they outsource? Student may go into detail on one or more issues such as Service Encounter Design: Service encounter design and management are defined Chapter 1 so go over these

OM 6 C1 IM definitions in class and apply to Zappos. Since service is one of the key premises of the company, service encounters with the web site (human customer-to-software) and with Zappo employees via the call center (human customer –to-human serviceprovider with superior service management skills) are the key to building and maintaining customer relationships (also could fit in a brief discussion of sustainability here). Remember Zappos is trying to “establish an emotional connection with all of its customers.” You can also use the service complaint and recovery example in the case to illustrate service encounter, service management skills, and employee empowerment capabilities, if class time permits. 4. Explain how this case illustrates each of the seven major differences between good-s producing and service providing businesses. Differences Between Goods and Services 1. Goods are tangible while services are intangible. (Does Zappo’s manufacture shoes? No. The CEO says “Deliver WOW through service.” And “They may only call once in their life, but that is our chance to wow them.” Zappo’s has a dual CBP with goods and services of roughly equal importance. That is, what does the customer buy? A bundle of goods and services.) 2. Customers participate in many service processes, activities, and transactions. (order entry, returns, calls to the call center—all create more uncertainty in delivery process). 3. The demand for services is more difficult to predict than the demand for goods. (customers can order via the web or call in at 3 am in the morning; time zones, convenience creates value, etc.) 4. Services cannot be stored as physical inventory (web and server capacity, call center staff and equipment capacity; capacity is the substitute for physical inventory in a service business). 5. Service management skills are paramount to a successful service encounter (face-to-face call center staff (humans) and the customer (humans); go over the three dimensions of service management; customer to Web page and software is also a set of service encounters but human to 100% technology interface so in some ways service management skills exists in the technology). 6. Service facilities typically need to be in close proximity to the customer (with Zappo’s virtual store the world is its market; no bricks and mortar here except at warehouses that have to supply the stores). 7. Patents do not protect services (no protection from a competitor setting up a similar virtual store for global markets; can also copy the return process system, order picking system, etc).

Teaching Strategy One suggestion is to begin class by asking the class “Have any of you bought something on-line from Zappos?” If so, let them tell their story pointing out key OM

OM 6 C1 IM issues/capabilities. Then go over each question letting the student answer the question with your oversight. This case takes 20 to 40 minutes to teach depending on what you cover and if you show them the firm’s Web page. Often we use only the first two case questions for a full 30 minute classroom discussion. You might also note that the CEO’s vision includes • • •

One, day 30% of all retail transactions in the US will be on-line. People will buy from the company with the best service and best election. Zappos.com will be that company.

Zappos initiated a trend among on-line retailers with FREE inbound and return shipments. L.L. Bean, for example, announced in 2011 that it would provide free shipping both ways. Why? Three-quarters of customers say that they will abandon their purchase when they can’t get free shipping (according to market research)! You can end by saying something like (i.e., lessons from the case):

(a) OM provides the core capabilities for this on-line retailer that provides both goods and services. For example, great customer service is only as good as supply chain and process capabilities! (b) The call center and web site are the gateways to Zappo’s business. If they are interrupted, Zappos is cut off from its markets and customers. (c) Zappos is a virtual platform that manufacturers no physical goods. (d) Zappos illustrates the importance of global sourcing agents in today’s markets. (e) Can you identify primary, support, and general management processes in any firm? To-date, Zappos is a successful on-line retailer, and is now a part of Amazon.com. The End TN C1!

OM6 C2 IM OM6 Chapter 2: Measuring Performance in Operations and Value Chains Discussion Questions 1.

What types of performance measurements might be used to evaluate a fraternity or student organization? Metrics might include attendance at key events, total membership each academic term, gains and losses in membership, fundraising amounts, operations costs, number of professional or social events held each term, grade point average of members, number of intramural sporting events participated in, number of guest speakers, student (member) satisfaction, projects completed on time and on budget, and so on.

Select an organization you are familiar with or have an interest in and write a short two-page paper describing key performance metrics in that industry and firm using the format of Exhibit 2.1. Students will develop some interesting tables for different industries and firms of interest to them. A few questions you might pose during discussion of this question are as follows: • • • • •

• • • • •

What criteria are missing? Explain Does the measurement support our mission? Will the measurement be used to manage change? Is it important to our customers? Is it effective in measuring performance? (Is it actionable?) Actionable measures provide the basis for decisions at the level at which they are applied—the value chain, organization, process, department, workstation, job, and service encounter. They should be meaningful to the user, timely, and reflect how the organization generates value to customers.) Is it effective in forecasting results? Is it easy to understand/simple? Is the data easy/cost-efficient to collect? (How would the data be collected? Who would do it? How long would it take? What would the cost be?) Does the measurement have validity, integrity, and timeliness? Does the measurement have an owner? (Who will ensure that the data do get collected, analyzed, and disseminated as needed?)

Good performance measures are actionable. Actionable measures provide the basis for decisions at the level at which they are applied—the value chain, organization, process, department, workstation, job, and service encounter. They should be meaningful to the user, timely, and reflect how the organization generates value to customers.

OM6 C2 IM 3.

Discuss some analytical or graphical approaches that organizations can use for analyzing performance data based on your experience and previous coursework. These methods might include simple charts that you would find in Microsoft Excel, such as bar charts, scatter plots, pie charts, and line charts for time series data. Other approaches would be basic statistical techniques such as frequency distributions and histograms, basic statistical measures such as means and standard deviations, statistical process control charts, Pareto (ABC) analysis, regression and correlation analysis, and so on.

Under which perspective of the balanced scorecard would you classify each of the following measurements? a. b. c. d. e. f. g. h. i. j.

On-time delivery to customers (customer perspective) Time to develop the next generation of products (innovation and learning perspective) Manufacturing yield (internal perspective) Engineering efficiency (internal perspective) Quarterly sales growth (customer perspective if units; financial perspective if dollars) Percent of products that equal 70 percent of sales (innovation and learning perspective) Cash flow (financial perspective) Number of customer partnerships (customer, perspective) Increase in market share (customer perspective) Unit cost of products (financial perspective)

Arguments can be made for other perspectives. Some measures may not clearly fall into a particular category; however, what is more important is that the organization takes a broad view of the most important measures across the enterprise, rather than just focusing on financial results. 5.

When the value of a loyal customer (VLC) market segment is high, should these customers be given premium goods and services for premium prices? If the VLC is low, should they be given less service? Explain. This question can trigger significant differences in student opinions. For example, should banking customers with average bank deposits of over $100,000 have to stand in the same teller line as a bank customer with average bank deposits of $1,000? That is, should the bank set up a premium service channel for premium customers? In the early 1990s when a New York bank set up a separate bank teller window (and line) for customers with bank deposits over $100,000, the outcry from other bank customers resulted in the bank closing the premium teller window for premium customers three days after it opened. Yet, hotels have VIP and loyal customer suites and floors, airlines give premium customers first choice at airline seats and flights plus VIP lounges and first class

OM6 C2 IM services, some automobile dealerships give free loaner cars to their top customers while not offering these extra services to less valuable customers, and so on. The reality is that when a small percentage of customers (say 20%) account for a large percentage of total revenue (say 65%) it is profitable to segment markets based on the value of a loyal customer or customers, and provide premium service for A customers. Problems and Activities (Note: an asterisk denotes problems for which an Excel spreadsheet template on the CourseMate Web site may be used.) 1.

Interview managers at a local company to identify the key business measures (financial, market, supplier, employee, process, information, innovation, etc.) for that company. What quality indicators does that company measure? What cause and effect (interlinking) performance relationships would be of interest to the organization? It is always interesting to see what organizations really measure. In many cases, don’t be surprised to see simply a heavy emphasis on financial results without a “balanced scorecard” as such. Quality indicators are often the traditional ones (defects, yield). Many smaller companies don’t measure the cost of quality or customer satisfaction. Does the firm measure time, product and service quality, or what? Highlight OM metrics and issues. This question can be used to generate discussion on what should be measured and why (a good lead in to ideas of strategy in the next chapter). For small firms all performance measurement is sometimes done by observation of the owner(s). So make sure the size of the firm is identified upfront.

Each day, a FedEx competitor processes approximately 70,000 shipments. Suppose that they use the same Service Quality Index as FedEx and identified the following numbers of errors during a 5-day week (see the “FedEx: Measuring Service Performance” box). These values are hypothetical and do not reflect any real company’s actual performance. Complaints reopened: 125 Damaged packages: 18 International: 102 Invoice adjustments: 282 Late pickup stops: 209 Lost packages: 2 Missed proof of delivery: 26 Right date late: 751 Traces: 115 Wrong day late: 15

OM6 C2 IM Compute the Service Quality Indicator by finding the weighted sum of errors as a percentage of total shipments. How might such an index be used in other organizations such as a hotel or automobile service facility? OM6 Chapter 2 Problem #2 Fed Ex Problem Number of Shipments/Day Total Number of Shipments Over 5 Days

70,000 350,000

Complaints Reopen Damaged Pkgs International Invoice Adjustments Late Pickup Stops Lost Packages Missed Proof of Delivery Right Date Late Traces Wrong Day Late

Percent of

Number of

Weight 3 10 1 1 3 10 1 1 3 5

Total Weight 0.079 0.263 0.026 0.026 0.079 0.263 0.026 0.026 0.079 0.132

Errors 125 18 102 282 209 2 26 751 115 15

Weighted Average Errors 9.87 4.74 2.68 7.42 16.50 0.53 0.68 19.76 9.08 1.97

1645

73.24

0.000209248*

0.020924812+

Total

Wt Average Percent of Total Shipments Service Quality Indicator (SQI)

99.979^

*73.24/350,000 = 0.000209248 +0.000209248*100 = 0.020924812 ^100-0.020924812 = 99.979 Over this 5-day period FE delivery performance was almost perfect on a percent basis, yet 1,645 customers experienced some type of service upset. You might point out that the U.S. Postal Service has good performance too (not as good as above) and that the huge volumes hide the number of impacts on customers. 3.

Research and write a short paper on how some organization applies the five dimensions of service quality. SERVQUAL was originally measured on 10 aspects of service quality: reliability, responsiveness, competence, access, courtesy, communication, credibility, security, understanding the customer and tangibles (background -- using factor analysis). It measures the gap between customer expectations and experience. By the early nineties the authors had refined (combined) the SERVQUAL model to the useful acronym RATER (these five dimensions are in the chapter): ▪

Reliability 4

OM6 C2 IM ▪ ▪ ▪ ▪

Assurance Tangibles Empathy, and Responsiveness

If students search SEVQUAL and/or the GAP model (in OM4 C15) they will find many applications. The SERVQUAL has been tested in banking, credit cards, repair and maintenance, and long distance telephone service. Hospitals, for example, (see web reference below) have also used these five measures of service quality to measure their performance. http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1069855/pdf/hsresearch00075-0070.pdf 4.

A major airline is attempting to evaluate the effect of recent changes it has made in scheduling flights between New York City and Los Angeles. Data available are shown below. Number of Number of Flights Passengers Month prior to schedule change 16 8,795 Month after schedule change 27 15,653 Using passengers per flight as a productivity indicator, comment on the apparent effect of the schedule change. Computing passengers per flight, we obtain (after rounding) Month prior to schedule change: 8795/16 = 550 Month after schedule change: 15,563/27 = 576 Productivity increased by 4.7 percent (26/550) after the schedule change. This could be due to more convenient flight times, better schedules or some other intervening variable. Here the productivity metric is output per flight. Other possible productivity indicators for airlines might include flights/labor dollar, passengers/labor dollar, total passenger revenue/total cost of all flights, total number of passengers/total cost of all flights.

Revenue or costs per passenger mile are two key performance measures in the airline industry. Research their use in this industry and prepare a one-page paper summarizing how they are used and why they are so important. These two metrics drive profitability in the airline industry. Few industries have so few and simple summary metrics yet they are very powerful. Southwest Airlines, for example, normally has the widest gap between these two metrics, and therefore, generates profits, while older airlines such as United often have costs per passenger mile equal to or higher than revenue per passenger mile. Your students will find many interesting ways to use these productivity metrics for this industry. Your

OM6 C2 IM students will also discover energy and labor costs are huge components of total airline costs. 6.

A hamburger factory produces 60,000 hamburgers each week. The equipment used costs $10,000 and will remain productive for 4 years. The labor cost per year is $13,500. a.

What is the productivity measure of “units of output per dollar of input” averaged over the four-year period? Productivity = total units produced divided by the total labor cost plus total equipment cost = 60,000(52)(4)/[13,500(4)+10,000] = 195 hamburgers/dollar

We have the option of $13,000 equipment, with an operating life of 5 years. It would reduce labor costs to $11,000 per year. Should we consider purchasing this equipment (using productivity arguments alone)? For the expensive machine, productivity = 60,000(52)(5)/[11,000(5) + 13,000] = 229.4 hamburgers/dollar input. Because the productivity of the expensive machine is higher, it would be a good investment based on this single criterion.

A fast-food restaurant has a drive-through window and during peak lunch times can handle a maximum of 50 cars per hour with one person taking orders, assembling them, and acting as cashier. The average sale per order is $9.00. A proposal has been made to add two workers and divide the tasks among the three. One will take orders, the second will assemble them, and the third will act as cashier. With this system it is estimated that 70 cars per hour can be serviced. Use productivity arguments to recommend whether or not to change the current system. Productivity = revenue/labor dollar For system 1, productivity = 50($9.00)/x = 450/x For system 2, productivity = 70($9.00)/3x = 210/x where x is the prevailing minimum wage. With the additional two workers, productivity drops by more than on-half (i.e., too much labor for system 2). Thus, it is not advisable to change the current system (i.e., keep system 1). System #2 simply uses too much labor.

A key hospital outcome measure of clinical performance is length of stay (LOS); that is, the number of days a patient is hospitalized. For patients at one hospital with acute myocardial infarction (heart attack), the length of stay over the past four years has consistently decreased. The hospital also has data for various treatment options such as the percentage of patients who received aspirin upon arrival and cardiac

OM6 C2 IM medication for Left Ventricular Systolic Dysfunction (LVSD). The data are shown below: Year 2007 2008 2009 2010

Average LOS Aspirin on arrival 4.35 days 95% 4.33 days 98% 4.12 days 99% 4.15 days 100%

LVSD medication 89% 93% 96% 98%

Illustrate the interlinking relationships by constructing scatter using Excel showing the LOS as a function of the other variables. What do these models tell you? The charts below show that as the percentage of aspirin on arrival and LVSD medications increase, the average LOS decreases, suggesting that these interventions reduce hospitalization which is good. Instructors might wish to illustrate how to add a trendline to a scatter chart (right click the data series and choose Add Trendline). Scatterplot of LOS vs Aspirin 4.40 4.35

LOS

4.30 4.25 4.20 4.15 4.10 95

98 Aspirin

100

OM6 C2 IM

Scatterplot of LOS vs LVSD 4.40 4.35

LOS

4.30 4.25 4.20 4.15 4.10 90

94 LVSD

Descriptive Statistics: LOS, Aspirin, LVSD Variable LOS Aspirin LVSD

Mean 4.2375 98.00 94.00

SE Mean 0.0596 1.08 1.96

StDev 0.1193 2.16 3.92

Minimum 4.1200 95.00 89.00

Median 4.2400 98.50 94.50

Maximum 4.3500 100.00 98.00

Correlations: LOS, Aspirin, LVSD LOS Aspirin -0.815 0.185 LVSD -0.885 0.985 0.115 0.015 Cell Contents: Pearson correlation P-Value Aspirin

Customers call a call center to make room reservations for a small chain of 42 motels located throughout the southwestern part of the United States. Business analytics is used to determine how and if the following performance metrics are related: time by quarter, average time on hold (seconds) before a customer reaches a company customer service representative, percent of time the customer inquiry is solved the first time (called first pass quality) and customer satisfaction with the overall call center experience. Average Percent Solved Overall Customer Quarter Hold Time First Time Satisfaction Percent Q1 22 seconds 89% 96%

OM6 C2 IM Q2 Q3 Q5 Q6 Q7 Q8

34 seconds 44 seconds 67 seconds 38 seconds 70 seconds 86 seconds

80% 78% 85% 87% 76% 67%

92% 82% 84% 90% 80% 74%

Develop a graphical interlinking model by constructing scatter charts showing the relationships between each pair of variables. What do results tell you? The charts below suggest that as the average hold time increases, both the percent solved the first time and customer satisfaction decreases (suggesting that service reps are probably rushing due to high call volumes). Instructors might wish to illustrate how to add a trendline to a scatter chart (right click the data series and choose Add Trendline).

% 1st Time vs Hold Time 90 88

% 1st Time

84 82

% 1st Time

Linear (% 1st Time)

78 76 74 0

40 Hold Time

Below are basic statistics and variable correlations in case you need them during a class discussion. Descriptive Statistics: Hold Time, % 1st Time, Cust Sat % Variable Hold Time % 1st Time Cust Sat %

Mean 51.57 80.29 85.43

SE Mean 8.71 2.86 2.89

StDev 23.05 7.57 7.63

Minimum 22.00 67.00 74.00

Median 44.00 80.00 84.00

Correlations: Hold Time, % 1st Time, Cust Sat % Hold Time % 1st Time -0.755 0.050 Cust Sat % -0.928 0.857 0.003 0.014 Cell Contents: Pearson correlation P-Value % 1st Time

Maximum 86.00 89.00 96.00

OM6 C2 IM

Cust Sat % vs Hold Time Customer Satisfaction %

120 100 80 60

Cust Sat %

Linear (Cust Sat %)

20 0 0

50 Hold Time

100

There also appears to be a positive relationship between Percent Solved the First Time and Customer Satisfaction as shown below.

% 1st Time vs Customer Satisfaction % 100

% 1st time

60 % 1st Time

Linear (% 1st Time)

20 0 0

50 100 HCustomer satisfaction %

150

10.* What is the average value of a loyal customer (VLC) in a target market segment if the average purchase price is $75 per visit, the frequency of repurchase is six times per year, the contribution margin is 10 percent, and the average customer defection rate is 25 percent? VLC = P*CM*RF*BLC, where P = the revenue per unit, CM = contribution margin to profit and overhead expressed as a fraction (i.e., 0.45, 0.5, and so on), RF = repurchase frequency = 6 times/year, BLC = buyer’s life cycle, computed as 1/defection rate, expressed as a fraction (1/0.25 = 4 years)

OM6 C2 IM

VLC = P*CM*RF*BLC = ($75)(.10)(6)(4) = $180 We may also use the spreadsheet template VLC:

11.* Using the base case data in question 10, analyze how the value of a loyal customer (VLC) will change if the average customer defection rate varies between 15 and 40 percent (in increments of 5 percent) and the frequency of repurchase varies between 3 and 9 times per year (in increments of 1 year). Sketch graphs (or use Excel charts) to illustrate the impact of these assumptions on the VLC.

12.* What is the average defection rate for grocery store shoppers in a local area of a large city if they spend $45 per visit, shop 52 weeks per year, the grocery store has a

OM6 C2 IM 4 percent gross margin, and the value of a loyal customer is estimated at $3,500 per year? VLC = P*CM*RF*BLC = ($45)(.04)(52)(1/DR) $3,500 = $93.6/DR $3,500 DR = $93.6 DR = 0.0267

(The average customer defection rate is 2.7%.)

The VLC spreadsheet template may also be used either by experimentation or using Excel’s Goal Seek tool: Copyright © 2016 Value of a Loyal Customer Cengage Learning Not for commercial Enter data only in yellow cells. use. Revenue per unit Percent contribution margin to profit and overhead Repurchase frequency (purchases/year) Defection rate

$45.00 4% 52 0.02674

Buyer's life cycle VLC

37.40 $3,500.37

13. Research and write a short paper on how sports analytics is used by some professional team. A recent Google search on “sports analytics” results in 57,700,000 hits including conferences, data hubs, methods, blogs, jobs, video, and consulting firms. Business analytics at work! Today, coaches, players, investors, and owners need to take full advantage of modern analytical methods and digital video software capabilities to make the most efficient use of a team’s resources. For example, the economic impact of Division I NCAA basketball exceeds $14 billion in the United States. During the 2009-2010 season the NCAA signed a 14 year $10.8 billion dollar contract with CBS television to cover the NCAA tournament through 2024. In addition, more than $3 billion changed hands with gamblers during the 2010 NCAA tournament alone. Similar economic statistics document the importance of the National Football League (NFL), National Basketball Association (NBA), Major League Baseball (MLB), NASCAR, and the National Hockey League (NHL). The USA is a “sports nation” and global events like the Olympics and World Cup Soccer demand that we analyze the performance of these sports organizations as rigorously as world-class 12

OM6 C2 IM corporations analyze their goods, services, processes, people, and supply chains. 14. Go to the Baldrige Web site and find the links to the most recent award recipients. Review one of the application summaries and describe the types of performance measures that these companies use. The Baldrige application summaries are excellent sources of information to learn about best practices. Categories 4 and 7 provide good examples of the types of measures that leading companies use. Instructors might also wish to ask students to compare measures used by small versus large companies, manufacturing versus service, and differences with not-for-profit education and health care sectors 15. The balanced scorecard was originally developed by Arthur M. Schneiderman at Analog Devices. Visit his Web site, www.schneiderman.com, and read the articles to answer the following questions: a. How was the first balanced scorecard developed? (Click The Scorecard link under the Contents link. Find “ADI: The First Balanced Scorecard) b. What steps should an organization follow to build a good balanced scorecard? (Find “How to Build a Balanced Scorecard”) c. Why do balanced scorecards fail? (Find “Why Balanced Scorecards Fail”) This Web site provides interesting history about the balanced scorecard and a host of other information developed by Mr. Schneiderman, including numerous articles on the subject.

Case Teaching Notes: Rapido Burrito Overview Rapido Burrito is a small regional chain of quick service restaurants. Rather than wait in a cafeteria style line, customers check boxes for their choice of ingredients, sauce, and so on paper menus at their table. The food is prepared quickly and then delivered to the tables. Lately, one of the store managers has been hearing customer complaints, such as: “The tortillas are too thin”; “The food is not hot”; “Everytime I get a burrito it seems to be a different size”; and “I got the wrong ingredients on my burrito.” Many complaints were submitted through the corporate website. The district manager was most concerned with the comments about the consistency of size. One of the staff designed a customer survey using the questions in Exhibit 2.9, based on a 5-point Likert scale [5 = excellent, or strongly agree; 1 = poor or strongly disagree] for the first 10 questions. The last two questions were coded as a 1, 2, 3, or 4. They administered the questionnaire to 25 random customers. The restaurant also gathered data on the weights of 50 samples of 3 burritos (a total of 150). (Both the survey data and weight data are available on spreadsheet Rapido Burrito Case Data.)

OM6 C2 IM Exhibit 2.9 Customer Survey Questions 1. Was the menu easy to read? 2. Was order prepared correctly? 3. Was the food tasty? 4. Was the food served hot? 5. Were employees courteous and polite? 6. Was the restaurant clean? 7. In your opinion, did you receive a good value for the price you paid? 8. What was your level of satisfaction? 9. How likely are you to dine with us again? 10. How likely are you to recommend us to your friends/family? 11. How often do you eat at Sizzleking? 12. First time, less than once/month, 1-3 times a month, weekly? 13. What was the main ingredient in your burrito: chicken, beef, pork, beans? Case Questions and Analysis 1. What conclusions do you reach when you calculate descriptive statistics for the answers to each of the survey questions in the database? Portions of the spreadsheet Rapido Burrito Case Soln.xlsx are shown below. A frequency count of the 25 customers who were surveyed is evenly divided, from first timers to those who eat there weekly.

✓ The survey averages show that customers were most satisfied with the menu and order preparation. ✓ Averages for tasty food, courtesy of employees, restaurant cleanliness, and value for price were between 4 and 4.16. ✓ Overall satisfaction averaged close to 4. ✓ Respondents were less enthusiastic about the food being served hot at an average of

OM6 C2 IM 3.72. ✓ The average likelihood of the customer dining again is only 3.64; likely to recommend is a bit lower at 3.65. ✓ The standard deviations for all of the questions for the menu, order preparation, employee courtesy, restaurant cleanliness, and overall satisfaction are similar. ✓ There was more variation in the responses to the questions about tastiness of food, food served hot, value vs. price, and likelihood to dine again, and likely to recommend. Hot food had a much larger standard deviation, indicating that there may be a problem in the kitchen or order delivery process. 2. If you average the responses to the first seven questions by customer, how closely are those averages correlated to the satisfaction score? Include a scatter chart in your analysis. The first chart is overall satisfaction versus the average score on the first seven survey questions. The second graph is the survey question scores (a) likely to dine with us again versus (b) the overall satisfaction score. The second graph is for your information only and was not asked in the case assignment questions. The average responses to the first seven questions by customers, are well correlated with their satisfaction scores. The R2 = 0.7 which indicates a fairly good linear fit [correlation coefficient = 0.84] between the average scores and the overall satisfaction scores, can be visualized on the scatter chart, below.

Overall Satisfaction vs Average Scores on Items 1-7

R² = 0.7002

Average 1-7 Scores

6.0 5.0 4.0 3.0 2.0 1.0 0.0 0

Overall Satisfaction

Comparing the likelihood of the customer dining again at Rapido Burrito with the satisfaction score, we also see a fairly strong correlation. The R2 = 0.78, and the correlation coefficient is 0.88 as shown below. The lower the overall satisfaction, the customer will be less likely to dine again.

OM6 C2 IM

Likelihood to Dine Again vs Overall SatisfactionR² = 0.779

Likelihood to Dine Again

5 4 3 2 1 0 0

Overall Satisfaction

3. Analyze the data on burrito weights using descriptive statistical measures such as the mean and standard deviation, and tools such as a frequency distribution and histogram. What do your results tell you about the consistency of the food servings? For all samples, descriptive statistics are Mean Standard Deviation Minimum Maximum

1.51 0.108375105 1.29 1.84

A frequency distribution and histogram are shown below:

OM6 C2 IM The frequency distribution and histogram show that the sample is generally symmetric around the mean and somewhat normal in shape. The burrito weights vary from 1.29 lbs. to 1.84 lbs. This could be due to the nature of the burrito product, where the customer specifies ingredients, which add more or less weight to the burrito. More data would be needed to understand this. If we plot the sample averages on a line chart, assuming that they were taken over consistent intervals of time, we see good consistency, although it appears that the averages seem to showing a downward trend toward the end. Again, this may be due to the type of product being ordered at that time, or might possibly be a result of fatigue and inattention after a long work shift.

4. What recommendations for decision-making and improvement can you make to the store manager? Recommendations for improvement include: a. Work to ensure that food is served hot. b. Try to understand why some customers are not likely to dine again or recommend. There appears to be a strong correlation between these measures and hot food, so improving that may be the answer. c. Provide incentives, such as a punched card that provides discounts to increase repeat business. d. Consider job design, technology, and work methods to ensure that consistent weights of ingredients can be measured and assembled in the burritos. That is, how can we continuously improve our job, equipment, and process designs to reduce variability?

OM6 C3 IM OM6 Chapter 3: Operations Strategy Discussion Questions 1. Select a business with which you are familiar and identify examples of customers using search, experience, and credence quality to evaluate the good or service. You might also research the businesses on the Internet or visit the library. This question allows students to apply the concepts to their own purchasing decisions and helps them understand the nature of goods and services. Ask them how they make a decision to buy a PC, furniture, vehicle, hair cut, doctor, concert, sporting event, etc. and frame the discussion using search, experience, and credence qualities. As students present their examples ask them, “What is easier to evaluate? Can it be evaluated at time of purchase?” See Exhibit 4.1 and power point slide. • • •

Search attributes are those that a customer can determine prior to purchasing the goods and/or services. These attributes include things like color, price, freshness, style, fit, feel, hardness, and smell. Experience attributes are those that can be discerned only after purchase or during consumption or use. Examples of these attributes are friendliness, taste, wearability, safety, fun, and customer satisfaction. Credence attributes are any aspects of a good or service that the customer must believe in but cannot personally evaluate even after purchase and consumption. Examples include the expertise of a surgeon or mechanic, the knowledge of a tax advisor, or the accuracy of tax preparation software.

2. Select a business with which you are familiar and identify examples of order qualifiers and winners. You might also research the businesses on the Internet or visit the library. For goods-producing businesses often the order qualifier is physical goods quality while innovation, time, price (cost), flexibility or service quality are the order winners. What’s the order winner for IBM or Caterpillar? Service! After sale services and consulting over the customer benefit package’s life cycle is the order winner and normally have higher gross margins than the physical goods. 3. Explain the interlinking model of quality and profitability (Exhibit 3.2). How does it connect to business and operations strategy? Can you provide any examples of goods and services that support and add credibility to this model? The value of a good or service in the marketplace is influenced by the quality of its design. Improvements in performance, features, and reliability will differentiate the good or service from its competitors, improve a firm's quality reputation, and improve the perceived value of the customer benefit package. This allows the company to command higher prices and achieve an increased market share. This, in turn, leads to increased revenues that offset the added costs of improved design.

OM6 C3 IM Improved conformance in production leads to lower manufacturing and service costs through savings in rework, scrap, and warranty expenses. The net effect of improved quality of design and conformance is increased profits. That is, both external and internal performance contributes to higher profitability. 4. Is it possible for a world-class organization to achieve superiority in all five major competitive priorities—price (cost), quality, time, flexibility, and innovation? Explain your reasoning. Generally not, as tradeoffs usually exist among these priorities. For example, Dell competes on quality, time, and flexibility, and therefore mass customization. However, Dell is not particularly a technology innovator or even a low cost producer. Recently it has had problems with call center service quality. Some fast food restaurants focus more on cost and time at the expense of flexibility. However, many firms today, such as IBM, Southwest Airlines, Procter & Gamble, Siemens, and Vanguard Mutual Funds are building capabilities in all of these areas in order to establish leadership superiority in their markets and meet the diversity of customer needs. A pure information intensive service such as Monster.com or Facebook might be the exception where most of the competitive priorities can be achieved. 5. Why is sustainability a strategy and not a competitive priority? Explain your reasoning. Competitive priorities represent the strategic emphasis that a firm places on certain performance measures and operational capabilities within a value chain. Time, cost, quality, flexibility, and innovation are the five competitive priorities defined in the chapter. Strategy is a pattern or plan that integrates an organization’s major goals, policies, and action sequences into a cohesive whole. The direction an organization takes and the competitive priorities it chooses are driven by its strategy. Basically, a strategy is the approach by which an organization seeks to develop the capabilities required for achieving its competitive advantage. Sustainability is defined in previous chapters using three dimensions— environmental, social, and economic sustainability. Stakeholders such as the community, green advocacy groups, or the government drive environmental sustainability. Social sustainability is driven by ethics and human ideals of protecting the planet and its people for the well being of future generations. Economic sustainability is driven by shareholders such pension funds and insurance companies. Therefore, sustainability is an organizational strategy—it is broader than a single criterion (i.e., a competitive priority). Sustainability requires major changes in the culture of the organization (see box on General Electric). Problems and Activities 1. Research and write a short paper (two pages maximum) about your cell phone provider. What are their mission, strategy, and competitive priorities? How is sustainability incorporated into their strategy, value chain, and operations? 2

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The corporate web sites for Verizon, AT&T, Sprint, etc. offer much information on these topics including annual reports. Discarded cell phones, tablets, and PCs are major sustainability issues (reverse logistics in Chapter 9). 2. What might the competitive advantage be for each of the following companies? a. eBay b. Southwest Airlines c. Starbucks d. Apple e Facebook Competitive advantage denotes a firm’s ability to achieve market and financial superiority over its competitors. (cost/price, quality, time, flexibility, innovation)

a. b. c.

d. e.

Some possible responses: eBay – flexibility, technology (innovation), worldwide market reach, self-service and self-reporting of quality levels Southwest Airlines – low price (cost), only one type of plane to reduce maintenance, training, and repair costs; workforce behavior and loyalty Starbucks – value of convenience (service quality), product quality, flexibility (customization), good service if fast processing time, cost/price is lowest ranked competitive priority Apple – product design and innovation, ability to charge higher prices Facebook – service quality, flexibility and independence, social network, ondemand service (time), innovation

Our top priority judgment is in italics but the true purpose of the question is to discuss several competitive priorities, pros and cons. 3. Choose an organization with which you are familiar that falls into one of the following categories: • sporting goods store • haircut salon • college bar or restaurant • pizza business • a sports team • wireless telephone service Define the firm’s strategic mission, strategy, and competitive priorities. What are the order qualifiers and winners? What would operations have to be good at to make this a successful business or organization? The objective of this question is to get students to think about and discuss strategy, mission statements, order winners, the role of operations and operational capability, and so on. OM must be good at things like capacity management, managing multiple

OM6 C3 IM sites, scheduling, service encounter design and management, controlling costs, process design and day-to-day execution, and so on. Web sites provide this information usually in their corporate link. 4. Research and explain the logic behind the statement, “General Electric discovered that 75 percent of its manufacturing costs are determined by design.” Design drives material and component purchasing requirements, processing and assembly equipment needs, and other resources needed to produce the good. A small change in design may require a large and costly change in operations. This is one reason some firms, such as Federal Express, Apple, Marriott, Disney, McDonald’s, and General Electric, spend so much time and resources on product and process design. Historically, Japanese automakers championed this “excellence in design first” practice. 5. How does a package delivery service such as UPS or FedEx use the competitive priority “time” to its competitive advantage? Research, then explain and provide examples in a short paper. (Maximum of two typed pages). Go to www.fedex.com or Google it and your students will have plenty of material to write a paper on. FedEx competitive priorities are inherent in the following: •

Economical - Our rates are among the most cost-effective for ground shipping.

•

Comprehensive - We offer delivery to every address in the 48 contiguous U.S. states within 1 to 5 business days based on the distance to the destination (delivery to Alaska and Hawaii in 3 to 7 business days).

•

Easy to track - Learn about all the available options for tracking the status of your shipments.

•

Reliable - FedEx Ground service in the U.S. is supported by a money-back guarantee.* If your package does not arrive by the end of the scheduled delivery day, FedEx Ground will credit or refund the shipping charges.

Managing “time” is their business—package delivery, meeting customer promise dates and times, instantaneous tracking and status of packages, customer access to online Fed Ex web sites, and so on. 6. How does Walmart use the competitive priority “cost” to its competitive advantage? Research, then explain and provide examples in a short paper (maximum of two typed pages). A good place to start is --- http://walmartstores.com/ Students may draw the supply chain and discuss how retail point of sale capability tied to factories, supplier cooperation, Wal-Mart trucking and GPS, cross-dock warehouse load and unload operations, and RFID enable their supply chain to be fast and on-time (reliable). Outsourcing and supplier discounts for huge order sizes give 4

OM6 C3 IM Wal-Mart much power in the global supply chains. Competitors such as Target, Safeway, and Costco have copied many of their methods and practices so Wal-Marts competitive advantage has diminished. 7. How does Procter & Gamble use the competitive priority “quality” to its competitive advantage? Research, then explain and provide examples in a short paper (maximum of two typed pages). Go to www.pg.com or Google it and your students will have plenty of material to write a paper on. One P&G quality management story is as follows: P&G Arabian Peninsula, which produces a wide range of premier products that improve consumers' daily lives, today announced that its plant in Dammam, Saudi Arabia has received the P&G Global Quality Excellence Award. One of P&G's highest accolades, this award is presented to Manufacturing and Research/Development sites that meet rigorous excellence criteria. The Dammam Plant is a multi-category site where a variety of well-known Dry Laundry, Hair Care, Dish Care and Fabric Enhancer Products are manufactured. It has demonstrated a consistent and exceptional commitment to quality while optimizing cost delivering millions in cost savings over the past four years while improving productivity by over 30%. The P&G Quality Excellence Award recognizes sustained excellence in quality performance and requires at least two consecutive 100% Quality Assurance Capability scores demonstrating high quality systems and execution, as well as zero 'significant quality incidents' (SQI) for more than two years. The Dammam plant has recorded zero SQI's for an impressive nine years. In addition, Quality Excellence Award recipients must meet or exceed Category Product Quality targets for four consecutive quarters, implement strong internal and external product quality measures, and demonstrate an active 'Quality Culture.' P&G Arabian Peninsula applies innovation, customer service and strict product quality and safety to all aspects of its business. It also strives to continually improve the lives of individuals in the local community through sustainable corporate social responsibility efforts. Also notice the link between quality management and sustainability for this international factory. 8. How does your cell phone provider use the competitive priority “flexibility” to its competitive advantage? Research, then explain and provide examples in a short paper (maximum of two typed pages). The corporate web sites for Verizon, AT&T, Sprint, etc. offer much information on these topics including annual reports. The main and unbelievable way to add 5

OM6 C3 IM “flexibility” to the customer benefit package represented by a cell phone is the millions of “apps” that accompany modern cell phone service. Ask students to provide examples of what the apps can do! 9. How does General Electric use the competitive priority “innovation” to its competitive advantage? Research, then explain and provide examples in a short paper (maximum of two typed pages). A good place to start is --- http://www.ge.com/ GE is supporting several new technologies such as film lighting (manufactured on newspaper presses in sheets), the Internet of Things, and green innovations of all types. 10. Explore the Web sites for several competing companies on the Fortune 500 list. Based on the information you find, on which competitive priorities do these firms appear to focus? What can you say about their operations strategy (either explicit or implied)? Report your findings in a short paper (maximum of two typed pages). Good sources of information include annual reports and news articles from magazines such as Fortune, Business Week, and Fast Company. 11. Research and write a short paper on a company that has a clear strategy based on social and ethical sustainability. The chapter write-up on sustainability at McDonald’s is a good benchmark for what you should expect from students. Companies you might suggest to students that they will be familiar with include cell phone firms, restaurant chains, hotel chains, airlines, health care and hospital systems, and web based virtual stores like Nike, Zappos, and eBay. And, of course, goods-producing firms in manufacturing, forestry, mining, fishing, construction, and farming. 12. Apply Hill’s strategy framework to one of the companies in problem/question 2. This will require research to identify corporate objectives and competitive priorities. See the McDonald’s example in the chapter for guidance and make sure that you emphasize OM concepts, capabilities, and execution. Report your findings in a short paper (maximum of two typed pages). This question is designed to force students to think independently and apply the principles in this chapter. This question might best be assigned to small teams or as a project. Responses to this question should be limited to no more than 1 to 5 typed pages by the instructor. A short 5-15 minute in class student or team presentation is also a possibility for this question. Remember to highlight OM issues to help students understand how OM contributes to the overall mission and strategy of the firm. Facebook and eBay would be interesting organizations to use for this question and challenge the students.

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13. Identify two competing organizations (for example, AT&T and Verizon, Taylor Made and Callaway golf club manufacturers, or Starbucks and Panera). Explain the differences in their missions, strategies, and competitive priorities, and how their operations strategies might differ. Use the Internet or business magazines to research the information you need. Report your findings in a short paper (maximum of two typed pages). Students may select local organizations that they are familiar with and that is fine Undergraduate students may not have the background to compare major corporations. Note that the question does not require the student or team to use Prof Hill’s framework. This is a broad question intended to generate student interest in how strategy impacts “big picture” operational and supply chain design and management. Given students are only in Chapter 3, the instructor may have to make a few of these tie-ins between strategy and OM. Taylor is more innovation (design) and flexibility (customization) while Callaway is more minimize cost and production efficiency, and standardization for the average golfer. Students will provide a wide range of examples. The instructor may want to have teams present their comparison during class using no more than 1 to 3 overheads or power point slides. Typical firms include: Apple versus Microsoft, United Airlines versus Southwest Airlines, McDonald’s versus Wendy’s, Amazon versus eBay, Hyatt Hotels versus Motel 6, Honda or Toyota versus General Motors, Apple versus Dell, Harvard Business School versus your business school, and so on. 14. Research Apple and define its strategic mission, vision, corporate strategy, competitive priorities, and operations strategy. What can you say about Apple’s strategy and practices regarding sustainability? You might use the Internet or visit the library. Report your findings in a short paper (maximum of two typed pages). A good place to start is --- http://www.apple.com/investor/ And, of course, a simple Google search on topics of interest. 15. How do the "Veja Company: Sneakers with a Conscience" operations and supply chain decisions, and practices support their mission and strategy? Provide examples and explain. Report your findings in a short paper (maximum of two typed pages). When students search for Veja they will find over 3 million hits. Many focus on the on-line store but if you look around you will find many interesting sites and articles. Please note that students may do a web search for “vega” not the correct name of “veja.” Founded in 2005 the Vega Company’s (www.veja-store.com) business model centers on economic, environmental, and social sustainability. Their model begins with suppliers followed by production and distribution, and ends with customers. Vega works with cotton, rubber, and leather suppliers, mainly in Brazil, to minimize their impact on the environment while making a profit. Example practices of their sustainability business model include:

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• • • • • • • • • • • • •

teach Brazilian cotton farmers how to grow organic cotton with no pesticides, support the production of natural rubber from trees to preserve Amazon forests, source leather that uses eco-tanning methods with vegetable extracts instead of toxic metals such as chromium, pay these farmers higher wages and create better working conditions and family and community services, encourage workers to unionize and enhance their quality of life, source directly from farmers eliminating warehouse and distributor intermediaries, package sneakers in 100% recyclable cardboard boxes, avoid “overproduction” by producing shoes to fulfill actual orders and using longer order lead times (called their zero stock strategy), ship “sneakers with a conscience” by barge and ship to reduce carbon dioxide emissions using longer lead times, ship finished products to Atelier Sans Frontieres Association (ASF) in France who distribute them to retail stores and customers using workers who have been historically excluded from the workforce, use only on referrals and word-of-mouth advertising (i.e., a zero advertising budget) power Vega headquarters using a green electric utility called ENERCOOPa, champion ethical fashions and clothing worldwide.

Vega does an especially good job supporting social sustainability, as the literature will document.

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Case Teaching Note: Sustainable Lawn Care Case Study The case focuses on how two firms in the same industry define their business strategy in different ways--one currently from a pure physical perspective and the competitor from a full service perspective. The case makes use of most of the ideas and paradigms in Chapter 3 on Operations Strategy. One of Lawn Care's competitors began an application service for parks and golf courses that routinely applied the fertilizer and grass seed for its primary customers. This competitor bundled the application service to the primary goods, fertilizer and grass seed, and charged a higher price for this service. The competitor sold the customer “a beautiful lawn with a promise of no hassles.” To the competitor this included an application service bundled to grass seed and fertilizer. The competitor learned the application business in the parks and golf course target market segment and was beginning to explore expanding into the residential lawn care target market. To avoid the liability of storing toxic fertilizer outside the competitor applied it the same day it was delivered to the customer’s site. The Lawn Care Company sold the “highest quality physical products” in the industry but they were not currently in either the professional park and golf course or the residential lawn care application market segments. A typical Lawn Care CBP analysis shown below provides the big picture. Make sure the student understand that processes create and deliver each peripheral or primary good or service and this is where OM has a major impact on overall organizational performance. Note: This case has been used in executive education programs so there is more contained in this teaching note than you can cover in a single class—pick and chose what you want to emphasize. The value chain diagram is probably most useful on the board to undergraduates with a quick discussion of how goods and services are bundled together, and that you need at least one process to create and deliver each good or service.

OM6 C3 IM Lawn Care Company Example CBP

Peripheral Service Claims Services

Peripheral Goods Packaging Primary Good Grass Seed and Fertilizer

Peripheral Good Retail Store Display Cases

What’s the order winner above? #1 competitive priority is high quality grass seed and fertilizer—a physical good! How would you rank order the competitive priorities using this vision of the business? One ranking might look as follows: • • • • •

#1Product quality (grass seed and fertilizer) #2 Product delivery (to job or retail site; to loading dock) #3 Flexibility (R&D, field testing for disease, etc.) $4 Innovation (green physical goods, etc.) #5 Price/cost (highest in industry)

It is also useful to revisit Chapter 1 on customer benefit packages (also see the CBP power point slides) and this VISION of the business. An industrial mentality permeates the management of Lawn Care. This management vision of the business was fine in the past but did not meet current customer and market requirements.

OM6 C3 IM The Competitor's Example CBP

Peripheral Good Retail Store Display Cases

Peripheral Service Claims Services Peripheral Goods Packaging

Immediate Application so No Liability

Primary Good Primary Service Grass Seed and Application Fertilizer Services Excellence Service Encounters Peripheral Goods Application With Clean Trucks & Service Customers Equipment Technician Skills & Training

What’s the order winner? A beautiful lawn with no hassles! Service! How would you rank order the competitive priorities using this vision of the business? • • • • •

#1a and 1b Product and service quality (grass seed and fertilizer) #2 Application service (service encounter execution, etc.) #3 Flexibility #4 Innovation #5 Price/cost

The Lawn Care Company defines its business more from a physical product or manufacturing perspective while the competitor defines its VISION of the business as a dual CBP where service is equal in strategic importance to the physical product. An even more radical (probably too radical) CBP perspective is as the application service being the primary (core) feature of the CBP with fertilizer and grass seed as peripheral goods. But make sure that you point out this “possible” radical CBP configuration in class. And, of course, the value chain and supporting processes are quite different for the two firms. Remember, IBM is the "Solutions Company" and there are other examples where the traditional goods-producing firm redefined itself from a service perspective. Case Questions and Brief Answers

OM6 C3 IM 1. Define Lawn Care’s current strategic mission, strategy, competitive priorities, value chain, and how it wins customers. What are the order qualifiers and winners? Draw the major stages in their value chain without an application service. The Lawn Care Company defines its business strategy as the "highest quality grass seed and fertilizer in the world" while the competitor defines their business strategy as "beautiful lawns with no hassles." One could view the “no hassles” as part of doing work practices that are environmentally friendly such as immediate application with no on-site storage of toxic materials (notice the fish kill sentence in case). Therefore, the Lawn Care Co. currently focuses on competitive priorities such as high product quality, delivery to retail store or golf course loading dock, and price. Product quality is the #1 competitive priority for the Lawn Care Co with price/cost #5. The competitor focuses on (1) high product quality, (2) no hassle application to the customer's lawn, (3) higher margins on the application service than the physical goods, (4) customized applications as needed, (5) service encounter excellence, (6) sustainability and eco-friendly work practices, and (7) building a strong relationship with customers. Service quality is the #1 competitive priority for the competitor. Operations management is a key skill to making everything work as promised, that is, each of the above processes. Some of above processes can be tied to “the physical good” while other processes focus on the “application service.” Instructor expectation of students defining these two processes should be general in nature at this early point in the course. The objective here is simply to get students to think in terms of processes and some general notion of what type of work and process steps is required. Keep it simple. Please note that the competitor firm requires high quality service providers (agronomic technician, application equipment operator, sales representative) to interact directly with customers, that is, service management skills. So, if The Lawn Care Co. adopts application services it must add high customer contact service processes. Historically, high customer contact an activity of marketing and its sales staff. Shifting from a physical product focus to a service focus is a strategic and tactical paradigm shift of major significance. Moreover, employee health is an issue since they apply this fertilizer and grass seed daily. The following value chain is what we usually put on the board. The base paradigm for this diagram are Exhibit 1.4 and 1.5.

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Lawn Care Value Chain (Focus on Physical Product or Add Service)

Suppliers Mining, Farmers, seeds, chemicals, packaging, ext.

Inbound Shipping and Transport Trucks, third party truckers and rail carriers

Grass Seed & Fertilizer Factories (Continuo us flow)

Factory Loading Dock (Lawn Care responsibilit y ends) Ship It

Third Party Shippers Trucks, & Rail to Cust. Loading Dock

Third Party Applicators Apply to Lawns or Do It Yourself (How?)

This value chain diagram is most valuable to undergraduates – draw it “together” on the board and discuss—have fun! Watch and allocate your class time. Have Fun! Notice with this physical product definition and VISION of the business, Lawn Care is finished when the grass seed and fertilizer leaves their loading dock (i.e., “the right product to the right customer at the right time”) and the shipment is unloaded at the customer’s loading dock. The competitor’s value chain (not shown) extends this traditional value chain by adding a profession application service so they can accomplish their corporate objective of “a beautiful lawn with no hassles.” 2. What problems, if any, do you see with The Lawn Care Company's current strategy, vision, customer benefit package design, and pre- and post-services? There will always be a market for self-service application for golf courses, parks, and residential lawns (like some step 1-2-3 self-service Four Step program sold at retail stores) but as the U.S. standard of living and disposable income increases, the market for lawn care application services will grow. The Lawn Care Co. is missing a major market opportunity but has time to catch up. Their current vision of the business focuses on perfect physical goods but that is not enough in today's competitive markets! Services need to be bundled with the goods to help gain competitive advantage in this market and they leave sustainability issues up to others (third party or golf course applicators, park managers, etc.). The “strategy” determines everything else! This case also fits nicely with the pre- and post-production value chain model of Exhibit 1.7. Pre-Production • Supplier negotiation and contracts • Employee and customer application service training

OM6 C3 IM • • • •

Financing is some cases for large cities and other government work Physical product warranties and application service guarantees Technical consulting services for parks, golf courses, government land, etc. Customized grass seed or fertilizer design for highway construction firms, golf courses, and other special applications (i.e., technical lawn consulting).

Post-Production • Warranty and claims processing • On-line billing and payment • Environmental and recycling processes • Field maintenance and repair of trucks and equipment • Transportation services for factories, warehouses, and application services • Technical consulting services for parks, golf courses, government land, etc. • Service Encounter Excellence Training Expect undergraduate students to only point out one or two of these – you will have to help them “see” these pre- and post-production goods and services. Only talk about a few in class. Of course, the key OM issue here is each of the above requires one or more processes to create and deliver it! 3.

Redo questions (1) to (2) and provide a new or revised strategy and associated customer benefit package and value chain that is more appropriate for today’s marketplace. Adding the application service (i.e., adding the last box to value chain) and extending the value chain forward toward the customer is the focus of this question. Most of the answer to this question is previously described. The objective of this question is to force your students to “think service and green” in what initially looks like a goodsproducing situation. The key to a good application service is (1) good equipment, (2) good seeds and fertilizer, (3) well trained employees with service management skills, (4) crew routing and scheduling of labor and trucks, (5) clean freshly painted equipment and crew uniforms (part of servicescape), (6) right number of trucks and crews per area (capacity), (7) eco-friendly work practices, (8) call center processes, and so on. Get these ideas on the board! Students need to see that adding a post-production service requires a whole new set of operations and logistic skills. Operations management is critical execution of a well-run and profitable lawn application service.

What does operations have to be good at to successfully execute your revised strategy? We normally get into a discussion of “What does the firm have to be good at to offer the application service?” Ask them questions like: (1) How many crews? 14

OM6 C3 IM (2) What’s the size of an application crew? Equipment? Trucks? (3) How route and schedule crews? (4) How grass seed and fertilizer delivered to job site? Does crew carry it or is it delivered separately? (5) What the liability of storing toxic materials at job site for even a day? (6) How develop service management skills for your employees? So implementing an application service is not easy and requires great OM and logistic skills!!!! 5. What are your final recommendations? Most students or teams will recommend they offer the application service but how to do it is not so clear to them so ask “What options does LC have to do their own applications?” Some options include: (1) 100% company owned application service, (2) Hire a third party local contractor, ( (3) Hire a third party local contractor and “certify” them in Lawn Care products, equipment, and work practices at corporate headquarters. Additional Case Questions to Consider 1. What issues do you see with respect to “green” in this business? The case hints at sustainability issues with reference to polluted lakes and streams, and the lawsuit by the green advocacy group. In real life, there are many profound issues with lawn application service and the health of people and the environment such as: (a) Where do you store toxic fertilizer and chemicals once delivered to the job site or do you store them? (b) Do employees breath contaminated air when they spray a lawn or golf course, and what is the impact on their health? (c) Should lawn care application businesses test their employees frequently for health reasons? (d) How are these potentially toxic goods shipped inbound to factories and outbound to warehouses and customer job sites? (e) What is the business liability once these chemicals migrate into lakes, ponds, streams, and the water supply? (f) Should Lawn Care require suppliers to be green certified? (g) What should be Lawn Care’s policy on sustainability? 2. What’s the gross margin on the physical goods (i.e., grass seed and fertilizer) versus the application service?

OM6 C3 IM Answer: Low for physical goods in the range of 10 to 30 percent while for the application service is it closer to 100 percent. So, how do you make money in this business? Also, you can draw the product life cycle for physical goods and ask students how the service life cycle overlaps. Key points are service life cycle continues on forever once reaches maturity stage (assuming repeat business) and pulls physical product. 3. What are two example processes that create and deliver each good or service in the current CBP? Briefly describe process issues and related decisions. Example processes that create and deliver the CBP include: • • • • • • • • • • • • •

Equipment and truck purchasing process Evaluating labor and equipment capacity and demand forecasts by area Equipment maintenance and repair process Equipment parts ordering and inventory management Claims process Production processes for grass seed and fertilizer Purchasing raw materials and packaging process (supplier processes) Retail store display design and production (maybe outsource) Lawn Management Training and Courses for Employees and Customers Application service training, crew scheduling and routing, and service encounter execution Application service providers hiring process Application service providers recognition and reward process Cleanliness and grooming standards for equipment, trucks, and employees

Postscript The postscript is the Lawn Care Co. dropped “professional” lawn care service after three years (the market was too small, limited ability to raise prices, and Lawn Care had little expertise in OM field service skills such as scheduling, purchasing, and capacity management) and bought existing and local residential application service firms that already had the proper OM skills in cities such as Pittsburg, Philadelphia, and Atlanta. These local firms already knew the neighborhoods and area, weather, and knew how to do OM tasks. Some of the local firm’s employees were “certified” by Lawn Care with training programs on how to operate equipment, different types and grades of grass seed and fertilizer, how to interact with the customer, and so on. This case takes 45 to 90 minutes to teach depending on what you emphasize. Ask your students – How many crews do they need? How do you define a crew? (One truck and two employees or ??) How will crews be organized—by district and region? How will they be routed (scheduled) on a daily basis? What will they do in the winter months? The local firms that are now part of the Lawn Care organization already knew the answers to these questions.

OM6 C3 IM The instructor should summarize key case issues such as: (1) How does Lawn Care want to define its strategy (with or without application services)? (2) What do you have to be good at if you adopt a lawn care application service? (3) How should Lawn Care and other firms in this industry define, control, and manage sustainability?

OM6 C4 IM OM4 Chapter 4: Technology and Operations Management Discussion Questions 1. Describe at least one application of modern technology in each of these service industries: a. b. c. d. e.

Financial services Public and government services Transportation services Educational services Hotel and motel services

How does your example application improve things, or does it? These should be easy to identify with a bit of literature or web-based research. Hotels, for example, use electronic keys that improve patron security while a oneperson automated garbage truck greatly boosts city government productivity. GPS improves transportation routing and efficiency while electronic medical records improve health care clinical and service quality, and help control costs. eReaders for education, on-line banking, and cell phone apps such as Uber are good candidates for this assignment. 2. Describe a situation where self-service and technology help create and deliver the customer benefit package to the customer. Provide examples of how such a system can cause a defect, mistake or service upset. An automatic picture kiosk is an example of where technology and customer labor create hard copy prints. Kodak, for example, has a freestanding kiosk where you put in your digital camera memory card and choose the finish, quantity, and size of your hard copy prints. Service upsets happen in many ways such as customer mistakes where many more prints are made than the customer intended. Also, one of the authors has watched a customer wait over 10 minutes while a service counter employee tried to figure out how to load paper and an ink cartridge in the kiosk (i.e., changeover and setup time). The use of most cell phone apps requires self-service (using customer labor and effort – co-production). Airline check-in kiosks, automatic teller machines, on-line banking, and firms like eBay, Facebook, Twitter, Zillow, and Zappos are other good candidates for this assignment question. 3. Discuss each of these statements. What might be wrong with each of them? a. “We’ve thought about computer integration of all our manufacturing functions, but when we looked at it, we realized that the labor savings wouldn’t justify the cost.”

OM6 C4 IM b. “We’ve had these computer-controlled robots on the line for several months now, and they’re great! We no longer have to reconfigure the whole line to shift to a different product. I just give the robots new instructions, and they change operations. Just wait until this run is done and I’ll show you.” c. “Each of my manufacturing departments is authorized to invest in whatever technologies are necessary to perform its function more effectively. As a result, we have state-of-the-art equipment throughout our factories - from CAD/CAM to automated materials handling to robots on the line. When we’re ready to migrate to a CIM environment, we can just tie all these pieces together.” d. “I’m glad we finally got that CAD system,” the designer said, a computergenerated blueprint in hand. “I was able to draw these plans and make modifications right on the computer screen in a fraction of the time it used to take by hand.” “They tell me this new computer-aided manufacturing system will do the same for me,” the manufacturing engineer replied. “I’ll just punch in your specs and find out.” a. Today, labor accounts for only a fraction of total expense in many industries. Traditional cost justification techniques cannot always be used. Instead of measuring payback or ROI only in terms of labor costs, management needs to judge technology investments against a global competitive cost advantage. Would firm survival justify the cost of technology? b. Reprogramming robots can cause inefficient downtime on the line. If manufacturing processes were centrally controlled by a computer, production breaks might be reduced. c. Components selected in isolation may perform a specific function well, but often they are not capable of providing the necessary information to other departments in an integrated environment. Manufacturing needs to support a company’s overall strategic plan; equipment selection must be considered in terms of total organizational goals. d. The manufacturing engineering department has to re-input specifications and this is a waste of unnecessary time and can also lead to errors. If designers and engineers were linked to the same computer system and databases, they could work from identical information and ensure the integrity of the instructions sent to the production line. 4. Identify one low and one highly scalable organization and explain why it is so. Netflix, Facebook, eBay, Twitter, and Monster.com are highly scalable businesses. That is, the cost to serve one additional customer is close to zero or extremely low incremental (variable) costs. High scalability businesses require a low incremental (variable) cost to serve one additional customer. Low scalability implies that serving additional customers requires high incremental variable costs. Often this involves organizations that perform a high degree of customization such as legal, dental, and engineering practices, and wedding and consulting services. But it also includes firms

OM6 C4 IM that deliver groceries and packages to home owners. Amazon.com is one of many retail firms trying to achieve high scalability (i.e., extremely low incremental variable costs). 5. How can social media enhance the sale of a physical good? A service? Provide examples. Explain. A web search of “social media relationship to physical goods” results in 2.2 million hits. No matter what you’re selling, a good social media presence will help you in some way—direct sales, customer service, or brand awareness. Companies in these industries see a much more significant sales increase through social media: ▪ Books (links to Amazon/Audible; this is a grey area in terms of strategy because you probably aren’t doing the fulfillment yourself) ▪ “Daily deals” sites, such as Groupon, AppSumo, LivingSocial, and Restaurant.com ▪ Apps—for mobile, Facebook, or browsers ▪ Bands and music promotion ▪ Games ▪ Software ▪ Video services (such as music lessons) ▪ Online coaching ▪ Webinars Advertising can be customized to a single individual customer based on their buying behavior and other social and economic factors. Source: https://www.safaribooksonline.com/library/view/socialecommerce/9781449366940/ch04.html A web search of the “Internet of Things” results in 289 million hits so there is plenty of material to answer this question. Examples students may describe include selfdriving automobiles, self-sensing and correcting machines like turbines, jet engines, locomotives, and home security systems controlling cameras, locks, appliances, garage doors, and lights. The Internet of Things (IoT) is the network of physical objects—devices, vehicles, buildings and other items—embedded with electronics, software, sensors, and network connectivity that enables these objects to collect and exchange data. For example, IBMs Watson IoT is a set of capabilities that learn from, and infuse intelligence into, the physical world. The Internet of Things-generated data is growing twice as fast as social and computer-generated data, and it is extremely varied, noisy, time-sensitive and often confidential. Complexity grows as billions of devices interact in a moving world. This presents a growing challenge that will test the limits of programmable computing. Cognitive IoT is our best opportunity to fully exploit this resource.

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Problems and Activities (Note: an asterisk denotes problems for which an Excel spreadsheet template on the CourseMate Web site may be used.) 1. Research and write a short paper (maximum of two typed pages) on the impact of electric cars on the three dimensions of sustainability. The lead-in to the chapter describes some of the issues regarding electric cars as follows. Ford Motor Company and Toyota, an unlikely couple, recently agreed to jointly develop the next generation of gas-electric hybrid systems for pickup trucks and SUVs. Toyota has built more hybrids but it has no hybrid pickup trucks while Ford has been a leader in first-generation hybrids for SUVs. Their partnership includes swapping patents, research and development, joint supplier qualification and sourcing, and building the next generation global supply chain that supports hybrids and ultimately electric vehicles. Software development is also a major part of this joint venture since Ford’s Volt, for example, contains over 10 million lines of code. Other supply chain participants are contributing to building out the supply chain necessary for electric vehicles. Cracker Barrel, for example, is installing electric vehicle chargers in 24 of its restaurants. Tesla is challenging other automobile manufacturers to build electric cars. A quick web search of “Tesla” reveals 163 million hits so student have plenty of sources to answer this question. A Google search on “electric cars” reveals over 500,000 hits and the following pros and cons of electric cars from http://www.bankrate.com/financing/cars/pros-and-cons-of-electric-cars/ Pros: • Cheap fuel. Nissan estimates it will cost approximately $2.75 at average utility rates to charge its Leaf from empty to full. The Leaf has a range of around 100 miles, a distance that would cost about $10 to drive in a compact car getting 30 mpg (3.33 gallons x the average gas price of $3.089). That gap will become even wider if gas prices rise in the coming years. • Less frequent maintenance. Because they don't have to deal with the heat and force generated by an unending series of powerful explosions the way combustion engines do, electric engines don't need the oil changes and other regular maintenance that conventional engines need to stay running. That can add up to significant savings over time. • Tax credits. Buyers of electric vehicles can get a significant tax credit from the federal government. The Nissan Leaf is eligible for a tax credit up to 4

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•

$7,500, for example. Cleanliness. Leaving aside the environmental benefits, which are considerable, an all-electric car means freedom from a substance that can be really messy: oil. If you've ever knocked over an oil pan, spilled gas on yourself while refueling or loaded a car up while it was idling and blowing exhaust all over you, you know oil and gas can smell, look and feel disgusting. Saying goodbye to all that could be a big motivator for some.

Cons: • Short range. Current battery technology can't yet match the energy stored in a regular old tank of unleaded. That means in the near future, electric cars will have significantly less range than comparable combustion cars. • High sticker prices. The subcompact Leaf retails at $32,780 before federal tax credits, $25,280 after. In contrast, the slightly bigger Nissan Sentra will cost you around $20,000, loaded. Plug those numbers into the Bankrate auto loan calculator, and you see the difference in monthly car payments with a 10 percent down payment and a 48-month loan term is significant: $537.05 for the Leaf vs. $424.88 for the Sentra. • No used option. Bankrate readers love their used cars, because they can offer a way out of the galling depreciation new cars experience once they're driven off the lot. Unfortunately, there likely won't be a used inventory of electric cars for years. • Few independent mechanics. I spoke to a mechanic I know over the weekend, and we got on the topic of upsides and downsides to electric cars. He said one major sticking point of ownership would be finding an independent shop that would work on all-electric vehicles, since the cars are both very different from their combustion counterparts and still quite rare. That will likely mean higher maintenance costs, since dealerships often charge more for the same repair than independent shops. • Less existing infrastructure. It's not uncommon to see a gas station on every corner, but I haven't yet laid eyes on one public car charger. Even if sales of electric cars take off, there won't be public chargers widely available in most cities for years to come. • Expensive home chargers. Unless you want to wait eight hours or more to "fill up your tank," you'll want a high-speed charger installed in your home, potentially adding thousands to your electric-car price tag. • Skimpy safety record. It's still too early for manufacturers and auto safety regulators to see how electric cars react to being subjected to the tremendous forces at work in an auto accident. • Battery uncertainty. Just like the batteries in your iPod or laptop, the large, expensive batteries in an electric car will inevitably run down and become unable to hold a full charge. The question is, how will they perform in the real world, under real-world weather and traffic conditions, over the many years buyers hope to own their cars?

OM6 C4 IM Read more: Pros and cons of electric cars | Bankrate.com http://www.bankrate.com/financing/cars/pros-and-cons-of-electriccars/#ixzz1r0h49eKG 2. Identify and describe (maximum of two typed pages) two apps for your cell phone or electronic reader and how they improve your productivity and quality of life? A Google search results in over 11 million hits on “cell phone apps” so students have plenty to write about, not to mention their own personal use of apps. Students know more about great apps than you do so let them explain, “Why they have value?” Personal technology has had a huge impact on all our lives. A good example of how to respond to this question was published by Kenneth E. Kendall in the July 2010 issue of Decision Line in his article “Continually Emerging Technologies: Will the iPad Really Change the Way We Live and Work?" (http://www.decisionsciences.org/decisionline/Vol41/41_4/default.asp) 3. Identify and describe (maximum of one typed page) a service encounter where technology helps create and deliver the service in total or in part. What hard and soft technology most likely is involved? Many examples can come to mind. For instance, reserving a hotel room relies mostly on the hotel’s computer system to identify whether a room is available, process a credit card, etc. Server and software technology with a good understanding of operations (i.e., process flow, standard times, capacity, etc.) are necessary. Other examples include airline check-in kiosks, automated pharmacies, Walt Disney’s Hall of Presidents, on-line ordering of shoes at Zappos, paying bills via Internet banking, MRI scans and electronic medical records, and automobile insurance quotes on-line. 4. Research radio frequency identification devices (RFID) and provide examples of how they are or might be used to improve productivity in operations. A Google search results in over 65 million hits on “RFID” so students have plenty to write about. RFID has been one of the hottest topics in recent years and numerous articles can be found in mainstream business periodicals like Fortune and Business Week, as well as on the web. The student should have no trouble finding good examples that complement the discussion in the text. Many interesting examples of using RFID are now found in service industries such as nursing homes and hospitals. 5. Find at least two new applications of modern technology in businesses that are not discussed in this chapter. What impacts on productivity and quality do you think these applications have had?

OM6 C4 IM Current business literature is the best source for examples. Students should consider how the technology affects the rate of production and whether it can enhance quality in all aspects of the customer experience. Students will focus on obvious technology like ATMs and electronic funds transfer, eBay, Twitter, CAT Scanners, Facebook, iPhones, Space Shuttle, YouTube, iPhone, etc. but also make sure they recognize more mundane types of technology such as automatic car washes, one-person automated garbage trucks, optical scanners, auto-pilot, movie projectors, electronic hotel keys, dry cleaner conveyors, automated language translators, fast food order entry systems, and many kids toys. 6. Investigate the current technology available for laptop computers, cell phones, iPods or iPads. Select two different models and compare their features and operational characteristics, as well as manufacturer’s support and service. Briefly explain how you might advise (a) a college student majoring in art, and (b) a salesman for a high-tech machine tool company in selecting the best device for his or her needs. (maximum of two typed pages) Consumer Reports (www.ConsumerReports.org) is good web site to see the criteria the experts use. For example, Consumer Reports rates laptop computers on many criteria such as convenience, speed, multimedia, display, expansion, energy, warranty, battery, weight, modular bay, high-speed USB, card slots, infrared port, and s-video output. All performance criteria are defined and how they were scored and tested is described. An art student might need a computer with powerful graphic and video editing capabilities and high amounts of RAM and disk space, while a salesman that travels will need a lightweight laptop with wireless capability. The variety of “applications (apps)” for cell phones and iPods is also increasing daily with apps for checking skiing conditions to restaurant ratings. 7. Research and write a short paper about how business analytics or advances in information systems influence the use of technology and decision making in operations management. ERP and CRM systems use many business analytic methods to support decision making (also see answer to P&A #8). Business analytics plays a critical role in managing value chains, particularly for integrating and analyzing data throughout the value chain within an information systems framework. Netflix, for example, uses analytics everywhere, from marketing to operations to customer service. Netflix collects extensive data using surveys, Web site user testing, brand awareness studies, and segmentation research. It uses analytics to help decide what price to pay for the rights to distribute new DVDs. Using data on customer preferences, film ratings, and comparisons with people who have similar viewing and preference histories, Netflix predicts movies that a customer is likely to enjoy and create personalized recommendations. This information also helps to manage its film inventory by recommending older movies to balance demand for newer releases.

OM6 C4 IM 8. Identify and describe (maximum of two typed pages) a business that uses ERP to manage its value chain (if possible, draw a picture of key elements of the value chain such as sourcing, production, shipping, sales, billing, and so on). What benefits and challenges does ERP bring to this business? Many companies use ERP software. One web site, matthewlefevre.com, lists dozens of them, including ALCOA, Briston Myers Squibb, Chevron, DHL, General Mills, Procter & Gamble, and Siemens. Many consulting firms publish case studies of ERP implementations. Students might also find a local firm that uses ERP and interview someone who works with the system. 9.* Suzy’s Temporary Employee (STE) business, located in a big city, can do an online criminal background check in-house for $1.29 per search with a fixed cost of $29,000. A third party on-line security firm offered to do a similar security search for $8.00 per person with an annual service contract with STE. If STE’s forecast is 3,000 searches next year, should STE continue to do the search in-house or accept the third party offer? What other criteria are important in making this decision? See Chapter 6 and Equations 6.1 and 6.2 for a full discussion of breakeven analysis and formulas plus previous accounting and finance courses. Total cost (TC) = fixed cost (FC) + variable cost (VC) TCcurrent = FC + VC = $29,000 + $1.29D TCnew = $0 + $8D Therefore, $29,000 + $1.29D = $0 + $8D $29,000 = $6.71D D = 4,322 searches Since the demand forecast of 3,000 searches is less than the breakeven quantity, STE should outsource the work. Also, STE saves $8.870 by outsourcing. TCcurrent = FC + VC = $29,000 + $1.29(3,000) = $32,870 (in-house) TCnew = $0 + $8D - $8(3,000) = $24,000 (outsource) The difference is $8,870 The OM spreadsheet template Break-Even can be used to verify this: Copyright © 2016 Outsourcing Break-Even Analysis Cengage Learning Not for commercial Enter data only in yellow cells. use. Production volume Produced In-House 8

3,000

OM6 C4 IM Fixed cost Unit variable cost

$29,000.00 $1.29

Unit cost

$8.00

Total In-House Production Cost Total Outsourced Cost Cost difference (In-House Outsourced) Optimal Decision

$32,870.00 $24,000.00

Outsourced

$8,870.00 Outsource

Other criteria include the risk/difficulty to STE being in an annual service contract and escalating search prices over time (i.e., $8/search1st year, $9/search 2nd year, etc.). The problem assumes the quality of the searches is equal in-house or by the third party. Since this criminal background check is very important it may be best to keep “control” by using only in-house work, and quality may also be better. 10.*A manager of Paris Manufacturing that produces computer hard drives is planning to lease a new automated inspection system. The manager believes the new system will be more accurate than the current manual inspection process. The firm has had problems with hard drive defects in the past and the automated system should help catch these defects before the drives are shipped to the final assembly manufacturer. The relevant information follows. Current Manual Inspection System Annual fixed cost = $45,000 Inspection variable cost per unit = $15 per unit New Automated Inspection System Annual fixed cost = $165,000 Inspection variable cost per unit = $0.55 per unit Suppose annual demand is 8,000 units. Should the firm lease the new inspection system? Total cost (TC) = fixed cost (FC) + variable cost (VC) TCcurrent = FC + VC = $45,000 + $15D TCnew = $165,000 + $.55D Therefore, $45,000 + $15D = $165,000 + $0.55D $14.45D = $120,000 D = 8,305 hard drives

OM6 C4 IM From an economic perspective the breakeven volume is 8,305 hard drives. If D = 8,305, we are indifferent to the two inspection systems assuming quality is equivalent. If D is less than 8,305 then the current manual system is preferred. Since D = 8,000 and less than the breakeven quantity of 8,305 we should keep the current manual system. See Chapter 6 and Equations 6.1 and 6.2 for a full discussion of breakeven analysis and formulas plus previous accounting and finance courses. 11.*In Problem 10, assume the cost factors given have not changed. A marketing representative of NEW-SPEC, a firm that specializes in providing manual inspection processes for other firms, approached Paris Manufacturing and offered to inspect parts for $19 each with no fixed cost. They assured Paris Manufacturing the accuracy and quality of their manual inspections would equal the automated inspection system. Demand for the upcoming year is forecast to be 8,000 units. Should the manufacturer accept the offer? See Chapter 6 and Equations 6.1 and 6.2 for a full discussion of breakeven analysis and formulas plus previous accounting and finance courses. If NEW-SPEC, a third party firm, does the inspections the total cost is $19D = $45,000 + $15D $4D = $45,000 D = 11,250 hard drives Since D = 8,000 is less than 11,250 drives, the manufacturer should accept the offer because the total cost is $152,000 (8,000*$19) with NEW-SPEC and $165,000 ($45,000 + $15*8,000) with their current manual inspection system. They will save $13,000 by outsourcing. The Excel template Break-Even may be used to solve this problem: Copyright © 2016 Outsourcing Break-Even Analysis Cengage Learning Not for commercial Enter data only in yellow cells. use. Production volume

8,000

Fixed cost Unit variable cost

$45,000.00 $15.00

Unit cost

$19.00

Produced In-House

Outsourced

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Total In-House Production Cost Total Outsourced Cost Cost difference (In-House Outsourced) Optimal Decision

$165,000.00 $152,000.00 $13,000.00 Outsource

12.*Edwards Machine Tools needs to purchase a new machine. The basic model is slower but costs less, while the advanced model is faster but costs more. Profitability will depend on future demand. The following table presents an estimate of profits over the next three years. Demand Volume Decision Low Medium High Basic model $80,000 $100,000 $150,000 Advanced model $40,000 $110,000 $220,000 Given the uncertainty associated with the demand volume, and no other information to work with, how would you make a decision? Explain your reasoning. This is a difficult decision because of the uncertainty in the volume. The wrong decision can lead to significant lost profit opportunity. For example, if the basic model is chosen and demand turns out to be high, only $150,000 will be realized as opposed to $220,000 with an advanced model. With absolutely no other information, it is a question of how much risk one is willing to take. Going with the advanced model has a risk of achieving only a $40,000 profit with low demand, while if the basic model is chosen, one is guaranteed at least $80,000 but may forego the potential for a larger payoff. If there is reason to believe that the likelihood that demand will be either low or high is good, then the decision is obvious, although some risk still remains. Operations managers face such risks all the time, and this is a good simple problem to help students understand the nature of such risks. This question ties into formal decision analysis and the instructor might want to cover decision analysis if students have not studied this topic in other courses (see Supplementary Chapter E on the text’s web site). The Excel template Decision Analysis can be used to find classical decision strategies based on the material in the supplementary chapter. The aggressive strategy (maximax) is to choose the advanced model; the conservative strategy (maximin) is to choose the basic model; and the opportunity loss strategy is to choose the advanced model.

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13.* Suppose that in Problem 12, a forecasting study determines that he probabilities of demand volume are Low = 0.2, Medium = 0.2, and High = 0.6. Using the techniques in Supplementary Chapter SC E, determine the expected value decision. How appropriate is it to use this criterion? The expected value can be computed using the Excel template Decision Analysis. We see that the expected profit for the advanced machine is $162,000 while it is only $126,000 for the basic model. Thus, the advanced machine should be chosen using this criterion.

Expected value should only apply to repeated decisions. As this is a one-time decision, expected value can be misleading, and the instructor should focus on risk evaluation. Other qualitative and strategic criteria may impact the final decision but in this problem the advanced machine should be chosen.

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14. For the information provided in Problem 13, compute the expected value of perfect information (EVPI) as discussed in Supplementary Chapter SC E. Clearly explain how to interpret EVPI for Edwards Machine Tools. With perfect information, we would make the following decisions: If the future event (demand volume) will be low, then choose the basic model; if the future event will be medium, choose advanced; and if the future event will be high, choose advanced. The expected value for these decisions would be 0.2(80,000) + 0.2(110,000) + 0.6(220,000) = $170,000 Thus, with perfect information, we improve the expected profit by $170,000 $162,000 = $8,000. This is the expected value of perfect information. We would never want to pay more than this for any information to help predict the demand volume. 15.* A company is considering three vendors for purchasing a CRM system, Delphi Inc., CRM International, and Murray Analytics. The costs of the system are expected to depend on the length of time required to implement the system, which depends on such factors as the amount of customization required, integration with legacy systems, resistance to change, and so on. Each vendor has different expertise in handling these things, which affect the cost. The costs (in millions of $) are shown below for short, medium, and long implementation durations. Conduct a decision analysis using the techniques in Supplementary Chapter SC E to evaluate the choice of a vendor. Clearly explain your recommendation.

The Excel template Decision Analysis may be used to evaluate this decision. As shown below, each decision strategy (minimin, minimax, and opportunity loss) results in a different decision. The instructor can use this question to discuss how different decision strategies reflect different attitudes toward risk.

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Case Teaching Notes: Bracket International – The RFID Decision Overview The case introduces the student to RFID criteria and decisions as a CEO, Mr. Jack Bracket, considers replacing the bar coding system used in three factories with a RFID system. Some of RFID’s costs and benefits can be used to compute a payback. Both qualitative and economic criteria are cited in the case. Less obvious case issues include changing the workflow patterns of an already good workforce, fast follower or first adopter strategies for a small firm, and short- and long-term strategies and practices for technology adoption. Instructors can introduce these issues during the class discussion. The case confronts the student with “strategic versus economic” tradeoffs and a “first adopter versus fast follower” decision. Case Questions and Brief Answers 1. How does RFID compare to bar-coding? By searching the Internet and library, summarize the advantages and disadvantages of RFID systems. Did you find any RFID applications for services? (maximum of two pages) Student will find many advantages and disadvantages such as: Advantages of RFID • • •

No line of sight required to read Less theft and miss-placed inventory Less accounting audits required and savings 14

OM6 C4 IM • • • • • • •

Locate items quickly in factories and warehouses Less miss-reads and rework More difficult to counterfeit than bar coding Information on some RFID tags can be updated More accurate and timely data on real time basis Faster workflows/more capability to change orders/jobs (higher throughput) Enabler to make processes capable of on demand production

Disadvantages of RFID • • • • • • • • • • • •

High costs of readers, tags, systems Not so good for liquids and metals Damage/interference from static electricity, water, heat, etc. Unproven technology w/o a critical mass of users Substantial training costs RFID “dead zones” similar to cell phones ROI low or negative and payback long Dead zones due to equipment placement, weak signals (like cell phones) Privacy concerns (track customers, marketing and advertising to individual customers as they walk through a retail store, etc. See Tom Cruise in the movie Minority Report) – invasive technology Possible negative reaction from employees use to bar coding Multiple readings of the same item/tag (called ghost tags) Risky and tags are high cost

How does RFID compare to bar-coding? • • • • • • •

RFID faster and can speed up entire supply chain Ability to update RFID information in tags and readers Potential to monitor shelf life of products RFID is too invasive (privacy and legal concerns) Static electricity tag and reader damage etc. risky Multiple readings of same item due to signal problems RFID tags can store at least 2kB of data whereas bar codes use only 10-12 digits (memory capability

2. What is the economic payback in years for this possible RFID adoption? (Hint: There are two benefits that can be quantified - labor savings due to faster scan times and miss-read savings. Annual benefits divided by economic benefits equals’ payback.) Students will calculate economic paybacks from 1 to 4 years depending on their assumptions (some of which are wrong, not needed, or beyond the case facts). If they stick to the case facts the simple payback should be around 2.56 years as shown below. See example payback computations that follow. 15

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Bracket International - The RFID Decision - Numerical Solution

Sales Cost of Goods Sold Average Inventory Factory Operates Employee Annual Salary Miss Reads Bar Code % Miss Reads RFID % Average Miss Read Cost No. Items Scanned/Day No. Items Scanned/Yr

$78,000,000 $61,000,000 $14,000,000 260 $69,000 0.020 0.002 $4.00 9,850 2,561,000

Bar Code Scan Time/Item (seconds) = No. Scan Seconds/Yr

25,610,000

Inventory Days Supply (IDS) =

Average Total Inventory Cost of Goods Sold per Day

CGS/Day =

$234,615.38

Inv Day Supply =

59.7

(25,610,000/3600) = 7,114 hours and 7,114/2000 = 3.56 people

(9,850*260) 10 [(10 sec/item)(260)(9,850)]

Direct FTE Labor Saved Due to Scan Time Reduction = Total Labor $ Saved Due to Scan Time Reduction =

Annual Cost Savings

($14,000,000/$234,615)

Students often convert to hours so all 3 factories

One Full Time Equivalent Employee Time (Hours) per Year = One Full Time Equivalent Employee Time (Seconds) per Year =

No of Miss Read Savings 46,098 $ Saved Due to Miss Read Reduction

($61,000,000/260)

days/year

2,000 7,200,000 3.56 $245,429

(2,000*3600)

people (25,610,000/7,200,000) (3.56*$69,000)

(0.02 - 0.002)(25,610,000) $184,392

$429,821

RFID Investment Costs Readers, Scnners, Tags New Operating Software Total Cost

$620,000 $480,000 $1,100,000

Simple Payback (years)

2.56

You do not have enough case information to do a NPV cash flow analysis over years 0 to n so a simple payback is most appropriate.

(annual cost savings/benefits)

Caution: The case provides data for a one-time payback calculation and does not give data for say a five year planning analysis cash flow and ROI calculation. Some students may expand the case to multiple years so you may want to inform them not to do a multiple year NPV analysis. 3. What are the risks of adopting a new technology too early? Too late? You can define first adopter and fast follower and write two headings on the board. The two key questions are: What to adopt? When to adopt? Obviously, a first adopter benefits from an early marketplace lead, reduced costs due to beta testing agreements with RFID developers, enhanced brand image, and the potential for huge profits (Apple iPhone, iPod, 16

OM6 C4 IM iPad, etc.). Fast followers wait and watch the technology and markets, and then jump in fast once the technology is proven and/or adopted by other competitors or the government. Laggards wait too long and miss market opportunities and can even be shut out of the market. Historically, Apple is a great example of introducing innovative products with different customer segments adopting the technology at different times while competitors enter the market trying to catch up (i.e., a fast follower) 4. What do you recommend Mr. Bracket do in the short- and long-term? Explain your reasoning. Short-term Recommendations/Actions • • • •

Do not adopt RFID now (firm is too small, too big a risk, etc.) Begin RFID awareness training program with employees Improve current process and supply chain design, flows, and jobs with RFID in mind Try to win back Wolf and Home Depot customers – meet with them, co-firm teams (RFID helps Bracket respond to their frequent order changes) Long-term Recommendations/Actions

• •

•

Watch RFID technology and supply chain players and kept track of what competitors are doing Adopt a fast follower strategy, not a first adopter strategy (let the big players like US government and Wal-Mart lead the way as first adopters and work out RFID problems, and stabilize the use of the technology; to gain the benefits entire supply chains need RFID capabilities, not just parts of it; critical mass of adopters, etc.) Long-term RFID capabilities could contribute to a huge increase in global productivity.

Teaching Plan You can begin class by asking your students if they have seen bar-coding in action, and of course they will say yes. Ask them to describe the situation (retail, education, warehouses, trucking, etc.) and point out possible advantages and disadvantages of barcoding technology. Also, ask how much time it takes people to position and read the barcode considering multiple attempts to scan, etc. Then ask the same question w/r to RFID and if you’re lucky one or two student may have been exposed to an RFID situation. After this lead-in, the case questions can be addressed in any order you think best. “What if” analyses can also be done if students used a spread sheet. And, of course, if you have teams present their case analyses either formally or informally many issues will come up.

The End!

OM5 C5 IM OM4 Chapter 5: Goods and Service Design Discussion Questions 1. How might modern technology, such as the Internet, be used to understand the voice of the customer? Consumers provide a lot of “free” information in the form of blogs, discussion groups, web site product reviews, web page click and order analysis, and so on. Companies can leverage this information by carefully monitoring comments about their products as well as their competitors’ products. The cost of monitoring Internet conversations (i.e., high scalability) is minimal compared to the costs of other types of survey approaches, and customers are not biased by any questions that may be asked. However, the conversations may be considerably less structured and unfocused, and thus may contain less usable information. Also, unlike a focus group or telephone interview, inaccurate perceptions or factual errors cannot be corrected. See Byron J. Finch, “A New Way to Listen to the Customer,” Quality Progress 30, no. 5 (May 1997), 73-76. 2. What lessons can be learned from the LaRosa’s Pizzeria boxed example? Customer requirements, as expressed in the customer’s own terms, are called the voice of the customer. They represent what customers expect a product or service to have or to do. The LaRosa’s example demonstrates that organizations must listen carefully to customers to fully understand their needs and expectations, and have good processes for doing so. Also go over the Building a Better Pizza box in the chapter. 3. In building a House of Quality, what departments or functions should be involved in each step of the process? Voice of the customer: Marketing Technical features: Design, Operations, and Marketing Competitive evaluation: Marketing and Design Customer requirement importance: Marketing and Design Deployment priorities: Operations 4. Explain how the goal post view of conforming to specifications differs from Taguchi’s loss function. Would you rather buy an automobile where suppliers used the goal post or Taguchi models? Why? Adopters of the Taguchi model try to design processes to hit the target value where any deviation from perfection results in an economic loss. Adopters of the goal post model try to design processes to be within a range of performance. A result very close to the low or high end of the range is deemed acceptable. (Show the power point slides or drawn the two models on the board.)

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You most likely have many examples you can share with students but here is a simple one. If a shaft on an automobile transmission is close to the high end of the goal post range (specification) and the hole that it goes through is close to the low end of its range then what happens? The shaft fits too tightly in the hole as it rotates and creates friction and heat and wears out sooner. In the reverse case, the slightly too small shaft rattles in slightly too big a hole. Consumer Reports for automobiles has many examples of mostly all red or all black circles indicating excellent to poor quality levels of automobiles. Once you have discussed this question in class and used examples most students would prefer to buy a vehicle from suppliers and manufacturers who use the Taguchi model. 5. Propose an explicit service guarantee for a fast-food restaurant. Clearly explain why you included the features of your service guarantee (maximum of one page). Do you think that a restaurant would adopt it? Why or why not? At one extreme, students may write something like “XYZ Restaurant will give you a full credit on current or future dinners if we do not provide 100% customer satisfaction.” To invoke the service guarantee, you simply have to tell us what the problem was, how to correct it, and what payout you want for your inconvenience.” This type of SG “trust” the customer to tell the truth and may maximize economic and non-economic payouts. At the other extreme, students may write something like “XYZ Restaurant will listen to your complaint and make every effort to make you happy and comfortable. Please download our service-upset forms, fill them out, and have them notarized by fellow customers and our employees, and mail to our service guarantee department. You will receive our reply within sixty days.” This type of SG guarantees nothing and the process to invoke is long and complicated, and the restaurant does not trust the customer. Here, total service upset economic payouts most likely would be very low. Most restaurants have implicit or explicit service guarantees somewhere in between these two extremes subject to corporate policy and legal and government regulations. Problems and Activities (Note: an asterisk denotes problems for which an Excel spreadsheet template on the CourseMate Web site may be used.) 1. Build a House of Quality (showing only the Voice of the customer, Technical features, Interrelationships, and Relationship matrix from Exhibit 5.2) for designing and producing chocolate chip cookies. The voice of the customer consists of: a. Soft

OM5 C5 IM b. c. d. e. f. g.

Fresh Bittersweet Not burned Large size Moderate price Lots of chocolate

The technical features identified are a. baking temperature b. baking time c. type of chocolate d. proportion of chocolate e. size f. shape g. thickness h. batch size i. amount of preservatives Clearly explain your reasoning for your ratings of the interrelationships and relationship matrix. Can you think of other technical features that should be included to better address the voice of the customer? Below is a HOQ template that students can use (you can copy it and embed it on a PowerPoint slide for class discussion). There is no one correct solution, but the answers should be logical. For example, softness would be affected by baking temperature and baking time as strong relationships, with perhaps medium relationships with size and thickness. Bittersweet would bear a strong relationship with the type of chocolate, etc. One thing to emphasize is that every combination need not have a relationship! Students often feel that they have to put something in every cell. The idea of the HOQ is to identify the most significant relationships. Students should also include relationships between technical requirements in the roof. For example, baking time and baking temperature probably have a strong relationship with each other; increasing the baking temperature generally requires a shorter baking time and vice-versa.

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2.* Suppose that the specification for a part (in inches) are 6.00 ± 0.02, and the Taguchi loss function for some part is estimated to be L(x) = 6,800 (x − T)2. Determine the loss if x = 6.05 inches. The Taguchi Loss Function is: L(x) = k(x - T)2 = 6,800(6.05 - 6.00)2 = 6,800 (.05) 2 = $17 per part 6.05 is also beyond the specification of 6.02 so we expect the Taguchi economic loss to be high per part. For say 1,000 parts the L(x) = $17,000. If you know any 3 of the 4 Taguchi model variables, you can solve for the fourth. The Excel template Taguchi can be used to compute the loss per part; use the second portion of the template “Loss Calculation for a Specific x” as shown below Loss Calculation for a Specific x Target specification, T Dimensional value, x k Loss

6 6.05 $6,800.00 $17.00

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3.* A quality characteristic has a design specification (in cm.) of 0.200  0.02. If the actual process value of the quality characteristic is at the boundary of the tolerance on either side, the product will require a repair of $30. Find the value of k and state the Taguchi loss function. What is the loss associated with x = 0.205? The Taguchi Loss Function is: L(x) = k(x - T)2 30 = k(0.02)2 or k = 75,000 The Excel template Taguchi can be used to compute this: Calculation of k for the Loss Function Deviation from target Loss associated with deviation k

0.02 $30.00 $75,000.00

The Taguchi loss function is L(x) = 75,000(x – 0.2)2 The loss associated with x = 0.205 is L(x=0.205) = 75,000(0.205 – 0.2)2 = $1.87 Loss Calculation for a Specific x Target specification, T Dimensional value, x k Loss

0.2 0.205 $75,000.00 $1.87

4.* For the situation in Problem 3, what are the economic design specifications if the cost of inspection and adjustment is $7.50? Using the logic in the Solved Problem in the chapter, the economic specification limits should be approximately between 0.190 and 0.210. The Excel template Taguchi can be used to confirm this; use the third portion of the template “Economic Design Specifications” as shown below. Economic Design Specifications Target specification, T k Cost of inspection and adjustment Break-Even Tolerance Lower specification limit Upper specification limit 5

0.2 $75,000.00 $7.50 0.010 0.190 0.210

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This problem illustrates that specification limits can be determine economically based on the Taguchi model. Of course, we do not know if these specification limits are technically capable of doing the job. 5.* Suppose that the design specifications for hydraulic cylinder are 10.00  0.10 centimeters, and that the Taguchi loss function is estimated to be L(x) = 1,400 (x − T)2. (a) Determine the estimated loss for a production order if the quality characteristic under study takes on a value of 10.04 and 100 parts are produced. The Taguchi Loss Function is: L(x) = k(x - T)2 = 1,400 (10.04 - 10.00)2 = 1,400(.04) 2 = $2.24 per part Loss Calculation for a Specific x Target specification, T Dimensional value, x k Loss

10 10.04 $1,400.00 $2.24

If 100 parts are produced at this value, the total loss is 100(2.24) = $224. (b) Assume the production process is recalibrated weekly and a new sample of cylinders after recalibration reveals an x-bar of 9.789. What action, if any, is need in this situation? Explain. If 100 parts are produced at an average x-bar of 9.789 centimeters the loss per unit is $62.33, which can be verified using the Excel template as shown below. L(x) = k(x - T)2 = 1,400 (9.789 - 10.00)2 = 1,400(.211) 2 = $62.33 per part Loss Calculation for a Specific x Target specification, T Dimensional value, x k Loss

10 9.789 $1,400.00 $62.33

Thus the total Taguchi economic loss for 100 parts is $6,233. In (a) the economic loss was low and actual process performance was very close to the target design specification but in (b) the recalibration was probably done

OM5 C5 IM incorrectly, and now the production process needs to be stopped and recalibrated again. Many different things can cause a production process to drift off target or change abruptly so management must constantly monitor processes and outputs. Make sure students realize that the Taguchi model helps managers translate design specs versus actual process performance into dollars. Taguchi dollar estimates can be used to help justify process and product improvements. 6. The service center for a brokerage company provides three functions to callers: account status, order confirmations, and stock quotes. The reliability was measured for each of these services over 1 month with these results: 0.80, 0.70, and 0.96, respectively. What is the overall reliability of the call center? Because this is a series system, reliability = (0.80)(0.70)(0.96) = 0.5376 You might ask a “what if” questions during class such as: if order confirmation reliability could be improved from .7 to .8, what is the overall system reliability now? (0.6144). 7. Two cooling fans are installed in some laptop computers. Suppose the reliability of each cooling fan is 0.98. What percent improvement in reliability does adding the second fan provide? A

B Because this is a parallel system, reliability = 1 - (1 - 0.98)(1 - 0.98) = 1 – (.02)(.02) = 1 - .0004 = 0.9996 Percent improvement is 1-0.9996/0.98 = 2%. So is it worth the extra cost and space to add a second fan? Probably not. 8. Given the following diagram, determine the total system reliability if the individual component reliabilities are: A = 0.94, B = 0.82, and C = 0.87. (Hint: Use equations 5.2 and 5.3 and note that the reliabilities of the parallel components are different.)

B A

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First find the reliability of the parallel subsystem BC: Reliability = 1 - (1 - 0.82)(1 0.87) = 1 – (.18)(.13) = 1 – 0.0234= .9766. This is the composite reliability of collapsing B and C into one part. Now find the series reliability of A and the BC composite subsystem: Reliability = (0.94)(0.9766) = 0.918. Make sure students understand these parallel reliability computations must be done first; then use the series computation method. You might also mention to the students that the space shuttle had five identical and parallel computers on board used most importantly for reentry into the earth’s atmosphere. 9. A simple electronic assembly consists of two components in a series configuration with reliabilities as shown in the figure below. (We’ll call Design Option A)

Engineers would like to increase the reliability by adding additional components in one of the two proposed designs shown below:

(Design Options B and C)

a. Find the reliability of the original design. Reliability = (0.9)(0.95) = 0.855

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b. Explain how the configurations of the proposed designs differ. Design option B places two components in series (.9 and .95) and duplicates this two-component series in a parallel and redundant configuration. Design option C places two redundant components in parallel (.9 first and later .95) and once they are collapsed we have composite reliabilities in a series configuration. Make sure students understand that for option B, series reliability computations must be done first; then use the parallel computation method. For option C, the parallel computations muse be done first, then the series reliability. c. Which proposed design has the best reliability? Option B Series reliability = (0.9)(0.95) = 0.855 Parallel reliability= 1 - (1 - 0.855)(1 - 0.855) = 1 – (.145)(.145) = .978975

Option C First parallel reliability = 1 - (1 - 0.9)(1 - 0.9) = 1 – (.1)(.1) = 1 – 0.01 = .99 Second parallel reliability = 1 - (1 - 0.95)(1 - 0.95) = 1 – (.05)(.05) = 1 – 0.0025 = .9975 Series reliability = (0.99)(0.9975) = 0.987525 Option C is the highest reliability (best design). 10. Research and write a short paper (maximum two typed pages) illustrating an example of how a company applies concepts of Design for Environment (DfE). A Google search for “design for environment” results in over 1.5 million hits so the students have plenty to write about. According to Wikipedia there are three main concepts that fall under the Design for Environment umbrella: ▪

▪

Design for environmental processing and manufacturing: This ensures that raw material extraction (mining, drilling, etc.), processing (processing reusable materials, metal melting, etc.) and manufacturing are done using materials and processes, which are not dangerous to the environment or the employees working on said processes. This includes the minimization of waste and hazardous by-products, air pollution, energy expenditure and other factors. Design for environmental packaging: This ensures that the materials used in packaging are environmentally friendly, which can be achieved through the reuse of shipping products, elimination of unnecessary paper and packaging products, efficient use of materials and space, use of recycled and/or recyclable materials.

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Design for disposal or reuse: The end-of-life of a product is very important, because some products emit dangerous chemicals into the air, ground and water after they are disposed of in a landfill. Planning for the reuse or refurbishing of a product will change the types of materials that would be used, how they could later be disassembled and reused, and the environmental impacts such materials have.

Life cycle assessment (LCA) is employed to forecast the impacts of different (production) alternatives of the product in question, thus being able to choose the most environmentally friendly. A life cycle analysis can serve as a tool when determining the environmental impact of a product or process. Proper LCAs can help a designer compare several different products according to several categories, such as energy use, toxicity, acidification, CO2 emissions, ozone depletion, resource depletion and many others. By comparing different products, designers can make decisions about which environmental hazard to focus on in order to make the product more environmentally friendly. 11. Choose a servicescape for a business with which you are familiar and list key physical attributes of the servicescape and their impact on customer service and value. Explain how the servicescape establishes the behavioral setting for your example. The servicescape is all the physical evidence a customer might use to form an impression. The servicescape also provides the behavioral setting where service encounters take place. Some servicescapes, termed lean servicescape environments, are very simple. Ticketron outlets and Federal Express drop-off kiosks would qualify as lean servicescape environments, as both provide service from one simple structure. More complicated structures and service systems are termed elaborate servicescape environments. Examples include hospitals, airports, and universities. Other examples include Southwest (lean servicescape) versus United Airlines (elaborate servicescape), Motel 6 versus Four Seasons hotels, and community college versus Ivy League schools. A Google search of “servicescape” reveals 398,000 hits but many are not the concept defined here. But there still is much good source information on-line on servicescapes for-yourinformation. 12. Select a service at your school, such as financial aid, bookstore, curriculum advising, and so on. Propose a redesign of this service and its service delivery system. First, baseline the current service and system, and then suggest how to redesign and improve it. Make use of chapter ideas as best you can. Most students will certainly understand the flaws in the current systems they encounter. Students often have better ideas for improvement than the people who work in these systems daily. One objective of this question is to get students to always “baseline current process performance” first so once improvements are made, then percent improvement can be documented for management (and on the

OM5 C5 IM students resume!). In class try to reinforce ideas in the chapter such as using Exhibit 6.1, house of quality, product and process simplification, service encounter design, and so on. 13. Identify a job in an organization and describe how the four elements of service encounter design are designed and managed for this job. (The job you select could be in a professional organization such as a dentist or tax advisor, or in a routine service organization such as a hotel check-in desk clerk or airline flight attendant.) The student should focus on the following four service encounter design elements: (a) customer contact behavior and skills, (b) service-provider selection, development, and empowerment, (c) recognition and reward, and (d) service recovery and guarantees. These four elements help build employee service management skills and behaviors for the job. Many of the ideas in the chapter can be applied to the job selected such as how employees are trained to handle service upsets, their degree of empowerment, and supporting servicescapes, and technology. 14. When Walt Disney created the Disney empire in the 1950s, he forbid its star characters such as Mickey Mouse and Pluto to talk. Mr. Disney thought it would be too difficult to control the service encounters between customers and the Disney characters, and it would ruin the “magic” of Disney. Therefore, Disney characters were trained to gesture and use only their body language to interact and entertain guests. Today, Disney is experimenting with talking characters. What are some advantages and disadvantages of talking Disney characters from a service design perspective? Research the current status of this Disney design decision and include a brief summary in your write-up (no more than two typed pages). Advantages of Disney Characters Talking to Customers • Build customer relationships and loyalty • Create an interactive set of service encounters • Can use the kid’s name in service encounters • Customize conversation to each customer (mass customization) Disadvantages of Disney Characters Talking to Customers • • • •

Customers may not like what Disney character says, their tone of voice, local dialects, faint or weak voice, etc. Lose partial control of Disney “magical” service encounters Ruin the magic – imaginary “ideal” of a Disney character; imagination is better than reality. Requires better hiring and training programs (cost)

OM5 C5 IM To-date, the results of this experiment have been mixed with many stories pro and con; some service upsets make the newspapers. Kids and their parents might not like what the Disney character says, their tone of voice or accent. Others like the extra interaction such as using the kid’s name. Was Mr. Disney right? 15. Identify a service-provider job and associated service encounters and design and write a job description for it. (Consider desired customer contact skills and behaviors, education and training requirements, empowerment capabilities, hiring criteria, and so on.) Student will (and should) select jobs they have experience with such as being a waiter, bartender, hotel front desk or bell person, retail clerk, bank teller, receptionist, consultant, call center representative, airline flight attendant, pizza delivery person, and so on. This may be the first time they have ever written a job description for a service job. After they describe their job ask them questions such as what training and education level is required, what will be the degree of job empowerment, how will you do recognition and reward for this job, what degree of patience and empathy toward other people (customers) do you need, and so on. Does this job require service management skills? Explain.

Teaching Note for Tom’s Auto Service Case Overview Tom’s Auto Service (TAS) is a quick service vehicle oil and lubricant change service much like Jiffy Lube and Tuffy Tire & Auto Service. The case allows the students to evaluate store managers, standards of performance, employees, facilities and the overall customer experience based on case information and analysis of survey results. The chapter supports the analysis of the case by defining Service delivery system design, The principal dimensions are: • facility location and layout, • the servicescape, • service process and job design, • technology and information support systems, and • organizational structure. Integrating these elements is necessary to design a service that provides value to customers and can create a competitive advantage. A poor choice on any one of these components, such as technology or job design, can degrade service system efficiency and effectiveness. Service encounter design. 12

OM5 C5 IM The principal dimensions are: • customer contact behavior and skills; • service-provider selection, development, and empowerment; • recognition and reward; and • service recovery and guarantees. These elements are necessary to support excellent performance and create customer value and satisfaction. The case is really about service delivery system design, and especially service encounter design. Regardless of how students analyze the survey data, the key issue is whether they identify the key problem(s), which is the “lack of adequate service management training and rewards, and customer interaction skills for auto mechanics.” You can’t just take backroom mechanics and push them into the front room without changing the hiring and training processes to build service management skills. Students will not totally reach this conclusion on their own so the instructor must lead this discussion. Once they mention there might be a problem with the employee skills and comment on the customer written comments, it is time for you to take the lead. As an extra assignment you can also ask students to flowchart the oil change process at RAS or a similar business. Case Questions and Brief Answers 1. Define and draw the customer benefit package and state TASs mission, strategy, and rank order of competitive priorities. A typical student dual CBP might be as follows:

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Peripheral Peripheral Good Service Bill and 90 Day Guarantee Warranty Warrantee Broc Peripheral Goods Peripheral Sofas & Services Magazines Coffee, Drinks Primary Good Primary Service & Wi-Fi Parts, tires, oil, Customer wiper blades, etc. Services Excellence Peripheral Goods Diplomas & Certifications On Walls

Peripheral Service Explain technical Aspects of service

Service Encounters With Customers

Strategy – Offer friendly customer service in a clean and professional environment to repair and maintain customer vehicles at multiple service centers. One ranking of competitive priorities might be • • • • • •

Product Quality #1a Service Quality #1b Time #2 Price #3 Flexibility #4 Innovation #5

What differentiates TAS from competitors? 2. Identify and briefly describe the “design” features of the (a) service delivery system and (b) service encounters. Use the case information to discuss each of the service delivery system and service encounter design features. For example, TAS facilities score high (4.82) and are part of the servicescape. So are employee uniforms and grooming. Notice that each store has a “window” where customers can see the “backroom” and their vehicle much like LensCrafters. 3. Identify and briefly describe five processes TAS stores use and their relative importance.

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Remember – they have 32 stores – multi-site management and consistent performance across all stores – not easy to do – must “standardize” all processes and systems. • • • • • • • • • • • • • •

Hiring process Promotion process and annual employee reviews Employee training processes Employee recognition and reward processes Customer appointment process and call center service management skills Customer check-in Vehicle technical diagnosis, repair, and maintenance Customer lounge processes (fresh coffee, clean, HD TV, working Wi-Fi, comfortable sofas Parts ordering (purchasing) process Inventory management process Green process for disposal of oils and lubricants Primary processes (oil change, tire change, install wiper blades, billing, information technology including customer vehicle history, etc.) Checkout process (billing, etc.) Advertising/marketing processes including discount coupons, specials, and customer e-mails on vehicle maintenance.

4. Given your analysis of the survey data, what opportunities for improvement, if any, do you recommend? TN Exhibit 1 Tom's Auto Service

Store Managers Q1 Q2 Q3 Average

4.36 3.87 4.4 4.21

Standards of Work Performance Q4 4.66 Q5 4.43 Q6 4.13 Q7 4.54 Q8 4.2 Average 4.39 Employees Q9 Q10

3.8 4.01

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3.88 3.90

Facilities Q12 Q13 Average

4.84 4.79 4.82

Overall Experience Q14 4.59 Q15 3.94 Q16 4.45 Average 4.33

There is an interaction/communication problem between mechanics and customers (see employee average score = 3.90; the lowest of all scores). More training on service management skills is required, and possibly change the hiring process to employ customer friendly mechanics. The ten written comments reinforce the survey results. The mechanics may not realize that their jobs now require more than production (back office) skills--they now must have service management (front- and back office) skills. It is not enough for the managers to be good at interacting with customers, the mechanics must also be trained to do better. Training (video, onthe-job, certification exams, etc.) for mechanics on customer interaction and service management skills should be formalize and done as quickly as possible. A class discussion of low versus high customer contact skills is a must somewhere during the case discussion. A recognition and reward system for mechanics based on customer comment cards might provide an incentive to change behavior. It is also evident that customers like the facility and servicescape (4.82; the highest average score). The beverages, television, current magazines, comfortable sofas and chairs, blue employee uniforms, signs, maintenance brochures, and employee and facility cleanliness are all part of the servicescape. You might ask the students to define the servicescape during class discussion? They do seem to keep their 32 service centers clean and well maintained (i.e., standard of performance average score = 4.39). The store layout is very good. The mechanics seem to fix the vehicle (i.e., technically competent). The customer waiting room is a hit with customers – relaxing, clean, comfortable, refreshments, and they can access the TV and Internet. 5. Summarize you final recommendation to the CEO. Main recommendation

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Everyone – managers and mechanics – need service management skills and training if they are to differentiate themselves from competitors. (Or you can’t hire for backroom mechanic skills and then move part of their job to front room interactions with customers without service management training.) 6. Other questions you might discuss 1. What is the “service window” for this service delivery system? (short, 18 + 9 minutes or 27 minutes, this short service window places demands on the operating systems such as staff and facility capacity, scheduling, etc.) The same is true for airplane gate turnaround time at the airport. 2. What is the content of a service management-training program? (technical skills, human interaction and behavior skills, and marketing and cross- and upselling skills) 3. Would you close the window bay so customers cannot see out into the backroom? 4. What data would you collect to organize the types of service upsets employees are confronted with on a daily basis? (Pareto analysis, top ten types of service upsets and a pre-defined recovery plan, etc.) 5. How will you handle service upsets? Procedure? 6. Will you allow the customer to go out into the bay (work) area to inspect and see their vehicle? Safety? Liability? 7. Can you use the GAP model in Chapter 15 to evaluate the survey data? Teaching Plan Students have experience with this service delivery system so let them begin class by describing good and bad experiences. The instructor must often manage the classroom discussion to highlight service management skills, service upsets, and front- and backroom skill differences. Then you can work your way through the case questions on the board or via student (team) presentations. This case takes 20 to 40 minutes if you do not discuss extra questions. THE END!

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OM 6 Chapter 6: Supply Chain Design Discussion Questions (1)

One study that focused on the impact of China trade on the U.S. textile industry noted that 19 U.S. textile factories were closed and 26,000 jobs lost in 2004 and 2005. If these factories had not closed, it would have cost U.S. consumers $6 billion more in higher textile prices. Assuming these facts are true, offer an argument for or against off-shoring U.S. jobs. This is a difficult issue with economic, social, and political consequences. How does one trade off the loss of domestic jobs with global economics? This question can trigger a robust class debate, and students will most likely have strong opinions in either direction. This debate is a key topic in the 2016 US presidential elections with Hillary Clinton, Donald Trump, Ted Cruz, and others arguing their plans to bring jobs back to the USA (reshoring). Other issues may come up such as the role of firms and government in retraining people who lose their jobs, the importance of an educated workforce in today’s information society, etc. One student made a very convincing argument that the “true cost” to U.S. society of losing 26,000 jobs far exceeds $6 billion in higher prices and placed much of the blame on government policies such as taxes, regulatory laws, lack of retraining programs, etc.

(2)

Explain why it is important for operations managers to understand the local culture and practices of the countries in which a firm does business. What are some of the potential consequences if they don’t? Culture defines the unique lifestyle for a nation or region. Since businesses locate their factories, call centers, warehouses, and offices around the world, operations managers need to be sensitive and understand the local culture. Notions of authority, time, color, value, respect, humor, work ethic, manners, and social status may be quite different from one’s own cultural norms. Global sourcing agents, for example, are good examples of a supply chain management job where these cultural skills are needed. The agent is on the other side of the planet representing their company in a different culture and negotiating big supply chain contracts based on cost, time, quality and sustainability. See Exhibit 6.4 (Things to Consider When Making Offshore Decisions) for offshore criteria.

(3)

Define the principal criteria that might be used for locating each of the following facilities: • hospital – minimize distance traveled, response time, labor supply and skills, communications capability, and accessibility to target population and good roads • chemical factory – water supply, transportation availability; labor costs and skills, tax incentives, zoning laws, regulatory policies, not close to population centers • fire station – distance to business, response time, multiple communication capabilities, proximity to key buildings such as schools and high rise buildings, and housing centers • coffee shop– closeness to high density traffic areas such as skyscrapers, city downtowns; good highway access, convenient, safe area, adequate utilities, plenty of parking spaces, drive-in service window for speed • regional automobile parts warehouse – transportation access, land costs, taxes, labor supply and skills, zoning laws, building and inventory taxes, minimize distance input and outbound goods travel

(4)

Select a firm such as Taco Bell (www.tacobell.com), Bank of America (www.bankofamerica.com), Walmart (www.walmart.com), or another service-providing

OM6 C6 IM organization of interest to you, and write a short analysis and list of location and multisite management decisions that the firm faces. Most students will work in service-producing firms and this question asks them to think about multisite management. OM value chains, processes, and decisions are far more complex when the firm must manage thousands of branch banks, stores, warehouses, delivery trucks, etc. The supply chain is more complex. Scheduling and capacity are very important in trying to coordinate supply chain resources. Standardized OM systems and facilities are best suited for monitoring and controlling these widely dispersed resources. (5)

How can satellite-based global positioning systems improve the performance of supply chains in the following industries: (a) trucking, (b) farming and food distribution, (c) manufacturing, and (d) ambulance service? All of these industries and their supply chains have benefited from GPS capabilities. Truck and equipment routing, asset (and inventory) positioning and control, scheduling, real time sequencing and priority dispatching rules, maintenance and repair services, field service, remote diagnostics and repair, and so on are all examples. Students will find interesting examples that enhance OM and supply chain capabilities. (a) trucking – know location of each truck, reroute via a cell phone call to improve route and emergency pickups and deliveries, less idle time, enhance safety, better customer response times, in general a smarter truck routing, scheduling, and dispatching systems leads to great improvements in system productivity and service levels (do more with less) (b) farming and food distribution – know location, direction and speed on real time basis of equipment such as tractors plowing a field, one day plowing and harvesting a field of crops may be 100% automated, reduce gas expenses, smarter routes, inventory tracking, item location (c) manufacturing – inventory tracking, less chance to lose parts, minimize in factory travel and move times, tie to RFID capabilities, inventory item and equipment location, and the Internet of Things (d) ambulance service – minimize response times, similar to trucking where can reroute on a moment’s notice, higher efficiency of ambulances, do more with less due to smarter scheduling and dispatching, know ambulance location at all times, ambulance can find nearest hospital quickly and identify fast route, what ambulance in route is closest to a major accident and reroute For any of the above examples, say 30 GPS-guided ambulances and smart GPS enhanced scheduling, routing, and dispatching, they could cover the same area and population with 40 ambulances using non GPS-based systems. Doing more with less. The IBM Smarter Planet ads are often cited here. IBM sells vehicle routing and dispatching software systems too!

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Problems and Activities Note: an asterisk denotes problems for which an Excel spreadsheet template on the OM6 Web is available. Excel Data Tables and Goal Seek can be used on many of these problems IF your students know how to do these Excel tools but the instructor has to add “what if” questions. 1.

If a small USA business with sales of $300 million wanted to expand into global markets, develop a check sheet with a list of twenty questions (and decisions) they might have to answer (make) regarding their supply chain(s). Be ready to present to the class. Chapter 6 provides a good source to answer this question. Exhibit 6.1 on ten typical supply chain decisions should get the students started on this assignment as well as other chapter topics such as push and pull systems, breakeven analysis, vertical integration, offshoring, outsourcing, efficient and responsive supply chains, facility location, transportation method to optimize shipping routes, and so on. Given this base students can search the web for other criteria for a USA firm to try and enter global markets. Chapter 2 on Measuring Performance in Operations and Value Chains and Chapter 15 on Quality Management also provide more material to answer this question. For example, in Chapter 15, we discuss ISO 9000 certification as a requirement to sell goods in many parts of the world.

2.*

Marine International manufactures an aquarium pump and is trying to decide whether to produce the filter system in-house or sign an outsourcing contract with Bayfront Manufacturing to make the filter system. Marine’s expertise is producing the pumps themselves but they are considering producing the filter systems also. To establish a filter system production area at Marine International, the fixed costs is $300,000 per year and they estimate their variable cost of production in-house at $12.25 per filter system. If Marine outsources the production of the filter system to Bayfront, Bayfront will charge Marine $30 per filter system. Should Marine International outsource the production of the filter system to Bayfront if marine sells 25,000 pumps a year? The total cost of in-house production is $300,000 + 25,000*($12.25) = $606,250 The total cost of outsourcing is 25,000*($30) = $750,000 So the best decision is to manufacture in-house. Using Equation 6.1 we compute Q* = • • •

______FC_______ = VC2 - VC1

$300,000 = 16,902 filter systems $30 - $12.25

If demand is greater than 16,902, then produce in-house (make) If demand is less than 16,902, then outsource For a quantity of 25,000 pumps, Marine should produce in-house. See the calculations below for confirmation.

Using the Excel Break-Even spreadsheet template: Production volume

25000

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Produced In-House Fixed cost Unit variable cost

$300,000.00 $12.25

Unit cost

$30.00

Total In-House Production Cost Total Outsourced Cost Cost difference (In-House Outsourced) Optimal Decision

$606,250.00 $750,000.00

Outsourced

-$143,750.00 Manufacture

The savings of $143,750 is substantial! 3.*

Given the location information and volume of material movements from a supply point (warehouse) to several retail stores for Bourbon Hardware, find the optimal location for the supply point using the center-of-gravity method.

Retail Outlet

Location Coordinates x y

Material Movements

1 2 3 4 5

20 18 3 3 10

1,200 2,500 1,600 1,100 2,000

5 15 16 4 20

C(x) = [20(1200) + 18(2500) + 3(1600) + 3(1100) + 10(2000)]/8400 = 11.56 C(y) = [5(1200) + 15(2500) + 16(1600) + 4(1100) + 20(2000)]/8400 = 13.51 The OM6 Excel spreadsheet available on-line provides the following.

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Center of Gravity 12

y-Coordinate

10 8 6 4 2 0 0

4.*

6 x-Coordinate

Cunningham Products is evaluating five possible locations to build a distribution center. Data estimated from the accounting department are provided below. The annual production is estimated to be 30,000 units. a. Which location provides the least cost? b. For what range of demand would each location be best?

Cunningham Products Location Analysis Data

Location 1

Location 2

Location 3

Location 4

Location 5

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Fixed costs

$75,000.00

$110,000.00

$95,000.00

$125,000.00 $110,000.00

Direct material cost/unit

$4.14

$4.65

$5.05

$4.50

Direct labor cost/unit

$12.45

$13.80

$11.80

$15.60

$13.75

Overhead/unit

$2.25

$2.60

$1.95

$2.75

$2.10

Transportation cost/unit

$0.50

$0.65

$0.30

$0.83

$0.67

a. Which location provides the least cost? For each location, the total cost is equal to the fixed cost plus the variable cost per unit times the annual volume. Location 1: Total cost = 75,000 + 19.34x Location 2: Total cost = 110,000 + 21.70x Location 3: Total cost = 95,000 + 19.01x Location 4: Total cost = 125,000 + 23.68x Location 5: Total cost = 110,000 + 21.02x The Excel template Location Analysis computes this easily as follows. As you can see, the least cost location is #1.

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b. For what range of demand would each location be best? The template selects Location 1, which can be verified using the cost functions.

5.* The Davis national drugstore chain prefers to operate one outlet in a town that has four major market segments. The number of potential customers in each segment along with the coordinates are as follows: Location Coordinates

Market Segment

Number of Customers

2,000

600

1,500

3,400

Which would be the best location by the center-of-gravity method? CX = [2(2,000) + 15(600) + 2(1,500) + 14(3,400)]/6,500 = 49,600/6,500 = 8.48 7

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CY = [18(2000) + 17(600) + 2(1500) + 2(3400)]/6,500 = 54,000/6,500 = 7.47

y-Coordinate

Center of Gravity 20 18 16 14 12 10 8 6 4 2 0 0

6.*

10 x-Coordinate

For the Davis drugstore chain in problem 5, suppose that after five years, half the customers from segment 1 are expected to move to segment 2. Where should the drugstore shift, assuming the same criteria are adopted?

Center of Gravity Enter data only in yellow cells. The template is designed for up to 10 locations. 8

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Name

x-Coordinate 1 2 3 4

Center of Gravity

2 15 2 14

y-Coordinate 18 17 2 2

10.21

7.33

Volume 1000 1600 1500 3400

y-Coordinate

Center of Gravity 20 18 16 14 12 10 8 6 4 2 0 0

10 x-Coordinate

Assuming the drug store can move, it should moved eastward (i.e., from x = 8.48 to x = 10.21). The y-coordinates are about the same (7.47 and 7.33). 7.*

A firm is evaluating the alternative of manufacturing a part that is currently being outsourced from a supplier. The relevant information is provided below: For in-house manufacturing: Annual fixed cost = $80,000 Variable cost per part = $140 For purchasing from supplier: Purchase price per part = $160

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a. Using this information, find the best decision if the demand is 5,000.

Production volume

5000

Fixed cost Unit variable cost

$80,000.00 $140.00

Unit cost

$160.00

Total In-House Production Cost Total Outsourced Cost Cost difference (In-House Outsourced) Optimal Decision

$780,000.00 $800,000.00

Produced In-House

Outsourced

-$20,000.00 Manufacture

The total cost of in-house production is $80,000 + 5,000*($140) = $780,000 The total cost of outsourcing is 5,000*($160) = $800,000 So the best decision is to manufacture in-house.

b. Determine the break-even quantity for which the firm would be indifferent between manufacturing the part in-house or outsourcing it. Using Equation 6.1 we compute Q* = ______FC_______ VC2 - VC1

$80,000 = 4,000 parts $160 - $140

We may use the Break-Even spreadsheet template to identify the break-even point, either by experimentation or using Excel’s Goal Seek tool (instructors might wish to illustrate this). 2 Production volume 4000 Produced In-House Fixed cost Unit variable cost

$80,000.00 $140.00

Unit cost

$160.00

Outsourced

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Total In-House Production Cost Total Outsourced Cost Cost difference (In-House Outsourced) Optimal Decision

8.*

$640,000.00 $640,000.00 $0.00 Manufacture

Refer to the information provided in question 7 to answer the following: a. If demand is forecast to be 3,500 parts, should the firm make the part in-house or purchase it from a supplier? b. The marketing department forecasts that the upcoming year’s demand will be 3,500 parts. A new supplier offers to make the parts for $156 each. Should the company accept the offer? c. What is the maximum price per part the manufacturer should be willing to pay to the supplier if the forecast is 3,500 parts, using the information in the original problem (Question #7). a. If demand is greater than 4,000, then produce in-house (manufacture). In this case, the part should be outsourced. (Demand at 3,500 is less than the break-even quantity of 4,000). Production volume

3500

Fixed cost Unit variable cost

$80,000.00 $140.00

Unit cost

$160.00

Total In-House Production Cost Total Outsourced Cost Cost difference (In-House Outsourced) Optimal Decision

$570,000.00 $560,000.00

Produced In-House

Outsourced

$10,000.00 Outsource

b. The marketing department forecasts that the upcoming year’s demand will be 3,500 units. A new supplier offers to make the parts for $156 each. Should the company accept the offer? If so, how much can they save? The new break-even point is

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Q* =

______FC_______ VC2 - VC1

$80,000 = 5,000 parts $156 - $140

Whenever the anticipated demand (volume) is less than Q*, the firm should outsource (purchase) the part. Since 3,500 is less than Q* of 5,000 the part should be outsourced to the new supplier (accept the offer). However, the savings will only be $10,000. Obviously, other criteria may influence the final decision given quality, delivery, sustainability, and supply chain risk criteria. c. What is the maximum price per part the manufacturer should be willing to pay to the supplier if the forecast is 3,500 parts using the information in the original problem (Question #7)? Q(VC2 - VC1) = FC or 3,500(VC2 - $140) = $80,000 3,500VC2 - $490,000 = $80,000 3,500VC2 = $570,000 VC2 = $162.86 This may also be solved using the spreadsheet template and Excel’s Goal Seek tool: Production volume

3500

Fixed cost Unit variable cost

$80,000.00 $140.00

Unit cost

$162.86

Total In-House Production Cost Total Outsourced Cost Cost difference (In-House Outsourced)

$570,000.00 $569,999.99

Produced In-House

Outsourced

9.*

$0.01

A university currently has a recycling program for paper waste. The fixed cost of running this program is $15,000 per year. The variable cost for picking up and disposing of each ton of recyclable paper is $40. If the work is outsourced to a recycling company, the cost would be $65 per ton. a. If the forecasted demand is 750 tons, what should the university do? Production volume

750

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Produced In-House Fixed cost Unit variable cost

$15,000.00 $40.00

Unit cost

$65.00

Total In-House Production Cost Total Outsourced Cost Cost difference (In-House Outsourced) Optimal Decision

$45,000.00 $48,750.00

Outsourced

-$3,750.00 Manufacture

The total cost of in-house production is $15,000 + 750*($40) = $45,000 The total cost of outsourcing is 750*($65) = $48,750 So the best decision is for the university to do the job in-house for a savings of $3,750.

b. Find the break-even point. Using Equation 6.1 we compute Q* =

______FC_______ VC2 - VC1

$15,000 $65- $40

= 600 tons

If demand is larger than 600 tons, recycle in-house; if demand is less than 600 tons, then outsource. Since demand is 750 tons, we recommend doing the job in-house (manufacture). 10.

A supply chain manager faced with choosing among four possible locations has assessed each location according to the following criteria, where the weights reflect the importance of the criteria. How can he use this information to choose a location? Can you develop a quantitative approach to do this? Location Criteria

Weight

Raw material availability

0.15 G

Infrastructure

0.1 OK

Transportation costs

0.35 VG

Labor relations

0.2 G

Quality of life

0.2 G

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VG = Very good 5 pts; G = Good 4 pts; OK = Acceptable 3 pts ; P = Poor 1 pt. Location 1 2 3 4

Total Points 4.25 3.50 1.75 3.30

Thus, we would prefer locations in the order 1 (best), 2, 4, and 3 (worst). Most student weighting systems will find 1 best and #3 location the worst. The key is that the student weighting scheme and scales are logical and explainable. 11.

Research a USA company that recently moved a corporate headquarters or factory or research and development center from the USA to another country. What were the advantages and disadvantages for the company in their offshoring decision? Develop a government-based incentive system to keep this offshoring from happening. Be ready to present to the class. One example that Donald Trump used during the 2016 presidential campaign is Carrier Corporation (www.carrier.com) moving some of its suppliers and the Indiana and Chicago factories to Monterrey, Mexico. Chris Nelson, Carrier President, HVAC Systems and Services North America, said, “This move is intended to address the challenges we continue to face in a rapidly changing HVAC industry, with the continued migration of the HVAC industry to Mexico, including our suppliers and competitors, and ongoing cost and pricing pressures driven, in part, by new regulatory requirements. Relocating our operations to a region where we have existing infrastructure and a strong supplier base will allow us to operate more cost effectively so that we can continue to produce high-quality HVAC products that are competitively positioned while continuing to meet customer needs.” “This decision is difficult and we recognize the impact on employees, their families and the community. We are committed to ensuring that our employees are treated respectfully and to working closely with their representatives throughout this transition,” Nelson added. Reducing the USA corporate tax rate, tax free trade zones, import taxes but no export taxes, reduce US regulations, and renegotiate trade agreements are just a few ideas to improve incentives to keep jobs in America. Take a close look at Discussion Question #1 in this Chapter. Also, ask your students would you rather pay $10,000 for a new residential Carrier HVAC system “Made and Assembled in America” or $7,500 for one “Made in Mexico?”

12.

Research the topic of “reshoring” in the USA and evaluate its impact. Develop an incentive system for USA firms to bring work back to the USA. Be ready to present to the class. 14

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A primary topic in the 2016 U.S. Presidential election is how to reshore jobs back to the USA or prevent them from leaving in the first place. If students search reshoring they will get many hits on the Internet such as www.reshorenow.org. The Reshoring Initiative, for example, mission is as follows: “The mission of the Reshoring Initiative® is to bring good, well-paying manufacturing jobs back to the United States by assisting companies to more accurately assess their total cost of offshoring, and shift collective thinking from offshoring is cheaper to local reduces the total cost of ownership.” This web site alone has many good articles such as “Do Trade Agreements Kill Jobs.” Have fun! 13.*

Microserve provides computer repair service on a contract basis to customers in five sections of the city. The five sections, the number of service contracts in each section, and the x, y coordinates of each section are as follows.

Section

No. of Contracts

Coordinates x y

Parkview Mt. Airy Valley Norwood Southgate

90 220 50 300 170

8.0 6.7 12.0 15.0 11.7

10.5 5.9 5.2 6.3 8.3

Use the center-of-gravity method to determine an ideal location for a service center. CX = [8(90) + 6.7(220) + 12(50) + 15(300) + 11.7(170)]/830 = 11.18 CY = [10.5(90) + 5.9(220) + 5.2(50) + 6.3(300) + 8.3(170)]/830 = 6.99

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Center of Gravity 12

y-Coordinate

10 8 6 4 2 0 0

10 x-Coordinate

Notice the high degree of variability in volume. Historical versus future growth makes location decisions difficult. 14.

Supreme Auto Parts produces components for motorcycle engines. It has plants in Amarillo, Texas, and Charlotte, North Carolina, and supply factories in Detroit and Atlanta. Production and cost data for a major component are as follows. Formulate a transportation model to determine the best distribution plan. Freight Costs Plant Detroit Atlanta Capacity Unit Cost Amarillo $12 $8 1,200 $125 16

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Charlotte Demand

$9 2,000

$3 900

3,000

$140

Min 137X11 + 133X12 + 149X21 + 143X22 (note that costs include production unit cost as well as freight costs) Subject to the constraints X11 + X12  1200 X21 + X22  3000 X11 + X21 = 2000 X12 + X22 = 900 All variables  0 15.*

Milford Lumber Company ships construction materials from three wood-processing plants to three retail stores. The shipping cost, monthly production capacities, and monthly demand for framing lumber are given below. Set up a spreadsheet to solve this transportation problem. Find the solution that minimizes total distribution costs. See Supplementary Chapter C for a discussion of how to do this and using Excel Solver. Plant 1 2 3 Demand

Store A $4.5 $5.1 $4.1 250

Store B $3.1 $2.6 $2.9 600

The spreadsheet optimal solution is shown below.

Store C $2.0 $3.8 $4.0 150

Capacity 280 460 300

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Boston Red Sox Spring Training Decision Case Study Overview The objective of case study is to introduce students to the complexity of location decisions and how to integrate economic and qualitative criteria (i.e., the multiple criteria problem) to make an objective decision that fully benefits the county taxpayers. The case data provides cost information, population locations, and many qualitative criteria. The first step in this analysis is to compute an accurate center-of-gravity for the population of the county. This case is based on an actual situation in Southwest Florida, and the case teaching note is accompanied by a postscript of what happened. Case Questions for Discussion 1. Using the center-of-gravity model and Exhibit 6.15, compute the center of gravity for the population of the county. Show all computations, explain, and justify. Based solely on this criterion, where is the best stadium location? The exhibit at the end of this TN computes the center of gravity to be Cx = 4.49 and Cy = 7.83. This center of the population for the county is very close to population center #3. Such a site location would minimize the distance traveled for all people (and taxpayers) in the county (another word for this is convenience). The center of gravity is farthest away from sites B and C, and close to A and D. The growth part of the county is to the west of I-75 where neighborhoods, malls, etc. are relatively new. Also,

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don’t be surprised that some of your students use geometry to compute distances from the four sites from the center of gravity.

Center of Gravity 12

y-Coordinate

10 8 6 4 2 0 0

6 x-Coordinate

2. Using a weighted scoring model of your own design what are the summary scores for each stadium site for the qualitative criteria in Exhibits 6.15 and 6.16. (You must decide how to scale and weight each criterion and whether to include or not include cost estimates.) Show all computations, explain, and justify. Notice the question asked “Show all computations, explain, and justify.” A few characteristics of good scoring models include:

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•

Scale all qualitative criteria on an ordinal scale. Students will use scales such as 1 to 3, 1 to 5, and 1 to 10. Some students will also scale the cost data on this scale assuming a linear relationship, and therefore, arrive at a total scaled weighted average score. Much explanation should accompany the justification of weights used per criteria. Each weight should be justified. Most students place the most weight on long-term economic development (i.e., often 0.2 to 0.4), traffic congestion/access (0.2 to 0.4) followed by shortest permit time (i.e, often 0.1 to 0.3). If they do this then sites A and D will have the best weighted average scores given how they scale criteria. Another approach is to divide total cost per site by the weighted average point totals to arrive at a cost per point (i.e., sort of a dollar productivity metric per point). This also favors A and D.

This is most likely the first time undergraduate students have be ask to combine a diverse set of performance criteria. 3. How will you combine these results (your center-of-gravity results. cost, and qualitative criteria analyses? How might you compute a summary score for each site using all three criteria? Explain and justify. Most undergraduate students will have difficulty confronting how to combine such data (i.e., the multiple criteria decision making problem) so expect a weak or incomplete answer here. Assuming they have performed a good center of gravity analysis and a weighted average analysis of qualitative criteria and costs. How might you combine these divergent performance results? Student approaches include: • 1st use the center of gravity model to exclude (screen) any sites that are too far from the center of the county’s population (i.e., sites B and C are quickly excluded) • 2nd make the decision based on the weighted average scores of costs and qualitative criteria (assuming they do a good job here as described in other questions). Note that you can scale costs and assign percent weights just like you do the qualitative criteria. • Rank order the three criteria (center of gravity, costs, qualitative) and weight the three criteria resulting in a summary score. For center of gravity some will measure the distance from the ideal location and then compute a summary score. Sites A and D are the dominate sites. • $ cost per acre (Site A 21,000,000/241 acres = $87,137/acre, Site B = $110,048, Site C $180,000, and Site D = $231,132). • $ cost per weighted average point (see spreadsheet) • Other types of rank order methods such as eliminate a site if it has a lowest score among all sites.

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4. Research and explain at least three ways a sports stadium can “go green” including at least one work practice for stadium employees. Do jobs and processes have to change too? Explain the role of OM. Building Design • Catch rain water and use irrigation (computer control systems) • Solar panels and generate a high percentage of total stadium power (ideally the stadium powers itself) • Make seats out of recycled materials • Soil covered roofs • Wind turbines and power • LEED certifications (green buildings) • Use lots of trees for parking lots and open soil • Toilets and urinals – waterless or low water requirements • Convenient locations of recycle stadium containers • Use recycled steel and other building materials to reduce overall energy requirements Supply Chain • Use biodegradable cleaning chemicals (e-friendly) • Use biodegradable and e-friendly fertilizer and grass seed • Use biodegradable cooking oils • Less need to drive to stadium given parking privileges for high occupancy vehicles and if close to center of gravity minimize distance travelled and fuel costs. • Add bus route to stadium • Use 100 percent recycled material for all paper and Styrofoam (it uses oil) items in food and beverage stadium services Work practices • Pay all stadium employees using electronic methods (no paper or cash; use PayPal, e-Pay) • Employees collect plastic and other recyclables before, during, and after the game. • Train employees to minimize their use of paper and bags • Use electronic tickets (no paper) • Turn off the stadium lights whenever possible • Plant one tree for every ton of carbon the stadium generates • Composing programs Students will find many articles on “stadium sustainability” such as Lincoln Financial Field, home of the Philadelphia Eagles. They installed 11,000 solar panels and 14 wind turbines. Their sustainability initiatives include: recycle all water, biodegradable cooking oils, recycle all paper products, composing programs, and so on. Be prepared. 5. What is your final stadium site recommendation? Explain and justify.

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•

Most students will select Site A since it is close to the university, shopping mall Y, an existing 8,000 seat indoor arena, population center #3, and has the huge potential for a retail and leisure service cluster that could host high school, state, and national sporting events. Based on the case information this is a very good choice but in the real decision, Site A became City Council’s second choice.

Postscript • The City Council decided on Site D arguing it would jump start development of the commercial industrial park next to the airport, be close to the major population of the county, the county would gain the full economic impact of the stadium, close to more hotels and spur growth of hotels and restaurants in that area, create an economic cluster for bio-tech and information technology firms, etc. •

By locating at Site D (with site A as the 2nd choice and backup site) the City Council members thought “the county” would get the “full benefit” of all economic development and annual economic impact. If, for example, they located at Site C, close to the county line, another county would reap part of the economic benefit. The premise was to give the full benefit to the county taxpayers who are paying for this through government bonds. And, developing the airport industrial park was given much importance in the real decision, and City Council thought with over 8 million passengers per year many people from out of town would “see” the industrial park and Red Sox spring training stadium.

Teaching Strategy You can begin class by saying that the case involves a location decision of a leisure service facility and you might want to read the quote -- (A great servicescape and facility layout can seldom overcome a poor location decision, simply because customers may not have convenient access.) You can also go over Exhibits 6.15 and 16.16 to gain inclass insights if you want. Students should have worked center of gravity homework before they do the case. You might also make a list on the board in class based on their response to “What value chains and respective processes are required for stadium operation?” Then you can address the four assignment questions in class and make summary points such as (i) the case illustrates the value of convenience and minimizing the distance traveled for most of the county’s population, (ii) location decisions establish the infrastructure of the value chain, (iii) the challenge of combining quantitative and qualitative criteria in making a location decision, and (iv reveal what decision the City Council actually made and why. This case normally takes 30 to 45 minutes to teach in a case discussion format or student teams can present the case informally (and the allocated class time is up to the instructor).

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Boston Red Sox Spring Training Decision Case Study Analysis Center-of-Gravity Model Total In and Outbound Population Center No. 1 2 3 4 5

Location Coordinates X

Population

1 11 4 2 10

11 11 8 1 2

290,000 95,000 145,000 80,000 120,000

Total County Population

730,000

Population Center-of-Gravity Cx =

4.49

Cy =

7.83

Cost per Site Model*

Weights

Site A

Site B

Site C

Site D

18 1 2 $21.00

22 0.5 0.5 $23.00

0 3 15 $18.00

22 0.5 2 $24.50

Weights

Site A

Site B

Site C

Site D

0.20 0.20 0.20 0.20 0.20 1.00

4 4 5 4 3

0 1 4 3 0

0 1 0 4 5

5 3 5 5 0

4.00

1.60

2.00

3.60

$5,250,000 Best

$14,375,000

$9,000,000

$6,805,556

Stadium land cost Additional utility cost New road cost Total cost (in million $)

Qualitative Model* Gain envir endorsement Traffic access congest Shortest permit time Long-term growth @ site Chance to preserve Weight Total Weighted Average Site Score *assume equal weights here but read TN $ Cost per Wt Ave Point =

The End! The Hudson Jewelers teaching note is separate and available on-line.

OM6 C7 IM OM6 Chapter 7: Process Selection, Design, and Analysis Discussion Questions 1. What type of process—project, job shop, flow shop, and continuous flow—would most likely be used to produce the following? Explain your reasoning. a. Apple iPads – flow shop (assembly line) b. Weddings -- project c. Paper – continuous flow d. Tax preparation -- job shop for complex returns or hybrid job/flow shop for simple EZ returns 2. Provide some examples of customer- and provider-routed services that you have encountered that are different from those described in this chapter. Can you identify any improvements to these processes? Customer-routed examples include: visiting a bookstore, checking in a major convention hotel, health clubs, Club Med, surfing the Internet, museums, taking a cruise, parks, vacations, etc. They offer the customer broad freedom to select from many possible routes (pathways) through the service delivery system. Provider-routed examples include: Federal Express, simple on-line will, CNN Headline News, most fast food restaurants such as McDonald’s, blood tests at a lab or hospital, automatic teller machine (ATM), credit card authorizations, movies, newspaper dispenser (there is no customer discretion or freedom in how to obtain the newspaper), checking in Motel 6, dentist cleaning teeth. They constrain customers to follow a very small number of possible routes (pathways) through the service delivery system. FYI--To simplify things we only have two choices in OM but in the original research articles (Collier and Meyer) there is a third choice: co-routed services such as playing golf (must go hole 1 to 18 but otherwise the customer can do his/her own thing), bank checkbook services, consulting, some medical and estate services, Scottrade on-line services, H&R Block’s tax service, etc. This might come up in class and is similar to hybrid processes in the product-process matrix. 3. List some common processes that you perform as a student. How can you use the knowledge from this chapter, such as identifying bottlenecks, to improve them? Example student processes include: studying for a test, applying for a student loan, writing a term paper, applying for US citizenship, paying rent or automobile loans, moving into or out of the dorm or apartment, reserving a U-Haul, using it, and its return; establishing credit, planning a wedding, etc. Simply identifying the process is the first step followed by recognition of C7 concepts 1

OM6 C7 IM like: customized versus standard, four types of proc2esses, provider or customer routed, the hierarchy of work (task, activity, process, value chain), flowchart, process boundary, value- and non-valued-added, reengineering, utilization, bottlenecks, and processing or flow time. 4. Discuss how sustainability might be incorporated into a process or value chain improvement initiative. Try to find an example and summarize it in a manner similar to that in the box feature on Alfa Laval. One objective of this “green” assignment is to get students motivated w/r to OM. Students should write something similar to the example of Alfa Laval in the chapter introduction, hopefully of interest to them. Since supply chains generate 60 to 70% of carbon emissions it is easy to find examples. A Google search for “company carbon emissions” results in 21.7 million hits focused on carbon calculators and firms like Nikon, Walmart, Proctor & Gamble, General Electric, Bank of America, General Motors, Alcoa, Microsoft, Apple, Google, Target, Tesla, and electric power generating companies. 5. What sustainability issues are present in the example restaurant order fulfillment process example (Exhibits 7.6 to 7.11)? What other restaurant processes need to include sustainability criteria in their design and day-to-day management? Sustainability refers to an organization’s ability to strategically address current business needs and successfully develop a long-term strategy that embraces opportunities and manages risk for all products, systems, supply chains, and processes to preserve resources for future generations. Sustainability can be viewed from three perspectives: environmental, social, and economic. Exhibit 1.6 is best suited to provide a framework to answer this question on the board with student inputs. Many students take their first jobs in the restaurant business so expect some interesting issues, examples, and solutions. Exhibit 1.6 Examples of Sustainability Practices Environmental Sustainability • Waste management: Reduce waste and manage recycling efforts • Energy optimization: Reduce consumption during peak energy demand times • Transportation optimization: Design efficient vehicles and routes to save fuel • Technology upgrades: Improvements to save energy and clean and reuse water in manufacturing processes • Air quality: Reduce greenhouse gas emissions • Sustainable product design: Design goods whose parts can be recycled or safely disposed of Social Sustainability • Product safety: Ensure consumer safety in using goods and services • Workforce health and safety: Ensure a healthy and safe work environment 2

OM6 C7 IM • Ethics and governance: Ensure compliance with legal and regulatory requirements and transparency in management decisions • Community: Improve the quality of life through industry-community partnerships Economic Sustainability • Performance excellence: Build a high-performing organization with a capable leadership and workforce • Financial management: Make sound financial plans to ensure long-term organizational survival • Resource management: Acquire and manage all resources effectively and efficiently • Emergency preparedness: Have plans in place for business, environmental, and social emergencies. Clearly, restaurant purchasing/sourcing, energy use, facility design, emergency and disaster plans and training, food inspections, employee safety, animal rights (see Chapter 3 on McDonald’s and sustainability), waste management such as cooking oils, water and air quality, and so on. Problems and Activities (Note: an asterisk denotes problems for which an Excel template in the OM6 Spreadsheet Templates in OM Online may be used.) 1. Use the Product-Process matrix to explain the implications for Boeing in changing from a project focus to more of a flow shop process as explained in the box "Rethinking Airplane Manufacturing Processes. Limit your discussion to one typed page. As the Product-Process Matrix (Exhibits 7.1 and 7.2) describes as we move from projects to job shops manufacturing performs more batching, small production order (lot) sizes, and uses more specialized equipment such as for part and sub-assembly movements. Boeing is trying to accomplish this change in process type by encouraging suppliers to do more assembly of major components parts and subassemblies using job and flow shops, and more job shop and assembly line process in their final assembly of their latest planes (777x jetliner, etc.). Assembly line production is a most cost efficient way to assemble discrete products, and Boeing is trying to gain some of the benefits. For example, robots that do most of the logistics in-house and move parts and sub-assemblies to their desired location frees employees from these strenuous tasks. Fetch Robotics is making robots to do exactly that and one model called Fetch lets the machine to the lifting and movement while employees focus on the high skilled tasks of final installation and inspection. That is, have human labor focus on the high skilled levels work tasks while robots, conveyers, and other specialized machines do the more strenuous tasks. In addition, Boeing is considering the idea of moving the entire plane one-inch per-half hour on an assembly line passing highly efficient and robotic workstations 3

OM6 C7 IM along the way. Flow shops exhibit dominant line flows, low or no setup and change over time (costs), more specialized machines. BOX TEXT IS AS FOLLOWS: Airplane manufacturing is typically performed on a project basis where volumes are lower and airlines demand more customization. However, as demand is rising rapidly, Boeing is rethinking this paradigm. Boeing plans to use newer, more standardized manufacturing techniques for its new 777X jetliner, paving the way for significant savings as it gradually feeds the changes back into existing assembly lines. The approach will draw increasingly on lessons learned from outside the aerospace industry. Boeing hired an executive from Toyota to oversee manufacturing at the Kentucky plant, who observed “If we can develop a system where we have direct deliveries to our lines and in an orientation which our operators will use to simply secure instead of handling parts, we have tremendous opportunities.” Improving the sequencing of parts reduces inventory, eases cash flow, and requires less space, thus lowering overhead. One Boeing executive noted: “We’ve gone to a single moving line, and even though it goes one inch per half-hour, it’s a moving line and it is the same concept as Toyota. We [put everything that is needed in kits.] We make it very visible. We deliver things right to the side, and before we had mechanics running all over the factory getting parts.” 4 2. Carbon dioxide emissions associated with a one-night stay in a hotel room are calculated at 29.53 kg of CO2 per room day for an average hotel. If your hotel’s 200 rooms are all occupied for 2 days during a college football game, how much CO2 did the guests and hotel release into the atmosphere? What work and leisure activities and processes in the hotel generate CO2 emissions? Provide three examples. Explain. CO2 released = (200 rooms/night)(2 nights) = (400 room days)(29.53 kg of CO2/room day) = 11,812 kgs or at 1 kilogram = 2.2046 pounds then 26,041 pounds of CO2. Example hotel processes that directly or indirectly release carbon dioxide into the atmosphere include: • • • • • • • • • •

Laundry services Air conditioning and heating Vending machines Room/cleaning//elevator service Building and equipment energy use Kitchen/meals/restaurant Televisions/fireplace/wi-fi Spa/pool/exercise room Trash storage and removal Security systems (energy use, vehicles, etc.)

And, of course, the vehicles that supply the hotel (vendors), airport transport, and customer vehicles all contribute to the release of CO2 into the atmosphere. Ask your 4

OM6 C7 IM students, “How can we reduce this release for say, hotel laundry services?” “How can we design “green hotel processes?” Can we design “green hotels?” Can we plant more trees on the hotel site? Can we paint the hotel roof white to reflect (not absorb) the sun’s rays and heat? OM must now analyze costs, time, quality AND sustainability in process and value chain design! If you Google “green hotels” you will get over 2 million hits such as the partial example below: And in a nod to the wishes of its environmentally concerned membership, AAA has added an "eco" icon to its 2010 Tour Books for hotels, motels, and other lodging facilities. The AAA Eco Program identifies - and in turn, promotes - AAA-approved lodgings that are certified by designated government and private programs. Clearly, eco-conscious meeting and leisure travelers are putting their dollars (and their Euros, yen, pesos and rupees) toward travel-related businesses with a focus on sustainability, and their preferences can no longer be disregarded. And not only are those travelers coming down on the side of green, but so are federal, state and local governments. "In the hospitality industry, we're seeing a wave of new government mandates stating that employees can only stay in or host meetings in green hotels," said Ray Hobbs, a member of EcoRooms & EcoSuites' Board of Advisors and a certified auditor for Green Globe International. "But there are only twenty three states with official green certification programs, and the industry is still attempting to find the certification process that best serves its needs." For example, in 2007, Florida Governor Charlie Crist signed an executive order mandating that all state meetings and conventions be held in designated green facilities whenever possible. With the stroke of a pen, Governor Crist started a veritable stampede of hoteliers scrambling to earn green certification for their properties - and achieve a competitive advantage when jockeying for state business. The mandate, while welcomed by environmental advocates in Florida, put a serious strain on the state's excellent green lodging certification program, which has since been nearly dismantled by drastic budget cuts. And Florida isn't alone. 3. Draw a flowchart for a process of interest to you, such as a quick oil-change service, a factory process you might have worked in, ordering a pizza, renting a car or truck, buying products on the Internet, or applying for an automobile loan. Identify the points where something (people, information) waits for service or is held in work-in-process inventory, the estimated time to accomplish each activity in the process, and the total flow time. Evaluate how well the process worked and what might be done to improve it. This question helps students see processes from a larger perspective and better appreciate the need for improvement and better design. Show their flowcharts in class 5

OM6 C7 IM on overheads or as power points and let them explain the process, how it works, performance metrics, etc. 4. Design a process for one of the following activities: a. Preparing for an exam b. Writing a term paper c. Planning a vacation The instructor should expect a simple flowchart with 3 to 10 activities possibly with feedback loops. Make sure the students understand a group of tasks define a workstation and the process map (flowchart) should be at the work station level. For many students this will be the first time they have organized their thinking about how things are accomplished so be patient. Ask them questions such as (1) Where does the process start and end? (2) Why does the process exist? (3) Can you identify the bottleneck? (4) Is the bottleneck labor or equipment constrained? (5) Is there a "line of visibility" in their flowchart? (6) Are there alternative ways to define how work gets done? 5. A 30,000-seat college football stadium is used 18 times for games, concerts, and graduation ceremonies. Each event averages six hours and assumes the stadium is full for each event. The stadium is available 365 days a year from 6 am to midnight. What is stadium (seat) utilization using Equation 7.1? Can you think of one or two other assets that have such low resource utilization? Utilization (U) = Resources Used/Resources Available (Eq. 7.1) [Notice: the focus is stadium “seat” utilization) = (30,000 seats/visit)(6 hours/visit)(20 visits/year) (30,000 seats/visit)(365 days/year)(18 hours/day) = 3,600,000 seat hours/year 197,100,000 seat hours/year = 0.0183 or 1.83% Stadium seat utilization (very few assets have such a low utilization; global manufacturers such as GE or Honda could never justify such a low utilization; only in “USA Sports Nation”.) 6. The demand for intensive care services in an urban hospital is 9 patients per hour on Mondays while intensive care nurses can handle 4 patients per hour. What is nurse (labor) utilization if five intensive care nurses are scheduled to be on duty for Monday? What are the advantages and disadvantages of this resource schedule for Mondays from the patient’s and management’s perspective? Use Equation 7.2 and notice all equation inputs are in the same units of measure! 6

OM6 C7 IM Utilization (U) = Demand Rate/[Service Rate*Number of Servers] (Eq. 7.2) U = (9 patients/hour)/[(4 patients/hour/nurse)(3 nurses)] = .75 The planned nurse utilization is 75% so nurse capacity is adequate with a 25% safety factor. Exam rooms, equipment, and doctors, may very well be the bottleneck(s) but nurse capacity is adequate. Patients won't have to wait too long given nurse capacity. Of course, surges in demand and peak demand may be a problem. 7. A telephone call center uses three customer service representatives (CSRs) during the 8:30 a.m. to 9:00 a.m. time period. The standard service rate is 3.0 minutes per telephone call per CSR. Assuming a target labor utilization rate of 80 percent, how many calls can these three CSRs handle during this half-hour period? Service rate = 3 minutes/call or 10 calls/30 minutes/CSR Utilization (U) = Demand Rate/[Service Rate*Number of Servers] (Eq. 7.2) 0.80 = DR/[(10 calls/10 minutes/CSR)(3 CSRs) DR = 0.80*30 = 24 calls/30 minutes For all of these problems emphasize that students must get all variables in the same units of measure “before” plugging numbers into the formula! Not doing this is a common mistake; for example, mixing up minutes and hours. 8. What is the implied service rate at a bank teller window if customer demand is 26 customers per hour, two bank tellers are on duty, and their labor utilization is 90 percent? Service rate = ?? Utilization (U) = Demand Rate/[Service Rate*Number of Servers] (7.2) 0.90 = 26 customers/hour/[SR*(2 tellers)] 2*(.90)SR = 26 customers/hour 1.8 SR = 26 SR = 14.44 or approximately 15 customers/hour/teller 9. Refer to Exhibit 7.7 and recomputed the total value-added and non-value-added time and cost given the following new information. If a restaurant uses iPads to place orders and notify waiters when the customer’s order is ready, the time on the order board (now an electronic order board) decreases from 5 to 1 minute, and the prepared order wait time decreases from 5 to 3 minutes. How might speeding up the order and delivery process affect customer satisfaction? Explain.

OM6 C7 IM The non-value added order wait time is now (1 minutes/order)(1hr/60 min)($5/hr) = $0.083 (instead of $0.417) The non-value added order prepare time is now (3 minutes/order)(1hr/60 min)($60/hr) = $3.00 (instead of $5.00) Total Revised Time = 20 minutes (VA time) + 4 minutes (NVA) = 24 minutes (instead of 30 minutes) Total Cost = $11.67 (VA Cost) + $3.08 (NVA Cost) = $14.75 (instead of $17.087) Therefore, introducing technology into this restaurant ordering process has reduced non-value added time and costs. In the spirit of continuous improvement, the next initiative is to try to reduce VA times and costs using better procedures, equipment (ovens), and operating practices. 10.*An express checkout line at a grocery store takes an average of 3 minutes to ring-up a customer’s order. On average 6 customers are in the checkout line. What is the average number of customers per hour that are processed in the checkout line? WIP = R* T 6 = R*(3 min) R = 2.0 customers per minute, or 60(2.0) = 120 customers/hour The Excel template Little’s Law may also be used to solve this problem:

11.* An accounts receivable manager processes 200 checks per day with an average processing time of 15 working days. What is the average number of accounts receivable checks being processed in her office? What if through information technology she reduces the processing time from 15 days to 10 days to 5 days? What are the advantages and disadvantages of adopting this technology? Explain. WIP = R* T = (200 checks/day)(15 days) = 3,000 checks WIP = R* T = (200 checks/day)(10 days) = 2,00 checks WIP = R* T = (200 checks/day)(5 days) = 1,000 checks The new information technology dramatically speeds up the process and 8

OM6 C7 IM simultaneously lowers the average number of checks (WIP) in the office. Processing more checks faster means more cash sooner in their accounts! The Excel template Little’s Law may also be used to solve this problem. The first calculation is shown below:

12.* A manufacturer’s average work-in-process inventory for Part #2934 is 995 parts. The workstation produces parts at the rate of 225 parts per day. What is the average time a part spends in this workstation? WIP = R* T 995 parts = (225 parts/day)(T days) T = 995/225 = 4.42 days The Excel template Little’s Law may also be used to solve this problem. Little's Law Enter any two of the three values only in the yellow cells and the spreadsheet will calculate the third. Throughput Flow time Work-in-process

225

Throughput Flow time Work-in-process

4.42

995

13. Marion Health Clinic sees patients on a walk-in basis only. On average, 10 patients per hour enter the clinic. All patients register at the registration window with a registration clerk (RC), which takes 3 minutes. After registration, but before being seen by a nurse practitioner (NP), the registration records clerk (RRC) pulls the patient’s records from the records room, which takes 6 minutes. At his or her turn, each patient then sees a NP, who checks weight, temperature, and blood pressure. This work activity takes 5 minutes. The NP determines if the patient must see a doctor (MD) or can be handled by a Physician’s Assistant (PA). There is one MD, one PA, one NP, one RRC, one BC, and one RC in the system at the current time. The NP sends 40 percent of the patients to the PA and 60 percent to the MD. The PA takes on average 6 minutes per patient whereas the MD takes 15 minutes. After the patient sees the PA and/or MD, the patient pays the bill or processes insurance 9

OM6 C7 IM information with the billing clerk (BC), which takes 5 minutes per patient. Then the patient exits the process. a. Draw a process flow diagram, label everything, and place the times and percentages given in the problem on the diagram. See the following.

Example computation: RC Regr Clerk @ 3 minutes/record or 10 records/hour. Then 10/20 is 50 percent average labor utilization rate. MD is 6/4 = 150%, etc. Notice that in the base analysis, the RRC is at 100% labor utilization (10/10) and the MD is overloaded at 150% (6/4) planned (100% actual) utilization. If 2 MDs are used, their utilization drops to 75% (6/(4*2)). b. What is the throughput in patients per hour of each stage in the process? Assume one person per stage MD = 4 patients/hour, NP = 12 patients/hour, PA = 10 patient/hour, BC = 12 patients/hour, RRC = 10 patients/hour, and RC = 20 patients per hour. c. What are the labor utilization rates for the MD, NP, PA, BC, RRC, and RC? Are these values appropriate? If not, how might you redesign the process? Where is the bottleneck? Assume one person per stage MD = 150%, NP =83.3%, PA = 40%, BC =83.3%, RRC = 100%, and RC = 50%. The bottleneck is MDs. The labor utilizations are too low for RC and PA, and too high for MDs. One expensive way to improve total process throughput is to use 2 MDs instead of 1 with a utilization of 75%. 10

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d. The PA often discovers the patient should see a MD so the patient is sent to the MD after seeing the PA 50% of the time. How does this change affect your answers to the questions above? The demand for MDs is now 8 patients/hour instead of 6 so with 1 MD on duty the utilization = 200%; with 2 MDs on duty it is 100%; and with 3 MDs it is 67%. It may also be a good idea to eliminate the PA position if they must refer 2 more patients to the doctor. 14. The Wilcox Student Health Center has just implemented a new computer system and service process to “improve efficiency.” The process flowchart and analysis framework is also provided. As pharmacy manager, you are concerned about waiting time and its potential impact on college students who “get no respect.” All prescriptions (Rxs) go through the following process: Assume that students arrive to drop-off Rxs at a steady rate of two Rxs per minute, with an average of one Rx per student. The average number of students in process (assume waiting and being serviced) at each station is: DROP-OFF—five students, PICK-UP—three students and PAY CASHIER—six students.

The fill Rx station typically has 40 Rxs in process and waiting on average. Because of this perceived long wait, 95 percent of the students decide to come back later for pick-up. They come back an average of three hours later. If the students choose to stay, each name is called as soon as the Rx is filled and the student then enters the pick-up line. Assume that the system is operating at a steady state. People and information flow with the assumption of 1 Rx per student. Demand (arrival) or throughput rate = 2 Rxs/minute This is not an easy problem but it illustrates you must flowchart both people 11

OM6 C7 IM and information (Rx here) flows to do a good process analysis. a. What is the average time a student spends in the pharmacy if they stay to pick-up their Rx? You may want to use the worksheet below.

WIP and R are given in problem and T is computed. For example, T = WIP/R = 40/2 = 20 minutes for filling Rxs. b. How many minutes does the student spend in the pharmacy if he or she picks-up the Rx 3 hours later (i.e., the student goes home after dropping the Rx off)? 2.5 + 1.5 +3.0 = 7 minutes c. What is the average time in minutes that all students spend in the pharmacy? 0.95(7 min.) + 0.05(27 min.) = 8 minutes d. What is the average time in minutes that the Rx spends in the process? Count time from entering the drop-off line to completing payment. 0.95(7 min + 180 min) + 0.05(27 min) = 177.65 + 1.35 = 179 minutes Note that the Rx must wait until pickup. 15. A manufacturer of air conditioner compressors is concerned that too much money is tied up in its value chain. Average raw material inventory is $50 million and work-inprocess (WIP) production inventory is $20 million. Sales are $20 million per week and finished goods inventory averages $30 million. The average outstanding accounts receivable is $60 million. Assume 50 weeks in one year. The value chain is shown below:

OM6 C7 IM

a. What is the total flow (process) time of a throughput dollar? (Hint: Use a WIP = R*T format and table as shown in Problem # 14 to organize your solution.) First, review the calculations below. If we add the flow times for each process in the value chain we obtain .05 + .02 + .03 + .06 = .16 years or 8 weeks. R = ($20m/week)(50 weeks) = $1,000m/year). This problem applies Little’s Law to a supply chain.

b. What is the average dollar inventory in the value chain? $50m + $20m + $30m + $60m = $160m c. Which of the major stages—raw materials, WIP, finished goods or accounts receivable—is the best candidate for freeing up dollars for the air conditioner manufacturer? Clearly, accounts receivable ties up $60m in cash and takes on average .06 years or 3 weeks to process and collect the money. The fact is a dollar tied up in accounts receivable is just as valuable as a dollar tied up in production or inventory. d. What is the target level of average accounts receivable inventory if management can reduce the time a dollar spends in accounts receivable inventory (processing and collections) by one-half by improving the accounts receivable process? WIP = R*T or $1,000m/year*.03 year = $30m instead of $60m. This improvement initiative frees up monies for other purposes or to reduce cash flow and debt needs. e. What else does this flow time analysis problem demonstrate? 38% (3/8) of the total flow time and total cash to operate the business ($60m/$160m) is due to accounts receivable. 13

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This post-production service is a good place to start improving value chain performance. Revisit Exhibit 2.3 to see what other post-production services might be relevant. Also, look at the pre-production services and think about their impact on total value chain flow time. This is an example of applying Little's Law to a value chain.

Case Teaching Note: The University of Audubon Rare Book Library Process Overview A rare book library handles requests from scholars and library patrons to examine certain rare books, manuscripts, and articles. These patrons normally are doing research on a topic and need to read and study the rare collection for some time. These rare manuscripts do not leave the library and must be checked back in each day. The case presents information on demand, service times, and product mix that can be evaluated using Little’s Law. Case Questions and Brief Answers 1. How many minutes, on average, does it take for a first edition patron to get the requested book from time of entry into the library? (State all assumptions and show the calculations.) 2. How many minutes, on average, does it take for a library patron to get the requested book from time of entry into the library? (State all assumptions and show the calculations.) 3. How many patrons, on average, are there in the total library service delivery system? (State all assumptions and show the calculations.) 4. If the following numbers of employees work at each activity, what is labor utilization for each activity? Head Librarian: 2 employees, 3 minutes per activity); Special Librarian Check-in: 3 employees, 4 minutes per activity); First Edition Retrieval: 2 employees, 4 minutes per activity, Original Manuscript Retrieval: 2 employees, 6 minutes per activity; and Author’s Journal Retrieval: 1 employee, 6 minutes per activity. 5. What labor resource is the bottleneck? 6. What do you recommend to break the bottleneck? What are the implications if you implement your recommendations? Explain and justify your reasoning. The first step is to fill in the worksheet below given case information. It is also informative for students to use the flowchart in class.

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Exhibit TN 7.14 Flow Time Worksheet for the University of Audubon Rare Book Library Using Little’s Law Demand = 40 patrons/hour (widgets per unit of time is a throughput metric or R. I is the number of library patrons. T is flow time in minutes. Notice that students MUST keep hours and minutes straight and not get them mixed up (a common mistake). Visitor Wait

I=R*T

Area

Head Librarian Register and Verify

Reference

Special

Wait

Librarian

Wait

Retrieval

Wait

Retrieval

Wait

Retrieval

Area

Check-in

Area

2.7

1.33

1.6

0.4

15+ min

15 min

11.25 min

min

Bold and larger type is the data given in the case; all other information is computed using Little’s Law. Example Computations: +Visitor Wait Area I = R*T

^Head Librarian Register & Verify I = R*T

10 = 40*T

I = 40*(3/60)

T = 10/40 = 0.25 hours or 15 minutes

TI= 40*(0.05) = 2 patrons (customers)

1. How many minutes, on average, does it take for a first edition patron to get the requested book from time of entry into the library? (State all assumptions and show the calculations.) Sum all appropriate flow times so 15 +3 +18 + 4 +15 + 4 = 59 minutes 2. How many minutes, on average, does it take for a library patron to get the requested book from time of entry into the library? (State all assumptions and show the calculations.)

OM6 C7 IM To compute the flow time per library patron we need to consider the product (service) mix as follows: Common Process flow time = 15 +3 +18 + 4 = FE flow time = 15 +4 = 19 minutes times 50% = OM flow time = 11.25 + 6 = 17.25 minutes times 40% = AJ flow time = 15 + 6 = 21 minutes times 10% =

40.0 minutes 9.5 minutes 6.9 minutes 2.1 minutes

Total Flow Time (T) for the Average Library Patron = 58.5 minutes 3. How many patrons, on average, are there in the total library service delivery system? (State all assumptions and show the calculations.) Sum all appropriate inventory (I) so 10 + 2 + 12 + 2.7 + 5 +1.33 + 3 + 1.6 + 1 + 0.4 = 39.03 patrons (customers) You can use Little’s Law to check this as follows: T = I/R = 39.03/40 = 0.97575 hours or 58.5 minutes! 4. If the following numbers of employees work at each activity, what is labor utilization for each activity? Head Librarian: 2 employees, 3 minutes per activity); Special Librarian Check-in: 3 employees, 4 minutes per activity); First Edition Retrieval: 2 employees, 4 minutes per activity, Original Manuscript Retrieval: 2 employees, 6 minutes per activity; and Author’s Journal Retrieval: 1 employee, 6 minutes per activity. Notice the question ask for labor utilization and we have added resources (labor). Using Equations 7.1 and 7.2 we find that Utilization = Resources Used/Resources Available or Demand Rate/[Service R ate*Number of Servers] so

Work Activity

Resource Type

Minutes/Task No Workers

Resources Resources (cust./hour) Demand Available Used Utilization

Head Librarian

100%

Special Librarian Check-in

Special Librarian 4

88.9%

First Edition Retrieval

Special Librarian 4

66.7%

Original Manuscript Special Librarian 6 Retrieval

80%

Author’s Journal Retrieval

40%

Special Librarian 6

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5. What labor resource is the bottleneck? Given the labor utilization computations in the previous question, the Head Librarian register and verify work activity (and position) has the highest possibility of a bottleneck since labor utilization is 100%. If standard times (i.e., 3 minutes per activity) are tight then the very first stage of this process is where a bottleneck may happen but if the standard work time is loose then there may be some built-in safety time and capacity. In a dynamic situation the first workstation could be starving downstream workstations for widgets (in this case customers)!

6. What do you recommend to break the bottleneck? What are the implications if you implement your recommendations? Explain and justify your reasoning. Student will make many recommendations some within the bounds of the case and some outside the bounds of the case study. A few student recommendations are as follows: • • • • • • • • •

Hire a third head librarian and now labor utilization is 67%. But remind students of the cost of another head librarian! Do not hire a third head librarian but check on the seasonality of demand in making such a decision. How is low/high demand handled? Is there a seasonal demand pattern or is demand fairly stable? The bottleneck is at the beginning of the process and starving downstream work centers, a very bad location for a potential bottleneck work stage. Cross-train special librarians to do head librarian’s job. Move one of the special librarians to do more head librarian work through cross-training. If you fix the bottleneck for head librarians, the process bottleneck switches downstream to special librarian check-in. Group work more such as work activities of the head and special librarian at the front of the rare book process. Non-value added time includes patron waiting times; try to reduce. The case does not note whether these standard work activity times include break, personal, and refresh times. If not, then the entire process is even more labor constrained than the computations show!

Teaching Plan Instructor’s can (1) teach this case on the board in class, (2) have student teams present their team report on the case, or (3) use as an individual case study assignment to be hand-in. The process flowchart and Little’s law worksheet (Exhibits 7.13 and 7.14) can be drawn on the board or discussed by showing on a view master in-class. This case can be taught in 30 to 60 minutes depending on what the instructor wants to emphasize. You can conclude this case discussion by pointing out that •

The “customer is in your process” (see seven differences between goods and services in 17

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• • •

•

Chapter 1). The widget we are processing is a human being, not a manufactured good! Little’s Law assumes AVERAGES and a point estimate without a probability distribution about it. The next logic upgrade in analyses is Waiting (Queuing) Models and then Simulation that can model the exact empirical distribution for demand and service times. Flow time is a surrogate measure for customer service in this case study and process. Safety capacity can be built into this analysis either by increasing standard work times or adding a small percentage increase in total safety (labor) capacity. Either way we may want to round up if our computations denote fractions of an employee (i.e., 2.1, 2.4, 2.7 employees required). Even a simple Little’s Law analysis can provide operational insights into where to add labor in a process, potential bottlenecks, where to cross-train, and how to improve process performance.

For instructor’s, answers to the Hudson Jewelers (HJ) 34 case questions are found in the HJ teaching note posted on-line with OM chapter teaching notes.

OM6 C8 IM OM6 Chapter 8: Facility and Work Design Discussion Questions 1. Discuss the type of facility layout that would be most appropriate for: a. b. c. d. e. f.

printing books---Product layout performing hospital laboratory tests---Process layout or cellular manufacturing home furniture---Process layout. a hospital---Process layout a photography studio---Product layout a library---Process layout

2. Describe the layout of a typical fast-food franchise such as McDonald’s. What type of layout is it? How does it support productivity? Do different franchises (e.g., Burger King or Wendy’s) have different types of layouts? Why? Students should be encouraged to visit these and look closely at the kitchen areas. McDonald’s is basically a process layout, while others bear closer similarity to product layouts, but are still basically process layouts. Students may argue McDonald’s has characteristics of both product and process layouts, and therefore, is a hybrid. This argument is valid. You can also tie in the concept of the servicescape and other service management ideas in Chapter 5 if you have previously covered it. Note that the items being processed are people, physical goods, and information. One key point is that process design and flow should be integrated with facility design and layout! 3. How might sustainability issues be incorporated into the design of facilities and workplaces? Provide examples and explain your reasoning. Undergraduate students will focus on what they know about such as restaurants, hotels, retail stores, universities, airlines, parks, beaches, utilities, and so on. Make sure you ask questions so students see how OM relates to sustainability. Exhibit 1.12 in Chapter 1 is a good place to begin (frame) this discussion as follows: Exhibit 1.12 Examples of Sustainability Practices Environmental Sustainability • Waste management: Reduce waste and manage recycling efforts • Energy optimization: Reduce consumption during peak energy demand times • Transportation optimization: Design efficient vehicles and routes to save fuel • Technology upgrades: Improvements to save energy and clean and reuse water in manufacturing processes • Air quality: Reduce greenhouse gas emissions • Sustainable product design: Design goods whose parts can be recycled or safely disposed of Social Sustainability 1

OM6 C8 IM • Product safety: Ensure consumer safety in using goods and services • Workforce health and safety: Ensure a healthy and safe work environment • Ethics and governance: Ensure compliance with legal and regulatory requirements and transparency in management decisions • Community: Improve the quality of life through industry-community partnerships Economic Sustainability • Performance excellence: Build a high-performing organization with a capable leadership and workforce • Financial management: Make sound financial plans to ensure long-term organizational survival • Resource management: Acquire and manage all resources effectively and efficiently • Emergency preparedness: Have plans in place for business, environmental, and social emergencies. 4. Describe the ergonomic features in the automobile that you drive most often. If it is an older model, visit a new-car showroom and contrast those features with those found in some newer models. Automotive designers pay much attention to ergonomics, such as placement of controls and cup holders, ability to reach them safely and comfortably, and the ability to see them without being distracted. The BMW interface wheel (albeit a bit dated) caused a lot of controversy when it was introduced, and you might suggest that students search for articles or reviews that discuss it. Today’s “heads up” displays that project information onto the windshield is an example of ergonomic design. Other topics that enter this class discussion are location of controls, cubic space, line of sight, size of the people, safety, etc. Cell phone use in vehicles is a hot topic today with voice-activated controls becoming more available. Self-driving vehicles are another entirely new design issue for automobile manufacturers. Most auto enthusiast magazines have reviews of cars and address these issues (while not formally calling them “ergonomics”). 5. What do you think of Cargill Kitchen Solutions’ 20-minute job rotation approach? Would you want to work in such an environment, or one in which you performed the same tasks all day. Why? See box in C8 titled “Cargill Kitchen Solutions: Inovtavie Job Design.” Most students will feel that the approach is a great idea because it provides more interesting work and cross-training (i.e., job enlargement). Few people today are happy with doing a monotonous task all day. This question can be used to introduce a class discussion of job design, job enlargement, and job enrichment, all topics in this chapter. As the text describes: “Two broad objectives must be satisfied in job design. One is to meet the firm’s competitive priorities—cost, efficiency, flexibility, quality, and so on; the other is to make the job safe, satisfying, and motivating for the worker. Resolving 2

OM6 C8 IM conflicts between the need for technical and economic efficiency and the need for employee satisfaction is the challenge that faces operations managers in designing jobs. Clearly, efficiency improvements are needed to keep a firm competitive. However, it is also clear that any organization with a large percentage of dissatisfied employees cannot be competitive.” Cargill is an excellent example of trying to reconcile these two broad objectives using job enlargement and rotation. Problems and Activities 1. Research and write a short report (maximum of two typed pages) on green facility design making sure that you incorporate some of the key topics in this chapter. Students will have no trouble finding “green facility design” issues and examples via an Internet search such as the US Green Building Council (www.usgbc.org), Siemens (www.seimens.com/answers), and The Kresge Foundation (www.kresge.org). Make sure the students focus on facility design, layout, how to group work (i.e., ALB), energy, lighting, CO2 emissions, recycling, waste, workplace and station design, job enlargement and practices, service encounters, safety, pollution, ergonomics, water, and so on in both goods-producing and service-providing organizations. If students present or briefly discuss in class what they found make sure you explore issue(s) such as: How are processes and facility design and layout integrated? Does facility design enhance the customer experience and/or production efficiency? What are the economics of the green design? What type of sustainability is it – economic, social or environmental? 2. Research and write a short paper illustrating how an organization uses one of the following types of facility layouts: • Product layout • Process layout • Cellular layout • Fixed position layout If you Google any of these types of layouts you get millions of hits. The challenge for students is to find an example of how a real company uses the layout. For example, cellular layout reduces part movement, set-up time, and wait time between operations, resulting in a reduction of work in progress inventory and freeing idle capital that can be better utilized elsewhere. Most immediately, processes become more balanced and productivity increases because the manufacturing floor has been reorganized and tidied up. The results are cost savings and the better control of operations. The following link, for example, provides an interesting story w/r to a firm using cellular layouts. http://www.massmac.org/newsline/0709/article05.htm

OM6 C8 IM 3. Visit a manufacturer or service organization and critique their facility design. What are the advantages and disadvantages? How does the layout affect process flows, customer service, efficiency, and cost? Describe the basic types of materials-handling systems commonly used in manufacturing. This activity gives students a chance to see the application of OM. They might uncover some obvious improvements after examining the facilities in the context of the text material. One objective of this question is for students to understand the complimentary relationship between the type of layout and type of process. Chapter 5: Goods and Service Design is a good source to answer this question with topics such as House of Quality, servicescape, design for manufacturability, service encounter design, and service delivery system design. And you should encourage students to make use of the “terminology of the OM field of study.” 4. Bass Fishing, Inc. assembles fishing nets with aluminum handles in an assembly line using four workstations. Management wants an output rate of 200 nets per day using a 7.5 hour work day. The sum of the task times is 7.00 minutes/net. a. What is the cycle time? Equation 8.2 is C = A/R or C = (7.5 hours/day)(60 minutes/1 hour)/[(200 nets/day] = 450 min/day/200 nets/day = 2.25 min/net. b. What is assembly-line efficiency? Equation 8.6 is Assembly Line Efficiency =  t/ (N*CT) = 7.00/(4*2.25) = 77.8% c. What is total idle time? Equation 8.5 is Total Idle Time = N*CT -  t = 4(2.25) – 7.00 = 2.00 min. Bass Fishing is paying for 2 minutes of idle time out of every 9.00 minutes to produce one net. This is not so efficient and the work content should be redefined and better assembly line work balances found. AB efficiency and total idle time are directly related to cost per unit. 5. Peter’s Paper Clips uses a three-stage production process: cutting wire to prescribed lengths, inner bending, and outer bending. The cutting process can produce at a rate of 200 pieces per minute; inner bending, 160 pieces per minute; and outer bending, 150 pieces per minute. Determine the hourly capacity of each process stage and the number of machines needed to meet an output rate of 20,000 units per hour. How does facility layout impact your numerical analysis and process efficiency? Explain. Cutting: 200/min (60 min/hour) = 12,000/hour; 20,000/12,000 = 1.67. Need to round up to 2 machines to ensure meeting the required output rate. Inner bending: 160/min (60) = 9600/hour; 20,000/9600 = 2.08. Need 3 machines. Outer bending: 170/min (60) = 10,200/hour; 20,000/10,200 = 1.96. Need 2 machines. 4

OM6 C8 IM

A few questions for class discussion include: Do we have enough space for these machines? How should the machines be configured? Would a product, process, or cellular layout work best? For each layout option, how many times to we handle the wire? Do we minimize the distance travelled for this three-stage wire cutting process? 6. An assembly line with 30 activities is to be balanced. The total amount of time to complete all 30 activities is 60 minutes. The longest activity takes 2.4 minutes and the shortest takes .3 minutes. The line will operate for 480 minutes per day. a. What are the maximum and minimum cycle times? Maximum cycle time = 60 minutes; minimum cycle time = 2.4 minutes. b. How much daily output will be achieved by each of those cycle times? Using Equation 8.2, CT = A/R or R = 480/60 = 8 units/day; C = 480/2.4 = 200 units/day Make sure students understand how to get the proper “units per day.” That is, they must get the numerator and denominator in the correct and same units of measure before they do the computation. 7. In Problem 6, suppose the line is balanced using 14 workstations and a finished product can be produced every 4.5 minutes. a. What is the production rate in units per day? Using Equation 8.2, CT = A/R or 4.5 = 480/R or R = 106.7 units/day b. What is the assembly line efficiency? Using Equation 8.6, Efficiency = 60/[4.5(14)] = 95.2 percent efficiency. This is about as high efficiency assembly line balance that you would achieve in the real world. 8. A small assembly line for the assembly of power steering pumps needs to be balanced. Exhibit 8.11 is the precedence diagram for problems #8 and #9. The cycle time is determined to be 1.5 minutes. How would the line be balanced by choosing the assignable task having the longest task time first? Longest (largest) processing time first rule? Station

Tasks

Total time 5

Idle Time

OM6 C8 IM 1 2 3

B,A,C,D E,F G,H,I Total

1.5 1.2 1.5 4.2

0.0 0.3 0.0 0.3

Using Equation 8.6, Efficiency = 4.2/[1.5(3)] = 93.3% 9. For the assembly line described in Problem 8, how would the line be balanced by choosing the assignable task having the shortest task time first? Exhibit 8.11 is the precedence diagram for problems #8 and #9.

Shortest (smallest) processing time rule? Station 1 2 3 4

Tasks A,D,F,G B,C E,H I Total

Total time 1.4 0.9 1.4 0.5 4.2

Idle Time 0.1 0.6 0.1 1.0 1.8

Using Equation 8.6, Efficiency = 4.2/[1.5(4)] = 70.0%. The conclusion is that the assembly line balancing rule does make a difference in line balancing solutions and therefore, must be carefully chosen and monitored. The idea is to strictly follow the ALB rule like a computer would do it. This is an important point to make to students and why we work this type of problem. Large assembly line balancing problems also used more complex heuristic rules and simulation to test out alternative line balances. 10. For the in-line skate assembly example in this chapter, suppose the times for the individual operations are as follows: Task Time (sec.) 1 20 2 10 6

OM6 C8 IM 3 30 4 10 5 30 6 20 7 10 8 20 Assume that inspections cannot be performed by production personnel, but only by persons from quality control. Therefore, assembly operations are separated into three groups for inspection. Design a production line to achieve an output rate of 120 per hour and 90 per hour. There is no one correct answer. A suggested solution is to group operations having a CT of 30 seconds or less (120/hour): tasks 1 and 2 (30 sec); task 3 (30 sec); task 5 (30 sec); tasks 4 and 6 (30 sec); tasks 7 and 8 (30 sec). A proposed design would then be: 5 1&2

7&8 4&6

The line would be perfectly balanced (100% efficient). Station A B C D E

Tasks 1 and 2 3 4 and 6 5 7 and 8 Total

Total time 30 sec. 30 30 30 30 150

Idle Time 0.0 0.0 0.0 0.0 0.0 0.0

Using Equation 8.6, Efficiency = 150/[30(5)] = 100.0% 11. For the in-line skate example described in Problem 10, design a production line to achieve an output rate of 90 per hour. For 90 parts/hour, each station needs to have a work content of 40 sec. or less. A configuration is shown below. There would be a lack of work delay before tasks 4 and 5, and flow blocking delay before tasks 6 and 7, and before task 8. 1&2 Station A B

3 Tasks 1 and 2 3

4&5

6&7

Total time 30 sec. 30

Idle Time 10.0 10.0

OM6 C8 IM C D E

4 and 5 6 and 7 8 Total

40 30 20 150

0.0 10.0 20.0 50.0

Using Equation 8.6, Efficiency = 150/[40(5)] = 75.0%

12. You have been asked to set up an assembly line to assemble a computer mouse. The precedence network is shown in Exhibit 8.12; task times in minutes are given in parentheses. There are 480 minutes of assembly time per shift and the company operates one shift each day. The required output rate is forecasted to be 60 units per shift. Exhibit 8.12 Precedence Network for Problem 12

a. Balance the assembly line using the longest processing time rule. State the tasks associated with each workstation, total time, and idle time. Work Station A B C D E F

Assigned Tasks 2, 4, 3 1, 6 (or 7 tie) 5 7 (or 6) 8

Total Time 8 minutes 7 6 3 8

Idle Time 0 minutes 1 2 5 0

You need to know the cycle time first so C = A/R = (480 min/shift)/(60 units/shift) = 8 min/unit. The sum of the task times is 32 minutes. See the table for a solution strictly following the longest processing time rule. (b) What is the assembly line efficiency?

OM6 C8 IM Equation 8.6 is Assembly Line Efficiency =  t/ (N*CT) = 32 minutes/(5*8.0) = 80.0% (c)

Is your assembly line balance solution good or bad? What criteria do you used to make this assessment? Explain. Equation 8.5 is Total Idle Time = N*CT -  t = 5(8.0) - 32 = 8 min. The firm is paying for 8 minutes of idle time out of every 40 minutes so this is not a good (just fair) balance. Also, since the idle time per work station varies greatly (i.e., from zero at station A and E to 5 minutes at station D, it is not a very good balance and solution. The potential for a bottleneck to happen at work stations A and E is greatest. We should redefine the work content into more tasks (say 15 to 20 instead of 8) and try to regroup the work better and increase efficiency.

13. Balance the assembly line in Exhibit 8.13 for (a) a shift output of 40 pieces and (b) a shift output of 20 pieces. Assume an eight-hour shift, and use the rule: choose the assignable task with the longest processing time. Compute the line efficiency for each case.

For a shift output of 40 pieces, cycle time (C) = 8(60)/40 = 12 minutes/unit Work Station 1 2 3 4

Tasks Total Time a, b, e 12 d, g, c 10 f, i 12 h, j, k 12 Total 46

Idle Time 0 2 0 0 2

Using Equation 8.6, Efficiency = 46/[4(12)] = 95.8% The idea is to strictly follow the ALB rule like a computer would do it. Students may also ask about the two ending tasks and one explanation is the assembly line is producing a subassembly where J and K are end items that are 9

OM6 C8 IM not yet put together (might be shipped separately and then used in final assembly). The longest processing time ALB rule works great for situation (a).

For an output of 20 pieces/shift, cycle time = 8(60)/20 = 24 minutes/unit. You need to go over the cycle time calculation carefully. Work station 1 2 3

Tasks Total Time a, b, c, d, e, f 21 g, h, i, j 22 k 3 Total 46

Idle Time 3 2 21 26

Using Equation 8.6, Efficiency = 46/[3(24)] = 63.9%. When output is 40 units/shift the ALB is very efficient but not so when the output rate is 20 units/shift. Different ALB rules will yield different solutions. Also, one could redefine the work (tasks and task times) into smaller units (go from 11 tasks to say 20 or 30 tasks) in (b) and then redo ALB. 14. List the ergonomic features of your automobile’s interior and discuss any improvements that you can identify. Height, width, seat comfort, visibility, headrests, cup holders, space, steering wheel, etc. If you Google “ergonomic automobiles” you get almost 3 million hits such as below: http://www.ccohs.ca/oshanswers/ergonomics/driving.html Automotive designers pay much attention to ergonomics, such as placement of controls and cup holders, ability to reach them safely and comfortably, and the ability to see them without being distracted. The BMW interface wheel (albeit a bit dated) caused a lot of controversy when it was introduced, and you might suggest that students search for articles or reviews that discuss it. Today’s “heads up” displays that project information onto the windshield is an example of ergonomic design. Other topics that enter this class discussion are location of controls, cubic space, line of sight, size of the people, safety, etc. Cell phone use in vehicles is a hot topic today with voice-activated controls becoming more available. Most auto enthusiast magazines have reviews of cars and address these issues (while not formally calling them “ergonomics”). 15. Research and write a short paper (1 page maximum) on the advantages and disadvantages of virtual teams in today’s digital environment.

OM6 C8 IM One of the major trends in business is a move toward virtual workplaces. In situations where this is not in place or not appropriate, virtual teams can be utilized within a more traditional workplace. In a virtual team, members are dispersed, either geographically or organizationally with their primary communications through electronic means (versus face-to-face). Team membership is also more likely to change over time than with traditional single-location teams. Advantages of a virtual team • • • • • • • • • • •

Saves time and travel expenses Eliminates moving expenses Provides access to experts Greater flexibility in team membership Less cost to use outside consultants Easier to hire and retain team members Better accommodation to team members personal & professional lives Dynamic team membership Allows assignment to multiple teams simultaneously Provides faster response to market demands See also virtual workplace advantages

Disadvantages of a virtual team • • • • • •

Lack of physical interaction Loss of face-to-face synergies Lack of trust Greater concern with predictability and reliability Lack of social interaction See also virtual workplaces disadvantages

Reference: Cascio, Wayne F. (2000, August). Managing a Virtual Workplace. Academy of Management Executive. pp. 81-90.

Case Teaching Notes: BankUSA Cash Movement Overview The case describes a department in the investment and trust operations area of a major bank that processes “information-intensive transactions (wires).” Notice the ALB problem is described for a service industry. The wires are initiated by a paper-based process. The case analysis requires a blend of numerical analysis as well as qualitative analysis. Some of the issues in the case encourage a vigorous class discussion such as (a) the best level of detail in defining work tasks for assembly line balancing in a 11

OM6 C8 IM service business, (b) control and the cost of failure versus higher process efficiency, (c) labor savings (costing out) due to more efficient balances, and (d) how to handle high dollar amount wires. The case focuses on outgoing wires only. Cycle time computations are included in the case to clarify this computation for the students. With these example computations their “what if” computations are normally accurate! This is a good case for a major team case write-up and management report. Students should work numerous ALB problems and master this topic before they try to analyze the case. BIG PICTURE: The case study “looks” more difficult than it is. Instructors might want to go over how rework is included in this ALB analysis. Also, the assembly line is in series with no parallel work tasks so grouping work is simple and must not violate the cycle time. There is no real need for a specific ALB rule since the process is in series and our objective is to find an ALB that achieves the desired output rate. Finally, this case also focuses on how many people are needed to staff the assembly line and the cost implications. Case Questions and Brief Answers 1. What is the best way to group the work represented by the 16 work groups for an average demand of 306 outgoing wires per day? What is your line balance if peak demand is 450 wires per day? What is assembly-line efficiency for each line balance solution? How to group work tasks most efficiently is best done with assembly line balancing methods. Please note that this process is best described as having dominant line flows (i.e., a flow shop) with considerable customization per transaction (widget). The high volumes and fair degree of customization per financial transaction resembles the idea of mass customization. Case Exhibit 8.13 gives us enough information to do assembly line balancing. Students should work line balancing problems before they are assigned this case. Please note that the line balancing solutions are for the outgoing wire process only. At the line balancing level of analysis we should examine the job design of every task in the process. Line balancing is a very effective and powerful method to reduce unit costs as long as the volume is high and stable, and the transaction is somewhat standardized. The cycle time at 306 wires/day is 1.47 min/wire as shown in the case. At about 150% of average demand, the cycle time in Equation 8.2 is C = A/R or C = 1/[(306 wires/day*1.5)(1/7.5 hours/day)(1 hr./60 minutes)] = 1/1.02 = 0.98 min/wire ≈ 1 min./wire. This assumes demand is 150% of average demand or 457 wires/workday or about 450. We use the 450 as peak demand in the case. The line balance below assumes an output rate of 457 wires/day or a cycle time of about 1.0 minutes/wire. (You may want to work out these cycle time computations and assumptions in class prior to them doing the case analysis.)

OM6 C8 IM You may also want to explain to students that if demand is greater than 457 wires/day, you have to redefine the work and break the 16 steps and times into more steps and smaller task times; then do line balancing. The resulting line balance with C = 1.0 min/wire for a peak demand of 457 wires/day is as follows: Work Station 1 2 3 4 5 6 7 8 9 Total

Tasks Total Time 1 0.8 2 0.3* 3, 4 0.9 5 1.0 6, 7, 8 0.9 9 1.0 10, 11, 12, 13 1.0 14, 15 0.4 16 .75 7.05 min.

Idle Time 0.20 0.70 0.10 0.00 0.10 0.00 0.00 0.60 0.25 1.95 min.

*Rework is 3% times 10 minutes or 0.3 minutes on average. Total Time Available = (Number work stations)(Cycle Time) = N*CT = 9(1) = 9.0 min (Equation 8.4) Total Idle Time = N*CT -  t = 9(1) - 7.05 = 1.95 min.

(8.5)

Assembly Line Efficiency =  t/ (N*CT) = 7.05/(9*1) = 78.33%

(8.6)

Balance Delay = 1 - Assembly Line Efficiency = 1.0 - .7833 = .2167 or 21.67% (8.7) Therefore, by grouping work using assembly line balancing you need 9 people, not 11 as currently assigned. The annual labor savings is (2 employee)($30,000)(1.30) = $78,000. The resulting line balance for low demand with C = 1.47 min/wire (306 wires/day) is as follows: Work Station 1 2 3 4 5 6 7

Tasks 1, 2 3, 4 5, 6, 7 8 9, 10, 11, 12 13, 14, 15 16 Total

Total Time 1.1 0.9 1.4 0.5 1.25 1.15 0.75 7.05 min.

Idle Time 0.37 0.57 0.07 0.97 0.22 0.32 0.72 3.24 min.

Total Time Available = (# work stations)(Cycle Time) = N*CT = 7(1.47) = 10.29 min (8.4) 13

OM6 C8 IM

Total Idle Time = N*CT -  t = 7(1.47) - 7.05 = 3.24 min.

(8.5)

Assembly Line Efficiency =  t/ (N*CT) = 7.05/(7*1.47) = 68.85%

(8.6)

Balance Delay = 1 - Assembly Line Efficiency = 1.0 - .6885 = .3115 or 31.15% (8.7) 2. How many people are needed for outgoing wires using assembly line balancing methods versus the current staffing level of 11 full-time equivalent employees? Therefore, by grouping work using assembly line balancing, you need 7 people, not 11 as currently assigned if you plan for average demand of 306 wires/day. Here, the annual labor savings is (4 employee)($30,000)(1.30) = $156,000. The question is whether the risk of going to 7 employees is worth it; given the necessity for control and the high cost of failure—going to 9 employees seems more reasonable. Many other "what if" scenarios are possible and left to the discretion of the instructor. For example, you could ask what if we worked 20% faster or 20% slower and change standard task times accordingly? The 20% faster standard times could be due to continuous improvement initiatives while the 20% slower stand times could be due to everyone ignoring the standards (which happen often). Eliminating the 3 rework tasks is working smarter and taking non-value added tasks out of the process. Eliminating rework saves two or three full-time employees (FTE) depending on how much safety capacity you want in the process. Several "what if" line-balancing solutions for outgoing wires are summarized below.

Seven Scenarios

Process Standard Output Time/Wire Rate*

Cycle No. Time Work(min) Stations

No. Direct People

Idle Time

(1) Peak Demand

7.05 min

450

1.00

1.95

(2) +20% Inc. Std Times 8.46 min

450

1.00

3.14

(3) -20% Dec. Std Times 5.67 min

450

1.00

1.33

(4) Drop 3 Rework Steps 6.15 min

450

1.00

1.85

(5) Average Demand 3.24

7.05 min

306

1.47

(6) Demand Inc. 50% 2.71

7.05 min

457

0.98

*An output rate of 450 wires per day assumes 7.5 hours/day times 60 minutes/hour. Hence, the cycle time is 1.0 minute/wire (Cycle Time = 1/Output Rate).

OM6 C8 IM In the spirit of continuous improvement, a 20 percent decrease in standard times (that is total time = 5.67 min/wire) results in higher process efficiencies, better grouping of tasks, and requires only 7 people, not the current 11. 3. How many staff members do you need for the outgoing wire process if you eliminate all rework? The next line balancing “what if” scenario assumes you eliminate the three rework areas. If this can be done, you need only 8 people instead of the original 9 people in the base case. These first four scenarios assume an output rate of 450 wires per day and a cycle time of one minute per wire. A few of the conclusions from these analyses are as follows: a) Either a 20 percent decrease in standard times or staffing to meet the average demand of 306 wires/day would require 7 associates for the outgoing wire process, not 11. This is a labor savings of $156,000 ($30,000*4*1.3). b) A 20 percent increase in standard times has severe consequences, requiring 12 workstations and 14 associates, given that all other variables remain the same. In this scenario, cost per wire would increase dramatically. One lesson here is that standard times must be carefully managed and not allowed to drift upward. c) Eliminating rework at three steps in the process would allow the reduction of one associate compared to the base case and a savings of $39,000. So rework does costs money and reduces efficiency! 4. What are your final recommendations? The student must decide on the best line balance given their assumptions. Please note that students at times will make assumptions that place their solution beyond the bounds of the actual case facts, and you must grade accordingly. Another issue in the case is “how to handle high dollar wire customers?” The case provides no data to help make this decision but does define the problem. At the time of the case, no real data existed to help make this decision. Preliminary initiatives to help analyze this issue include: a) Do an ABC analysis on dollars per wire versus customer category. Who are the high-dollar wire A customers? These data will also help set a high dollar wire cut-off dollar value. b) Do a well-designed Pareto cause and effect analysis on who causes what types of problems (other banks, the BankUSA departments, customers, Federal Reserve system, etc.). c) Another related idea is to evaluate the advantages and disadvantages of sending high dollar wire customers a "confirmation" that once the wire is successfully 15

OM6 C8 IM completed, to enhance customer service and relieve customer anxiety. For example, by sending the confirmation for wires over say $100,000, Cash Movement sets customers expectations. What if the high dollar wire customer now asks for this premium service on all wires they initiate? d) High dollar wire volumes may be large enough to justify a separate dedicated high wire process. If this topic comes up in class ask the class (a) Do we need duplicate equipment for a new dedicated high wire process? (b) What dollar amount and decision rule would you use here? Greater $10,000, $50,000, etc. (c) How would you determine such a decision rule? Other questions you may or may not want to cover include: (1) Could you balance the assembly line using the 47 more detailed work tasks (mentioned but not provided in the case)? What is the best level of detail for grouping work? 47 versus 16 tasks? (2) How would you estimate the standard times? (work measurement) (3) Should Cash Movement set up a separate process for high dollar wires? What information do we need to make this decision? What else could Cash Movement do to provide superior service to high dollar wire customers? (4) How should wires be processed and sequenced? What type of information do you need to make this decision? (5) How would you handle the tradeoff between “control and no mistakes” versus “risk and cost of failure” versus the “cost of labor resources and assembly line efficiency?” What are the economic, customer service, and managerial tradeoffs? Teaching Plan 1.

2. 3. 4.

What is the best way to group the work represented by the 16 work groups for an average demand of 306 outgoing wires per day? What is your line balance if peak demand is 450 wires per day? What is assembly-line efficiency for each line balance solution? How many people are needed for outgoing wires using assembly line balancing methods versus the current staffing level of 11 full-time equivalent employees? How many staff members do you need for the outgoing wire process if you eliminate all rework? (see other possible questions)What are your final recommendations? THE END!

MTOM C9 IM MTOM Chapter 9: Forecasting and Demand Planning Discussion Questions 1.

Discuss some forecasting issues that you encounter in your daily life. How do you make your forecasts? Students might suggest such things as cell phone usage, vehicle mileage, university enrollment, financial needs and cash flow, weather, attendance at social and sporting events, waiting times in restaurants dependent on the time of day, apartment demand and rent changes, time to install cable TV, to even perhaps what will be on an exam!

Suppose that you were thinking about opening a new restaurant. How would you go about forecasting demand and sales? Sister restaurants in similar locations and demographics using variables such as customer disposable income by ZIP code, population density, age and income distribution with five miles, urban or rural, density of competitors within close proximity, and so on.

Provide some examples of time series that exhibit a. trends (U.S. employment growth or decline, demand for iPads, eBook versus hard copy book sales, disposable income by ZIP code, hotel and rental car reservations, USA Gross Domestic Product, television viewers, etc.) b. seasonal patterns (resort hotel bookings, snow blowers, lawn mowers, jet skis, vehicles, airline passenger miles, winter clothing, soup, etc.) c. cyclical patterns (climate change, stock market, recessions by country and global, economic recession cycles, etc.)

If a manager asked you whether to use time series forecasting models or regression-based forecasting models, what would you tell him or her? Time series methods always include time as a variable such as by hour, day, week, month, quarter or year. Five characteristics are trend, seasonal, cyclical, random variation, and irregular (one-time) variation. Regression methods allow the modeler to use a single dependent variable and one or more dependent variables. Regression, in its many forms, can model complex multiple criteria situations while time series methods such as exponential smoothing is a simpler method. What method to use depends on the application? Both methods use historical data to forecast into the future.

MTOM C9 IM 5.

Looking back at the chapters you have studied so far, discuss how good forecasting can improve operations decisions in these areas. Good forecasting is essential to improve process and value chain performance. • • • • • • •

Demand forecasting (goods and services, setup assembly line, etc.) Short-term capacity and schedules (call center or factory staffing, etc.) Long-term capacity and schedules (equipment, facilities, stock keeping units, etc.) Purchasing and global sourcing (SKUs, equipment, workforce, global shipments, etc.) Technology changes and adoption patterns (iPad, RFID, GPS, voiceactivated devices, bookstore sales, etc.) Competitive priorities (cost, time, goods or service quality, etc.) Customer satisfaction given certain operational improvements.

Note that judgmental forecasting is also a valid approach, in addition to statistical forecasting methods. You can also review chapter concepts and give OM examples such as seasonal patterns, trends, planning horizon, time bucket size, forecast error, and methods. Problems and Activities Note: an asterisk denotes problems for which an Excel Spreadsheet template is available on line. 1.

Search the Internet for some time series data that relates to sustainability, for example, environmental emissions. What types of patterns do these data exhibit? Apply forecasting techniques in this chapter to forecast ten years into the future. In an article by R. Schmalensee, T.M. Stoker, and R.A Jackson, Massachusetts Institute of Technology, Massachusetts Institute of Technology, and U.S. Federal Reserve Board, respectively, they find strong times series relationships between CO2 emission and Gross Disposal Product for developed and developing countries. Global CO2 emissions often follow logarithmic curves. Governments keep track of the percent of waste that is recycled.

The historical sales for a certain model of a single serve coffee maker in units is: January, 26; February, 21; March, 20; April, 23; May, 17, and June, 20. Using a 2month moving average, what is the forecast for July? If July experienced a demand of 15, what is the forecast for August? July forecast: Time Period 7 Forecast = 18.5

Moving Average Forecasting

MTOM C9 IM

Enter data only in yellow cells. The template is designed for up to 20 observations and k = 2, 3, or 4. Periods in moving average, k (2, 3, or 4)

Time Period Observation Forecast 1 26 2 21 3 20 23.50 4 23 20.50 5 17 21.50 6 20 20.00 7 #N/A 8 #N/A 9 #N/A 10 #N/A 11 #N/A 12 #N/A 13 #N/A 14 #N/A 15 #N/A 16 #N/A 17 #N/A 18 #N/A 19 #N/A 20 #N/A Next period forecast - Time period: 7 18.50

Error

-3.50 2.50 -4.50 0.00 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A

Error^2

12.25 6.25 20.25 0.00 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A

MSE Moving Average Forecasting

9.69

Enter data only in yellow cells. The template is designed for up to 20 observations and k = 2, 3, or 4. Periods in moving average, k (2, 3, or 4) 2 Time Period 1 2 3

Observation Forecast 26 21 20 23.50 3

Error

-3.50

Error^2

12.25

MTOM C9 IM 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next period forecast - Time period:

23 17 20 15

20.50 21.50 20.00 18.50 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A 17.50

2.50 -4.50 0.00 -3.50 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A

6.25 20.25 0.00 12.25 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A

MSE

10.20

August forecast below: Time period 8 Forecast = 17.5 3. In Problem 2, use single exponential smoothing with  = 0.2 and compute the exponential smoothing forecasts for February through July. Exponential Smoothing Forecasting

Enter data only in yellow cells. The template is designed for up to 20 observations. Smoothing constant Time Period 1 2 3 4 5 6 7 8

0.2 Observation Forecast 26 26.00 21 26.00 20 25.00 23 24.00 17 23.80 20 22.44 #N/A #N/A 4

Error -5.00 -5.00 -1.00 -6.80 -2.44 #N/A #N/A

Error^2 25.00 25.00 1.00 46.24 5.95 #N/A #N/A

MTOM C9 IM 9 10 11 12 13 14 15 16 17 18 19 20 Next period forecast - Time period:

#N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A 21.95

#N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A

4.* Forecasts and actual sales of MP3 players at Just Say Music are as follows: Month Forecast Actual Sales March April May June July August September October

150 220 205 256 250 260 270 280

170 229 192 241 238 210 225 179

a. Plot the data and provide insights about the time series. 300 250 200 150 100 50 0 1

4 5 Actual Sales

The time series appears to be relatively stable.

#N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A

MTOM C9 IM b. What is the forecast for November, using a three-period moving average? November forecast = (225 + 179)/2 = 202 c. What is the forecast for November, using a two-period moving average? November forecast = (210 + 225 + 179)/3 = 204.67 or 205 Note also that the forecast values provided are irrelevant to computing these moving average forecasts.

d. Compute MSE for the two- and three-period moving average models and compare your results. Note that we can only compute these measures through October because we need to know the actual sales. Using the Excel template Moving Average, we find:

MTOM C9 IM

The 2-month moving average is a better model. e. Find the best number of periods for the moving average model based on MSE. By changing the number of periods in the Excel template, we find that the 2-period model has the lowest MSE. 5.* For the data in Problem 4, find the best single exponential smoothing model by evaluating the MSE for a from 0.1 to 0.9, in increments of 0.1. How does this model compare with the best moving average model found in Problem 4?

Alpha 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

MSE 1787.36 1430.95 1272.33 1199.04 1169.81 1171.71 1202.25 1262.54 1355.16

A smoothing constant of 0.5 has the smallest MSE. The Excel template Exponential Smoothing shows the details: 7

MTOM C9 IM

6.* A restaurant wants to forecast its weekly sales. Historical data (in dollars) for fifteen weeks are shown below and can be found on the worksheet C9P6 in the Data Workbook. (Note: you may copy the data from the worksheet to the appropriate Excel template.) a. Plot the data and provide insights about the time series. Copyright © 2016 Cengage Learning

Moving Average Forecasting

Not for commercial use. Enter data only in yellow cells. The template is designed for up to 20 observations and k = 2, 3, or 4. Periods in moving average, k (2, 3, or 4) Time Period 1 2 3 4 5 6 7

2 Observation Forecast 1623 1533 1455 1578.00 1386 1494.00 1209 1420.50 1348 1297.50 1591 1278.50 8

Error

-123.00 -108.00 -211.50 50.50 312.50

Error^2

15129.00 11664.00 44732.25 2550.25 97656.25

MTOM C9 IM 8 9 10 11 12 13 14 15 16 17 18 19 20 Next period forecast - Time period:

1332 1245 1521 1421 1502 1656 1614 1332

1469.50 1461.50 1288.50 1383.00 1471.00 1461.50 1579.00 1635.00 #N/A #N/A #N/A #N/A #N/A 1473.00

-137.50 -216.50 232.50 38.00 31.00 194.50 35.00 -303.00 #N/A #N/A #N/A #N/A #N/A

18906.25 46872.25 54056.25 1444.00 961.00 37830.25 1225.00 91809.00 #N/A #N/A #N/A #N/A #N/A

MSE

32679.67

Moving Average Forecast 600 500 400 300

200 100 0 1

Time Period Observation

Forecast

The data are relatively stable with a slight trend upward (increasing) but notice the forecast lags demand and greatly underestimates demand. b. What is the forecast for week 16, using a two-period moving average? Forecast for week 16 = 1,473 (See previous Excel results) c. What is the forecast for week 16, using a three-period moving average? 9

MTOM C9 IM

Forecast for week 16 = (1656 + 1614 + 1332)/3 = 4,602/3 = 1,534 d. Compute MSE for the two- and three-period moving average models and compare your results. 2-period: MSE = 32,680 3-period: MSE = 27,717 The 3-period model is better. e. Find the best number of periods for the moving average model based on MSE. Using the Excel template, we cannot find a better model than the 3 period model.

Moving Average Forecast 600 500 400 300 200 100 0 1

Time Period Observation

Forecast

Moving Average Forecasting

Enter data only in yellow cells. The template is designed for up to 20 observations and k = 2, 3, or 4. Periods in moving average, k (2, 3, or 4)

Time Period 1

Observation Forecast 1623 10

Error

Error^2

MTOM C9 IM 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next period forecast - Time period:

1533 1455 1386 1209 1348 1591 1332 1245 1521 1421 1502 1656 1614 1332

#N/A 1537.00 1458.00 1350.00 1314.33 1382.67 1423.67 1389.33 1366.00 1395.67 1481.33 1526.33 1590.67 #N/A #N/A #N/A #N/A #N/A 1534.00

#N/A -151.00 -249.00 -2.00 276.67 -50.67 -178.67 131.67 55.00 106.33 174.67 87.67 -258.67 #N/A #N/A #N/A #N/A #N/A

#N/A 22801.00 62001.00 4.00 76544.44 2567.11 31921.78 17336.11 3025.00 11306.78 30508.44 7685.44 66908.44 #N/A #N/A #N/A #N/A #N/A

MSE

27717.46

7.* For the data in Problem 6, find the best single exponential smoothing model by evaluating the MSE for  from 0.1 to 0.9, in increments of 0.1. How does this model compare with the best moving average model found in Problem 6? Alpha 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

MSE 31,784 27,453 25,892 25,358 25,413 25,824 26,440 27,162 27,918

A smoothing constant of 0.4 is the best. This ES model with alpha = 0.4 has a smaller MSE than the moving average model with n = 3 (see problem 6).

MTOM C9 IM 8.* The monthly sales of a new business software package at a local discount software store were as follows: Week 1 2 3 4 5 6 7 8 9 10 Sales 460 415 432 450 488 512 475 502 449 486 a. Plot the data and provide insights about the time series. 18500 18000 17500 17000 16500 16000 15500 15000 14500 14000 1

The time series is relatively stable. b. Find the best number of weeks to use in a moving-average forecast based on MSE. Using the Excel template Moving Average, we find that among a 2, 3, or 4 week moving average, k = 2 is best as verified below. k 2 3 4

MSE 894.78 1270.92 1533.38

c. Find the best single exponential smoothing model to forecast these data. Using the Excel template Exponential Smoothing, we find: Alpha MSE 0.1 1039.080177 0.2 1032.628238 0.3 1026.055445 0.4 1023.834527 0.5 1026.213591 0.6 1034.889231 0.7 1053.291064 0.8 1085.858251 12

MTOM C9 IM 0.9 1137.734505 The best smoothing constant (alpha) is 0.4. 9.* Consider the quarterly sales data for Worthington Health Club shown here (also available on the worksheet C9P9 in the Data Workbook):

Year 1 2 3 4 5

1 4 6 10 12 18

Quarter 2 3 2 1 4 4 3 5 9 7 10 13

4 5 14 16 22 35

Total Sales 12 28 34 50 76

a. Develop a four-period moving average model and compute MSE for your forecasts. Using the Excel template Moving Average, MSE = 47.77.

b. Find a good value of  for a single exponential smoothing model and compare your results to part (a). Alpha MSE 0.1 66.53594394 0.2 54.53193036 0.3 51.2416283 0.4 51.2117151 0.5 52.54729432 0.6 54.42745061 0.7 56.38901248 13

MTOM C9 IM 0.8 58.11874101 0.9 59.40694213 The moving average forecast with n = 4 (and MSE = 47.8) provides a smaller MSE than with any ES model.

10.* Using the factory energy cost data in Exhibit 11.11, find the best moving average and exponential smoothing models. Compare their forecasting ability with the regression model developed in the chapter. Which model would you choose and why? k 2 3 4

MSE 267109.98 420795.85 544054.44

For the moving average models, k = 2 is best.

MTOM C9 IM

For exponential smoothing: Alpha 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

MSE 2437086.953 1218910.64 716342.3987 475299.1805 344064.2178 264970.2159 213357.9127 177538.737 151456.9193

Here we see that alpha = 0.8 gives a lower MSE than the best moving average model.

MTOM C9 IM

Note that in both cases, the forecasts lag the data. This occurs because we have a linear trend, and the instructor should point out that moving average and exponential smoothing models work best for stable time series; other techniques such as regression should be used when we have a linear increasing or deceasing trend. 11. The president of a small manufacturing firm is concerned about the continual growth in manufacturing costs in the past several years. The data series of the cost per unit for the firm’s leading product over the past eight years are given as follows: Year Cost/Unit ($) 1 20.00 2 24.50 3 28.20 4 27.50

Year Cost/Unit ($) 5 26.60 6 30.00 7 31.00 8 36.00

a. Construct a chart for this time series. Does a linear trend appear to exist?

Yes, a linear trend is apparent. 16

MTOM C9 IM

b. Develop a simple linear regression model for these data. What average cost increase has the firm been realizing per year? The trend line shown on the chart is Unit Cost = 1.7738 Year + 19.993. The average cost increase per year is $1.7738, the slope of the trend line. 12. Interview a current or previous employer about how he or she makes forecasts. Document in one page what you discovered, and describe it using the ideas discussed in this chapter. Students will find companies and managers who use a wide range of methods to make forecasts such as the Delphi Method, grass roots forecasting, linear and nonlinear regression, and time series methods. Often students discover “rules of thumb” used by retail store managers such as add another cashier for every X forecasted customers. Questions to ask students include: What are we forecasting and why? How repeatable is the method? What’s the planning horizon length? Time bucket size? Are there seasonal patterns? Linear or non-linear patterns? How do they measure forecast error? Bias? What is the impact of forecast errors on profitability? 13. Canton Supplies, Inc., is a service firm that employs approximately 100 people. Because of the necessity of meeting monthly cash obligations, the Chief Financial Officer wants to develop a forecast of monthly cash requirements. Because of a recent change in equipment and operating policy, only the past seven months of data are considered relevant.

Month 1 2 3 4

Cash Required Cash Required ($1,000) Month ($1,000) 190 5 230 212 6 240 218 7 200 260

As you can see from this graph, cash flows have been erratic. Maybe there is some seasonal cycle for this firm that is not described in the problem. It could be logical or simply – erratic! What are the implications of such an erratic cash flow for the CFO? Moving Average (k) 2 3 4 5 6

MSE 15,689 16,562 11,890 12,634 14,088

For the moving average models, k = 4 is best (see next).

MTOM C9 IM

Moving Average Forecasting

Copyright © 2016 Cengage Learning Not for commercial use. Enter data only in yellow cells. The template is designed for up to 20 observations and k = 2, 3, or 4. Periods in moving average, k (2, 3, or 4) 4 Time Period Observation Forecast 1 190 2 212 3 218 #N/A 4 260 #N/A 5 230 170.00 6 240 130.00 7 200 137.00 8 #N/A 9 #N/A 10 #N/A 11 #N/A 12 #N/A 13 #N/A 14 #N/A 15 #N/A 16 #N/A 17 #N/A 18 #N/A 19 #N/A 20 #N/A Next period forecast - Time period: 8 132.50

Error

Error^2

#N/A #N/A -140.00 110.00 63.00 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A

#N/A #N/A 19600.00 12100.00 3969.00 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A

MSE

11889.67

If you use simple exponential smoothing you get the following results using the Templates: ES (alpha) .1 .2 .3 .4 .5 .6 .7

MSE 8,060 8,529 9,050 9,583 10,075 10,518 10,920 18

MTOM C9 IM .8 .9

11,292 11,654

Simple exponential smoothing with alpha = 0.1 is a better model than a moving average with k = 4. Finally, students might try a regression model as follows: Regression Analysis: Cash SS versus Month The regression equation is Cash SS = 207 + 3.50 Month Predictor Constant Month

Coef 207.43 3.500

S = 24.9428

SE Coef 21.08 4.714

T 9.84 0.74

R-Sq = 9.9%

P 0.000 0.491

R-Sq(adj) = 0.0%

Analysis of Variance Source DF SS Regression 1 343.0 Residual Error 5 3110.7 Total 6 3453.7

MS 343.0 622.1

F 0.55

P 0.491

Trend Analysis Plot for Cash SS Linear Trend Model Yt = 207.4 + 3.50*t Variable Actual Fits

260 250

Accuracy Measures MAPE 7.146 MAD 15.796 MSD 444.388

Cash SS

240 230 220 210 200 190 1

4 Index

The regression is not statistically significant and not useful given the erratic nature of cash flows.

MTOM C9 IM 14.* Two experienced managers at Wilson Boat, Inc. are resisting the introduction of a computerized exponential smoothing system, claiming that their judgmental forecasts are much better than any computer could do. Their past record of predictions is as follows (these data can also be found on the worksheet C9P14 in the Data Workbook): Week Actual Demand Manager’s Forecast 1 4,000 4,500 2 4,200 5,000 3 4,200 4,000 4 3,000 3,800 5 3,800 3,600 6 5,000 4,000 7 5,600 5,000 8 4,400 4,800 9 5,000 4,000 10 4,800 5,000 a. How would the manager’s forecast compare to a single exponential smoothing forecast using  = 0.4? Manager’s forecast:

Exponential smoothing:

MTOM C9 IM

b. Based on whatever calculations you think appropriate, are the manager’s judgmental forecasts performing satisfactory? With experimentation, you will find that the MSE for the manager’s forecast is better than any exponential smoothing forecast (see the table below). Thus, you can conclude that the manager’s forecast is rather good. Alpha MSE 0.1 637725.2747 0.2 592564.5051 0.3 572326.1302 0.4 567780.9143 0.5 572385.3217 0.6 581945.6953 0.7 594097.6302 0.8 607772.437 0.9 622839.5048 c. What other criteria should be used to select a forecasting method for this company? Students might consider issues such as how much time or other information must be obtained to develop the forecast or sensitivity to external factors that may change. 15. Research and write a short paper (2 pages maximum) that summarizes the capabilities of commercial software available for forecasting. How does such software compare with using Excel? A Google search reveals 24 million hits on the topic of “forecasting software.” SAS (www.sas.com) is a popular commercial software that does business analytics and 21

MTOM C9 IM forecasting. Autonox (www.autobox.com) does time series forecasting and allows you to lead or lag variables. IBM Cognos performs forecasting and integrates it into demand planning, budgeting, and other areas of the business. Students will also find Excel plug-ins that do forecasting.

Case Teaching Note: BankUSA: Forecasting Help Desk Demand by Day Overview The case describes a telephone call center (contact center) where 98% of the call volume is internal customers (i.e., the bank's sales force, trust administrators, branch managers, wealth advisors, etc.). Accurate and quick answers are expected from the customer service representatives (CSRs). Staff call center scheduling is critical to maximizing service and minimizing costs. Of course, the first step is an accurate short-term forecast of call volume by day. A small sample of call volume data is presented in the case and the student or student team is ask to determine the best method or methods to forecast these data. This data can be evaluated using simple graphs, time series, or regression analysis. Although the focus is forecasting there are several other OM issues. The four-step demand-capacity-schedule framework is (1) Demand Analysis, (2) Set Service Standards, (3) Compute Capacity Requirements to Meet Demand (Using Equation 7.2 or queuing models), and (4) Develop a Resource (Staff) Schedule” and associated issues. This case focuses only on the forecasting step but you might want to frame in what happens after a good forecast of demand is generated. Case Questions and Brief Answers 1. What are the service management characteristics of the CSR job? This is an important question and we find that students do not fully appreciate the magnitude of “service management jobs” unless you carefully discuss it in class. Discuss each component – technical and operational skills, human interaction skills, and face-to-face marketing and cross-selling skills – all in one CSR (also flight attendants, bank tellers, fast food counter workers, nurses, etc.). Ask the students questions like (1) Can you move an employee from the backroom to the front room? (2) What are the characteristics of good hires for front room jobs (high contact)? Backroom jobs (low contact)? (3) How does “training” enter the picture here? Tom’s Auto Service case study in Chapter 5 highlights some of these issues. The best way to answer this question is to ask students, especially ones who have worked in a call center. Make sure students realize when they are interacting with a call center such as when getting the cable TV or phone installed, turning on their apartment’s electric and water, reserving a hotel room, airline seat, or concert ticket; and so on.

MTOM C9 IM Typical CSR job characteristics include: service management skills (i.e., simultaneous technical (operational), marketing, and human interactions skills), job is electronically monitored, low pay, stressful, show empathy toward customer problem, patience, sitting all day, supervisors listening in on your customer-service provider conversations, no privacy, and so on. Is it more stressful than most manufacturing jobs? Most students will say yes but point out safety and environment risks in goodsproducing industries (risk of accidents, heat, physical lifting and twisting, etc.). 2. Define the mission statement and strategy of the Help Desk contact center? Why is the Help desk important? Who are its customers? The Help Desk's mission is "to provide accurate and timely resolution of customer problems and inquires for the bank." The Help Desk is the gateway to problem resolution and is an interdisciplinary function since it researches and resolves errors across all functional areas. It is a high profile operation where customer problems must be resolved quickly; otherwise, they end up on top management's desk. Internal and intermediate front room bank employees call the Help Desk for help--simple as that. Hence, the customer is mainly an internal bank employee. 3. How would you handle the customer affected by the inaccurate stock price in the banks trust account system? Passive or pro-active approach? Justify your answer. Two options exist as follows: (1) If the stock price is in error correct this customers account statement, call them and apologize, and immediately mail a corrected account statement. Otherwise, be passive and wait and see if other customers call the bank and recognize the stock price error, and if they do, correct the problem immediately. (2) Be pro-active and search all customer accounts looking for this stock price error and immediately notify all customers affected by the error, and mail each of them corrected account statements as soon as possible. What this real bank actually does is briefly described as follows: Call a Priority 1 meeting with the appropriate systems, product support, retail, and backroom support personnel. Correct the problem as soon as possible, notify all front line trust and wealth account advisors, express mail corrected account statements to all intermediate (internal) customers and let them hand deliver the corrected statement to the ultimate customer or mail directly to the customer. After the error is acknowledged and fixed do a root cause analysis and try to fix the source of the error, if at all possible. Write-up a report summarizing what happened and how it was resolved and how the process was fool proofed. One automated tool used by the bank is software that monitors the variance in stock price and if deemed out-of-control, the stock is investigated. 4. Using the data on Call Volume in the accompanying table, how would you forecast short-term demand? The data in the case is changed from past versions so please don’t use old solutions.

MTOM C9 IM

Moving Average Forecast 600 500 400 300 200 100 0 1

Time Period Observation

Moving Average (k) 2 3 4 5 6

Forecast

MSE 5,058 5,177 5,663 16,744 30,812

For the moving average models, k = 2 is best (see next) but notice how it lags and underestimates call volume (demand). Therefore, this is not a good model. Can we find a better forecasting model? Moving Average Forecasting

Observation Forecast 204 336 295 270.00 251 315.50 280 273.00 300 265.50 24

Error

25.00 -64.50 7.00 34.50

Error^2

625.00 4160.25 49.00 1190.25

MTOM C9 IM 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next period forecast - Time period:

398 418 309 471 522 502 449 452 420 500

290.00 349.00 408.00 363.50 390.00 496.50 512.00 475.50 450.50 436.00 #N/A #N/A #N/A #N/A 460.00

108.00 69.00 -99.00 107.50 132.00 5.50 -63.00 -23.50 -30.50 64.00 #N/A #N/A #N/A #N/A

11664.00 4761.00 9801.00 11556.25 17424.00 30.25 3969.00 552.25 930.25 4096.00 #N/A #N/A #N/A #N/A

MSE

5057.75

Using the OM template for simple exponential smoothing we find that when alpha = 0.1 the MSE = 16,947; alpha = .2 MSE = 9,410; alpha = .3 MSE 6,798; alpha = .4 MSE = 5,761; alpha = .5 MSE = 5,339; alpha = .6 MSE = 5,195; alpha = .7 MSE = 5,193; alpha = .8 MSE = 5,271; and alpha = .9 MSE = 5,402.

Exponential Smoothing Forecast 600 500 400 300 200 100 0 1

Time Period Observation

Exponential Smoothing Forecasting

Forecast

MTOM C9 IM Not for commercial use. Enter data only in yellow cells. The template is designed for up to 20 observations. Smoothing constant 0.65 Time Period Observation Forecast 1 204 204.00 2 336 204.00 3 295 289.80 4 251 293.18 5 280 265.76 6 300 275.02 7 398 291.26 8 418 360.64 9 309 397.92 10 471 340.12 11 522 425.19 12 502 488.12 13 449 497.14 14 452 465.85 15 420 456.85 16 500 432.90 17 #N/A 18 #N/A 19 #N/A 20 #N/A Next period forecast - Time period: 17 476.51

Error

Error^2

132.00 5.20 -42.18 14.24 24.98 106.74 57.36 -88.92 130.88 96.81 13.88 -48.14 -13.85 -36.85 67.10 #N/A #N/A #N/A #N/A

17424.00 27.04 1779.15 202.69 624.15 11394.29 3290.22 7907.45 17128.70 9371.56 192.72 2317.57 191.81 1357.72 4502.87 #N/A #N/A #N/A #N/A

MSE 5180.80 The simple exponential smoothing model with alpha = 0.6 provides another good forecast and notice that the forecast still lags demand (as expected) but it does a much better job of predicting call volume compared to the moving average model with k = 2. If these are the only models your students use than ES with alpha = .6 to .7 is the best model (see alpha = .65 above). Finally, some students might try simple linear regression on these data with mixed results. The regression forecast below might be improved by adjusting the forecast “by day of the week,” using indices for Monday, Tuesday, Wednesday, and so on.

MTOM C9 IM

Trend Analysis Plot for Call Vol Linear Trend Model Yt = 234.0 + 17.4*t 550

Variable Actual Fits

500

Accuracy Measures MAPE 13.39 MAD 47.89 MSD 2910.79

Call Vol

450 400 350 300 250 200 2

8 10 Index

Teaching Plan (1) What are the service management characteristics of the CSRs job? (2) Define the mission statement and strategy of the Help Desk contact center? Why is the Help desk important? (3) How would you handle the customer affected by the inaccurate stock price in the banks trust account system? Passive or pro-active approach? Justify. (4) How would you forecast short-term demand? Method? Approach?

THE END!

OM6 C10 IM OM6 Chapter 10: Capacity Management Discussion Questions 1. Provide and discuss some examples of economies and diseconomies of scale in a college environment. Economies of scale mean that long-run average costs decline as volume increases. Diseconomies of scale happen when size (capacity) increases to the point where longrun average costs begin to increase due to increasing complexity, and communication and coordination efforts. One college example is the instruction cost per student hour declines as class size increases but at some point (say 400 or 500 students in a lecture hall class) costs begin to increase due to diseconomies of scale. University information systems are highly scalable (see Chapter 4) as more and more students are added to the system, the cost per student decreases. Also, Monster.com, Facebook, etc. are highly scalable and exhibit economies of scale. You might also want to ask your students when does a university become too big - 40,000, 60,000 or 100,000 students? Complexity? How do costs behave as student volume changes? Same question with a hospital – 500, 100, 200, 5,000 beds? Same question with an automobile assembly factory? 2. Define useful capacity measures for a(n) a. Brewery. Barrels of output/month, number of unload/loading docks, bushels of hops b. Airline. Seats available per flight, number of planes by type and size, number of airport gates c. Movie theater. Seats available, number of theaters, number of showings, number of customers (attendance). d. Pizza restaurant. Pizzas made/hour, seats available, number of cash registers, pounds of dough, number of ovens, number of table servers f. Amusement park. Restaurant seats available, guests/hour on individual rides, number of parking places For undergraduates, this question takes time and classroom discussion. Many students have never thought about capacity in this way. 3. How might a college or university with growing enrollment use the capacity expansion strategies in Exhibit 10.6? Discuss the pros and cons of each of these. You might begin by asking the class – What are examples of capacity in a university? Your answers might include faculty and instructors, dorm rooms, classroom seats, meals served, server capacity, sports stadium seats, etc. Also, can a university get too big? Explain. Capacity expansion strategies vary widely in universities. Educational systems struggle with issues like (a) how much capacity should be add, and (b) when (timing)?

OM6 C10 IM Exhibit 10.6 (a) shows one large capacity increase would require greater state funding for public universities possibly with some idle classroom and office capacity in the short-term; state legislatures seldom have funds to do this type of expansion. Exhibit 10.6 (b) depicts several small capacity increases that match demand; this means the timing of capacity expansions decisions is excellent and matches demand well and that funding is available when the college or university needs it (an unlikely situation). Exhibit 10.6 (c) illustrates when small capacity increases lead demand and idle resources exist; again not a likely situation in education unless a big alumni donation or other private source of funds is available. Avid sports alumni might be able to fund situations (a) or (c). Exhibit 10.6 (d) shows a situation where capacity lags demand—a more likely demand/capacity situation for public colleges and universities. Over crowded classrooms, a shortage of instructors, lack of parking garages, temporary classrooms, etc. are just a few types of resources that never catch up with demand. 4. Briefly describe a business you are familiar with and explain how it might use each of the five ways to adjust its short-term capacity levels. Students should apply the following five ways to their situation. Short-term adjustments to capacity can be done in a variety of ways and are summarized below. •

•

Add or Share Equipment Capacity levels that are limited by machine and equipment availability are more difficult to change in the short run because of high capital expense. However, leasing equipment as needed, can accomplish this in a cost-effective manner. Another way is through innovative partnership arrangements and capacity sharing. For example, a consortium of several hospitals might be set up in which each hospital focuses on a particular specialty and shares services. Sell Unused Capacity Some firms might sell idle capacity, such as computer storage space and computing capacity, to outside buyers and even to competitors. For example, hotels often develop partnership arrangements to accommodate their competitor’s guests when they are overbooked. Change Labor Capacity and Schedules Labor capacity can usually be managed easily through short-term changes in workforce levels and schedules. Overtime, extra shifts, temporary employees, and outsourcing are common ways of increasing capacity. Adjusting workforce schedules to better coincide with demand patterns is another. Many quick-service restaurants employ large numbers of part-time employees with varying work schedules. Change Labor Skill Mix Hiring the right people who can learn quickly and adjust to changing job requirements and cross-training them to perform different tasks provides the flexibility to meet fluctuating demand. In supermarkets, for

OM6 C10 IM

•

example, it is common for employees to work as cashiers during busy periods and to assist with stocking shelves during slow periods. Shift Work to Slack Periods Another strategy is to shift work to slack periods. For example, hotel clerks prepare bills and perform other paperwork at night, when check-in and checkout activity is light. This allows more time during the daytime hours to service customers. Manufacturers often build up inventory during slack periods and hold the goods for peak demand periods.

This question allows student to apply these ideas to a business they know such as cell phone service centers, food service, dorms, airlines, and many summer jobs they might have held 5. How would you apply the Theory of Constraints to a quick-service automobile oil change service? Explain. To meet the time guarantees of many quick service automobile stores such as an oil change in 10-20 minutes or less the store must know where the BN and NBN workstations and associated activities are. Assume the bottleneck workstation is defined as (1) draining the oil, (2) taking the oil filter off, (3) installing a new filter, and (4) refilling with oil. All parallel activities such as checking tire pressure and cleaning the windshield are non-bottleneck activities and if rushed the auto technician still must wait for the vehicle to leave the service rack. See Exhibit 10.7 in text. Problems and Activities Note: an asterisk denotes problems for which an Excel spreadsheet template on the OM Web site may be used. The instructor may also want to consider the Greyhound Frequent Flyer Call Center case study at the end of Chapter 14 on staff (resource) capacity and scheduling. A student prerequisite for doing the Greyhound case is Chapters 7 and 10. Take a look! 1. As the assistant manager of a restaurant, how many servers will you need given the following information for Saturday night’s dinner menu. • • •

Demand (dinners served) = 100 dinners per hour Server target utilization = 85% Service rate per server = 16 dinners/hour

What does the service rate per server assume? Explain. Many students have worked in restaurants as waiters so we begin with a review of Equation 7.2 that is also covered in Chapter 10. Ask your students if they ever had to work as a waiter when the service delivery system was understaffed. What happens? Utilization (U) = Demand Rate/[Service Rate*Number of Servers] (Eq. 7.2) 3

OM6 C10 IM 0.85 = (100 dinners/hour)/[(16 dinners/hour/server)(X) 13.6X = 100 X = 7.35 servers or about 8 servers Extra Thought: The 100 dinners/hour is during peak dinner time that lasts say 4 hours. The four hours is an example of a “service window” in a restaurant. A service window places constraints on service systems that make staff capacity and scheduling decisions even more important to achieving great customer service. 2. Research and write a short paper (2 pages maximum) on organizations that have successfully used the focused factory concept. A Google search reveals over 14 million hits on “focused factory concepts.” One interesting example is referenced below. http://findarticles.com/p/articles/mi_m1038/is_n5_v37/ai_15859256/ In 1982, management at the Copeland Corporation contemplated shutting down its noncompetitive manufacturing plant in Sidney, Ohio. The plant manufactured compressors for commercial and residential refrigeration and air conditioning products and provided employment to approximately 1,000 hourly workers. Closing the 28yearold plant would have dealt a severe economic blow to Sidney. In a last attempt at restoring the plant's competitiveness, management adopted a focused factory strategy, splitting the facility into two completely separate plants within a plant (PWPs). One plant was organized to build large, low-volume, customized compressors for the commercial market. The other focused on manufacturing small, high ‘volume, standard compressors for the residential market. With a minimum of capital investment, the focusing of Copeland's Sidney plant proved to be the turning point in its return to profitability. From 1982 to 1988, total inventory investment was cut by 50 percent, customer returns dropped 90 percent, and manufacturing lead times were reduced from ten weeks to fewer than ten days. Today the plant enjoys strong demand for its high-quality, price-competitive products. Copeland's success with the focused factory concept is similar to that experienced by other companies, such as Black and Decker, 3M, Deere and Co., Honeywell, and Cincinnati Milicron. Since 1974, when Wickham Skinner first articulated the idea of focusing manufacturing activities, the concept has been regarded as part of good management practice. Despite the many success stories, however, our study of focused factories indicates that many issues should be considered before managers proceed with a focused factory strategy. For example, should the plant be focused primarily on products, processes, or customers? Does focus always lead to improved plant performance and profitability? Do flexible manufacturing technologies obviate the need to focus the plant? Is plant focus a static or dynamic concept? The answers to these questions and others are a critical part of formulating a focused plant strategy.

OM6 C10 IM 3.* Medical Solutions, Inc. has the following claims (demand) it must complete in the next week (40 hours). The jobs are as follows: Claim Type

Number of Claims to Process (Work Order Quantity)

Setup (Changeover) Time per Claim Type (hours)

Processing Time per Claim (hours)

Cancer Treatment Spinal Injury Hip Replacement

18 12 9

3 1 2

0.9 1.6 0.7

Given process claim capacity of 40 hours of work, can the workload (demand) be completed this week? Explain. If not, what short-term capacity solution would you recommend? Show all computations. Capacity Required (Ci) = Setup Time (Si) + [Processing Time (Pi)*Order Size (Qi)] CT Claims Workload = 3 hours + 18(0.9) = 19.2 hours SI Claims Workload = 1 hours + 12(1.6) = 20.2 hours HR Claims Workload = 2 hours + 9(0.7) = 8.3 hours Total workload is 47.7 hours while capacity is 40 hours so resource utilization is 119.25% (44.7/40) using Equation 7.1. The work cannot be complete using regular time hours but can be completed with 7.7 hours of overtime. Temporary workers and overtime are the best options for this small amount of extra work. Work could also be shifted to earlier or later weeks if these weeks have slack or idle time. You might point out that each week the claims mix will change in this job shop environment. ********************************************************************** NOTE: Some of the homework problems are pure manufacturing work orders where setup time is a one-time event allocated over all order size units. For service, like in the dental office example (Exhibit 10.3 and 10.4) and the David Christopher case study at the end of the chapter, setup time accompanies each patient as we clean up after each patient and setup for the next patient. The following is a repeat from the textbook. Manufacturing work orders normally assume that one setup is necessary for each work order, and therefore, the setup time is spread over the single work order quantity. That is, setup time is independent of order size. Some services such as hospital surgeries may require a new setup (changeover) time for each single surgery (i.e., the order size is one), and therefore, every patient surgery requires a setup time. This service setup time might include sterilizing equipment, cleaning and disinfecting the surgical suite, and the doctors resting, cleaning up, and studying the next patient’s medical files. It is important to understand this assumption regarding setup (changeover) time in goods-producing and

OM6 C10 IM service-providing applications so workload is correctly computed. Make sure you discuss this setup time issue for manufacturing versus some service applications. ********************************************************************** 4.* Abbott Manufacturing produces plastic cases for solar photovoltaic panels and has decided to combine orders from customers to increase work order size, and thereby, make one large production run per model type. Plastic injection molding machines are used to make these parts and it is time consuming to clean and re-setup the machines between production runs. Each molding machine and operator works one nine-hour shift with a one-hour lunch break and one-half hour for operator breaks. Consolidated Work Orders

Work Order Quantity

Setup (Changeover) Time per Work Order (minutes)

Processing Time per Panel (seconds)

Model XVT-5 Case

9,500 panels

2.05

Model UYT-3 Case

7,500

1.78

Model KLY-6 Case

10,800

150

4.31

What is the total workload (demand) in hours for this work order mix? How many machines will it take to do this work in one, two or three days? How might this process be improved? Capacity Required (Ci) = Setup Time (Si) + [Processing Time (Pi)*Order Size (Qi)] Model XVT-5 Workload = 90 min + [(9,500 panels)(2.05 sec/panel)/60 sec/min] = 414.6 min Model UYT Workload = 75 min + [(7,500 panels)(1.78 sec/panel)/60 sec/min] = 297.5 min Model KLY Workload = 150 min + [(10,800 panels)(4.31 sec/panel)/60 sec/min] = 925.8 min Total ST + PT Workload = 1,637.9 minutes or 27.3 hours One work day = 7.5 hours To do this work in 1 day we need 3.64 (27.3/7.5) or 4 machines. To do this work in 2 days we need 1.82 (27.3/15.0) or 2 machines. To do this work in 3 days we need 1.21 (27.3/22.5) or 2 machines. If students use the Excel spreadsheets make sure they keep their units of measure correct. They will have to modify the spreadsheet for seconds, minutes, and hours. 5. Identify one example of a resource with a very low average utilization rate, and a second example with a very high average utilization rate. Consider both service and

OM6 C10 IM manufacturing organizations. Write a short (one-page typed) paper that describes these situations and their capacity implications. You might want to review Problem #5 on seat utilization for a college football stadium in Chapter 7 with 1.83% utilization! Very low asset utilization – sports stadium (seats), movie theater, seats for musicals and plays, some ATMs Moderate utilization – hotel beds, airline seats, television hours, cell phones (for some!), High asset utilization – automated steel stamping machine (fenders, hoods, etc.), some X-ray and CAT Scan machines, assembly lines, servers, etc. Sports stadium seats (see P&A #5 in Chapter7) are notorious for low utilization (2 to 15%). Low CAT scanner utilization drives up health care costs. Occupancy rates in hotels ranges from 40 to 75% depending on location. Airline seats normally have a breakeven utilization (load) factor of around 50-65%. Remember, service capacity is perishable. 6. Hickory Manufacturing Company forecasts the following demand for a product (in thousands of units) over the next five years. Year Forecast demand

1 60

2 79

3 81

4 84

5 84

Currently the manufacturer has seven machines that operate on a two-shift (8 hours each) basis. Twenty days per year are available for scheduled maintenance of equipment with no process output. Assume there are 250 workdays in a year. Each manufactured good takes 25 minutes to produce. a. What is the capacity of the factory? Normal capacity = (250 – 20 days)(2 shifts/day)(8 hrs/day)(7 machines) = 25,760 machine hours or 29,440(60)/25 = 70,656 units b. At what capacity levels (percentage of normal capacity) would the firm be operating over the next five years based on the forecasted demand? (Hint: Compute the ratio of demand to capacity each year.) Year: Forecast demand: Demand/capacity ratio

1 60 0.85

2 79 1.12

3 81 1.15

4 84 1.19

5 84 1.19

c. Does the firm need to buy more machines? If so, how many? When? If not, justify. Demand in the first year Hickory is 85% of capacity in year 1. But it increases quickly in subsequent years. The average demand/capacity ratio is (0.85 + 1.12 + 7

OM6 C10 IM 1.15 + 1.19 + 1.19)/5 = 5.5/5 = 1.10. The number of extra machine hours required = .1(25,760) = 2,576. The number of machines required = 2,576/[230(2)(8)] = 2,576/3,680 = 0.70 or 1 additional machine. An alternative might be to consider outsourcing or using the current seven machines on an overtime basis. 7. The roller coaster at Treasure Island Amusement Park consists of 16 cars, each of which can carry up to three passengers. According to a time study each run takes 2.5 minutes and the time to unload and load riders is 3.5 minutes. What is the maximum effective capacity of the system in number of passengers per hour? The coaster completes a trip every 6 minutes including loading and unloading time or completing 10 trips per hour. With 3 passengers per car or 48 riders per trip, 480 passengers per hour is the maximum effective (actual) capacity. If the solution assumes the 6 minutes includes some safety capacity (for example, extra time to help handicapped guests on the ride) then 480 is a good estimate. If the 6 minutes includes no safety time then 480 may be too high. It all depends on the standard times! 8. Worthington Hills grocery store has five regular checkout lines and one express line (12 items or less). Based on a sampling study, it takes 11 minutes on the average for a customer to go through the regular line and 4 minutes to go through the express line. The store is open from 9 a.m. to 9 p.m. daily. a. What is the store’s maximum capacity (customers processed per day)? b. What is the store’s capacity by day of the week if the five regular checkout lines operate according to the schedule below? (The express line is always open.) Hours/Day

Mon Tue Wed Thur Fri Sun 9–12 a.m. 1 1 1 1 3 12–4 p.m. 2 2 2 2 3 4–6 p.m. 3* 3 3 3 5 6–9 p.m. 4 4 4 4 5 * A 3 means 3 regular checkout lines are open on Monday from 4 to 6 p.m.

Sat 5 5 3 3

a. What is the store's maximum capacity (customers processed per day)? Regular Checkout Capacity = (12 hours/day) (60 min/hour) (5 regular lines) = 3600 regular checkout lane minutes available per day or 327 (3600/11) customers/day. Express Checkout Capacity = (12) (60) (1) = 720 express checkout min/day or 180 (720/4) customers/day. Therefore, the store's maximum checkout system capacity is 507 customers/day. This is a long problem but students have experienced good/bad service in retail stores so they identify with the problem and OM solution. You might also make the point 8

2 4 2 1

OM6 C10 IM in class that if a business can not compute capacity required and schedule resources to meet demand to maximize service and minimize costs, it can not provide great service. OM skills are needed to create superior customer service! b. What is the store's capacity by day of the week if the five regular checkout lines operate according to the schedule below (The express line is always open.)? Worthington Grocery Problem Regular Lane Service Rate = Express Lane Service Rate = Express Lane = 180.0

11 minutes or 5.45 4 minutes or 15.00 customers per day

customers/hour customers/hour

Hours

Monday Tuesday

Wed.

Thur.

Friday

Sat

Sunday

9-12am 12-4pm 4-6pm 6-9pm

1 2 3 4

3 3 5 5

5 5 3 3

2 4 2 1

Store Capacity by Day of Week (customers/time period) Regular Lanes Hours Monday Tuesday Wed. Thur. Friday

Sat

Sunday

9-12am 12-4pm 4-6pm 6-9pm

16.4 43.6 32.7 65.5

49.1 65.5 54.5 81.8

81.8 109.1 32.7 49.1

32.7 87.3 21.8 16.4

Reg Totals Express Totals

158.2 180.0 338.2

250.9 180.0 430.9

272.7 180.0 452.7

158.2 180.0 338.2

2574.5

customers per week

Grand Total =

1 2 3 4

One lesson from this problem is customer service is only as good as forecasting demand and scheduling lanes to be open. The objective is to maximize service and minimize costs. 9. Given the following data for Albert’s fabricating production area: Fixed costs for one shift = $80,000 Unit variable cost = $7 Selling price = $12 Number of machines = 6 Number of working days in year = 340 Processing time per unit = 40 minutes

OM6 C10 IM a. What is the annual capacity with a single 8-hour shift? Annual single shift capacity = (340days/year)(6 machines)(8 hours/shift)/(60/40 hours/unit)= 24,480 units/ shift b. What is the capacity with two shifts? Double shift capacity = 24,480(2) = 48,960 units c. What is the break-even volume with a single-shift operation? Using Equation 2.1 Q* = ______FC_______ = $80,000 = 16,000 units P - VC ($12 - $7)

[2.1]

d. What is the maximum revenue with a single shift? Maximum revenue with single shift = 24,480($12) = $293,760 Contribution to Profit & Overhead = ($12 - $7)(24,480 - 16,000) = $42,400 e. What is the break-even volume with a two-shift operation? Using Equation 2.1 Q* = ______FC_______ = P - VC

$80,000 + $80,000 = 32,000 units ($12 - $7)

10. For the Solved Problem on processing driver’s licenses at the Archer County Courthouse in this chapter, if 40 drivers are to be processed each hour, how many clerks and typists should be hired assuming a 90 percent target utilization rate? Utilization (U) = Demand Rate/[Service Rate*Number of Servers]

(7.2)

Assuming an 80% target utilization rate (and implied safety capacity of 20%) we have 0.9 = 40/[10*N] or 9N = 40 or N = 4.44 clerks or about 5 clerks 0.9 = 40/[8.57*N] or 7.713N = 40 or N = 5.19 ≈ 6 typists You might also point out that if standard service times are loose and have plenty of safety time, then rounding down can make sense to minimize labor costs. 11. Due to county and state budget cuts Archer County Courthouse now have only two clerks and two typists and expects to process 40 drivers/hour. What is the current labor utilization of each labor type and where is the bottleneck in this three-stage process? What is the impact of your analysis on customer service? How might the job and process design be improved? 10

OM6 C10 IM

Using Equation 10.4, Utilization (U) = Capacity/[Service Rate*Number of Servers] Clerks: U = 40/[10*2] = 200% Service Rate Typists = 60/7 = 8.57 drivers/hour U = 40/[8.57*2] = 40/17.14 = 233% Both clerks and typists are understaffed now (they need about 5 clerks and 6 typists given our answers and assumptions to 10b). Customers will wait for driver license services. Long lines could cause complaints and even nasty interactions among customers and service-providers (co-production, the customer is in your factory) and even among customers. The best way to help alleviate this bottleneck is by using better work practices and technology to reduce the standard times from 5, 1, and 7 minutes to much less. 12. You have just been promoted to manage the process defined by the five stages A to E below. After three months on the job you realize something is not right with process capacity because your employees experience big pile-ups of work, things take too long to be processed, the opportunity for error is increasing, and the entire process is approaching chaos. Do a capacity analysis of this process. The numbers in parentheses (#) are the time in minutes to complete one unit of work. Demand on the process averages 27 units per hour and each unit must be worked on by all five stages. Administrative clerks complete Stages A and B. The assistant manager completes Stages D and E. Processing times per stage can be combined when labor is assigned two or more stages (i.e., the resources are pooled). The coding specialist takes care of Stage C.

Since demand is in units per hour we find that the capacity of Stage A = 12 units/hour, Stage B = 20 u/hr, Stage C = 10 u/hr., Stage D = 15 u/hr, and Stage E = 15 u/hr. This problem assumes all jobs (work) need to be processed on all five workstations and resources are pooled by skill category so they are cross-trained.

OM6 C10 IM (a)

How many administrative clerks should be hired, assuming a target utilization for them of 85 percent? Using Equation 10.4 and clerks do stages A and B with a pooled standard service time equal 7.5 units/hour (60/8), Utilization (U) = Capacity/[Service Rate*Number of Servers] 0.85 = 27/[7.5*N] or 27 = 6.375N or N = 4.235 or need 5 clerks

(b)

What is the current labor utilization of the coders if two coding specialists are currently on duty? Utilization (U) = Capacity/[Service Rate*Number of Servers] U = 27/[10*2] = 27/20 = 135 % (this is a bottleneck) With three coding specialist, labor utilization is 27/30 = 90% so they really need three coding specialist if the standard service times are accurate.

(c) What is the total process (output) capacity in units per hour for the five stage process A to E assuming 4 administrative clerks, 2 coding specialist, and 3 assistant managers are on duty? Stage A and B (clerk resource pool capacity) = 7.5*4 = 30 units/hour Stage C (Coding specialist) = 10*2 = 20 units/hour Stages D and E (assistant manager) = 7.5*3 = 22.5 units/hour Total process output is 20 units per hour and the bottleneck is coding specialist. If you hire three coding specialist then the revised bottleneck becomes the assistant managers at 22.5 units/hour. (d) Where do any bottlenecks exist and what do you recommend to improve this process? Given the staffing levels in (c), coding specialists are the bottleneck but administrative clerks are a close second. The four assistant managers have a current labor utilization of 90% (Utils = 27/(7.5)(4) = 0.90. Ways to improve the process is train one assistant manager to do coding in peak demand periods so that clerks utils = 27/(7.5)(3) = 120%, coding specialist utils = 27/(10)(3) = 90%, and manager utils = 27/(7.5)(3) = 120%, and/or reduce standard processing times (work faster) using better training and equipment by 20% so clerks utils = 27/(7.5)(1.2)(3) = 100%, coding specialist utils = 27/(10)(1.2)(3) = 75%, and manager utils = 27/(7.5)(1.2)(3) = 100% and/or hire additional labor. Reducing standard processing times seems like a good option w/o hiring additional employees.

OM6 C10 IM 13. Perform a capacity analysis using the process structure defined in Problem #12 with the following changes. Demand on the process has increased to 36 units per hour and each unit must be worked on by all five stages. The administrative clerk(s) complete Stages A, B and D. The assistant manager completes Stage E. The coding specialist takes care of Stage C. Stage C (6)

Stage A (5)

Stage E (4)

Stage B (3)

Stage D (4) a. How many administrative clerks should be hired assuming a target utilization for them of 90 percent? Using Equation 7.2 and clerks do stages A, B and D with a pooled standard service time equal 5.0 units/hour (60/(5+3+4), Utilization (U) = Demand Rate/[Service Rate*Number of Servers] .9 = 36/[5.0*N] or 36 = 4.5N or N = 8.0 clerks b. What is the current labor utilization of the coders if four coding specialists are currently on duty? Utilization (U) = Demand Rate/[Service Rate*Number of Servers] Util % = 36/[10*4) = 36/40 = 90 % (this is a bottleneck) c. What is the total process (output) capacity in units per hour for the five-stage process A to E assuming 7 administrative clerks, 4 coding specialists, and 3 assistant managers are on duty? Stage A, B and D (clerk resource pool capacity) = 5.0*7 = 35.0 units/hour Stage C (Coding specialist) = 10*4 = 40 units/hour Stage E (assistant manager) = (60/4)*3 = 45 units/hour The total process output is 35.0 units per hour and clerks are the bottleneck. 13

OM6 C10 IM d. Where’s the bottleneck(s) and what do you recommend to improve this process? We can reallocate the work and try to get a better work load balance, reduce processing times (increase units/hour) for say Stage A, B and D from 5.0 to 6.0 units/hour and now the capacity of clerks is 6.0(7) = 42 units/hours so we have 42, 40 and 45 units/hour. Therefore, total process output is now 40 units/hour, not 35 (and increase in total process output of 5/35 = 14.3%. Two lessons are (a) that you must be able to identify the bottleneck to increase total process output (b) balancing and how you group the work makes a difference. 14. Research and write a short paper (two pages maximum) on two examples of revenue management applications not in the text and explain how they help organizations. A Google search on “revenue management” results in 47 million hits. Students will find yield (revenue) management applications in a wide variety of businesses such as parking and electric meters, hotels, airlines, cruise ships, concert and sport event tickets, Broadway theatre shows, and some variable pricing schemes for physical goods. 15. Research and write a short paper (2 pages maximum) on how an organization has applied the Theory of Constraints. A Google search reveals about 3 million hits. One interesting example is hand tied fishing flies at: http://www.nysscpa.org/cpajournal/1999/0499/departments/d530499.htm Many other examples are available on the Web and there is far more information than can be covered in an introductory OM course.

Case Teaching Note: David Christopher, Orthopedic Surgeon Overview David Christopher is an orthopedic surgeon who currently works 11-hour days four days a week and finds it difficult to estimate his workload and whether he needs to hire additional surgeons. The entire case focuses on setup and processing time in a professional service business. The objective is to get students out of the manufacturing factory and into a service business where the same principles and models help estimate workload. Some very interesting class discussion is possible about the role of setup/changeover time in this job shop situation. This is a good case for a major team write-up and management report and/or student presentation. Note: Make sure you explain how to handle setup time in this professional medical office before the students do the case (as explained in the textbook, instructor’s manual, and case analysis that follows).

OM6 C10 IM Note: The numbers in Case Exhibit 10.8 have been changed from ALL previous versions of this popular case. Case Questions and Brief Answers 1. What is their current weekly workload? First, the instructor should go over the case Exhibit 10.8 with the students. What insights do you gain from inspecting this exhibit? For one thing Dr. Christopher spends a considerable part of his day in changeovers. The doctor says this improves the quality of his surgery and he does not want to compromise patient care by rushing from surgery to surgery. This way the surgeon has time to rest between surgeries, review the next patient's surgery plan, and focus on the quality of care. Setup time includes the time to clean up the room and surgery crew from the previous surgery, review the next patient’s charts and medical history, time to rest, and setup for the next surgery. Ask students if they want “their surgeon to be rushed.” Is driving Dr. Christopher's setup/changeover time close to zero like they do in Japanese automobile factories a good idea? The answer is no--driving a stamping machine's changeover time to a few minutes is one thing but driving a surgeons changeover time to minutes increases the opportunity for errors and human exhaustion. Orthopedic Surgery Procedure

Surgeon Changeover Time (minutes) Rotator cuff repair 20 Cartilage knee repair 20 Fracture tibia/fibula 20 Achilles tendon repair 20 ACL ligament repair 20 Fractured hip 20 Fractured wrist 20 Fractured ankle 20 Hip replacement 30 Knee replacement 30 Shoulder replacement 40 Big toe replacement 20

Surgery Time (minutes)

Surgeon Identity

45 30 60 30 60 80 60 70 150 120 180 90

B B B B B A A A A A B B

Demand (No. of Patients Scheduled this Week) 2 1 1 3 3 0 2 1 2 3 1 0

Orthopedic Surgeons One-Week Surgery Workload (case data in yellow changed in OM3 from previous OM editions) The spreadsheet that follows indicates that the two surgeons enjoy 230 minutes of excess capacity, and therefore, they do not need to hire a 3rd surgeon. Surgeon A is 15

OM6 C10 IM under utilized by 20 minutes (1060 - 1080) while Surgeon B has an even lighter workload per week of 210 (870 - 1080) minutes. Surgeon B labor utilization is 870/1080 = 80.6% while Surgeon A is 98.1%. So they have capacity to grow the business although the surgeon workload could be rebalance by having surgeon B do one of A’s surgeries on a regular basis (say, fractured wrist at 160 minutes). Students will also notice that 23.3% of total work time is taken by setup and changeover time. Do students have any recommendations to reduce setup/changeover time? Of course, this highlights the “clinical quality” versus “capacity utilization” issues. If you reduce setup time too much, will clinical quality deteriorate? Example "what if" scenarios using the Excel spreadsheet are many such as: (a) What if changeover time was reduced by one-half, how much more surgeon capacity is available? Answer: Now we have 455 excess minutes of surgeon capacity to grow the business. But what is the impact on clinical quality and a possible malpractice lawsuit? (b) What if surgery hours are increased from 7:00 a.m. to 1:00 pm (from 5 to 6 hours)? Answer: Now we have 662 excess minutes of surgeon capacity to grow the business! (c) What if surgery processing times could be speeded up by 10% (i.e., working faster)? Answer: Now we have 378 minutes of excess surgeon capacity (we do not change setup times) with minor to moderate speed up of surgery procedures. All three of the above example scenarios position the firm for growth, more revenue, and higher profits. 2. Should they hire more surgeons, and if so, how many? There is no need to hire a 3rd surgeon now. However, the workload is slightly unbalanced during this “example” week. One solution to balance the workload is to move one surgery from A to B, as previously discussed. If a student wants to hire an extra surgeon here – ask students “What would this cost?” Sometimes students go out of the bounds of the case by making assumptions of surgeon cost and revenue per surgery. Good case analysis stays within the bounds of the case. 3. What other options and changes could they make to maximize patient throughput and surgeries, and therefore revenue, yet not compromise on the quality of medical care? By reducing changeover time or speeding up the surgeries themselves the orthopedic surgery clinic could do more patients (assuming demand is strong) and increase the number of patients processed per time period. The clinic could move from a classic 16

OM6 C10 IM job shop to more of a flow shop (assembly line) if revenue maximization is the objective. But what is the impact on clinical and service quality? Typical options to increase surgeon capacity include: • • • • • • • •

Reduce setup times (work smarter) Reduce processing (run) times (work faster) Move a surgery procedure from an overworked surgeon to an underworked surgeon Change the surgical (product) mix to rebalance surgeon workload Change the five hours per day surgeon work day Make more of a flow shop and do back-to-back similar surgeries, and thereby eliminate setup time Surgeons work on Friday or Saturday Drop a complex surgery or one with high liability risks such as shoulder replacement

Other issues to discuss include the following: (1) Safety capacity is set at 10%. What if it is reduced to 2% or increased to 20%? (2) The doctors could work Fridays and/or Saturdays as their business grows? (3) How might they handle the seasonal nature of elective (not life threatening) surgery? (4) Ask the students how they feel about a surgeon operating on them or a family member who is tired or exhausted. Also, the advantages and disadvantages of robotic surgery sometimes come up during a class discussion. 4. What are your final recommendations? Explain your reasoning. Given the analysis and assumptions in the spreadsheet there is no need to hire a third surgeon. The case does not provide information on “future” demand so students should not recommend hiring a third surgeon. But as the business grows, it is prudent to understand how they might free up extra surgeon capacity to maximize revenue. As long as students learn about the tradeoffs between short-term capacity adjustments, costs, and clinical quality, the case has accomplished its objective. Teaching Plan 1. What insights do you gain from inspecting the case exhibit? 2. Is driving Dr. Christopher's setup/changeover time close to zero like they do in Japanese automobile factories a good idea? 3. What is their current weekly workload? 4. Should they hire more surgeons, and if so, how many? 5. What other "what if" questions should we ask and answer? 6. What other changes could they make to maximize patient throughput and surgeries, and therefore revenue, yet not compromise on the quality of medical care? 7. What are your final recommendations?

OM6 C10 IM Base Case David Christopher, MD

Number of Surgeons = Days per Week = Surgery Hours per Day =

2 4 5

Surgery Minutes/Week/Dr.= Safety Capacity = Surgery Minutes/Week/Dr.=

1200 0.1 1080

Orthopedic Surgeon Mini-Case

Surgery Procedure

Setup Times

Process Time

Fractured hip Fractured wrist Fractured ankle Hip replacement Knee replacement

20 20 20 30 30

80 60 70 150 120

Shoulder replacement Big toe replacement Rotator cuff repair Cartilage knee repair Fracture tibia/fibula Achilles tendon repair ACL ligament repair

Total Available Surgeon Capacity = Total Demand in Minutes = Excess +/Shortage - Minutes = Net Surgeon(s) Excess/Shortage

40 20 20 20 20 20 20

Number of Patients Scheduled Today Dr. Dr. A B

180 90 45 30 60 30 60

2160 1930 230 0.213

THE END!

0 2 1 2 3

1 0 2 1 1 3 3

Totals

Total Setup Time

Total Process Time

Total Setup & Process Time

0 40 20 60 90

0 120 70 300 360

0 160 90 360 450

210 19.8%

850 80.2%

1060 100.0%

40 0 40 20 20 60 60

180 0 90 30 60 90 180

220 0 130 50 80 150 240

240 27.6%

630 72.4%

870 100.0%

450 23.3%

1480 76.7%

1930 100.0%

OM6 C11 IM

OM6 Chapter 11: Managing Inventories in Supply Chains Discussion Questions 1.

Discuss some of the issues that a small pizza restaurant might face in inventory management. Would a pizza restaurant use a fixed order quantity or period system for fresh dough (purchased from a bakery on contract)? What would be the advantages and disadvantages of each in this situation? A pizza restaurant must maintain inventories of dough, toppings, sauce, and cheese, and other supplies such as boxes, napkins, cups, and so on. Because many of these items are perishable, careful decisions must be made on the quantities to purchase. The perish ability of the stock-keeping-unit (SKU) relates to the freshness, safety and quality of the food. Without adequate forecasting, it would be difficult to know how much and when to purchase. Supplier relationships are important to ensure that food and suppliers are delivered on time and fresh. A FPS might be most appropriate for dough so that frequent orders (T) increase inventory to the replenishment level (M). Coupled with higher safety stock levels for a FPS than a FQS, the risk of running out (stockout) of dough is low. However, varying order sizes might be difficult for the supplier to execute unless tied to the pizza restaurant information system. The FQS is easier to implement, carries less inventory, but conceptually could stockout more. A FQS is more appropriate for non-perishable SKUs such as straws, napkins, and boxes. The cost of several days of stock outs can be computed using methods such as the value of a loyal customer (Chapter 2) and the single-period inventory model (Chapter 11).

List some products in your personal or family “inventory.” How do you manage them? (For instance, do you constantly run to the store for milk? Do you throw out a lot of milk because of spoilage?) How might the ideas in this chapter change your way of managing these SKUs? Any food items, printer ink cartridges, audio and video tapes, yard supplies such as fertilizer, pencils and pens, gasoline for a lawnmower and/or automobile, clothes for laundry or dry cleaners, flash drive (number and capacity), bread, DVD disks, printer paper, soda, and so on. This question might have some very interesting responses! Asks students do they “stock out” frequently? Why? Do they use decision rules as to when to reorder? Are their decision rules similar to a FQS or FPS or do they stock out all the time?

Does the EOQ increase or decrease if estimates of setup (order) costs include fixed, semi-variable, and pure variable costs while inventory-holding costs includes only pure variable costs? Vice versa? What are the implications? Explain. Because the EOQ model only depends on the order quantity, fixed costs associated with any ordering or inventory holding are irrelevant (in accounting language, sunk 1

OM6 C11 IM costs). From an economic perspective, the EOQ is a marginal (incremental or pure variable cost) model, and therefore, should use only variable cost estimates for order cost and inventory-holding costs. That is, if inventory is increased “one” more unit what is the revised total order and holding cost.

Q* =

2DCo Ch¢

The C0/Ch ratio represents the cost structure of the business. If C0 is estimated using variable and fixed costs, it will be a larger number, that is, a full cost estimate. Likewise, if it is estimated using only pure variable costs (as it should be), it is a variable cost estimate. Similar logic is applicable for Ch. If OM managers ignore these cost accounting issues and do not get good estimates of C0 and Ch, major errors can be made in inventory levels. For example, if C0 is estimated on a full cost basis while Ch is on a pure variable cost basis, the EOQs will be too large. Marketing will like this and will seldom stock out but finance needs more funds to finance inventory. In the reverse situation, the EOQs are too small, and marketing won’t like the increase in stock outs but finance will need fewer funds to finance the firm’s inventory. If both C0 and Ch are estimated on a full cost basis (apples to apples) the effect is minimal since it is a relative ratio. Also, the square root formula of the EOQ makes it robust with respect to some degree of parameter estimation errors. The ideal way to estimate these two EOQ variables is using a pure variable cost approach. One lesson for students is that process, value chain, and OM managers need to understand cost accounting and exactly what types of costs are used in their inventory models. 4.

Find two examples of using RFID technology to monitor and control SKUs and explain the advantages and disadvantages of adopting such technology. The SKUs might be livestock, pallets, medicine, surgery instruments in a hospital, retail store items, identifying counterfeit brands, patient tracking in hospitals and nursing homes, and parts and sub assemblies in a factory. Students will find many interesting examples. You can use Chapter 4 concepts (ERP, hard technology, CRM, scalability, etc.) on technology in this class discussion if you covered Chapter 5.

Identify at least two other practical examples of a single period inventory model different from those in the book. The book cites examples for Christmas trees, perishable food such as dough, fruit, fashion and seasonal clothing items, and newspapers. Students will provide examples of one time promotion items such as concert t-shirts, golf clubs, flash drives, iPads, lawnmowers and other seasonal items such as outside grills and snow blowers, notebooks, special cell phone models, perishable food such as fruit and bread, magazines, flowers, airline seat deals for a specific flight, and so on. 2

OM6 C11 IM

Problems and Activities Note: an asterisk denotes problems for which an Excel spreadsheet template found at OM6 Online Web site may be used. 1.

Find, describe, and draw an organization’s supply chain and identify the types of inventory in it and if possible, there purpose and how it is monitored and controlled. (The example could be a place you worked such as a call center, restaurant, factory, retail store, hotel, school, or medical office.) Students will try to draw a supply chain using the framework of the input-output model in Exhibit 1.4, the pre- and postproduction model of defined in Exhibit 1.7 or the hierarchical model of Exhibit 1.9 in a wide variety of organizations including secondary schools, restaurants, branch banks, airlines, hotels, automobile dealer service departments, and the like. The focus is on the type of inventory, where it is located in the supply chain, and how it is monitored and controlled, or is it?

Interview a manager at a local business about his or her inventory and materialsmanagement system, and prepare a report summarizing its approaches. Does the system use any formal models? Why or why not? How does the manager determine inventory-related costs? Like many OM issues, many firms, especially small firms, do not take systematic approaches to decisions. This question can help students understand how inventory management decisions are made and also to identify potential opportunities for improvements. You can pose questions such as (a) Does the business specify service levels? (b) Do they use a FQS or FPS or what? (c) Do they use ABC analysis? (d) Is data integrity maintained and controlled? (e) Do they use technology to track inventory such as bar codes or RFID? (f) What type of inventory do they have? (only finished goods, raw materials, work-in-process). (g) Can the concept of dependent demand be applied to their situation? (h) Do they forecast item demand? (i) What is their current order quantity? (j) Using the total cost equation and an EOQ, can you save this business money by adopting an EOQ versus their current order quantity?

3.* The Welsh Corporation uses 13 key components in one of its manufacturing plants. The data are provided in the worksheet C11P3 in the OM6 Data Workbook. Perform an ABC analysis. Explain your decisions and logic. Use the Excel template ABC:

OM6 C11 IM

One possible ABC classification scheme is A items (WC397, WC008, WC971, WC413) with 23% (4/13) of items accounting for about 76.2% of total inventory value; B items (WC713, WC759) with 15% (2/13) of items accounting for about 14% of total inventory value; and the remaining 7 items as C items with 54% (7/13) of items accounting for about 6.1% of total inventory value. Since there are no absolute guidelines on ABC analysis, students might choose a different classification. 4.* Perform an ABC analysis for the data provided in worksheet C11P4 in the OM5 Data Workbook. Clearly explain why you classified items as A, B, or C. The data set is as follows (in OM6 Data Workbook) Annual Unit Item Usage Value 1 8800 $68.12 2 9800 $58.25 3 23600 $75.25 4 25000* $53.14 5 60000 $26.33 6 165000 $4.52 7 112000 $7.59 8 198000 $3.19 9 210000 $2.98 10 168000 $4.27 11 100000 $9.00 12 7000 $13.57 *changed from 40,000 to 25,000 in OM6. ABC Inventory Analysis

OM6 C11 IM After entering the data, right click on any value in column D; choose Sort > Sort Largest to Smallest. Projected Usage

Item

Number Annual 1 2 3 4 5 6 7 8 9 10 11 12

Unit Cost

8800 9800 23600 25000 60000 165000 112000 198000 210000 168000 100000 7000

Projected Dollar Usage

Cumulative Dollar

Cumulative Percent

Annual

Usage

of Total

of Items

$68.12 $58.25 $75.25 $53.14 $26.33 $4.52 $7.59 $3.19 $2.98 $4.27 $9.00 $13.57

$599,456.00 $570,850.00 $1,775,900.00 $1,328,500.00 $1,579,800.00 $745,800.00 $850,080.00 $631,620.00 $625,800.00 $717,360.00 $900,000.00 $94,990.00

Total

$10,420,156.00

$599,456 $1,170,306 $2,946,206 $4,274,706 $5,854,506 $6,600,306 $7,450,386 $8,082,006 $8,707,806 $9,425,166 $10,325,166 $10,420,156

5.75% 11.23% 28.27% 41.02% 56.18% 63.34% 71.50% 77.56% 83.57% 90.45% 99.09% 100.00%

This ABC analysis profile is not as clear cut as the previous problem #3. One might argue that since the first four items (33% of items) account for almost 41.0% of the total dollar usage, they could be classified as A items; while the last four items, accounting for 33% (4/12) of the items but only about 16% of dollar value could be C items. B items would be in the middle (what’s left) accounting for four of twelve items (33%) and about 43% of total item value. So, one example ABC profile would be as follows: • • •

A items are 33% of total items and 41% of total inventory value B items are 33% of total items and 43% of total inventory value C items are 33% of total items and 16% of total inventory value

5.* Perform an ABC analysis for the data provided in worksheet C11P5 in the OM5 Data Workbook. Clearly explain why you classified items as A, B, or C.

Item 1 2

Annual Usage 2400 6200

Unit Cost $19.51 $32.60 5

8% 17% 25% 33% 42% 50% 58% 67% 75% 83% 92% 100%

OM6 C11 IM 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

8500 3200 6000 750 8200 9000 5800 820 500 2000 2400 6300 4750 2700 1600 1350 5000 1000

$10.20 $6.80 $4.50 $55.70 $3.60 $44.90 $35.62 $82.60 $40.50 $15.40 $14.60 $35.80 $17.30 $51.75 $42.90 $25.30 $67.00 $125.00

Using the ABC spreadsheet template, we have the results shown below. We might classify the first six items, which account for 30% of items and about 68% of dollar usage as A items, and the last 10 items as C items. Again, there is no strict rule and students will have differing opinions on how to classify them. So, one example ABC profile would be as follows: • • •

A items are 30% of total items and 68% of total inventory value B items are 20% of total items and 26% of total inventory value C items are 50% of total items and 16% of total inventory value

OM6 C11 IM

6.* MamaMia’s Pizza purchases its pizza delivery boxes from a printing supplier. MamaMia’s delivers on-average 225 pizzas each month (assume deterministic demand). Boxes cost 43 cents each, and each order costs $12.50 to process. Because of limited storage space, the manager wants to charge inventory holding at 25 percent of the cost. The lead time is 7 days, and the restaurant is open 360 days per year, assuming 30 days per month. Determine the economic order quantity, reorder point assuming no safety stock, number of orders per year, and total annual cost.

EOQ =

2DCo 2(225)(12)12.50 = = 67,500/0.1075 = 792.4 or 793 boxes Ch 0.25(.43)

The cost of storing one box in inventory for the year, denoted by Ch, is given by Ch = I*C = .25*.43 = .1075 cents/year. The Excel template EOQ Model can be used as shown next. Economic Order Quantity Model Enter the data only in the yellow cells. Annual Demand Rate Ordering Cost Unit Cost Carrying Charge Rate 7

2700.00 $12.50 $0.43 0.25

OM6 C11 IM

Economic Order Quantity Order cost Inventory cost Total cost

792.41 $42.59 $42.59 $85.18

Inventory Costs $300.00 $250.00

Cost

$200.00

Order cost

$150.00

Holding cost Total cost

$100.00 $50.00 $0.00

171

160

148

137

125

114

103

Order quantity

Reorder point is one week’s demand or (225 boxes/month)/(30 days/month) = 7.5 boxes/day times 7 days a week = 52.5 boxes. Note the problem says 360 days per year so most students try to work the problem out in days. Order decision rule: Place a new order for 793 boxes when the inventory position drops to or past the reorder point of 52.5 boxes. Number orders/year = Annual Demand/EOQ = 2700/793 = 3.4 (explain to students this is an average over many order cycles; one year it might be 4 orders, then 3 orders, etc.) Using Equation 12.6, total annual cost is = (793/2)*.1075 + (2700/793)*$12.5 = $42.59 + $42.59 (differences in template due to numerical precision) = $ 85.18 8

OM6 C11 IM

7.* Refer to the situation in Problem 6. Suppose the manager of MamaMia’s current order quantity is 400 boxes. How much can be saved by adopting an EOQ versus their current Q = 400? Using Equation 12.6, total annual cost for the current order quantity of 400 = (400/2)*.1075 + (2700/400)*$12.5 = $21.50 + $84.38 = $105.88 If Q = 400 boxes then it costs $20.70 ($105.88 – $85.18) MORE to implement the current order policy than by adopting an EOQ = 793 boxes. The EOQ spreadsheet template may also be used to find the total cost associated with any order quantity in the sensitivity analysis section. Economic Order Quantity Model Enter the data only in the yellow cells. Annual Demand Rate Ordering Cost Unit Cost Carrying Charge Rate Economic Order Quantity Order cost Inventory cost Total cost

2700.00 $12.50 $0.43 0.25 792.41 $42.59 $42.59 $85.18

Sensitivity Analysis Enter any order quantity to evaluate the cost and compare with EOQ Order Quantity 400 Order cost $84.38 Inventory cost $21.50 Total cost $105.88 EOQ Benefit

$20.69

8.* Super K Beverage Company distributes a soft drink that has a constant annual demand rate of 4,600 cases. A 12-pack case of the soft drink costs Super K $2.25. Ordering costs are $20 per order, and inventory-holding costs are charged at 25 percent of the cost per unit. There are 250 working days per year, and the lead time is four days. Find the economic order quantity and total annual cost, and compute the reorder point. 9

OM6 C11 IM

EOQ =

2DCo 2(4600)10 = = 572 cases Ch (2.25)(.25)

Reorder point is four days’ demand or (4600/250)(4) = 73.6 or 74 cases. Note the problem says 250 days per year so most students try to work the problem out in days. Order decision rule: Place a new order for 572 cases when the inventory position drops to or past the reorder point of 74 cases. 9.* Environmental considerations, material losses, and waste disposal can be included in the EOQ model to improve inventory management decisions. Assume that the annual demand for an industrial chemical is 1,200 lb, item cost is $5/lb, order cost is $40, inventory-holding cost rate (percent of item cost) is 18 percent. a. Find the EOQ and total cost assuming no waste disposal.

EOQ =

2DCo 2(1200)(40) = Ch (.18)(5)

= 326.6 Using the EOQ spreadsheet template, we have:

OM6 C11 IM

b. Now assume that 8 percent of the chemical is not used and disposed of, with a disposal cost of $0.75/lb. Find the EOQ and total cost when disposal costs are incorporated into the model. (Hint: add to the holding cost the disposal cost times the percent of product that is disposed of.)

EOQ =

2DCo 2(1200)(40) = Ch (.18)(5) + (0.75)(.08)

= 316.23 Using Equation 12.6, total annual cost is (316.23/2)*.96 + (1200/316.23)*$40 = $151.79 + $151.79 = $303.58 c. What implications do these results have for sustainability practices? Although the total cost is slightly higher ($303.58 versus $293.94), by adjusting the economic order quantity, the company can actually save additional costs while protecting the environment. 10.* High Tech, Inc. is a virtual store that stocks a variety of calculators in their warehouse. Customer orders are placed, the order is picked and packaged, and then shipped to the customer. A fixed order quantity inventory control system (FQS) helps monitor and control these SKUs. The following information is for one of the calculators that they stock, sell, and ship. Average demand Lead time Order cost Unit cost Carrying charge rate Number of weeks Standard deviation of weekly demand SKU service level Current on-hand inventory 11

12.5 calculators per week 3 weeks $20/order $8.00 0.25 52 weeks per year 3.75 calculators 95 percent 35 calculators

OM6 C11 IM Scheduled receipts Backorders a.

20 calculators 2 calculators

What is the Economic Order Quantity?

EOQ =

2DCo 2(12.5)(52)($20) = = 114.02 or 114 calculators Ch 2.0

I*C = .25*$8.00 = $2/year b.

What is the total annual order and inventory-holding costs for the EOQ?

1 D TC = QCh + Co 2 Q = ½ (114)($2) + (650)/114)($20) = $114 + $8114 = $228. c.

What is the reorder point without safety stock?

R =dL = (12.5)3 = 37.5 → 38 calculators d.

What is the reorder point with safety stock?

R =dL+zs L = (12.5)3 + 1.28(3.75) 3) = 37.5+10.7 = 48.2 → 48 calculators (Comment: You may want to review how you looked up the Z = 1.65 for a service rate = 95% using Appendix A) Most of these calculations can also be found using the FQS Safety Stock Excel template: Fixed Order Quantity Inventory System with Uncertain Demand Enter the data only in the yellow cells. Average Annual Demand Ordering Cost Unit Cost Carrying Charge Rate Lead time (weeks) Standard deviation of weekly demand Service level

650.00 $20.00 $8.00 0.25 3.00 3.75 0.95

Economic Order Quantity 114.02 Order cost $114.02 12

OM6 C11 IM Inventory cost $114.02 Total cost $228.04 Average demand during lead time Standard deviation during lead time z-value Safety stock Reorder point

37.50 6.50 1.64 11 48

Based on the previous information, should a fixed order quantity be placed, and if so, for how many calculators? Inventory position (IP) is defined as the on-hand quantity (OH) plus any orders placed but which have not arrived (called scheduled receipts, SR), minus any backorders (BO), or IP = OH + SR – BO = 35 + 20 – 2 = 53

[12.1]

FOQ Order Decision Rule: Place a new order for 114 calculators when the inventory position drops to or past the reorder point of 38 (w/o calculators) and 48 with safety stock. Since the IP is greater than either reorder point, do NOT place an EOQ = 114 calculators yet. 11.* Crew Soccer Shoes Company is considering a change of their current inventory control system for soccer shoes. The information regarding the shoes is given below. Average demand = 250 pairs/week Lead time = 3 weeks Order cost = $75/order Unit cost = $21.50 Carrying charge rate = 0.20 Desired service level = 95% Standard deviation of weekly demand = 40 Number of weeks per year = 52 The company decides to use a fixed order quantity system. What is the economic order quantity? What should be the reorder point be to have a 95% service level? Explain how the system will operate. EOQ =

2 DCo 2(250)(52)75 = = 673.42 → 674 pairs Ch 4.3

R = dL + z L = (250)3+ 1.645(40 3) = 750 + 113.96 = 742.5 → 864 pairs 13

OM6 C11 IM

FOQ Order Decision Rule: Place a new order for 674 pairs when the inventory position drops to or past the reorder point of 864 pairs.

12.* Tune Football Helmets Company is considering changing its current inventory control system for football helmets. The information regarding the helmets is given below. Demand = 200 units/week Lead time = 3 weeks Order cost = $60/order Unit cost = $80 Carrying charge rate = 0.075 Desired service level = 90% Inventory position (IP) = 450 Standard deviation of weekly demand = 40 Number of weeks per year = 52 Compute T and M for a fixed period inventory system model with and without safety stock. Explain how this system would operate. I*C = .075*$80.00 = $6/year

OM6 C11 IM

EOQ =

2DCo 2(200)(52)60 = → 456.1 helmets = Ch 6.0

T = EOQ/D = 456/(200)(52) = 0.043846 years or (0.0877)(52) = 2.28 weeks ≈ 3 weeks

M =d(T + L)+zs T+L =200(3+ 3)+1.28(40) (3+ 3) =1, 200 +125.4 » 1,325 At the beginning of the current week, the materials manager, checked the inventory level of helmets and found, for example, 450 units. There were no scheduled receipts and no back orders. How many units should be ordered? Order quantity (Q1) = M – IP1 = 1,325 – 450 = 875 helmets FPS Order Decision Rule: Place a new order every 5 weeks for an order quality at time t of Qt = 1,661 – the inventory position at time t. The spreadsheet template FPS Safety Stock may be used to perform the basic calculations: Fixed Period Inventory System with Uncertain Demand Enter the data only in the yellow cells. Average Annual Demand 10400.00 Ordering Cost $60.00 Unit Cost $80.00 Carrying Charge Rate 0.08 Lead time (weeks) 3.00 Standard deviation of weekly demand 40.00 Service level 90.00 Economic Order Quantity 456.07 Order cost $1,368.21 Inventory cost $1,368.21 Total cost $2,736.42 Review period (weeks, rounded up) Optimal replenishment level without safety stock Standard deviation of demand during T+L z-value Safety stock M-Level

3 1200.00 97.98 1.28 125 1325

13.* Suzie’s Sweetshop makes special boxes of Valentine’s Day chocolates. Each costs $15 in material and labor and sell for $30. After Valentine’s Day, Suzie reduces the price to $10.00 and sells any remaining boxes. Historically, she has sold between 50 15

OM6 C11 IM and 100 boxes. Determine the optimal number of boxes to make. How would her decision change if she can only sell all remaining boxes at a price of $5? Assuming sales are between 50 and 100 boxes, we have a uniform distribution between 50 and 100. For a sale price of $10.00 we have: cu = $30 - $15 = $15 cs = $15 - $10 = $5 P(demand <= Q*) = 15/(15 + 5) = 0.75 The optimal order quantity is 50 + 0.75(100 – 50) = 87.5 or 88 boxes See the spreadsheet template Single Period Inventory solution next.

If the sale price is $5.00, we obtain: cu = $30 - $15 = $15 cs = $15 - $5 = $10 P(demand <= Q*) = 15/(15 + 10) = 0.60 The optimal order quantity is 50 + 0.60(100 – 50) = 80

OM6 C11 IM

14.* For Suzie’s Sweetshop scenario in Problem 13, suppose that demand is normally distributed with a mean of 75 and a standard deviation of 8. How will her optimal order quantity change? [Hint: note that for a normal distribution, the value of Q* in Equation 12.17 can be found using Appendix A. Find the value of z that corresponds to the cumulative probability defined by Equation 12.17, and then find Q* by converting back to the original normal distribution using the formula z = (Q* )/ Verify your result using the Excel template. P(demand <= Q*) = 15/(15 + 5) = 0.75. This does not change. z = 0.68 (approximately) 0.68 = (Q* - 75)/8 Q* = 80.44 (The difference in the template is due to the approximation identification of z in Appendix A.)

OM6 C11 IM

15.* The J&B Card Shop sells calendars featuring a different Colonial picture for each month. The once-a-year order for each year’s calendar arrives in September. From past experience the September-to-July demand for the calendars can be approximated by a normal distribution with µ = 300 and standard deviation = 20. The calendars cost $6.50 each, and J&B sells them for $15 each. a.

Suppose that J&B throws out all unsold calendars at the end of July. Using marginal economic analysis, how many calendars should be ordered? [Hint: note that for a normal distribution, the value of Q* in Equation 12.17 can be found using Appendix A. Find the value of z that corresponds to the cumulative probability defined by Equation 12.17, and then find Q* by converting back to the original normal distribution using the formula z = (Q* - )/ cs = 6.50, cu = 15.00 – 6.50 = 8.50 Using Equation 12.10, P(Demand  Q*) = 8.50/(8.50+6.50) = 0.567. The z value corresponding to this is approximately 0.17. Order 300+ 0.17*20 = 303.4 or 304 calendars, just slightly more than the average demand. The template difference is due to numerical precision in the z value. 18

OM6 C11 IM Single Period Inventory Model Enter the data only in the yellow cells. Item cost Selling price

$6.50 $15.00

Sale price

$0.00

Cs Cu

$6.50 $8.50

P(demand <= Q*)

0.57

Uniform Distribution Minimum Maximum

350.00 650.00

Optimal order quantity Q*

520.00

Normal Distribution

Mean Standard deviation

300.00 20.00

Optimal order quantity Q*

303.36

If J&B sells any surplus calendars for $1 at the end of July and can sell all of them at this price, how many calendars should be ordered? cs = 6.50 – 1.00 = 5.50 cu = 15.00 – 6.50 = 8.50 Using Equation 12.10, P(Demand  Q*) = 8.50/(5.50 + 8.50) = 0.607. The zvalue corresponding to this is approximately 0.28. This corresponds to Q = 300 + .0.28(20) = 305.6 calendars. The Excel template solution is shown next. Single Period Inventory Model Enter the data only in the yellow cells. Item cost Selling price

$6.50 $15.00

Sale price

$1.00

Cs Cu

$5.50 $8.50

P(demand <= Q*)

0.61

OM6 C11 IM

Uniform Distribution Minimum Maximum

350.00 650.00

Optimal order quantity Q*

532.14

Normal Distribution Mean Standard deviation

300.00 20.00

Optimal order quantity Q*

305.44

Teaching Note for Hardy Hospital Case Study Overview A university and university hospital's materials management systems are interdependent and neither is under control. The ordering and inventory control system experienced stock outs on some items, excessive inventory on other items, multiple stocking points throughout the hospital and university with no assigned process or inventory item owner, used a paper-based system, and an array of different types of regular and special orders. Originally the purpose of processing some hospital orders through the university system was to qualify for price breaks and lower total costs to the university. Inventory in the hospital was stocked at one central stocking point, 31 hospital departments, and 215 secondary stocking points. Deliveries were made daily to the central storeroom and the 31 departments. Orders for less than $800 did not go through the regular ordering processes. Real hospital data is provided in the case on one SKUs that is assumed to be representative of all SKUs. Given these data the Director of Materials Management wanted to evaluate if formal inventory control methods and systems could make a difference. Case Questions and Brief Answers (1)

What are good estimates of order cost and inventory holding cost? (See Excel Model for computations and logic) Order cost estimate = $18.00 per order Inventory Carrying Cost = 27.24% if item value Ask an accounting major to develop these costs in class. The topic of what types of costs do the EOQ model required may also come up during class? Answer: Purely variable or incremental costs. The EOQ is a marginal cost model.

OM6 C11 IM Comment: This is the first time many students are not “given” these parameter estimates in a toy problem so expect some wild answers – they should keep it simple but some will not. If handled right, a very important lesson on inventory management – Models are only as good as their parameter estimates – garbage-ingarbage-out! Also, the EOQ model is a marginal cost model that requires information per SKU, not per purchase order. If the average purchase order has more than one SKU on it then we must divide the cost of a PO by the average number of SKUs per PO. You might want to explain to the students up front or use as a discussion issue during class. (2)

What is the EOQ and reorder point for Strike Disinfectant given your answer to Question 1?

EOQ =

2DCo (2(11.63)(52)($18.00) = 61.62 gallons = Ch (.2724)($21.05)

Ch = I*C = (.2724)($21.05) = $5.734 See Excel Model – Some students will define the SKU in terms of cases. An EOQ of 120 gallons is about 30 cases.

R = dL + z L = (11.63)2+ 1.88(8.02) 2) = 23.3 + 21.3 = 44.6 → 45 gallons (Case Exhibit 11.17 provides cycle service level, standard deviation, average weekly demand, and Exhibit 11.16 provides the current order quantity, Q = 200). (3)

Compute the total order and inventory holding costs for the Q and r system and compare to their current order Q's. Current (Q=200) total costs Strike Disinfectant

= $627.80

EOQ total costs Strike Disinfectant

= $353.32

Total SAVINGS if adopt EOQ versus using the current Q = $274.48. The spreadsheet also has computations for a fixed period system (FPS) if you cover it but most of the time we do not for this case study. (4)

What are your final recommendations? Explain. Justify. Typical recommendations (not in any particular order) include: • •

This materials management system is totally out of CONTROL! Immediately do an ABC analysis to understand where inventory value resides in the system. For A items, assign inventory analyst and buyers to review, let C items be ordered by the computer and FQS. 21

OM6 C11 IM • • • • • •

• •

•

• • • •

Baseline current performance in terms of cost/SKU, time, quality levels, etc. The current paper based system is incredibly SLOW (not responsive to real world and hospital needs). Conduct a system wide inventory audit and clean out obsolete SKUs, update on-hand quantities, and try to improve “data integrity.” How can they keep the state bidding system from being by-passed? Change state system so a team (committee) reviews each order request and/or improve the processes speed of delivery, etc. Train, train and hire people who can do this – buyers, inventory specialists, nurses, department heads, materials managers. Develop a plan to reduce “special orders” by developing new criteria and procedures. Assign a team to approve each special order independent of departments (could use double sign-offs, check sheets, authorization signatures, etc.). By the way, how do you tell a doctor they cannot order their preferred brand of an item? Reduce the 216 (multiple) stocking points (maybe only one per ward/department) . Implement a modern inventory management system using a computer for regular items first using all the tools and concepts in this chapter such as ABC analysis, cycle counting, FQS, FPS, and so on. Students will recommend FQS for most SKUs. Reevaluate key buying and stocking processes making use of Chapter 7 and 10 concepts and tools to find bottlenecks, improve processing time, flowchart work flow, etc. UNDERSTAND WORK AND ORDER FLOW (flowchart, study). Train purchasing managers on latest methods such as negotiation, price breaks, hedging, and so on. Begin to build a common database with uniform purchase order formats, data formats, and controls for improved data integrity. Data integrity is the key to good inventory decisions. Implement an employee-training program on materials management systems to raise the organizations expertise and skills. Who? What? When? Outsource materials management to a third party vendor such as American Hospital Supply.

Especially for undergraduate students they will identify few of the “managerial issues or ways to improve”---they simply do not have the experience—you will have to lead this class discussion. The following spreadsheet answers many of the previous questions. What if scenarios can be studied in class or as an extra assignment. Teaching Plan The case is about Control versus Cost versus Service versus Liability. Ask your students, what if the hospital stock out of a SKU and hurts a patient or if the patient dies 22

OM6 C11 IM due to lack of inventory? Answer the four case questions with special emphasis on getting good estimates of order and inventory holding costs. You might begin class posing this question? Who approves what in this materials management system? (Regular, emergency, special purchase orders). Another fun way to begin class is to ask each (or a few) team(s) or student(s) what they used for estimates of inventory-carrying and order costs, and what their EOQ were for Strike Disinfectant. If you write this information on the board students see why quality (data integrity) inputs to the EOQ is a first step to making good inventory decisions. Their answers will be in a wide range with very different EOQs, of course, and that is the first major lesson of this case! You can also draw on the board a supply chain for the university and hospital if you want. FYI: • •

When we grade student management reports we normally allocate 4 points to each of the 4 case questions for a total of x out of 16 points. Although the case numbers are different from ALL previous versions of this case, notice that from the OM5 version, order costs go from $15 to $18 per line item, and also inventory carrying costs changes from 22.4% to 27.24%. Since both increase, the EOQ is not much different from the OM5 version but total costs are higher. THE END!

OM6 C11 IM

Hardy Hospital Case Study OM6 C11 (Revised - Case numbers changed from all previous case versions - see yellow)

Order Costs 3 labor hours per P.O. 4 SKUs per P.O. $24 per hour including benefits Order cost/SKU =

Inventory Holding Cost 36,750 sq ft @ $4.60/sq ft. = 5 warehouse personnel @ $32,000 each + 20% OH = Other costs

$18.00 Average Value Inventory = Holding Cost as % of Total Inv. = Cost of Capital Funds (Bonds) = Inv. Hold Cost as % of Item = Cost

Current Order Quantity Weeks/Year Weekly Demand Std Dev Demand Annual Demand Order Leadtime

Strike Disinfectant 200 52 11.63 8.02 604.76 2

Order Cost

$18.00

Item Value ($84.20/4 Gallons) Inv. % Cycle Service Level Z-Value

$21.05 0.2724 97.00% 1.88

SQRT No. EOQ = Round EOQ Up

3,797.08 61.62 62.00

Leadtime demand Safety Stock Reorder Point

23.3 21.3 44.6

Order Cost Inventory Hold Cost Total EOQ Cost

$175.58 $177.75 $353.32

Current Q = 200 gallons Order Cost Inventory Hold Cost Current Q Total Cost If Adopt EOQ Save

DAC

$627.80 $274.48

If you cover FPS

$192,000.00 $400,000.00 $761,050.00 $4,150,000.00 18.34% 8.90% 27.24%

(see footnote in case Exhibit 11.16)

weeks

per gallon

gallons

$54.43 $573.37

$169,050.00

Note: This solution is in gallons. Students may also work the case out in cases.

OM6 C11 IM Fixed Period System (T and M) T = EOQ/D = Demand T + L = Safety Stock T+L M = D(T+L)+SS

0.102

5.30 84.9 40.7 125.6

weeks

Optional Topic (Do not recommend covering except for advanced courses and students but FYI; req'ds additional readings) Safety Stock varies with the square root of the number of stocking points for the same service level EOQ Safety Stock

62.00 21.3

Q/2 + SS

52.32

No. Stock Points

Gallons $ Ave Inv 1 52 $1,101 2 74 $1,558 3 91 $1,908 4 105 $2,203 31 291 $6,132 50 370 $7,788 100 523 $11,014 150 641 $13,489 200 740 $15,576 231 795 $16,740 Note: 231 is 215 secondary pts + 24 depts. + hospital storeroom + university storeroom Conclusion: Additional stocking points are expensive! So try to reduce them with moving carts of inventory, no stock in exam rooms, only one department store room, etc.

OM6 C12 IM OM6 Chapter 12: Supply Chain Management and Logistics Discussion Questions 1.

Cite and explain one advantage and one disadvantage of the following different transportation modes (a) air, (b) rail, (c) truck, and (d) ship. Section 12-2a describes the following advantages and disadvantages: Air: Advantages include fast, for mostly high-value items, etc. Disadvantages include weight and/or volume limits, no door-to-door service, highest transportation cost, and so on. Rail: Advantages include a good balance between cost, delivery speed, tonnage capacity, and environmental sustainability, low cost, long hauls, heavy and large volumes, good in bad weather, etc. Disadvantages include inflexible routes, no door-to-door service, slow, often delayed, and so on. Truck: Advantages include fast, most flexible, door-to-door service, good for perishable goods, small shipments, higher cost than rail, more dependable, etc. Disadvantages include weight limits, delays due to traffic congestion and weather, driver errors, and so on. Ship: Advantages include moving large quantities such as coal and grains, low cost per unit, etc. Disadvantages include weight or volume limits, no door-to-door service, slow, weather delays, and so on. Pipelines: Advantages include low cost per unit, dependable, continuous flow, etc. Disadvantages include high investment cost, needs preventive maintenance, doesn’t harm environment, so on.

What is vendor-managed inventory? How can it help supply chain management? Vendor-managed inventory (VMI) is becoming a popular concept where the vendor (a consumer goods manufacturer, for example) monitors and manages inventory for the customer (a grocery store, for example). VMI essentially outsources the inventory and ordering management functions in supply chains to suppliers. VMI allows the vendor to view inventory needs from the customer’s perspective and use this information to optimize their own production operations, better control inventory and capacity, and reduce total supply chain costs. VMI can also reduce the bullwhip effect discussed earlier in this chapter by allowing vendors to make production decisions using downstream

customer demand data. For example, points of sale data for light bulb sales from stores worldwide such as Wal-Mart, Target, and Costco immediately are collected at Sylvania and General Electric light bulb factories for analysis. Sylvania and G.E. decide on production order quantities and their timely delivery to customer break bulk warehouses. 3.

What is contract manufacturing? Why is it important? A contract manufacturer is a firm that specializes in certain types of goods-producing activities, such as customized design, manufacturing, assembly, and packaging, and

OM6 C12 IM works under contract for end users. Outsourcing to contract manufacturers can offer significant competitive advantages, such as access to advanced manufacturing technologies, faster product time-to-market, customization of goods in regional markets, and lower total costs resulting from economies of scale. 4.

Explain the bullwhip effect. Why is it important for managers to understand it? What can they do to reduce it? The bullwhip effect results from order amplification in the supply chain (see Exhibit 12.2 on HP Inkjet Printers). Order amplification is a phenomenon that occurs when each member of a supply chain “orders up” to buffer his or her own inventory. In the case of a distributor, this might mean ordering extra finished goods; for a manufacturer, this might mean ordering extra raw materials or parts. Order amplification increases as one moves back up the supply chain away from the retail customer. For example, small increases in demand by customers will cause distribution centers to increase their inventory. This leads to more frequent or larger orders (called cycle inventory in Chapter 11) to be placed with manufacturing. Manufacturing, in turn, will increase their purchasing of materials and components from suppliers. Because of lead times in ordering and delivery between each element of the supply chain, by the time the increased supply reaches the distribution center, customer demand may have leveled off or even dropped, resulting in an oversupply. This will trigger 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 cause a mismatch between the actual customer demand and the supply chain’s 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 and characterizes the bullwhip effect. Instead of ordering based on observed fluctuations in demand at the next stage of the supply chain (which are amplified from other stages downstream), all members of the supply chain should use the same demand data from the point of the supply chain closest to the customer. Modern technology such as point-of-sale data collection, electronic data interchange, and radio frequency identification chips can help to provide such data. Other strategies include using smaller order sizes, stabilizing price fluctuations, and sharing information on sales, capacity and inventory data among the members of the supply chain.

What are the implications of a negative cash-to-cash conversion cycle? The key is the logic of the following equation. Cash-to-Cash CC = IDS + ARDS – APDS

(12.8)

When a firm’s cash-to-cash conversion cycle is positive it must pay its bills before it receives payments from its revenue generating customers. Most likely the firm must borrow funds to make this cash conversion cycle work. When the C2CCC is negative the firm receives more money before it must pay its suppliers. A negative cash-to-cash conversion cycle generates an amount of liquidity, or basically free cash flow that funds growth and limits a company’s need for external debt. Also, see answers to Problems #4 and #5.

OM6 C12 IM Problems & Activities 1. Alpha Medical Manufacturing (AMM), located in Punta Gorda, Florida, produces medical devices for orthopedic surgery including replacement parts for human knees, hips, and elbows, and surgical tools. One product they assemble in their factory is a special aluminumalloy surgical screw used to anchor human tissue to the bone. The screw consists of four component parts, one being the aluminum alloy while the other three parts are made of medical grade plastics. AMM is evaluating three Tier 1 suppliers to manufacture the aluminum part of the orthopedic screw. Annual demand for this item is 20,000 units per year, with 365 days in a year. Other information is shown in Exhibit 12.10. Exhibit 12.10 Alpha Medical Manufacturing (AMM) Outsourcing Information for a Surgical Screw Contract Manufacturer (Tier 1 Supplier) Xiajing Supplier Boston Medical Supplier Werkzeug Supplier

Price per Unit @Q= 10,000 (C) $1.10

Price per Tariff Unit (C) Cost (Tc) @Q= per Unit 20,000

Transport Mode Cost (Tm) per Unit

Order Costs (Co)

Cost to Store One Unit per Year (Ch)

Order Lead Time in Days

$0.82

$0.20

$0.35

$655

$1.35

180

$1.25

$1.15

$0.00

$0.15

$260

$1.00

$1.35

$1.00

$0.10

$0.20

$350

$1.05

120

(a) What is the total annual logistics cost for each supplier when Q = 10,000 and Q = 20,000? TN C12 Problem #1 Total Annual Logistics Cost (TALC) Analysis

Boston

See Excel C12 Problem 1 Audubon Medical Manufacturing

Xiajing

Medical

Werkzeug

TALC Parameters

Supplier

C = Wholesale or retail price per unit considering price breaks

$0.82

$1.15

$1.00

Tc = country import or export tariff cost per unit, if any

$0.20

$0.10

Tm = cost per unit to ship by air, ship, truck and/or rail

$0.35

$0.15

$0.20

$1.37

$1.30

$655.00

$260.00

$350.00

$1.35

$1.00

$1.05

L = lead time in days =

180

120

Yd = days per year =

365

Sub Total (C + Tc + Tm) D = Forecast annual demand in units =

20,000

Q = Typical order quantity in units=

20,000

Average Number orders per year (D/Q) =

1.0

Co = cost to place one order = Ch = cost to store one unit in inventory for one year =

d = average daily demand in units (D/Yd) =

54.79

OM6 C12 IM

(C + Tc + Tm)*D Co(D/Q) [Q/2 + d*L]Ch TALC =

$27,400

$26,000

$655

$260

$350

$26,815

$14,932

$17,404

$54,870

$41,192

$43,754

(b) What supplier and order quantity do you recommend based on these total costs? TN Exhibit 2 Summary Total Cost for Audubon Medical Manufacturers Global Supplier Order Quantity (Q) 10,000 units 20,000 units Xiajing Supplier Boston Medical Supplier Werkzeug Supplier

$54,375 $38,452 $45,854

$54,870 $41,192 $43,754

TN Exhibit 2 summarizes the total cost of each supplier option. Boston Medical is the lowest cost supplier for both order quantities due to its low order cost, shortest order lead time, zero tariffs, low shipping cost, and globally competitive pricing. The next decision is whether to order Q = 10,000 or Q = 20,000 from Boston Medical. It only costs $2,740 ($41,192 - $38,452) more to order a one-year supply (Q = 20,000). The disadvantage of ordering a one-year supply is the risk of obsolescence of the alloy part and a slightly higher total costs. Therefore, order Q = 10,000 from Boston Medical twice a year. (c) List other criteria you might use to make the final supplier decision, and suggest metrics for measuring each criteria. • Product quality – conformance to specifications measured by R-bar, X-bar charts and product capability analysis • Delivery reliability – the variance of delivery times • Delivery speed – how close to the target delivery time of 90 days • Supply chain risks – see short- and long-term risks in exhibits 12.3 and 12.4 • Shipping mode(s) – assuming this is a high value and low cubic volume item, it could be shipped by air by Xiajing or Werkzeug suppliers; however, it is also a high value and high weight item which might argue against shipping by air. For Boston Medical all shipping is by truck. • Sustainability – do the suppliers practice environmental, social, and economic best practices or are there violations? 2. Bragg Johnson, materials manager at Johnson & Sons, has determined that a certain product experienced 3.8 turns last year, with an annual sales volume (at cost) of $975,000. What was the average inventory value for this product last year? What would be the average inventory level if inventory turns could be increased to 6.0? Inventory turnover (IT) = Cost of goods sold /Average inventory value 3.8 = $975,000/X or X = $256,579 average inventory level last year

(12.1)

6.0 = $975,000/X or X = $162,500 average inventory target level if TT = 6 3. Andrew Manufacturing held an average inventory of $1.1 million (raw materials, work-inprocess, finished goods) last year. Its sales were $8.0 million, and its cost of goods sold was

OM6 C12 IM $5.8 million. The firm operates 260 days a year. What is the inventory day’s supply? What target inventory level is necessary to reach a 20- and 10-day inventory days supply during the next two years? Inventory turnover (IT) = Cost of goods sold /Average inventory value = $5,800,000/$1,100,000 = 5.3 inventory turnover rate.

(12.1)

Cost of goods sold/day (CGS/D) = Cost of goods sold value/Operating days/year CGS/D = $5,800,000/260 = $22,307.70

(12.4)

Inventory days’ supply (IDS) = Ave. total inventory /Cost of goods sold/day

(12.3)

IDS = $1,100,000/$22,307.70 = 49.3 days 20 = X/$22,307.70 or X = $446,154 or a total inventory reduction of $653,846! 10 = X/$22,307.70 or X = $223,077 or a total inventory reduction of $876,923! Point out to the students this is one way to set inventory reduction targets over a planning

horizon of several years. 4. As an operations management consultant, you have been asked to evaluate a furniture manufacturer's cash-to-cash conversion cycle under the following assumptions: sales of $23.5 million, cost of goods Sold of $20.8 million, 50 operating weeks a year, total average on hand inventory of $2,150,000, accounts receivable equal to $2,455,000, and accounts payable of $3,695,000. What do you conclude? What recommendations can you make to improve performance? Cost of goods sold/day (CGS/D) = Cost of goods sold value/Operating days/year CGS/D = $20,800,000/50 = $416,000

(12.4)

Inventory days’ supply (IDS) = Ave. total inventory/Cost of goods sold/day

(12.3)

IDS = $2,150,000/$416,000 = 5.2 weeks Revenue per day (R/D) = Total revenue/Operating days per year R/D = $23,500,000/50 = $470,000

(12.7)

ARDS = Accounts receivable value /Revenue/day ARDS =$2,455,000/$470,000 = 5.2 weeks

(12.5)

APDS = Accounts payable value /Revenue per day APDS = $3,695,000/$470,000 = 7.9 weeks

(12.6)

Cash-to-Cash CC = IDS + ARDS – APDS = 5.2 + 5.2 - 7.9 = +2.5 weeks

(12.8)

The furniture manufacturer cash-to-cash conversion cycle is positive at 2.5 weeks, which means it must pay its bills on average 2.5 weeks before it receives payments from its revenue generating customers. Most likely the firm must borrow funds to make this cash conversion cycle work. This firm's numbers should be compared with furniture industry competitor cashto-cash conversion cycle numbers. Reducing IDS and ARDS or increasing APDS are ways to improve overall firm performance.

OM6 C12 IM 5. Using the data in problem 4, assume the operating manager reduces total average inventory on-hand by 21 percent by using better operations and supply chain methods. What is the revised cash-to-cash conversion cycle in weeks? What does this change in the C2C cycle mean? Cost of goods sold/day (CGS/D) = Cost of goods sold value/Operating days/year CGS/D = $20,800,000/50 = $416,000

(12.4)

Inventory days’ supply (IDS) = Ave. total inventory/Cost of goods sold/day

(12.3)

IDS = ($2,150,000*0.79)/$416,000 = $1,698,500/$416,000 = 4.1 weeks Revenue per day (R/D) = Total revenue/Operating days per year R/D = $23,500,000/50 = $470,000

(12.7)

ARDS = Accounts receivable value /Revenue/day ARDS =$2,455,000/$470,000 = 5.2 weeks

(12.5)

APDS = Accounts payable value /Revenue per day APDS = $3,695,000/$470,000 = 7.9 weeks

(12.6)

Cash-to-Cash CC = IDS + ARDS – APDS = 4.1 + 5.2 - 7.9 = +1.4 weeks

(12.8)

The furniture manufacturer cash-to-cash conversion cycle is positive at 1.4 weeks. This is 1.1 weeks (2.5 – 1.4) less than before the reduction in total average inventory. This is worth one week of the cost of goods sold or $416,000 plus the reduction in inventory carrying cost for a reduced average inventory of $451,500 ($2,150,000 - $1,698,500) or if carrying cost is 25% then $112,875 (0.25*$451,500). The firm does not have to fund one weeks worth of cost of goods sold and saves on inventory carrying costs or $528,875 ($416,000 + $112,875). 6. Draw a supply chain flowchart similar to Exhibit 12.1 using the SCOR Model for a business you have worked in or have experience with. Describe how the supply chain works. If you have little or no work experience, then do the assignment for a restaurant or business you frequent (maximum of three typed pages).

Students are expected to draw the SCOR model for at least one supplier, their firm, and one customer. In Chapter 1 we covered three ways (paradigms) to model value (supply)

OM6 C12 IM chains such as (a) the input-output model in Exhibit 1.4, (b) the pre- and post-service model in Exhibit 1.7, and the hierarchical model depicted in exhibit 1.9. Now we introduce a fourth way to conceptualize and model a value/supply chain, the SCOR model. 7. Select three types of supply chain risks and explain in-depth how supply chain managers can help mitigate these risks. That is, develop an action plan to mitigate these risks (maximum of two typed pages). Student have plenty of source material in Exhibits 12.3 and 12.4 to answer this question. The textbook cites the following information. One research study analyzed more than 800 supply chain disruptions that took place between 1989 and 2000. Firms that experienced major supply chain disruptions saw a 93% decrease in sales, 33-40% lower shareholder returns, 13.5% higher share price volatility, 107% decline in operating income, and 114% ROA decline over a three-year period.

Exhibit 12.3 Tactical Supply Chain Risks and Possible Management Actions Tactical Risks Ways to Mitigate Tactical Risks INVENTORY RISKS • Inventory and warehouse stock outs • Add safety stock • Inventory backorders • Change order quantities • Imbalances between work centers • Reduce lead times • Carry extra capacity • Add more inventory buffers between stages (work-in-progress) CAPACITY RISKS • Equipment shortage • Lease/share extra equipment • Production capacity shortage • Schedule overtime • Overproduction • Multiple suppliers • Equipment breakdowns • Schedule under time • Employee shortages, strikes, and layoffs • Frequent preventive maintenance • Add temporary and backup (float pool) workers LOGISTICS and SCHEDULING RISKS • Supplier quality problems • Add safety stock • Supplier delivery problems • Change order quantities • Long lead times for order cycles • Increase lead times • Poor transportation infrastructure by • Extra local warehouse space country • Increase quality control inspections • Hire new and/or multiple contract manufacturer(s) and supplier(s) • Partnerships with local transportation firms • Emergency and/or backup plans to ship 7

OM6 C12 IM by air, truck, ship, or rail by alternative shippers •

Exhibit 12.4 Strategic Supply Chain Risks and Possible Management Actions Strategic Risks Ways to Mitigate Strategic Risks GLOBAL ECONOMIC RISKS • Population and wealth forecasts by • Franchise and company owned store country mix • Monetary exchange rates and market size • Virtual versus direct sales channel mix • Regulations, taxes, and tariff laws by • Facility locations (headquarters, R&D, county factory, warehouse, service centers, distribution hubs, call centers, etc.) • Natural disasters such as earthquakes, tsunamis, volcanoes, hurricanes, and • Disaster and emergency plans and predroughts. deployment of resources • Workforce skills, pay, and availability • Multi-country sourcing of suppliers • Championing social sustainability in host country GOVERNMENT RISKS • Intellectual/Patent Rights and Protection • Global legal team to defend infringement • Man-made disasters such as wars, chemical spills, transportation accidents, • Facility locations (headquarters, R&D, political revolutions, government factory, warehouse, service centers, instability, and terrorist attacks. distribution hubs, call centers, etc.) • Disaster and emergency plans and predeployment of resources • Multi-country out-sourcing to contract manufacturers and suppliers PRODUCT RISKS • Product modifications due to cultural • Better strategic planning and demand differences forecasting capability (i.e., hire experts, upgrade software and hardware data • Major forecasting errors by product by mining technology including social country networks) • Chronic inventory and/or capacity • Co-operative plans to share resources shortages • Hire more contract manufacturers and • Goods and service (product) suppliers (outsourcing) obsolescence • Hedging inventory SECURITY RISKS • E-commerce system downtime • Technology upgrades and backup systems and sites • Cyber-security • Sourcing (hiring) criteria for workforce • Theft, fraud, and pay-off practices by country • Corporate value and mission statements 8

OM6 C12 IM

7. Research the job of a global sourcing manager and describe the job duties, travel requirements, and skill set (maximum of two typed pages). One recent Google search reveals almost 4 million hits on “global sourcing specialist.” Below are excerpts from just one web site. Students will find thousands of job postings with starting salaries in the $60,000 to $70,000 range for college undergraduates, and for majors in operations and logistics at the undergraduate and graduate levels rising up to the $150,000 range. A good assignment question for recruiting operations, supply chain, and logistic majors and minors.

Global sourcing specialists – would they be useful to me? Why should a firm use global sourcing specialists for their international procurement? Because they want to reduce costs, ensure quality, shorten sourcing lead times and mitigate risks. Most organizations don’t have the in-house resources or skills to implement all these successfully. What can global sourcing specialists do for me? Most global third-party procurement agents or strategic sourcing companies can achieve a 20% or more reduction in overall cost. Using experts they can also negotiate on your behalf, manage quality and ensure on-time delivery. Some companies provide other services including design of new products and packaging and sourcing the manufacturers. Choose the right organization for your needs. Proven sourcing skills are the base requirement for choosing global sourcing specialists. They can pre-qualify suppliers, develop the relationship for you and ensure that the goods or services you require are provided in the right place at the right time for the right price. Most firms have expertise in supplier management and managing risk across borders. Price negotiations Negotiation on base price and packaging and transportation costs is one of the key roles of global sourcing specialists. They provide clients with the lowest possible pricing based on long term established relationships and volume buying power without using middlemen. Look for established firms that source direct from many countries and where they utilize in-house local language speakers as buyers in the negotiations. Sourcing a manufacturer Selecting the most suitable manufacturer for your new product requires the use of global sourcing specialists with a track record in locating and identifying reliable, transparent and capable factories in the best territories. You need to be confident of lower costs, assured quality and best speed to market for new products. Quality control The top class firms in this field monitor and ensure that all the suppliers and factories that they partner with meet all government regulations and trade restrictions and that they comply with international codes of conduct. They should provide quality documentation where certification is required must conduct on-site quality audits as specified by the client. Value added services Providing prototypes and final samples for approval is another service that is available from global sourcing specialists. They can provide packaging design and manufacture, apply for trademarks and get legal approvals. Regular communication between you, the client, and the global sourcing specialists that you are using is vital. A formalized tracking and reporting system should be established, included in their costs. Using a carefully selected service provider, with checked references and testimonials, will ensure that the goods or services are delivered as per your exact specifications with minimum hassle

OM6 C12 IM 9. A major automobile manufacturer located in Georgetown, Kentucky, has two certified vendors that produce brake pads with the following information. Audubon Manufacturing is located in Columbus, Ohio, and LaPlaya Manufacturing is located in Monterrey, Mexico. The automobile assembly factory is assumed to operate 340 days per year. Certified Supplier

Quantify per Order Shipped

Price per Unit

Tariff Cost per Unit

Transport Cost per Unit

Order Cost

Cost to Store Oder One Unit Lead One Year Time in Days

Audubon Mfg.

50,000

$11.80

$0.00

$0.90

$155

$1.45

LaPlaya Mfg.

100,000

$ 10.85

$0.46

$1.25

$195

$1.10

100

(a) What is the total annual part and logistics cost for each supplier if annual demand is 1,000,000 brake pads?

Total Annual Logistics Cost (TALC) Analysis Problem 9, C12, OM6 TALC Parameters

Audubon

C = Wholesale or retail price per unit considering price breaks Tc = country import or export tariff cost per unit, if any Tm = cost per unit to ship by air, ship, truck and/or rail Sub Total (C + Tc + Tm)

LaPlaya

$11.80 $$0.90 $12.70

$10.85 $0.46 $1.25 $12.56

D = Forecast annual demand in units = Q = Typical order quantity in units= Average Number orders per year (D/Q) = Co = cost to place one order =

1,000,000 50,000 20.0 $155.00

1,000,000 100,000 10.0 $195.00

Ch = cost to store one unit in inventory for one year = L = lead time in days = Yd = days per year = d = average daily demand in units (D/Yd) =

$1.45 45 340 2,941.18

$1.10 100 340 2,941.18

$12,700,000 $3,100 $228,162 $12,931,262

$12,560,000 $1,950 $378,529 $12,940,479

(C + Tc + Tm)*D Co(D/Q) [Q/2 + d*L]Ch TALC =

OM6 C12 IM

(b) What supplier and order quantity do you recommend based on total costs? The difference in total logistical costs is only $9,217 so the economics is about equal. Technically, Audubon Manufacturing is the lowest total cost. One advantage of the Columbus, Ohio supplier (i.e., Audubon Manufacturing) is close proximity to Georgetown, Kentucky (about 200 miles by truck on Interstate highways). Shipments would be 20 times a year for 50,000 brake pads and that would reduce raw materials and work-in-progress inventories at the Georgetown assembly plant. Emergency shipments could arrive within 4 hours from Columbus. We recommend Audubon Manufacturing as the supplier of this manufacturer part based on lowest cost and close proximity to the assembly plant in Georgetown. (c) List other criteria you might use to make the final supplier decision. Other criteria that can be measured but not available in this problem include: product quality, delivery speed, delivery reliability (variance), capability to quickly make engineering changes (flexibility), and proximity to Columbus, Ohio supplier engineers and experts. (d) What will you tell the supplier that is not awarded the brake pad order? When total costs are this close and all other performance criteria are about the same, we would tell LaPlaya Manufacturing located in Monterrey, Mexico that proximity to the Georgetown assembly plant was the order winner. But we would ask them to consider lowering their costs more and to serve as a backup supplier. 10. Research and find a “return facilitator.” Describe what they do and how they make money (maximum of two typed pages). The e-commerce view of the supply chain is shown in Exhibit 12.5. An intermediary is any entity—real or virtual—that coordinates and shares information between buyers and sellers. Some firms, such as General Electric, Walmart, and Procter & Gamble, use e-commerce to communicate directly with suppliers and retail stores, and thereby skip traditional bricks-and-mortar intermediaries. UPS and Federal Express are two example return facilitators. Return facilitators specialize in handling all aspects of customers returning a manufactured good or delivered service and requesting their money back, repairing the manufactured good and returning it to the customer, and/or invoking the service guarantee. Many firms provide this service such as NVC Logistics Group (nvclogistics.com), Microland Reverse Logistics (microland.ca), MoveIt (moveit.com), and Optoro (optoro.com). The following diagram and discussion is from MoveIt web site. Reverse Logistics [Source: (moveit.com)] Reverse Logistics is the process related to the reuse of products and materials. The MoveIt® companies are skilled at helping companies with planning, implementing and controlling the costeffective return of goods. Our projects have included returns of surplus and lease-return goods, as well as end-of-life assets. Retailers, resellers and equipment vendors are faced with the challenge of processing returns as efficiently as possible. Our goal is to reduce the costs and shorten return times for shippers. From projects with worldwide or nationwide scope to regional and local consolidation and distribution –

OM6 C12 IM our network and systems are fine-tuned to help you reach your logistics objectives. Specialized Transportation Inside Pick Up Packaging Palletizing Removal and Disposal Non Technical De-installations Reclaim Useable Parts and Equipment Reconditioning Equipment Consolidation and Warehousing Custom Online Reports

11. Based on the following information, how many days of supply of inventory is the firm holding (assume 250 days of operation per year)? Interpret your answer if the industry average inventory days supply is 30 days. Sales Cost of goods sold Gross profit Overhead costs Net profit Total inventory Fixed assets Long-term debt

$8,300,000 $7,200,000 $1,100,000 $ 600,000 $500,000 $2,600,000 $3,000,000 $2,700,000

OM6 C12 IM Inventory turnover (IT) = Cost of goods sold /Average inventory value (12.1) = $7,200,000/$2,600,000 = 2.77 inventory turnover rate. Cost of goods sold/day (CGS/D) = Cost of goods sold value/Operating days/year (12.4) CGS/D = $7,200,000/250 = $28,800 Inventory days’ supply (IDS) = Ave. total inventory /Cost of goods sold/day

(12.3)

IDS = $2,600,000/$28,800 = 90.3 days supply If the industry average days supply is 30 days and this firm’s IDS is three times more, they definitely have inventory management problems. They may also have engineering or engineering change problems or simply accounting needs to write off obsolete inventory from past years. 12.

Claiken Incorporated is a supplier of axles for light trucks. They held an average axle inventory of $1.6 million last year, with a cost of goods sold of 21.0 million. What is the inventory turnover for axles? A customer wants them to increase its inventory turnover rate to 20 by implementing better inventory and operating practices. What average axle inventory level is needed to meet this 20-turn target? Inventory turnover (IT) = Cost of goods sold /Average inventory value (12.1) = $21,000,000/$1,600,000 = 13.13 current axle turnover rate. 20 = $21,000,000/X or 20X = $21,000,000 or X = $1,050,000 so need to reduce average axle inventory by $550,000.

13.

Research and find a good or service supply chain with a quantifiable carbon footprint. Write a short paper (maximum of two typed pages) on the topic, and if possible, how the carbon footprint was computed. Cite your sources. This is a challenging assignment since many organizations and governments are only recently trying to quantify carbons emissions and footprints for a good or service. Governments in Europe are probably ahead of everyone else but the gap is closing quickly. For example, go to www.ntm.a.se to see example initiatives (hit the English button). Wal-Mart, IBM, MIT’s Center of Transportation & Logistics, the US Department of Energy, the Environmental Protection Agency, and many state governments are also working on this topic. Tesco PLC supermarket chain in the United Kingdom (www.tesco.com), for example, is well known for its sustainability initiatives. In June 2011, Tesco announced that it was working with 2degrees Network to create an online hub as part of its target to reduce its supply chain carbon footprint by 30% by 2020.[105]

14.

Research and find a physical good that is biodegradable or carbon neutral. Be prepared to present your findings to the class in a two- to five-minute discussion. A Web search reveals over 10,900,000 hits for “carbon neutral”, for example, so students will have no problems researching these issues. Packaging, plastics, chemicals, and so on

OM6 C12 IM tend to lead this list. If you go to http://www.bizrate.com/skincareproducts/biodegradable/you will find many examples. If your students search “carbon neutral” the result is about one million hits! Also, read the answers to Problems # 13

and #15. 15.

Research what type(s) of reverse logistics program(s) your city, county, or state government supports and write a short paper describing how it works (and a simple flowchart if possible). What percent of total waste ends up in a landfill? (Maximum of two typed pages) Possible items students may use include: vehicle parts, cell phones, used college textbooks, cell phones, iPads, pizza box, old personal computers, tires, paper, ink cartridges, eye glasses, plastic, soda cans, and so on. Each of these eight recovery options for reverse logistics (see Exhibit 12.9) do not apply to all types of goods. This question gets at the core of sustainability issues. You might guide the students along the lines of thinking what processes would be necessary to implement one or more recovery options. For example, Lee County, Florida operates a waste-to-energy facility where household waste collected in Lee and Hendry counties eventually ends up at the Lee County Resource Recovery Facility, where it is sorted for reusable and recyclable materials. The lowest value waste is brought to the Waste-To-Energy Plant where, for the last 20 years, it has been converted to electricity through combustion. Lee County has won numerous international, national, and state awards for its sustainability practices including recycling programs and energy generation from trash. At this facility's mass-burn combustion system, waste is combusted at temperatures above 1,800 degrees Fahrenheit. The energy created during the combustion process is transformed into electricity. Once the waste is combusted, all that is left is an inert ash residue that is about 10 percent of its original volume. The Waste-to-Energy plant is also equipped with an enhanced metal recovery system that efficiently removes ferrous and non-ferrous metals from the ash; the recovered material is recycled. This ash is then disposed of at the landfill in Hendry County. Florida Light & Power and the county exchange electrical power as needed to meet the energy needs of their Florida customers.

Teaching Note J&L Packaging, Inc. --- Cash-to-Cash Conversion Cycle Overview The objectives of the case are (1) to learn how to do the computations for the cash-to-cash conversion cycle and interpret the results, and (2) discuss the role of operations and supply chain management in improving this cash-to-cash conversion cycle. The cash-to-cash conversion cycle highlights the importance of cash flow in a supply chain where operations and logistics skills are needed to improve cash flow performance. A YouTube video is available on the box cutting and fabrication machine --- ISOWA FALCON.

OM6 C12 IM

Case Questions and Brief Answers (1) Should we consider services in the cash-to-cash conversion cycle (C2CCC) computations? Since accounts receivable and payable data most likely includes both goods and services receivables and payables, it is best to do a total C2CCC analysis. You can do these separately (goods versus services) given various assumptions. Because some students might do this we have included a possible goods versus services only analysis in our spreadsheet. (2) How will you handle the $886,000 in obsolete inventory? The box and packaging business is more technical and dynamic than your students might have thought so obsolete inventory is a recurring problem. If you want to penalize the firm for such practices then add $886,000 to $4,906,000 or $5,792,000 (see Excel spreadsheet). If you do not, then write off the $886,000 and go with $4,906,000 for average total inventory. We use $5,792,000 in this analysis because it takes financing to fund the $886,000 (that is an actual cash outflow). Some students will argue the $886,000 is a research and development expense or due to fast product life cycles and ever-changing customer requirements, and should be written off. If you include the obsolete inventory into the analysis then you have two C2CCC options, that is (1) total without obsolete inventory, (2) total with obsolete inventory. The Excel spreadsheet summarizes key C2CCC numbers. Also notice, the C2CCC = -28.12 days for service highlights benefits of the service business such as no inventory, high margins on services, and which business show we try to grow more – goods or services? And what does a negative C2CCC mean? Please note an Excel worksheet is included with this case that you may or may not want to give to students. (3) What is the “total” cash-to-cash conversion cycle for last year?

Dollars (in 1,000) Sales Manufactured Goods Services Total Cost of Sales Manufactured Goods Services Total Operating Expenses Research and Development Sales and Marketing Other Total Obsolete Inventories Inventories Inventory + Obsolete Accounts Receivable

$87,475 $18,619 $106,094 $25,818 $5,907 $31,725 $17,619 $23,132 $6,182 $46,933 $886 $4,906 $5,792 $7,593

OM6 C12 IM Accounts Payable

$9,338

Manufactured

Total

Goods w/o Obs

Services

w/o Obs Inv

Total with Obs Inv

Cost of Goods Sold per Day

$86,060

$19,690

$105,750

Revenue per Day

$291,583

$62,063

$353,647

Inventory Day's Supply

57.0

46.4

54.8

Inventory Turnover

5.26

6.47

5.48

Acct. Receivable Days Supply(ARDS)

26.04

122.34

21.47

Acct. Payable Days Supply(APDS)

32.03

150.46

26.40

Cash-to-Cash Conversion Cycle = IDS + ARDS - APDS

51.02

-28.12

41.46

49.84

Below is one set of example computations; all others are in the spreadsheet. Total C2CCC without Obsolete Inventory Included Cost of goods sold/day (CGS/D) = Cost of goods sold value/Operating days/year CGS/D = $31,725,000/300 = $105,750

(12.4)

Inventory days’ supply (IDS) = Ave. total inventory/Cost of goods sold/day

(12.3)

IDS = $4,906,000/$105,750 = 46.4 days Revenue per day (R/D) = Total revenue/Operating days per year R/D = = $106,094,000/300 = $353,647

(12.7)

ARDS = Accounts receivable value /Revenue/day ARDS =$7,593,000/$353,647 = 21.5 days

(12.5)

APDS = Accounts payable value /Revenue per day APDS = $9,338,000/$353,647= 26.4 days

(12.6)

C2C Conversion Cycle = IDS + ARDS – APDS = 46.4 + 21.5 – 26.4 = +41.5 days (12.8) = 67.9 days – 26.4 days = +41.5 days (4) What are your conclusions and final recommendations?

OM6 C12 IM J&L Packaging, Inc. total cash-to-cash conversion cycle with obsolete inventory included is positive at 49.84 days that means it must pay its bills on average 49.84 days before it receives payments from its revenue generating customers. Most likely J&L Packaging, Inc. must borrow funds to make this cash conversion cycle work. This firm's numbers should be compared with industry competitor's cash-to-cash conversion cycle numbers. Relative to inventory days, ARDS and APDS are short and could mean these processes have already been reengineered for efficiency and speed, and J&L works closely with suppliers and customers. Conclusions are: (a) reduce inventory day’s supply from 54.8 days, way too long, and tying up cash in inventory, (b) reduce accounts receivable days from 21.5 if possible by process improvements, and (c) see if the CFO can figure out a way to increase the time of paying account payable from 26.4 days. You can also point out to students that every industry is characterized by different cash-to-cash conversion cycles and comparisons within an industry are the most valid. Inventory is an asset that collects risk over time as evidenced by the $886,000 potential inventory write-off (in our analysis we added it to total inventories). Ideally, J&L Packaging should do more just-in-time ordering to help reduce the 54.8 inventory days supply but this may require better information ties and relationships with suppliers and customers. You can teach this case in 15 to 40 minutes (depends on how many teams or students present the case or if you teach it in class or if you want to show the YouTube video of the ISOWA FALCON box machine) by exploring the role of operations in (1) reducing IDS from 54.8 days, and (2) reducing ARDS from 21.5 days (an information intensive process that can be reengineered). For example, ask the students if you reduce ARDS by one-half (22 to 11 days) how many dollars do you get earlier? Answer: 11 days*$353,647 = $3,890,117! Also, make sure students understand that it takes OM skills to reengineer and improve these processes. The reward is it frees up funds for the firm in the supply chain. You might also pose the question in class as to “What a negative cash-to-cash conversion cycle means?” A negative cash-to-cash conversion cycle generates an amount of liquidity, or basically free cash flow that funds growth and limits a company’s need for external debt. For example, if students do C2CCC for services they should get about – 28.12 days. Services such as consulting are not hindered by inventories! Teaching Plan (1) Should we consider services in the cash-to-cash conversion cycle computations? (2) How will you handle the $886,000 in obsolete inventory? (3) What is the total cash-to-cash conversion cycle for J&L Packaging, Inc. last year? (4) What are your conclusions and final recommendations?

The END!

OM4 Chapter 13: Resource Management Discussion Questions 1. Identify a goods-producing or service-providing organization and discuss how it might make aggregate planning decisions using the variables described in Exhibit 13.3. Students will “apply” Exhibit 13.3 aggregate planning concepts to an organization of interest to them. For example, a manufacturer like Briggs and Stratton produces small internal combustion engines to power snowmobiles, lawn mowers, jet skis, and snow blowers. The timing of promotions and pricing initiatives, overtime and under time, whether to follow a level or chase production strategy, when and how to build inventory for these seasonal stock keeping units, complementary products, lost sales, factory utilization, and so on are all key variables in their aggregate planning. Similar issues abound for service-providing organizations such as golf and tennis clubs (see chapter box), tax services, airline demand and services, many hotel resorts, athletic clubs, retail stores especially during holidays, student loans, and so on. 2. Provide an argument for or against adopting a chase strategy for a major airline call center. The airline call center would have varying demand such as for summer travel and major holidays. Inaccurate forecasts can cause havoc with regard to staff capacity and scheduling decisions. In some situations, equipment capacity may not be adequate during periods of peak demand. Advantages of adopting a chase strategy in this situation include minimizing costs as management changes the workforce levels (capacity) and skill mix and use of full- and part-time employees, while trying to maintain service levels. Disadvantages include radical changes in workforce capacity and mix may harm customer service levels and harm employee morale. Hiring and layoff costs increase as we change labor to meet varying demand. (Remember, in a service business staff capacity is a substitute for physical goods inventory.) One alternative for many airlines is to offshore their call center to other countries where costs are much lower than in Europe, Japan, and the USA. 3. Discuss some examples of real-life organizations that use demand management as a resource planning strategy.

Demand management reduces and in some cases eliminates the need to forecast item demand. Retail point-of-sale information is immediately available for planning production and/or staff levels. Demand management and a “pull” system coordinate the flow of information and physical goods along the supply chain. Today, most retail chains use demand management such as Nordstrom’s, Target, Wal-Mart, Safeway, and ACE Hardware. Revenue Management systems also use demand management capabilities (see Chapter 10). If you search something like “demand management services” you get over 30 million hits so there is plenty of information for the students to use. 4. How do the concepts of master production scheduling and material requirements planning translate to a service organization? Provide an example. Most service organizations use only two levels to disaggregate their resource plan(s) as shown and discussed in Exhibit 13.2. Without physical inventories and non-discrete outputs (i.e., services where the process is the service and vice versa), service organizations often take aggregate sales, budgets and resources, and immediately disaggregate them to the retail store level. Master scheduling as defined in manufacturing focuses on the end-item level. Similar concepts of end-items for services include standard meals in a restaurant, surgical kits (see chapter box) in a hospital, standard legal documents such as a simple will, cleaning a standard hotel room, space shuttle launches, and so on. The MPS is the number of standard meals, kits, documents, rooms, and launches by time period (often low numbers, sometimes just one, compared to goodsproducing MPS schedules). The concept of dependent demand and MRP often exists in services but seldom is recognized or used (see Problem # 5 on banking slips). Bills of Labor (BOL) become more prevalent in services than just Bills of Material (BOM) but both are used in goods and service businesses. An explosion of a BOL, for example, for a hotel might result in estimates of the work hours (standard cleaning time per occupied room) and materials (soap, cleaning fluid, shampoo, towels, bottled water, etc.) required per day over the planning horizon. The MPS would be the number of rooms cleaned per day over a planning horizon. Bottom line – Service organization can make use of the concepts and logic of MPS and MRP to estimate resource capacity (i.e., labor, trucks, equipment) and materials required by time period (i.e., a planned schedule). 5. How should managers choose an appropriate lot-sizing rule? Should they be chosen strictly on an economic basis, or should intangible factors be considered. Why?

As Exhibits 13.13 to 13.16 document using different lot sizing rules has a significant effect on average item inventory levels. Although not done in this introductory chapter, you can briefly explain how the total cost of inventory and ordering activity for each rule (i.e., LFL, FOQ, POQ) can be done simply by counting the number of orders times order cost plus adding up ending inventory levels per period times inventory holding cost per unit per period. The fact is the economics of different lot sizing rules vary widely so total cost of each rule is very important, (say over 50% weight in choosing the appropriate rule). Other criteria for selecting lot-sizing rules in an MPS/MRP environment include the relative size of inventory holding to order costs (i.e., FOQ is often best when inventory costs are low and order costs high), system nervousness where things change too much, distorting true dependent demand (i.e., favors LFL), and the availability of inventory analyst and purchasing employees to monitor their assigned number of items. Selecting the best lot-sizing rule is a management decision that relies more on economics than qualitative factors but both are important, and must be tailored to the unique operating situation. Not an easy decision! Problems and Activities Note: an asterisk denotes problems for which an Excel spreadsheet template on the OM6 online web site may be used. 1. Interview a production manager at a nearby goods-producing company to determine how the company plans its production for fluctuating demand. What approaches does the company use? This exercise is designed to help students relate real-world OM activities to the text material. As the student describes what they see ask questions such as: Are the chasing demand? Are they trying to execute a level production strategy? Is demand seasonal? Do they adjust workforce levels, production rates, and inventory levels to meet demand? Do they use all full-time or part-time employees or some combination? How do they try to influence demand, or do they? 2. Research and write a short paper (2 pages maximum) describing how organizations use aggregate planning options in Exhibit 13.3. Exhibit 13.3 provides a broad framework for students to research and report. Topics include: demand management, resource utilization, carbon emissions, workforce (hire, layoff, full-time, part-time), and overtime, under time, subcontracting (outsourcing), back orders, stock outs, and anticipation inventories. For example, a Google search of “overtime” reveals 66 million hits; “under time” is 2.5 million hits; “demand

management” is 34 million hits, and so on. Below is an example of what IBM says w/r to demand management. Demand Management -- More than software In virtually every industry, companies are challenged by ever-higher customer expectations, stricter regulations, changing market dynamics and the ongoing impact of the Web – all of which are compelling them to reexamine and refine how they forecast and manage demand. As many are learning, it is a process that involves far more than installing forecasting software. These tools, though increasingly sophisticated, are a small part of the overall solution, and are by no means solely responsible for steering business growth. Today, successful demand management requires a multichannel, multilevel approach that exploits every link in the supply chain, which for most enterprises represents a complex group of constituents. Still, many organizations cling to “install now, think later” strategies that fail to take into account the various, often subtle factors that can affect the success or failure of their value chain. When one considers the increasingly virtual and volatile nature of commerce, this can have dramatic implications. Forecasting demand is no longer measured in days and months; it is gauged in hours and minutes. If an organization’s process for gathering, disseminating and utilizing data takes too long, or if the data is marked by redundancies, inaccuracies or irrelevancies, information can lose what is now a smaller window of opportunity to provide meaning and impact. The ability to generate a nearly instant forecast that can be applied the same day is increasingly essential to strengthening the bottom line, gaining market share, keeping inventory lean, and continually meeting and exceeding customer expectations. Source: http://www-935.ibm.com/services/us/gbs/bus/pdf/g510-6014-demandmanagement.pdf 3.

The forecasted demand for fudge for the next four months is 220, 150, 100, and 70 pounds. a.

What is the recommended production rate if a level strategy is adopted with no back orders or stock outs? What is the ending inventory for month 4 under this plan? To ensure no backorders or stock outs, a level production strategy would require producing at peak demand or 220 pounds/month. This would result in an inventory at the end of month 4 of 880 - (220 + 150 + 100 + 70) = 880 – 540 = 340 pounds. You might also want to ask students the implications of this strategy. Using Equation 13.1 we find Production Demand Ending Inventory Month 1 220 units 220 0

Month 2 Month 3 Month 4

220 units 220 units 220 units

150 100 70

70 190 340

Average monthly inventory = 135 units (540/4) Staffing to peak is not a smart strategy resulting in much inventory at the end of the 4 month planning period. This inventory incurs the cost to carrying inventory plus the risk of obsolescence. b. What is the level production rate with no ending inventory in month 4? To ensure no ending inventory, the production rate must be (220 + 150 + 100 + 70)/4 = 135 pounds/month; however, this would result in backorders or stock outs as shown below:

Month 1 Month 2 Month 3 Month 4

Production 135 units 135 units 135 units 135 units

Demand 220 150 100 70

Ending Inventory -85 -100 -65 0

4.* Using the Excel template Aggregate Planning to try to find the best production strategy for the Golden Beverages example to minimize the total cost. Note that the chase demand strategy has a total cost of $1,835,050, so you should seek a solution that has a lower cost. Students can experiment using the Aggregate Planning template (not the Agg Plan Level or Agg Plan - Chase templates) by changing the production decisions in column D. Students should be encouraged to document their search process and explain their iterative reasoning (this makes a good competitive case for student teams). The optimal solution can be found using linear programming (Supplementary Chapter SC E); however, the model is probably too advanced for most undergraduate students. The minimum total cost is $1,796,670. 5.* Chapman Pharmaceuticals, a large manufacturer of drugs, has this aggregate demand forecast for a liquid cold medicine.

The firm has a normal production rate of 90,000 liters per month and the initial inventory is 100,000 liters. Inventory-holding costs are $30 per 1,000 liters per month, regular-time production costs are $400 per 1,000 liters. Overtime costs an additional 20 percent, and under time costs an additional 12 percent. Assume that there are no lost sales or rate change costs. Compute the costs of level and chase demand production plans. The results using the Agg Plan – Level and Agg Plan – Chase spreadsheet templates are shown next. We see that the chase strategy has a lower cost due to the fact that no additional inventory needs to be carried and no lost sales are incurred.

6.* The Westerbeck Company manufactures several models of automatic washers and dryers. The projected requirements over the next year for their washers follow.

Current inventory is 100 units. Current capacity is 960 units per month. The average salary of production workers is $1,300 per month. Material costs $120/unit. Each production worker accounts for 30 units per month. Overtime is paid at time and a half. Any increase or decrease in the production rate costs $50/unit for tooling, setup, and line changes. This does not apply, however, to overtime. Inventory-holding costs

are $25 per unit per month. Lost sales are valued at $75 per unit. Compare the costs of level and chase demand production plans. The key to solving this problem is to convert the costs to a per-unit basis. For example, the production cost per unit is $1300/30 = $43.33; thus, the unit production cost = $43.33 + $120 = $163.33. Overtime costs ($1300)(1.5)/30 = $65 per unit. Using the Excel templates, we see that the costs are very similar for level and chase strategies, with the chase strategy being slightly lower.

7.* The Silver Star Bicycle Company will be manufacturing men’s and women’s models of its Easy-Pedal 10-speed bicycle during the next two months, and the company would like a production schedule indicating how many bicycles of each model should be produced in each month. Current demand forecasts call for 150 men’s and 125 women’s models to be shipped during the first month and 200 men’s and 150 women’s models to be shipped during the second month. Additional data are shown in Exhibit 13.18. Last month Silver Star used a total of 4,000 hours of labor. Its labor relations policy will not allow the combined total hours of labor (manufacturing plus assembly) to increase or decrease by more than 500 hours from month to month. In addition, the company charges monthly inventory at the rate of 2 percent of the production cost based on the inventory levels at the end of the month. Silver Star would like to have at least 25 units of each model in inventory at the end of the two months.

Exhibit 13.18 Silver Star Bicycle Data Model Production Costs Men’s $40 Women’s $30

Labor Required for Manufacturing (hours) 10 8

Labor Required for Assembly (hours) 3 2

Current Inventory 20 30

Establish a production schedule that minimizes production and inventory costs and satisfies the labor-smoothing, demand, and inventory requirements. What inventories will be maintained, and what are the monthly labor requirements? The optimal solution can be found using linear programming, although most students will likely create a spreadsheet to find a good solution. The LP model is shown below. Let xij = number of model i (1 for men’s and 2 for women’s) produced in month j, and sij = inventory at end of month j. Min 40x11 + 30x21 + 40x12 + 30x22 + .8s11 + .6s21 + .8s12 + .6s22 Material balance equations: 20 + x11 – s11 = 50 30 + x21 – s21 = 125 x11 + x12 – s12 = 200 s21 + x22 – s22 = 150 Ending inventory requirements: s12  25 s22  25 Labor force smoothing 4000 – 10x11 –3x11 – 8x21 – 2x21  500 and 4000 – 10x11 –3x11 – 8x21 – 2x21  -500 13x11 + 10x21 –13x12 –10x22  500 and 13x11 + 10x21 –13x12 –10x22  -500 All variables nonnegative. The optimal solution is x11 = 130, x21 = 181, x12 = 225, x22 = 89; total cost = $22,386.60

If the company changed the constraints so that monthly labor increases and decreases could not exceed 250 hours, what would happen to the production schedule? How much would the cost increase? What would you recommend?

Changing the right hand sides of the labor force smoothing constraints yields a new solution: x11 = 130, x21 = 206, x12 = 225, x22 = 64; total cost = $22,401.60. 8.

Given the bill of materials for the printer cartridge (A) shown below, a gross requirement to build 200 units of A, on-hand inventory levels for each item as shown in the table below, and assuming zero lead-times for all items A, B, C, D, and E, compute the net requirements for each item.

Item A B C D E

On-Hand Inventory 40 50 100 70 25

Item

On-Hand Inventory

Dependent Demand Calculations

200 – 40 = 160

160 – 50 = 110

100

160 – 100 = 60

2(60) + 110 - 70 = 160

60 – 25 = 35

This problem illustrates the pure idea of dependent demand without the complications of lead times, lot sizing or safety stock. 9.

Consider the same bill of material and information in Problem #8 but assume that two of component B are needed for each A, and that the gross requirement for A is 220 units. Compute the net requirements for each item assuming zero lead times.

Item

On-Hand Inventory

Dependent Demand Calculations

220– 40 = 180

180*2 – 50 = 310

100

180 – 100 = 80

2(80) + 310 - 70 = 400

80 – 25 = 55

This problem illustrates the pure idea of dependent demand without the complications of lead times, lot sizing or safety stock. When finished pure MRP logic drives ending inventory to zero. 10. Each bank teller workstation is forecasted to process 200 transactions (the end-item) on Friday. The bank is open from 9:00 a.m. to 7:00 p.m. on Friday with 90 minutes for lunch and breaks. Three teller windows are open on Friday. A work-study analysis reveals that the breakdown of the transaction mix is 40 percent deposits, 45 percent withdrawals, and 15 percent transfers between accounts. A different form is used for each type of transaction, so there is one deposit slip per deposit, one withdrawal slip per withdrawal, and two transfer slips per transfer. The forecast is for 200 customer transactions during 8.5 hours on Friday at each of three teller station. Deposit, withdrawal and transfer slips are “dependent” upon forecast for the end-item (customer transactions). a. How many transfer slips are needed on Friday? Using the concept of dependent demand (200 transaction/workstation)(3 workstations) (.15)(2 slips/transaction) = 180 transfer slips required on Friday. b. How many withdrawal slips are needed on Friday? Using the concept of dependent demand (200 transaction/workstation)(3 workstations) (.45)(1 slip/transaction) = 270 withdraw slips required on Friday. c. Deposit slips are delivered every second day. If the on-hand balance of deposit slips is 50 at this bank, how many deposit slips should be ordered? Using the concept of dependent demand (200 transaction/workstation)(3 workstations) (.40)(1 slip/transaction) = 240 deposit slips required on Friday. Order Quantity = (2 days/order cycle)(240 deposit slips/day) – 50 on hand = 430 slips.

d. What is the end-item and component part is this bank example. The end-item is a customer transaction at the bank teller workstation. Component parts are three different forms-deposit, withdraw, and transfer slips. e. What are the implications of having too many or too few deposit, withdrawal, and transfer slips? Explain. Too many deposit slips per branch bank and at each teller workstation could incur unnecessary inventory carrying costs and also risk obsolescence if the bank wants to make changes in format or information on the slips. Too few slips and some of the banks systems and processes may not be able to operate or process the transaction. The cost of failure here could be high with customers pulling their assets out of the bank and/or being unhappy. A lack of deposit and withdrawal slips could in fact stop a process or disrupt it. Remember, services have many sites (multisite management) and this complicates the availability of these simple documents that trigger financial transactions. 11. The BOM for product A is shown next and data from the inventory records are shown in the table. In the master production schedule for product A, the MPS quantity row (showing completion dates) calls for 250 units in week 8. The lead time for production of A is two weeks. Develop the materials requirements plan for the next eight weeks for Items B, C, and D.

Data Category Lot-sizing rule Lead time Scheduled receipts Beginning (on-hand) Inventory

B P=2 2 weeks 100 (week 1) 0

C FOQ = 1,000 1 week 0 100

D LFL 2 weeks 0 0

MPS Product A – Lead time = 2 weeks Week

Product A

250

Planned Order Release Item C Description Use 2 Cs for each A Week

250 Lot Size: FOQ = 1,000 Lead Time: 1 week 1

Gross Requirements

500

Scheduled Receipts Projected OH inventory 100 100

100

Planned Order Receipts

600

1000

Planned Order Releases Item D Description Week

600

1000 Lot Size: LFL Lead Time: 2 1

Gross Requirements

250

Scheduled Receipts Projected OH inventory

0 0

Planned Order Receipts

0 250

Planned Order Releases

250

Item B Description Week

Lot Size: P = 2 weeks Lead Time: 2 1

Gross Requirements Scheduled Receipts Projected OH inventory

250

100 0 100

100

Planned Order Receipts Planned Order Releases

100

0 150

150

250

12. David Christopher is an orthopedic surgeon who specializes in three types of surgery—hip, knee, and ankle replacements. The surgery mix is 40 percent hip replacement, 50 percent knee replacement, and 10 percent ankle replacement. Partial bills of materials for each type of surgery are shown in the following information.

Hip Replacement Surgical kits #203 & #428 Hip part package #A Patient’s blood type—6 pints pints Data Category Lot-sizing rule Lead time Scheduled receipts Beginning (on-hand) inventory

Knee Replacement Surgical kit #203 Knee part package #V Patient’s blood type—4 pints B

P=2 2 weeks 100 (week 1) 0

FOQ = 1,000 1 week 0 100

LFL 2 weeks 0 0

Ankle Replacement Surgical kit #108 Ankle part package #P Patient’s blood type—3

a. Given that Dr. Christopher is scheduled to do 5 hip replacements, 3 knee replacements, and one ankle replacement next week, how many surgical kits and part packages of each type should the hospital have available next week? No Surgical kits #203 = 5 + 3 = 8 No Surgical kits #428 = 5 No Surgical kits #108 = 1 Part Package A = 5 Part Package V = 3 Part Package P = 1 There is no need to forecast these requirements assuming the BOM is accurate. b. How many total pints of blood are needed next week? Pints of blood = 5(6) + 3(4) + 1(3) = 45 c. Design a “mistake-proof” system to ensure each patient gets the correct blood type. Students might design a simple spreadsheet that calculates component part requirements given end-item independent demand. Also, see Chapters 7, 15, and 16 for control ideas/methods such as check sheets and double sign-offs. d. What are the implications of a shortage (stock out) of a surgical kit or part package discovered several hours before the operation? What if a part package has a missing part that is not discovered until surgery begins? As simple as this problem is its solution is of paramount importance. Here, the type of surgery (end-items) and the number of surgeries (order quantity in master production schedule) determines the dependent demand requirements for all component parts. To be short a surgical kit or part package during the operation

would be a significant service failure. Someone in the surgery team must do such calculations to make sure inventory is available to support the surgery. Of course, another strategy is to maintain extremely high inventories of all surgical kits to ensure no stock outs, a costly strategy. Missing instruments and parts can delay surgery and in a crisis even endanger the patient. 13. Consider the master production schedule, bills of materials, and inventory data shown below. Complete the MPS and MRP explosion and identify what actions, if any, you would take given this requirements plan.

Bills of Materials

Item File Lot sizing rule Lead time (weeks) Beginning (on-hand) inventory Scheduled receipts

C LFL 3 5 8 in week 1

D LFL 1 8 None

E FOQ (25) 3 19 25 in week 3

F POQ (P = 2) 1 3 20 in week 1

Make sure the students use the 1 and 2 week lead times in the MPS. The only action to take is release an order for 5 Cs in week 1. If a student can do this problem correctly they understand dependent demand and many of the issues.

Item C, LFL, LT=3 Gross Requirement Scheduled Receipts Projected On Hand 5 Planned Receipts Planned Order Release

1 5 8 8

2 0

3 8

4 5

5 0

6 20

0 5

0 20

Item D, LFL, LT = 1 Gross Requirement Scheduled Receipts Projected On Hand 8 Planned Receipts Planned Order Release

1 5

2 0

3 8

4 0

5 0

0 5

Item E, FOQ = 250, LT=3 Gross Requirement Scheduled Receipts Projected On Hand 19 Planned Receipts Planned Order Release

1 0

2 10

Item F, P = 2, LT=1 Gross Requirement Scheduled Receipts Projected On Hand 3 Planned Receipts Planned Order Release

1 0 20 23

6 10

7 0

8 0

0 10

4 0

5 20

6 0

7 0

8 0

3 0 25 34

2 10

3 0

4 10

5 20

6 20

7 0

8 0

20 27

0 20

14. The MPS for product A calls for 100 units to be completed in week 4 and 200 units in week 7 (the lead time is 1 week). Spare part demand for Item B is 10 units per week. The bill of materials for product A is shown on the right, and the inventory records are shown below. Data category Lot sizing rule Lead time (weeks) Beginning (on-hand) inventory Scheduled receipts

Item B FOQ = 500 2 100 none

Item C LFL 3 10 200 (week 2)

Bill of Material A

B(1)

C(2)

B(1)

a. Develop a material requirement plan for the next 7 weeks for items B and C. MPS Product A – Lead time = 1 week Week

Product A

100

7 200

We must know POR for Item C before we can compute GR for Item B Item C Description Week

Lot Size: LFL Lead Time: 3 Use 2 Cs for each A 1

Gross Requirements

200

Scheduled Receipts Projected OH inventory

7 400

200 10 10

210

Planned Order Receipts

390

Planned Order Releases

390

Item B Description

Lot Size: FOQ = 500 Lead Time: 2 Spare part demand = 10

Week

Gross Requirements

500

210

Projected OH inventory 100 90

340

Scheduled Receipts Planned Order Receipts Planned Order Releases

500 500

b. Will any action notices be generated? If so, what are they and explain why they must be generated. No actions are required since no planned order releases in action bucket (week 1). The analyst might want to check on the scheduled receipt of Item C in week 2 to make sure it is as planned. 15. Garden Manufacturing is a small, family-owned garden tool manufacturer located in Florence, South Carolina. The bills of materials for models A and B of a popular garden tool are shown in Exhibit 13.19 and other additional component information is shown in Exhibit 13.20. There is considerable component part commonality between these two models, as shown by the BOM. The MPS calls for 100 units of Tool A to be completed in week 5 and 200 units of Tool A to be completed in week 7. End-item A has a 2-week lead time. The MPS calls for 300 units of Tool B to be completed in week 7. End-item B has a 1-week lead time. Do an MRP explosion for all items required to make these two garden tools. What actions, if any, should be taken immediately and what other potential problems do you see?

Exhibit 13.20 Component part information Data Category Lot-sizing rule Lead time Scheduled receipts Beginning inventory

Item D LFL 2 weeks 50 (week 1) 70

C FOQ = 400 1 week 450 (week 1) 100

E POQ = 4 2 weeks None 50

F LFL 1 week None 900

Master Schedule Item: End item A

Lead Time: Week 1

100

MPS end 100

MPS start

200

Master Schedule Item: End item B

Lead Time: Week 1

300

MPS end 300

MPS start

Action notice: delay SR of item C to week 3

Item C Description Week Gross Requirements Scheduled Receipts Projected OH inventory Planned Order Receipts Planned Order Releases

200

100

450 550

550

350

Lot Size: FOQ = 400 Lead Time: 1 week 5 6 7 400

300

350 400

400

Action notice: delay SR of item D to week 6

Item D Description Week Gross Requirements Scheduled Receipts Projected OH inventory

Lot Size: L4L Lead Time: 2 week 5 6 7

600

50 120

120

480

Planned Order Receipts Planned Order Releases

480

Item E Description

Lot Size: P = 4 weeks, LT = 2 weeks 1

Gross Requirements Scheduled Receipts Projected OH inventory Planned Order Receipts Planned Order Releases Item F Description Week Gross Requirements Scheduled Receipts Projected OH inventory Planned Order Receipts Planned Order Releases

100

480

200

680 730

200

Lot Size: LFL Lead Time: 1 week 5 6 7

730

170

730

900

170

Case Teaching Note: Blue Note Mortgage Overview This case illustrates the typical aggregate planning problem for service organizations. Exhibit 13.2 applies here since there is no need for intermediate aggregate planning as in manufacturing firms. That is, most manufacturing firms use discrete subassemblies and component parts to create their final products while in services, good staff capacity planning and scheduling allow the firm to meet demand (i.e., there are no equivalent component parts and sub-assemblies). The case is simple and considers only workforce level (capacity) changes. There are no cost information cited in the case such as overtime, subcontracting, hire and fire, costs. You might also point out to students a simple lesson from Chapter 1 regarding the seven differences between goods and services. That is “services cannot be stored as physical inventory.” Staff capacity is the substitute for physical inventory in a service business. Finally, please note this case is about “backroom operations” so there is very little need for employees to have service management skills. The Case Study The process of obtaining a mortgage for a house or condominium is more complex than most people think. It starts with an application that contains all pertinent information about the borrower that the lender will need. The bank or mortgage company then initiates a process that leads to a loan decision. It is here that key information about the borrower is provided by third-party providers. This information includes a credit report, verification of income, verification of assets, verification of employment, and an appraisal of the property among others. The result of the processing function is a complete loan file that contains all the information and documents needed to underwrite the loan, which is the next step in the process. Underwriting is where the loan application is evaluated for its risk. Underwriters evaluate whether the borrower can make payments on time, can afford to pay back the loan, and has sufficient collateral in the property to back up the loan. In the event the borrower defaults on their loan, the lender can sell the property to recover the amount of the loan. But, if the amount of the loan is greater than the value of the property, then the lender cannot recoup their money. If the underwriting process indicates that the borrower is creditworthy, has the capacity to repay the loan, and the value of the property in question is greater than the loan amount, then the loan is approved and will move to closing. Closing is the step where the borrower signs all the appropriate papers agreeing to the terms of the loan. Beverly Frydann is the manager of a loan-processing department and needs to

know how many employees will be needed over the next several months to process a certain number of loan files per month so she can better plan capacity. Staffing changes are expensive and time-consuming. Thus, it is quite important to understand staffing requirements well in advance. In many cases, the time to hire and train new employees can be 90 to 180 days, so it is not always possible to react quickly to changes in staffing needs. Hence, advance planning is vital so that Beverly can make good decisions about overtime or reductions in work hours, or adding or reducing temporary or permanent staff. Suppose that there are different types of products that require processing. A product could be a 30-year fixed rate mortgage, 7/1 ARM, FHA loan, or a construction loan. Each of these loan types vary in their complexity and require different levels of documentation and, consequently, have different times to complete. Assume that the manager forecasts 750 loan applications in May, 825 in June, 900 in July, and 775 in August. Each employee works productively for 7 hours each day, and there are 22 working days in May, 20 in June, 22 in July, and 22 in August. Beverly also knows, based on historical loan data, the percentage of each product type and how long it takes to process one loan of each type. These data are presented in Exhibit 13.21. Exhibit 13.21 Loan Processing Data Products Product 1 Product 2 Product 3 Product 4 Product 5 Product 6 Product 7 Product 8 Product 9 Product 10 Total

Product Mix (%) 22 % 17 13 12 10 9 7 5 3 2 100

Hours Per File 3.60 2.00 1.50 5.50 4.00 3.00 2.00 2.00 1.50 4.00

Beverly would like to predict the number of full time equivalent (FTE) staff needed each month to ensure that all loans can be processed. Determine how to calculate the FTEs required. Develop a spreadsheet model that she can use to easily update the product mix for other months with different numbers of working days. Case Questions 1. Develop a spreadsheet model that Beverly can use to easily update the product mix for other months with different numbers of working days.

The Excel model that follows is part of the OM6 Instructor’s Manual. Blue Note Mortgage TN

Desired Throughput Hours Worked Per Day Days in Month

May 750 7 22

June 825 7 20

July 900 7 22

August 775 7 22 May

Products Product 1 Product 2 Product 3 Product 4 Product 5 Product 6 Product 7 Product 8 Product 9 Product 10 Total

Product Mix 22% 17% 13% 12% 10% 9% 7% 5% 3% 2% 100%

Hours Per File 3.60 2.00 1.70 5.50 4.00 3.00 2.00 2.00 1.50 4.00

Files/Month 165 127.5 97.5 90 75 67.5 52.5 37.5 22.5 15 750

FTE Load FTEs Required

Hours Required 594.00 255.00 165.75 495.00 300.00 202.50 105.00 75.00 33.75 60.00 2286.00 14.84 15

Example Computations for May 22% x 750 = 165 files 3.6 x 165 = 594 hours required 2,286/[7 x 22] = 14.84 June Files/Month 181.50 140.25 107.25 99.00 82.50 74.25 57.75 41.25 24.75 16.50 825.00

Hours Required 653.40 280.50 182.33 544.50 330.00 222.75 115.50 82.50 37.13 66.00 2514.60 17.96 18

July Files/Month 198.00 153.00 117.00 108.00 90.00 81.00 63.00 45.00 27.00 18.00 900.00

August Hours Required 712.80 306.00 198.90 594.00 360.00 243.00 126.00 90.00 40.50 72.00 2743.20 17.81 18

Files/Month 170.50 131.75 100.75 93.00 77.50 69.75 54.25 38.75 23.25 15.50 775.00

Hours Required 613.80 263.50 171.28 511.50 310.00 209.25 108.50 77.50 34.88 62.00 2362.20 15.34 16

2. Use the model to determine how many FTE staff are required in May through August. May - 15 full time employees June - 18 full time employees July - 18 full time employees August - 16 full time employees 3. What types of aggregate planning strategies might Beverly use in this situation? Below are three aggregate planning strategies student may propose to handle this situation. Option 1 – Staff to Peak Demand This option means we hire 18 FTE as quickly as possible to maximize service and labor costs. If maximizing customer service is Blue Notes absolute top priority then we might adopt this strategy but it does maximize labor costs. Option 2 – Pure Chase Strategy This option means we hire and fire for each month to maximize service and minimize labor costs. This strategy is highly disruptive to the workforce and would contribute to low employee morale. It is not recommended. Option 3 –Level Production Strategy With this option we staff to average demand, that is, 812.5 files (750+825+900+775) per month. Therefore, we hire about 16 FTEs (see August computations) and maintain that level of staff capacity during all four months. The case does not give overtime, hire, and fire costs but for May we would be overstaff by 1 FTE, understaffed by 2 FTEs in July and August (need overtime), and in August we are staffed about right. This strategy tries to maximize service while keeping costs lower. It is probably the best choice here given what we know about Blue Note Mortgage. Summary Points and Teaching Strategy A few summary points are as follows: • Exhibit 13.2 applies here since there is no need for intermediate aggregate planning as in manufacturing firms. (Explain why to the students) • The case is simple and considers only workforce level (capacity) changes. There are no cost information cited in the case such as overtime, subcontracting, hire and fire, costs. • You might also point out to students a simple lesson from Chapter 1 regarding the seven differences between goods and services. That is “services cannot be stored as physical inventory.” Staff capacity is the substitute for physical inventory in a service business.

• •

•

The case is about “backroom operations” so there is very little need for employees to have service management skills. The adoption of an aggregate planning strategy should be tied to a rank ordering of competitive priorities. If minimizing cost is #1 than a chase strategy is often best. If customer service is #1 than a staff to peak demand is often best. And, a level production strategy is a compromise between these two extremes. The product mix for service businesses often changes so managers must be prepared for those types of changes too.

Other thought! As we were writing the teaching note for this case, the USA Transportation Security Administration (TSA) was struggling to find enough security screeners for USA airports. The TSA seemed to be surprised by an increase in airline passengers exactly when they were cutting staff! If the TSA (www.tsa.gov/) had forecasts of future airline passenger traffic they could use the simple models here to try to predict future TSA staffing needs.

OM6 – C14 IM

OM6 Chapter 14: Operations Scheduling and Sequencing Discussion Questions 1. Discuss how you decide to schedule your school assignments. Do your informal scheduling rules correspond to any of those in this chapter? Many students will probably recognize that they use a shortest processing time (procrastination!) rule, or an earliest due date to establish priorities, even though they don’t consciously schedule their work. Or a student may make their major and its courses their top priority and sequence other functional areas last. 2. Explain why appointments are necessary for many professional services. (Hint: How do services differ from goods as described in Chapter 1?) List and explain some key issues and decisions that must be addressed in designing appointment systems. Seven differences between goods and services are described in Chapter 1. You might begin discussion of this question by asking students to give examples of professional service organizations (PSOs), such as consulting, accounting, engineering, medical, dentistry, and architectural firms. Several of these differences provide the foundation to answer this question. In fact, one can argue they are even more pronounced for PSO than RSOs (routine service organizations). For example, services cannot be stored as physical inventory. Service capacity is the substitute for physical inventory, and therefore, managers must schedule service capacity to meet demand at the right time in the right amount. Also, the demand for services is more difficult to predict than the demand for goods especially when the customer participates in creating the service process (co-production), and therefore, service demand normally exhibits many peaks, valleys, and irregular patterns. Examples of service demand include retail stores, ambulances, libraries, hospital emergency rooms, hotels, airlines, and consulting services. Finally, service capacity in a PSO is perishable. That is, once a doctor or lawyer does not use an hour of his or her billable idle time, it cannot be stored for later sale—the revenue potential for that hour is lost forever. You can point out to students the box in Chapter 10 from a doctor’s office titled “If You Make a Reservation, Be Sure to Show Up!” 3. Explain how modern vehicle routing and dispatching software and systems can support sustainability goals and objectives. The simple answer is we use fewer resources to accomplish more work. The resources are normally labor such as the number of postal delivery workers or equipment such as delivery trucks. Fewer resources used means less CO2 in the atmosphere and less pollution. For example, assume a swimming pool service-provider cleans and maintains 5,000 pools per week and uses 100 trucks and 150 personnel. Trucks are given a list of customers to visit each day with numerous changes and lots of expediting and phone calls. After a systematic vehicle

OM6 – C14 IM

routing and dispatching system is implemented with GPS capabilities and next customer dispatching, the firm needs only 75 trucks and 75 personnel to do the same work with fewer resources. Fewer trucks mean less pollution. IBM, and many others, offers these types of software systems. A Google search of “vehicle routing and dispatching” results in over 500,000 results such as Paragon routing and scheduling software. Paragon’s web site states “Our range of vehicle routing software options enables you to plan, model and run optimized truck routes that make the best use of your available resources. In doing so you can cut transportation costs, streamline your operation, improve customer service levels, cut CO2 emissions, and meet business targets and distribution KPIs. Paragon vehicle routing systems enable you to enter or import details of your customer addresses, delivery quantities, time windows, vehicle sizes, driver shift details, and other transportation parameters. Our vehicle routing software, powered by an advanced route optimization algorithm, creates optimized, feasible and cost-effective routes and schedules at the click of a button.” 4. Why is staff scheduling in a service environment a difficult task? What can managers do to ensure that staff schedules are effective and efficient? This question differs from #2 in that it includes both RSOs and PSOs. Although similar reasons cited in the answer to #2 help address this question, other issues include the use of multiple shifts, part-time employees, and varying demand. For example, call centers typically operate long hours or a typical two-shift day. Employees often rotate shifts. Many service firms, such as McDonald’s, use part time employees (e.g. students) whose availability varies. This makes it difficult to fill capacity throughout a typical week. Finally, the demand for service workers varies over the course of a day and different days of the week. Matching workers’ availabilities and/or preferences to needs makes scheduling very difficult. The chapter boxes on “Telling Umpires Where to Go” and “Using Spreadsheet Models to Schedule Medical Students” illustrates the complexity of staff scheduling in services. 5. Explain the advantages and disadvantages of SPT and EDD sequencing rules. Under what circumstances might you prefer one over the other? The SPT sequencing rule maximizes workstation utilization and minimizes average job flow time and work-in-process inventory. This is a very powerful sequencing rule. One disadvantage is some long jobs may wait a long time before they get their chance to be processed. The EDD rule matches the promise date for each customer job, and it minimizes the maximum job tardiness and job lateness. The SPT is internally focused whereas the EDD has an external (customer) focus. Problems and Activities

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Note: an asterisk denotes problems for which an Excel spreadsheet template on the OM6 Web site may be used. 1. Write one-page paper listing the advantages and disadvantages of using part-time employees to help meet demand. The main advantage of part-time employees is to help minimize cost. Other advantages include flexibility, screen and on-the-job training of potential full time employees, and meet surges and peaks in demand such as the holiday season for retail stores and post offices. The main disadvantage of part-time employees is do they have adequate production or service management skills compared to full-time employees. If interacting with the customer, the service-providing organization carries the risk of more service upsets and errors than a full time and more experienced staff. Other disadvantages include less motivated and loyal to the organization, lack of customer interaction or technical skills, unfamiliarity with the organization’s goods and services, and they incur more hire, layoff, and training costs per labor hour received. Also, as discussed in question #4 above, the use of part-time employees makes scheduling more difficult. 2. Other than Kroger, research how airlines, car rentals, retail stores, and so on try to manage and minimize customer-waiting time. Prepare a one-page report. The Kroger box is as follows: You probably don’t like to wait in line at a grocery store, especially when the shopper in front of you has a basket full of items! Kroger, headquartered in Cincinnati, Ohio, is a national chain of grocery stores that has addressed this issue using some innovative technology. Kroger uses technology to forecast demand so that managers can better anticipate future needs before the lines grow too long. Their system, called Que Vision, relies on infrared sensors to count the number of customers entering and leaving (and hence, compute the number in the store) and uses analytical models to determine the number of checkout lines they need and to forecast the demand 30 minutes in the future. This information is used to open or close checkout lanes as needed to balance customer-waiting times. Waiting time has dropped from an average of about 4 minutes to under a half a minute A Google search results in over 11 million hits on “customer waiting software” including IBM’s Customer Analytics and Predictive Analytics for Enhanced Customer Engagement. Minimizing customer waiting time is one part of this broader approach to improving and predicting customer experiences. IBMs case studies in different industries are informative and your students may discover these testimonials in a wide variety of industries such as insurance, banking, transportation, government, telecommunications, and industrial goods. And, of course, Disney is a world-class leader in waiting line design, models, behavior, and influencing customer perceptions of waiting.

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Do an Internet search of "vehicle-routing software" and "vehicle routing." Write a two-page report of the capabilities, advantages, and disadvantages of these vehicle-routing and dispatching systems. Provide one or two examples of real-world applications of these systems and the benefits.

A Google search reveals about 900,000 plus hits for “vehicle routing software” so your students have plenty of information to build a short paper upon. Numerous firms provide consulting and software for such purposes ranging from IBM to Route Solutions (www.routesolutions.com). Route Solutions, for example describes the following software. StreetSyncTM Desktop is an affordable and easy-to-use route scheduling software package for your business. Improve fleet efficiency, enhance customer service, and streamline your overall operations with StreetSync. The program utilizes digital maps to help you locate customers, partition your workload, and optimize your route stop sequences. ArcLogisticsTM is a complete solution for complex routing and scheduling problems. Create dynamic routes and schedules to minimize costs and improve customer service using ArcLogistics. ArcLogistics creates optimized routes while accounting for customer time windows, driver skills, order capacities, restrictions, special equipment needs and more. Also, see the answer to Discussion Question # 3 and Paragon’s vehicle routing and scheduling system. ScheduleAnywhere claims on their web site that their software helps reduce overtime by up to 30% and reduce flow time by up to 70%! Their client list is huge and includes Ace hardware, AT&T, British Airways, CBS, Con Edison, Pfizer, Miami Police Department, Harley Davidson, Turner Broadcasting, Sherman Williams, and National Naval Medical Center. 4. Interview an operations manager at a nearby manufacturing or service company to find out about scheduling problems the company faces and how they are addressed. This question can help make the text material relevant and also demonstrate to the student the complexity of real scheduling issues. One point to make in class is that if a company cannot schedule (and compute the proper amount of capacity it needs), it is almost impossible to maximize service and minimize costs. Capacity management and scheduling, OM skills, are where “the rubber meets the road.” Plans are great but then it must be executed, and scheduling and sequencing play a huge role. 5.

A hospital emergency room needs the following numbers of nurses. Day M Min. number 4

T 3

W 2

T 4

F 7

S 8

S 5

Each nurse should have two consecutive days off. How many full-time nurses are required and what is a good nurse schedule?

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Notice this is a difficult target-staffing pattern ranging from a minimum of 4 to 8 nurses. There exist many alternate solutions but here is one. With 8 full-time nurses this schedule exceeds all minimum staffing requirements. Step 1 2 3 4 5 6 7 8

M 4 3 2 1 1 0 0 0

T 3 3 3 2 2 1 0 0

W 2 2 2 2 1 1 0 0

T 4 3 2 2 1 1 0 0

F 7 6 5 4 3 2 1 0

S 8 7 6 5 4 3 2 1

S 5 4 3 2 1 0 0 0

Capacity Check@8 Min Req'd +/- FTE

5 4 +1

4 3 +1

3 2 +1

5 4 +1

8 7 +1

8 8 0

7 5 +1

6. A supermarket has the following minimum personnel requirements during the week. Each employee is required to have two consecutive days off. How many regular employees are required and what is a good schedule?

Day Mon Minimum Personnel 3 Step 1 2 3 4 5 6 7

Capacity Check Min Req'd +/- FTE

Tue 4

Wed 5

Thur 3

Fri 5

Sat 6

Sun 5

M 3 3 2 1 1 1 0

T 4 4 3 2 1 1 0

W 5 4 4 3 2 1 1

T 3 2 2 2 1 0 0

F 5 4 3 3 2 1 0

S 6 5 4 3 2 1 0

S 5 4 3 2 2 1 0

4 3 +1

5 4 +1

5 5 0

4 3

6 5 +1

6 6 0

5 5 0

Seven employees are required, and there are many other alternative staff schedules. 7. These six jobs are to be scheduled on a single machine: Job

3 5

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Processing Time (min.)

100

130

210

150

a. Suppose the jobs are processed in numerical order. Compute the average flowtime after each job is completed. For the sequence 1-2-3-4-5-6 the average flowtime is 456.7 minutes (2,740/6). Sequencing

Job 1 2 3 4 5 6

Processing Time 100 130 210 90 150 80

Average Due Date 0 0 0 0 0 0

Sequence Processing Time 1 100 2 130 3 210 4 90 5 150 6 80

Flowtime Lateness Tardiness 456.67 456.67 456.67

Due Date Flowtime Lateness Tardiness 0 100 100 100 0 230 230 230 0 440 440 440 0 530 530 530 0 680 680 680 0 760 760 760

b. In what order would the jobs be processed using the SPT rule? Compute the average flowtime after each job is completed. Compare this answer with your answer to part a. For the SPT sequence 6-4-1-2-5-3 the average flowtime is 371.7 minutes (2,230/6). The SPT rule minimizes flow time and gets the most work done in the least amount of time. Sequencing

Job 1 2 3 4 5 6

Processing Time 100 130 210 90 150 80

Average Due Date 0 0 0 0 0 0

Sequence Processing Time 6 80 4 90 1 100 2 130 5 150 3 210

Flowtime Lateness Tardiness 371.67 371.67 371.67

Due Date Flowtime Lateness Tardiness 0 80 80 80 0 170 170 170 0 270 270 270 0 400 400 400 0 550 550 550 0 760 760 760

Of course, the longest processing time job waits until the end to be work on and in this problem we have no information on job profitability, due dates, or strategic importance (maybe a Wal-Mart order with the risk of losing all of their orders). 8.*

An insurance claims work area has five claims waiting for processing as follows. Job

Processing Time

Due Date (Di)

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1 2 3 4 5

22 18 20 15 17

35 40 32 28 30

Compute the average flowtime, tardiness, and lateness for the following sequences: SPT sequence, EDD sequence, and the sequence 2-1-5-3-4. What sequencing rule do you recommend and why? SPT sequence: 4-5-2-3-1

Earliest due date sequence: 4-5-3-1-2

Sequence 2-1-5-3-4

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SPT is recommended. It minimizes average flow time and number of jobs in system. Note that the last sequence based on common sense or random sequencing is the worst performer on all criteria, so the job sequencing rule does make a significant difference in insurance firm performance. 9.

Mike Reynolds has four assignments due in class tomorrow, and his class times are as follows. Class Marketing 304 OM 385 Finance 216 Psychology 200

Time 8 a.m. 10 a.m. 1 pm 3:30 p.m.

Each class lasts one hour, and Mike has no other classes. It is now midnight, and Mike estimates that the finance, OM, marketing, and psychology assignments will take him six, three, four, and two hours, respectively. How should he schedule the work? Can he complete all of it?

Job Processing time ------------------------------1 Marketing 4 2 Finance 6 3 OM 3 4 Psychology 2

Due date --------8 13 10 15.5

Using earliest due date (EDD) rule:

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Using shortest processing time (SPT) rule:

Mike will be able to meet all his assignment deadlines using EDD rule. However, the SPT rule will result in 2 assignments being late. 10.*

Eight jobs have arrived in the following order:

Job 1 2 3 4 5 6 7 8

Processing Time 7 3 5 2 6 9 14 4

Due Date 21 7 8 5 17 16 38 12

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Find and compare the average flowtime, lateness, and tardiness for the following sequencing rules: a. Process in the order they have arrived b. Shortest processing time c. Earliest due date Arrival order:

SPT:

EDD:

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11.*

In this chapter we noted that the EDD rule minimizes the maximum job tardiness and maximum lateness while the SPT rule minimizes the average flowtime. However, neither of these rules minimize the average lateness or average tardiness. Use the data in problem 10 to do the following: a. Try to find a sequence that minimizes the average lateness. b. Try to find a sequence that minimizes the average tardiness. c. Can you generalize your logic into a rule or procedure that will accomplish these objectives most of the time? From Problem #10 we know the following: • Sequence 1 to 8 the average lateness 9.5 and tardiness is11.25. • Using SPT the average lateness is 4.88 and tardiness is 5.88 • Using EDD the average lateness is 5.63 and tardiness is 6.25 This question can be addressed by experimentation using the Sequencing spreadsheet template. This can be used as a competitive exercise among individual students or small teams. Using advanced optimization techniques, we found heuristic solutions for average lateness as the sequence 4-2-8-3-5-1-6-7 with average lateness of 4.875; and average tardiness of 5.625 for the sequence 2-4-3-8-5-1-6-7

12.

Monday morning Baxter Industries has the following jobs waiting for processing in two departments, milling and drilling, in that order. Time Required (hours) Job Mill Drill 216 4 7 327 8 10 462 10 3 519 5 6 258 9 12 617 2 7 Develop a minimum makespan schedule using Johnson’s rule. Sequence the jobs in the following order: 617, 216, 519, 327, 258, 462 11

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13. Graph the minimum makespan schedule in Problem 12 on a Gantt chart. MILL time: 0 2 6 11 19 28 38 |--|-----|------|----------|--------|------| job: 617 216 519 327 258 462 DRILL time: job:

0 2 9 16 22 32 44 47 |--|---------|------|--------|------|--------|------| 617 216 519 327 258 462

Makespan = 47 hours (notice that when all jobs finish on the mill, they can immediately begin on the drill. The drill is only idle for 2 hours waiting for the first job. 14. Dan’s Auto Detailing business performs two major activities: exterior cleanup, and interior detailing. Based on the size of car and condition, time estimates for six cars on Monday morning are as shown in the accompanying table.

Exterior Interior

1 50 30

Car Number 3 4 90 65 20 45

2 35 40

5 45 25

6 80 55

(a) Sequence the cars so that all exterior detailing is done first and total completion time is minimized. Since it is a 2-facility, n-job problem, we use Johnson's rule. The processing times are: Job --1 2 3 4 5 6

Exterior -------50 35 90 65 45 80

Interior -------30 40 20 45 25 55

The shortest processing time is for Job 3 at 20 so it is scheduled last. The next shortest is job 5 at 25 minutes so it is next to last. The next shortest time is 30 for Job 1 so it is scheduled third from last since it is on the second machine (interior stage). The next shortest time is Job 2 at 35 minutes so it is scheduled first. The next shortest time is 45 for Job 4 so it is scheduled fourth. Finally, Job 6 is scheduled second. Using Johnson’s rule, we generate the following sequence: 2–6–4–1–5-3

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(b) Draw a Gantt chart and evaluate the idle time. The schedules are shown on the following Gantt charts (timelines are not to scale). Exterior: 0 35 115 180 230 275 365 |***|****|*****|****|***|*******| 2 6 4 1 5 3 Interior (dash single lines are idle time and asterisks are job processing times (2 – 6 – 4 – 1 – 5 – 3) Time ----35***75----115****170---180***225-230*** 260—275**300-------365**385 The idle time adds up to 170 minutes (35+40 + 10 + 5 + 15 + 65) while the actual processing time adds up to 215 minutes (40 + 55 + 45 + 30 + 25 + 20) for the second stage (i.e., the interior). Even for a relatively simple problem structure like this, Johnson’s rule is normally better than common sense scheduling. Also point out to students that using Johnson’s rule provides consistent sequencing logic as opposed to seat-of-the-pants erratic sequencing. 15.

The Naples Newspaper completes production of its daily edition by 5 a.m. A truck picks up pallets loaded with newspapers and delivers them to five neighbor sites, where carriers sort and fold the papers for individual routes. The mileage is shown in the table below. Currently, the truck picks up the number of pallets required by each customer at the factory, delivers them, and then returns to the factory to get the papers for the next customer (i.e., current route 0-1-0-2-0-3-0-4-0). The truck always returns to Scottsville and gets 10 miles per gallon using diesel fuel. A truck can carry up to 16 pallets. A gallon of diesel fuel is $3.00. The newspaper operates 365 days per year.

Factory (0) Scottsville(1) Hudson (2) Bonita (3) Walker (4)

Factory (0) —

Scottsville (1) 20 —

Hudson (2) 11 10 —

Bonita (3) 4 5 9 —

Walker (4) 7 12 3 14 —

Pallets Demanded 10 6 4 8

a. How many miles does the truck travel each day using the current route? What is the total number of miles traveled annually? The current route is 0-1-0-2-0-3-0-4-0. The number of miles per day is 2*20 + 2*11 + 2*4 + 2*7= 84 miles per day. 84*365 = 30,660 miles per year b. Use the Clarke-Wright Method to find a more efficient route.

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i/j 0 0 1 2 3 4

Delivery Distance 1 2 3 20 11 4 10 5 9 -

Demand (Pallets required) 10 6 4 8

4 7 12 3 14 -

We compute the savings between each pair of customers s(i,j) as follows: s(1,2) = t(0,1) + t(0,2) – t(1,2) = 20 + 11 – 10 = 31 s(1,3) = t(0,1) + t(0,3) – t(1,3) = 20 + 4 – 5 = 19 s(1,4) = t(0,1) + t(0,4) – t(1,4) = 20 + 7 – 12 = 15 s(2,3) = t(0,2) + t(0,3) – t(2,3) = 11 + 4 – 9 = 6 s(2,4) = t(0,2) + t(0,4) – t(2,4) = 11 + 7 – 3 = 15 s(3,4) = t(0,3) + t(0,4) – t(3,4) = 4 + 7– 14 = -3 The savings in miles are summarized in the table below: i/j 1 1 2 3 4

2 31 -

3 19 6 -

4 15 15 -3 -

The initial solution is to service all customers from the factory: Routes 0-1-0 0-2-0 0-3-0 0-4-0 Total:

Travel Distance 40 22 8 14 84 miles

Pallets on route 10 6 4 8

Capacity available 16 – 10 = 6 16 – 6 = 10 16 – 4 = 12 16 – 8 = 8

The largest savings is 31 for sites 1 and 2. If these sites are combined on the same route, the total cases on this route would be 10 + 6 = 16, which is equal to the capacity of the truck of 16 pallets; therefore, combine them, resulting in the route 0-1-2-0. The total distance of the route is 20 + 10 + 11 = 31. New solution: Routes Travel distance 0-1-2-0 31 0-3-0 8 0-4-0 14 Total: 53

Cases on route Capacity available 16 16 – 16 = 0 4 16 – 4 = 12 8 16 – 8 = 8

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Note that the total travel distance was reduced by the amount of the savings (84 – 53 = 31). The next largest savings is 19, between customers 1 and 3. However, if we add customer 3 on the route 0-1-2-0, the total pallets for this site (3) would exceed the available capacity (16 pallets); therefore, we do not consider this option. Similarly, the next largest savings of 15 for customers 1 and 4 would also exceed the capacity, as would customers 2 and 4. The other savings is 6 but customer 2 is already assigned to the first route with customer 1. Since the next largest savings is negative (-3), we stop (see Step 3 of the C-W method). The C-W heuristic results in a total distance travelled of 53 miles using one truck that makes two more trips back to the factory to serve four customers. That is, a total of three trips to serve four customers. d. How many miles, gallons, and dollars can be saved per year by adopting the current versus shorter route found by the Clarke-Wright Method? 53*365 = 19,345 miles per year for this shorter C-W heuristic method route 30,660 – 19,345 = 11,315 miles saved per year or at 10 miles/gallon or 1,131.5 gallons per year 1,131.5 gallons per year*$3.00/gal = $3,394.5 saved per year d. How many pounds of gas are emitted into the atmosphere and saved per year using the shortest truck route versus the current truck route? Assume that one gallon of gas generates 15 pounds of carbon dioxide and other global-warming gases from the truck’s tailpipe. (1,131.5 gallons saved/year by shorter truck routes)(15 pounds/gallon) = 16,972.5 lbs of gas Extra Insights Not Assigned in the problem in case a student asks Departing from the C-W heuristic solution shown in (a) to (c) consider the following addition to the C-W heuristic solution. Note that if we decide to combine customers 3 and 4 based on human logic, not the C-W heuristic logic, the total distance is 56: Routes 0-1-2-0 0-3-4-0 Total:

Travel distance 31 25 56

Pallets on route 16 12

Capacity available 16 – 16 = 0 16 – 12 = 4

Here, one truck makes one trip back to the factory to serve four customers, two customers on each route for a total of two round trips. Or one could assume that two trucks are used and each truck makes one trip to serve two customers each. Realize this solution is not based strictly on the C-W heuristic but adds human logic to the final solution. You can quickly compute the cost of traveling an extra 3 miles per day (56 – 53). Cost analysis and whether to use a single or multiple trucks are beyond the logic of the C-W heuristic. The C-W heuristic tries to find the best vehicle route(s) while considering the capacity of the vehicles.

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Case Teaching Note: Greyhound Frequent Flyer Call Center Overview The case begins by the following scenario: “I’m an accounting major, not an operations expert,” yelled just-promoted Bob Barthrow, the Executive Vice President of the Greyhound Frequent Flyer Call Center, during a senior level management meeting. “Bob, Horizon Airlines (HA) is going to stop doing business with us if we don’t provide better call center service. We need to maximize service and minimize costs! So, find a solution to HA’s service problems or we are all out of a job,” stated Adam Bishop, the Chief Executive Officer of Greyhound Call Center Services (GCCS). Bob retreated to his office and closed the door. As he sat in his chair, he thought about the many meetings he had participated in where managers “promised great customer service but could not deliver it.” Upon further reflection, he came to the conclusion that to promise great customer service you first had to know how to analyze resource capacity and develop good schedules. He pulled out his old college operations management textbook and began reading. He also did a Google search on the topics and found several articles to read. He planned on building an electronic spreadsheet analysis of the situation. Student must follow the four-step process described in the case and use Equation 7.2 to baseline current staff capacity and schedules, and then develop a better schedule. Students can normally do the case after having covered Chapters 7 and 10 only. The case takes about 45-60 minutes to do on the board or teams can present the case to the class and the instructor leads the discussion. Note: This case can also be used with OM6 Chapters 7, 10 and/or 13 (see Exhibit 13.2) depending on the judgment and guidance of the instructor(s). The case focuses on staff capacity and scheduling in a call center. Excel models with case data accompany the OM6 Data Workbook files.

Case Decisions Bob decides to answer the following questions and present answers to Adam next week. He knows his accounting but if he is to be promoted, he must also demonstrate to management he can “analyze a process and successfully manage it.” Is the main problem lack of staff capacity or poor scheduling or both? 1. Analyze the case data and current schedule, and answer the following “baseline” questions. What’s labor utilization for each thirty-minute period given their current staffing plan? Is the main problem lack of staff capacity or poor scheduling or both, and can you support you answer with numerical analysis?

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See TN Exhibits A, B &C to answer issues in case question (1). From Exhibit B we see that current CSR utilization ranges for 38% to 160% with high variability—this is evidence of a scheduling problem. From Exhibit B, we also see 163.5 units of 30-minute staff capacity and using Eq. 7.2 we need exactly 168.5 so there is a slight capacity problem. However, when we round up to whole people (CSRs) we need 182 units of staff capacity so we do have a capacity problem too. Some students will round FTE (full time equivalent employees) to 0.5 since with breaks you can have say 1.5 or 4.5 CSRs on duty for a 30-minute time period. So, the baseline analysis indicates both a capacity and scheduling problem. Students will find many clever, and not so clever, ways to identify scheduling and capacity problems. As long as their logic is sound, we give full credit. 2. What is the cost of abandon and busy signal calls for this typical Monday day? Annually? (State and make assumptions as needed). Given the data in the case, 5.4% (103/1,897) of total calls are abandoned and 2.6% (50/1,897) of customers receive a busy signal and hang up for this example one day. Therefore 153 calls potentially result in lost sales now or forever. Students may exclude abandon or busy calls from these “cost of poor service” computations give their assumptions or argument for or against. Estimated Cost of Abandon and Busy Signal Calls per Year = (153 calls/day)(365 days/year)($21/call) = $1,172,745 This assumes the call center is open 365 days per year, the $21 cost of poor service is a good estimate, and this one example day is representative of all days. If the customer never calls back then we have also lost their revenue stream for all future purchases (a big number) and most likely reduced market share. GCCS cannot afford to lose a client. It is a small third party call center contractor. 3. Develop a better CSR staff schedule (see Excel posted current staff schedule) if needed and decide whether they should hire more CSRs or layoff a few. Will you use part-time employees? If so, explain why and justify. See the TN Staff schedule discussion and schedules. Analysis of the Case Data and Exhibits

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TN Exhibit B CSR Demand - Capacity Analysis Time Period

Number of Calls Taken

Number of

6:30 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 12:30 1:00 1:30 2:00 2:30 3:00 3:30 4:00 4:30 5:00 5:30 6:00 6:30 7:00 7:30 8:00 8:30 9:00

15 16 45 60 62 71 77 84 75 81 69 79 66 80 76 92 85 73 78 67 62 54 51 37 48 42 32 26 22 19

Abandon Calls by Customer 0 0 4 5 6 4 5 11 8 4 6 2 3 4 8 6 7 4 2 4 2 1 1 0 3 0 0 2 1 0

Totals Average Std Dev Minimum Maximum

1744 58.1 22.9 19 92

103 3.4 2.8 0 11

Number of Busy Signal Calls Not Taken 0 0 0 0 2 1 0 4 3 3 1 0 2 3 6 7 5 3 3 4 0 0 1 0 2 0 0 0 0 0 50 1.7 2.0 0 7

Total Calls

Equation 7.2

Rounded

15 16 49 65 70 76 82 99 86 88 76 81 71 87 90 105 97 80 83 75 64 55 53 37 53 42 32 28 23 19

Current Number of CSRs On-Duty 2 2 3 5 5 5 5 6 7 7 6 6 6 5 4.5 6 10.5 11 10 7 7 4.5 5 5 4 4 3 4 4 4

Current CSR Utils (%) 0.60 0.64 1.31 1.04 1.12 1.22 1.31 1.32 0.98 1.01 1.01 1.08 0.95 1.39 1.60 1.40 0.74 0.58 0.66 0.86 0.73 0.98 0.85 0.59 1.06 0.84 0.85 0.56 0.46 0.38

Target Number of CSRs@90% + 1.3 1.4 4.4 5.8 6.2 6.8 7.3 8.8 7.6 7.8 6.8 7.2 6.3 7.7 8.0 9.3 8.6 7.1 7.4 6.7 5.7 4.9 4.7 3.3 4.7 3.7 2.8 2.5 2.0 1.7

to Next Highest Number 2.0 2.0 5.0 6.0 7.0 7.0 8.0 9.0 8.0 8.0 7.0 8.0 7.0 8.0 8.0 10.0 9.0 8.0 8.0 7.0 6.0 5.0 5.0 4.0 5.0 4.0 3.0 3.0 3.0 2.0

1897 63.2 26.6 19 105

163.5 5.5 2.2 4 11

28.10 0.94 0.31 0.38 1.60

168.51 5.62 2.36 1.69 9.33

182.00 6.07 2.33 2.00 10.00

Note (+): Standard time of 12.51 calls/CSR/30 minutes. We rounded here to integers but some students will round to one-half FTEs since with breaks you can have say 1.5 or 4.5 FTEs per 30-minute time period. .

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An abandon call means the customer gets into the GCCS call center system but then hangs up for some underdetermined reason. A customer who gets a busy signal because all incoming trunk phone lines are busy cannot get into the GCCS system and therefore hangs up. What is true demand? Arguments can be made both ways but we would say that true demand is total number of calls including abandon and busy signals. Yes some customers call multiple times, hang up and call again, and call later but it is best to slightly overestimate demand by 1% to 3% than underestimate it.

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CURRENT and BLANK STAFF SCHEDULE WORKSHEETS (6:30 am to 2:00 pm) Exhibit 13.20 Greyhound Current CSR Staff Schedule for Horizon Airlines

Service Rep 6:30 7:00 7:30 8:00 8:30 9:00 9:30 10:00 10:30 11:00 11:30 12:00 ####### 1:00 1:30 2:00 1 X--------- ----------------------------------------------------------(----)-----------------------------------(Lunch) (Lunch) ------------------------------------------------(----) ----------------------2 X--------- ---------------------------------------------------------------(----) ------------------------------------------(Lunch) (Lunch) -------------------------------------------(----)---------------3 X--------- --------------------------------------------(----)-------------------------------------------------(Lunch) (Lunch) -----------------------------(----)---------------4 X--------- -----------------------------------(----) --------------------------------------------------------(Lunch) (Lunch) -------------------(----) --------5 X--------- --------------------------------------------------------------------------------------(----)---------------------(Lunch) (Lunch) --------------(----)--6 X--------- -------------------------------------------------------------(----) --------------(Lunch) (Lunch) -------------------(--7 X--------- ----------------------------(----)----------------------(Lunch) (Lunch) --------8 X--------- ---------------------------------(----) -----------------------------(Lunch) (Lunch 9 X--------- -------------------------------------------(----)----- (Lunch) (Lunch 10 11 12 13 Avail CSR (Min) 60 60 90 150 150 150 150 180 210 210 180 180 180 150 135 180 Current # CSRs 2 2 3 5 5 5 5 6 7 7 6 6 6 5 4.5 6 Target # CSRs Short/Excess (-/+)

CURRENT and BLANK STAFF SCHEDULE WORKSHEETS (2:30 PM TO 9:00 PM) Exhibit 3 Current CSR Staff Schedule for Horizon Airlines (continued)

Service Rep 2:30 3:00 3:30 4:00 4:30 5:00 5:30 6:00 6:30 7:00 7:30 8:00 8:30 9:00 Total 1 2 3 ----------- ----------4 ------------------------- ----------5 --------------------------------------6 ------------------------------------------------------------------7 -----(----) ------------------------------------------------------------------- ----------- ----------8 --------------------------------------------------------(----)-----------------------------------------------------------9 ----------- -----------------------------------------------(----) ----------------------------------------------------10 X--------- ----------- ----------- ----------- ----------- (Dinner) (Dinner) ----------- ----------- ----------- (----)------------------ ----------- ----------11 X--------- ----------- ----------- (----)------------------ (Dinner) (Dinner) ----------- ----------- ----------- -----(----) ----------- ----------- ----------12 X--------- ----------- ----------- -----(----) ----------- ----------- ----------- (Dinner) (Dinner) ----------- ----------- ----------- ----------- ----------13 X--------- ----------- ----------- ----------- ----------- (----)------------------ (Dinner) (Dinner) ----------- ----------- ----------- ----------- ----------Avail CSR (Min) 315 330 300 210 210 135 150 150 120 120 90 120 120 120 4,90 Current # CSRs 10.5 11 10 7 7 4.5 5 5 4 4 3 4 4 4 16 Target # CSRs Short/Excess (-/+)

The current staff schedule is 13 employees with 9 full time (FTE greater than 7 hrs plus 1 hr lunch + at least one 15 minute break) and 4 part-time (defined as anything other than full-time). Using part time employees reduces total labor costs including benefits (i.e., the economic incentive to use PT). Students may redefine FT and PT so be ready for it. 20

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The following TN staff schedules show you what to expect from your students. They need to move staff capacity around to meet (match) demand so they can maximize service and minimize costs. They often graph demand and overlay the staff schedule on top of it. Make sure you point out to them that if managers are not capable of creating a good resource schedule it is futile to promise the customer great service. Also, if managers have no idea how to determine capacity and schedule then they often default to “staff to peak demand,” and thereby, maximize service and maximize costs! Students must also address the issues of using full- or part-time employees and the disadvantage of each. Often students use a mix of full and part time to meet demand yet minimize staff costs. They will also be confronted with the significant impact of employee breaks and lunches have on overall cost and service performance. (4) What are your final recommendations? Explain and justify. Students will make a wide variety of recommendations. Typical staffing plans depending on assumptions range from (a) fifty percent full-time and fifty percent part-time employees to meet call center demand, (b) 100% full time, and (c) some mix such as 75% full time and 25% parttime. As long as their logic, presentations, clarity, and so on are sound we normally give full credit. The key lesson is introducing students to this problem structure and confronting them with COST vs. CAPACITY vs. SERVICE tradeoffs. Students identify with call centers as we all interact with them. Other recommendations include: • More service management training of full- and part-time CSRs • Add additional phone line(s) – they could be a bottleneck (out of bounds of case but worth thinking about) • Use automated systems to shift calls to web site solutions or to specialists. • Implement a monthly live Internet chat with GCCS managers and airline call center customers • Eliminate the travel advice option (too time consuming, not GCCS core business) • Monitor and update standards times per call quarterly You will find student graphs of demand and capacity to be very well done and colorful.

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Teaching Approach You might begin class by asking the students if they have experienced service upsets and long waits due to poor capacity or staffing decisions. Let them tell their stories and then ask them “Any idea if the root cause was a capacity or scheduling problem or both? Also, Exhibit 13.2 depicts the big picture service organizations face when doing resource planning. Therefore, you might want to compare Exhibits 13.1 and 13.2 at the beginning of class. Once you have established that only OM skills can create the right mix of capacity and schedules to maximize service and minimize costs one way to continue is to go through the four case questions. Another way is have teams present their case analyses and moderate class discussion. The case takes about 30-60 minutes to do depending on how much you want to cover. Make sure you or your students do a few example computations so all students see how the numbers were found. Have fun! (See one example student team staff schedule for this case on the next page).

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OM6 Chapter 15: Quality Management Discussion Questions 1.

Two of Deming’s 14 Points are Point 8: Drive Out Fear (in the workplace) and Point 4: Stop Making Decisions Purely on the Basis of Cost. Discuss the importance of them to operations managers (as well as all managers) in today’s business environment. Point 8: Drive Out Fear. Fear is manifested in many ways: fear of reprisal, fear of failure, fear of the unknown, fear of relinquishing control, and fear of change. No system can work without the mutual respect of managers and workers. Workers are often afraid to report problems because they might not meet their quotas, their incentive pay might be reduced, or they might be blamed for them. Managers are also afraid to cooperate with other departments, because the other managers might receive higher performance ratings and bonuses, or because they fear takeovers or reorganizations. Fear encourages short-term thinking. Performance metrics, especially those used in public and meetings, should focus on jobs, processes, systems, and not individual performance and people. Fear is a cultural issue for all organizations. Creating a culture without fear is a slow process but can be destroyed in an instant with a transition of leadership and a change in corporate policies. Therefore, today’s managers need to continue to be sensitive to the impact that fear can have on their organizations. Point 4: Stop Making Decisions Purely on the Basis of Cost Purchasing departments have long been driven by cost minimization and competition among suppliers without regard for quality. Deming recognized that the direct costs associated with poor quality materials that arise during production or during warranty periods, as well as the loss of customer goodwill, can far exceed the cost “savings” perceived by purchasing. Thus, purchasing must understand its role as a supplier to production and its impact on the system. Deming also urged businesses to establish long-term relationships with fewer suppliers, leading to loyalty and opportunities for mutual improvement. Management previously justified multiple suppliers for reasons such as providing protection against strikes or natural disasters, while ignoring “hidden” costs such as increased travel to visit suppliers, loss of volume discounts, increased setup charges resulting in higher unit costs, and increased inventory and administrative expense. Most importantly, constantly changing suppliers solely on the basis of price increases the variation in the material supplied to production, because each supplier’s process is different. In contrast, a reduced supply base decreases the variation coming into the process, thus reducing scrap, rework, and the need for adjustment to accommodate this variation. A long-term relationship strengthens the suppliercustomer bond, allows the supplier to produce in greater quantity, improves communication with the customer, and therefore enhances opportunities for process improvement. Suppliers know that only quality goods are acceptable if they want to maintain a long-term relationship. Today’s emphasis on supply chain management (SCM) reflects the achievement of Point 4. SCM focuses heavily on a system’s view

OM6 C15 IM of the supply chain with the objective of minimizing total supply chain costs and developing stronger partnerships with suppliers. 2. How do you think that quality management concepts can support sustainability efforts? Find some sources or examples to support your beliefs. All quality management principles can support sustainability. For example, if we think in terms of customers, then society is an important customer of organizations. Other principles, such as those described by the ISO 9000:2000 standards, are useful for sustainability efforts. For instance, we need a process and metrics (factual approach) to make good decisions; leadership must drive sustainability efforts; an organization’s workforce (people principle) need to be involved, and so on. The International Organization for Standardization has developed a voluntary social responsibility standard, ISO 26000:2010 – Guidance on social responsibility. [ISO 26000:2010 Abstract, www.iso.org] The standard provides guidance on concepts, terms and definitions related to social responsibility; the background, trends and characteristics of social responsibility; principles and practices relating to social responsibility; the core subjects and issues of social responsibility; integrating, implementing and promoting socially responsible behavior throughout the organization and, through its policies and practices, within its sphere of influence; identifying and engaging with stakeholders; and communicating commitments, performance and other information related to social responsibility. CSR has been prominent in the Baldrige Criteria since its inception. [Note: A review of management theories and their relationships with CSR and the Baldrige Criteria can be found in Jessica Foote, Nolan Gaffney, and James R. Evans, “Corporate Social Responsibility: Implications for Performance Excellence,” Total Quality Management & Business Excellence, 21, 8, August 2010, 799-812.] In the initial 1988 Criteria, public responsibility was focused narrowly on mechanisms used for external communication of information concerning corporate support of quality assurance or improvement activities outside the company. Over the next several years, this item was expanded to include how the company extended its quality leadership to the external community and integrated its responsibilities to the public for health, safety, environmental protection, and ethical business practice into its quality policies and activities. This included how the company promoted quality awareness and sharing with external groups; how the company encouraged employee leadership and involvement in quality activities of external organizations; how the company defined and set quality improvement goals, indicators used to monitor quality, and progress reviews. 3. What types of defects or errors might the following organizations measure and improve as part of a quality or Six Sigma initiative? a. a department store such as Wal-Mart or Macy’s Customer complaints by category (checkout, gift wrapping, tailoring, retail clerks, etc.), long wait times, mispriced labels, number of non-scanable items, etc.

OM6 C15 IM b. Walt Disney World or a regional amusement park such as Six Flags Customer complaints by category (ride type, restrooms, food service, tour guides, parking, etc.), long wait times, mispriced store items, customer satisfaction scores by park ride or area, number of stock outs baby carriages, etc. c. your college or university Customer complaints by category (advising, job placement, student health services, college, course, specific faculty, parking, etc.), long wait times, student satisfaction scores, courses closed out, course scheduling conflicts, etc. 4. Explain how each of the 7 QC Tools would be used in the five phases of the Six Sigma DMAIC problem solving approach. For example, in which phase(s) (Define, Measure, Analyze, Improve, or Control) would you expect to use flowcharts, check sheets, and so on? Define: Flowcharts for defining a process; Pareto analysis for identifying significant problems Measure: Check sheets for collecting data; histograms for understanding data Analyze: Flowcharts for more detailed process mapping, cause-and-effect diagrams for analyzing possible causes of problems; Pareto diagrams for drilling down to key problems Improve: Scatter diagrams to verify whether improvements will impact the problem Control: Run and control charts for monitoring how well improvements are performing 5. Which of the Seven QC Tools would be most useful in addressing each of the following situations? Explain your reasoning. a. A copy machine suffers frequent paper jams and users are often confused as to how to fix the problem. Cause and effect diagram to help diagnose the source of the paper jams. (Comment: The focus of this question is to trigger a class discussion of when and where to use the seven QC tools, and depending on student perception(s) there are several tools that could possibly be used in each situation so take a broad perspective on this question.) b. The publication team for an engineering department wants to improve the accuracy of its user documentation but is unsure of why documents are not error-free. Flowcharts to understand the process of creating documents; check sheets and cause and effect diagrams would also be useful to determine the type of errors and their sources. c. A bank needs to determine how many teller positions, drive-through stations, and ATM machines it needs for a new branch bank in a certain busy location. Its information includes the average numbers and types of customers served by other

OM6 C15 IM similar facilities, as well as demographic information to suggest the level of customer traffic in the new facility. Histograms would help to summarize and sort out the data. Scatter diagrams might also help to examine relationships between the variables. d. A contracting agency wants to investigate why they had so many changes in their contracts. They believe that the number of changes may be related to the dollar value of the original contract or the days between the request for proposal and the contract award. Scatter diagrams to investigate the relationship between number of changes and the other variables. e. A travel agency is interested in gaining a better understanding of how call volume varies by time of year in order to adjust staffing schedules. Run charts would show the call volume over time to show patterns and trends. Problems and Activities Note: an asterisk denotes problems for which an Excel spreadsheet template on the OM6 web site may be used. 1.

Find the websites for the W. Edwards Deming Institute, the Juran Institute, and Philip Crosby Associates. What services do they offer? How do these organizations maintain the philosophies and legacies of these quality leaders? The websites are: www.deming.org; www.juran.com; and www.philipcrosby.com. Students should explore them to identify consulting and training, seminars offered, publications, FAQs, and so on. For example, if you Google Mr. Deming you will find over 2 million hits. His teachings are outlined on his web site. The Deming System of Profound Knowledge The following is an excerpt from Chapter 4 of The New Economics, second edition by W. Edwards Deming: The prevailing style of management must undergo transformation. A system can not understand itself. The transformation requires a view from outside. The aim of this chapter is to provide an outside view-a lens-that I call a system of profound knowledge. It provides a map of theory by which to understand the organizations that we work in. The first step is transformation of the individual. This transformation is discontinuous. It comes from understanding of the system of profound knowledge. The individual, transformed, will perceive new meaning to his life, to events, to numbers, to interactions between people.

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Once the individual understands the system of profound knowledge, he will apply its principles in every kind of relationship with other people. He will have a basis for judgment of his own decisions and for transformation of the organizations that he belongs to. The individual, once transformed, will: • • • •

Set an example Be a good listener, but will not compromise Continually teach other people Help people to pull away from their current practice and beliefs and move into the new philosophy without a feeling of guilt about the past

The layout of profound knowledge appears here in four parts, all related to each other: • Appreciation for a system • Knowledge about variation • Theory of knowledge • Psychology One need not be eminent in any part nor in all four parts in order to understand it and to apply it. The 14 points for management (Out of the Crisis, Ch. 2) in industry, education, and government follow naturally as application of this outside knowledge, for transformation from the present style of Western management to one of optimization. 2.

Identify an organization that has achieved ISO 9000 certification and write a short paper (1 page maximum) that summarizes the benefits and results that the organization has achieved using ISO 9000. See if you can find a service organization rather than a traditional manufacturing company. A Google search of “ISO 9000 companies” reveals about 700,000 hits. Students will find firms that achieved good results with ISO certification such as Specialties Graphic Finishers LTD below: One company (http://www.specialtiesgraphics.com/page.php?id=98), Specialties Graphic Finishers LTD, Toronto, Ontario states the following in its ISO introduction. WHAT IS ISO 9000? The ISO 9000 philosophy can be summarized in four steps: 1. 2. 3. 4.

say what you do, do what you say, be able to prove it, and improve it.

OM6 C15 IM ISO 9000 is a rigorous, thorough system of quality assurance standards for both manufacturing and service organizations. These standards were first widely adopted by businesses in the European Economic Community and are now being accepted and implemented by many North American companies. Intended to help businesses improve internal processes through the implementation of effective quality management systems, these standards also give customers a method of comparing competing vendors. For some companies, ISO 9000 has also served as a useful foundation for Total Quality Management (TQM) and other quality improvement programs. At the cornerstone of ISO 9000 is a comprehensive audit and documentation method that covers objectives, production processes, quality policies, job descriptions, organizational charts, customer requirements, quality control procedures, and problem-solving tools. Ideally, all this documentation results in clearly stated quality control instructions that are implemented company-wide. Documentation can take the form of manuals, flow charts, and diagrams. ISO 9000 BENEFITS Companies that adopt ISO 9000 standards offer their customers a reliable, widely accepted yardstick against which to measure performance or quality. Internally, the formalization and standardization of processes helps employees become more productive. As companies clearly document their operating procedures and methodically audit them, the likelihood of employee ambiguity and misunderstanding dramatically diminishes. This helps decrease frustration and allows people to do their jobs more effectively and efficiently. Some large printers have hoisted the ISO 9000 banner because their customers require suppliers to be ISO 9000 certified. As more companies enter international markets, certification, or lack thereof, will become an issue. Even if a printer doesn't have any foreign clients, its customers may, and this exerts pressure on printers to become ISO 9000 certified. The best reason why printers should consider adopting ISO 9000 standards is to meet customer expectations, improve manufacturing processes, reduce waste, and increase profit margins. Also, certification provides a competitive advantage when seeking new business and forming strategic partnerships. As an added bonus, companies discover that ISO 9000 certification helps their marketing efforts. A Different Vantage Point ISO 9000, however, has its critics because it focuses on processes and does not guarantee the quality of the finished product. Detractors have suggested that quality would be measured better through actual product improvements rather than detailed documentation. One author has pointed out that it's possible to comply with ISO 9000 standards and still have inferior products. While this may be possible, it doesn't mean there's anything wrong with ISO 9000 itself, rather the system was never meant to be the answer to all quality issues and business concerns. ISO 9000's true

OM6 C15 IM benefit is that it provides a framework for a comprehensive, long-term quality improvement program. WHY DID SPECIALTIES GET ISO 9000 CERTIFIED? As a post press finishing company, Specialties is at the end of the production chain. The company must respond to the quality expectations, not only of its customers, but also to its customers' customers. To maintain competitive selling proposition, Specialties felt it must meet ongoing market demands for shorter production cycles, seamless client vendor relationships, world-class service, and stringent quality control. The certification process has forced formalization of systems and operating procedures that has improved the quality of services while achieving better productivity. Specialties chose ISO 9000 over competing programs because ISO 9000 focuses on eliminating redundancy and inefficient processes that lead to production mistakes and inconsistencies. In general, the errors of the company's past lay not with its employees, but with the previous production system. For example, some procedures were never carried out the same way twice, nor were they executed in the most efficient manner. The lack of standardized methods left the company vulnerable to errors, oversights, and miscommunication. The ISO 9000 process forced consistent procedural standards, which in turn replaced improvisation with clarity and order. Specialties' system today emphasizes a preventive, rather than a reactive, approach to solving potential production problems. CUSTOMER BENEFITS ISO 9000 standards have led to operational consistency and numerous customer benefits. In the graphic arts industry, consistency is a major component of quality. Since Specialties became ISO 9000 certified, many customers have commented on the company's better quality, improved communication, excellent service, and problem resolution skills. This last result is striking because Specialties employees haven't changed – just the system. THE FINAL WORD No matter how talented a company's workforce is, without standardized procedures and continuous improvement, even the best people cannot deliver consistently outstanding results. ISO 9000 doesn't claim to point companies in the right direction, rather it makes day-to-day operations go more smoothly and efficiently. 3.

Identify an organization that uses the Six Sigma DMAIC improvement approach. Describe (maximum of two pages) some of the ways that this organization has applied DMAIC and the results they have achieved. Many sources provide case studies about Six Sigma. Some include ASQ (www.asq.org), Quality Digest magazine (www.qualitydigest.org), and various consulting organizations such as iSixSigma (www.isixsigma.com). Simple web searches will also uncover numerous sources of information.

OM6 C15 IM 4.

Find two examples similar to the introductory example in this chapter that describe the economic consequences of poor quality. The lead-in story for this chapter is about a problem at General Motors with the engine turning off and disabling the car and air bags. Over 100 people died from this problem and the ultimate cost of poor quality may be over $4 billion! A Google search on “economic impact of poor quality” results in over 17 million hits. The Wikipedia web site (http://en.wikipedia.org/wiki/Cost of poor quality) provides some interesting information.

5.* One industry expert stated that software today has six errors for every 1,000 lines of code. a. Assuming that there is only one opportunity to make an error for each line of code, at what sigma level is the coding process operating? Using the formula NORMSINV (1 – 6/1000) + 1.5 = 4.01, far less than a six-sigma level. It is up to the instructor whether to use and/or explain the use of the Excel function and logic to compute the sigma level. The Excel template Six Sigma can be used to verify these calculations. Copyright © 2016 Cengage Learning Not for commercial use.

Six Sigma Calculations Enter data only in yellow-shaded cells. Number of defects discovered Number of units Number of defect opportunities/unit

6 1000 1

Defects per unit (DPU) Total number of defect opportunities Defects per million opportunities (dpmo) Sigma level

0.006 1000 6000 4.01214433

b. If eight errors are discovered, how many lines of code must there be for the process to be operating at a six-sigma level? This question may be answered by trial-and-error using the Six Sigma Excel template. We can also find the answer exactly using the Goal Seek tool in Excel: set cell B11 to the value of 6 by changing cell B5. This results in the following exact answer: 2,345,414 lines of code (see Excel model that follows!)

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6.* Over the last year, 1,200 injections were administered at a clinic. Quality is measured by the proper amount of dosage as well as the correct drug. In nine instances, the incorrect amount was given, and in two cases, the wrong drug was given. What is the epmo metric and what sigma level does it correspond to? Because each injection has two different opportunities for error, there are a total of 2*1,200 = 2,400 opportunities for error. Thus, epmo = (11/2,400)(1,000,000) = 4,583 errors per million opportunities. The sigma level is =NORM.S.INV(1 – 11/2400) + 1.5 = 4.11. Many students will not see the 2 opportunities for error and use the wrong denominator. Copyright © 2016 Six Sigma Calculations Cengage Learning Not for commercial Enter data only in yellow-shaded cells. use. Number of defects discovered Number of units Number of defect opportunities/unit

11 1200 2

Defects per unit (DPU) Total number of defect opportunities Defects per million opportunities (dpmo) Sigma level

0.00916667 2400 4583.33333 4.10577496

It is up to the instructor whether to use and/or explain the use of the Excel function and logic to compute the sigma level. Here a 4- or 5-sigma level of performance is expected given the potential cost of poor quality (failure).

OM6 C15 IM 7.

Provide some specific examples of quality costs in a fast-food operation or in the operation of your college or university. Classify the costs into the four major categories described in the chapter. Quality costs can be organized into four major categories: prevention costs, appraisal costs, internal-failure costs, and external-failure costs. Prevention costs are those expended to keep nonconforming goods and services from being made and reaching the customer. Appraisal costs are those expended on ascertaining quality levels through measurement and analysis of data to detect and correct problems. Internalfailure costs are costs incurred as a result of unsatisfactory quality that is found before the delivery of a good or service to the customer. External-failure costs are incurred after poor-quality goods or services reach the customer. Students should provide examples similar to those in the text but for an organization they may be more familiar with, namely a fast food operation or the university. Some examples might be: Prevention: training fast food workers and college advisors; setting up and updating information systems Appraisal: double-checking food orders or student course choices to ensure they meet the requirements for a degree Internal-failure: discarding a food order that is prepared wrong before handing it over to the customer; wrong set up of computer lab equipment prior to the school year discovered during testing External failure: re-doing a food order if the wrong item was given to a customer; recording the wrong grade in a final grade list

The following list gives the number of defects found in 30 samples of 100 electronic assemblies taken on a daily basis over one month. Plot these data on a run chart, computing the average value (center line). How do you interpret the chart? 1 6 5 5 4 3 2 2 4 6 2 1 3 1 4 5 4 1 6 15 12 6 3 4 3 3 2 5 7 4 The average is 4.3. The chart shows an unusual spike at observations 21 and 22, which may be indicative of a special cause, even without calculating control limits. (You may want to explain to students that the 4.3 defects is an estimate of process capability. That is, on average this process produces 4.3 defects per day. Continuous improvement could set reduction targets like 3.5 next year, 3.0 the year after, etc.)

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16 14 12 10 8 6 4 2 0 1

11 13

15 17 19 21

23 25 27

Develop cause-and-effect diagrams for any one of the following problems: a. poor exam grade b. no job offers c. too many speeding tickets d. late for work or school There is no one correct answer for these diagrams but you will find some student diagrams to be quite good. This assignment allows students to apply quality improvement tools to personal situations that they know about. Emphasize and check that each major cause-and-effect branch should have a major category such as labor, equipment, process/procedures, technology, materials – each with several possible sub-root causes.

10. Find two examples (different from the ones in this chapter) of how check sheets have been applied in an organization. A Google search results in about 79,000 hits on the term “check sheets.” A quick review of some of these hits include the following using check sheets: universities (advising, graduation, curriculum, science experiments, etc.) and manufacturing (sales orders, quality control, lean manufacturing, accounting audits, start-up a production process, safety audits, and so on). 11.* Analysis of customer complaints at an e-commerce retailer revealed the following: Billing errors 537 Shipping errors 2,460 Electronic charge errors 650 Shipping delays 5,372 Packing errors 752 Construct a Pareto diagram and discuss the conclusions you may draw from it. Using the Excel template Pareto, we obtain: 11

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We see that shipping delays (39% of errors) and packing errors (24%) account for the majority of customer complaints; these should be the focus of improvement activities. If you fix these two root causes you solve more than 60% of customer complaints. 12.*

Classify the following cost elements into the appropriate cost of quality categories, prepare a Pareto chart for the categories, interpret the results, and provide recommendations. Cost Element

Amount

Customer complaint remakes Printing plate revisions Quality improvement projects Gauging Other waste Correction of typographical errors Proofreading Quality planning Press downtime Bindery waste Checking and inspection

$ 81,000 28,000 14,000 90,000 39,000 55,000 350,000 57,000 185,000 53,000 42,000

Cost classification: Customer complaint remakes EXTERNAL FAILURE $ 81,000 Printing plate revisions INTERNAL FAILURE 28,000 Quality improvement projects PREVENTION 14,000 Gauging APPRAISAL 90,000 Other waste INTERNAL FAILURE 39,000 Correction of typographical errors INTERNAL FAILURE 55,000 Proofreading APPRAISAL 350,000

OM6 C15 IM Quality planning Press downtime Bindery waste Checking and inspection

PREVENTION 57,000 INTERNAL FAILURE 185,000 INTERNAL FAILURE 53,000 APPRAISAL 42,000

Total Prevention costs: $71,000 Total Appraisal costs: $482,000 Total Internal failure costs: $360,000 Total External failure costs: $81,000 Total Quality Cost: $994,000 Pareto Chart Enter names in column A and frequencies in column B. Enter data only in yellow cells; the template will chart up to 10 items. Then use the Excel sort procedure to sort the data in columns A and B only from largest to smallest on column B. Name Internal failure Appraisal External failure Prevention

Amount

Percent of Total 360000 482000 81000 71000

Total

994000

36.22% 48.49% 8.15% 7.14%

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Pareto Chart 600000 500000

Frequency

400000 300000 200000 100000 0

Although external failure costs are relatively small (8.2%), the company is incurring extensive costs for appraisal and internal failure (36.2% + 48.5% = 84.7%). Prevention costs are low (7.1%), suggesting that more effort be spent on preventing defects and waste. You may want to discuss “company cost of quality profiles” with this problem such as what does is say about a company with say 0% prevention costs, 25% appraisal costs, and 37.5% each for internal and external costs. Or the reverse such as a world class company where prevention costs might be 55%, 40% appraisal costs, and 2.5% each for internal and external costs 13.*

The following cost of quality data were collected at the installment loan department of the Kenney Bank. Classify these data into the appropriate cost of quality categories and analyze the results. What suggestions would you make to management? Loan Processing 1. Run credit checks: $2,675.01 2. Review documents: $3,000.63 3. Make document corrections; gather additional information: $1,032.65 4. Prepare tickler file; review and follow up on titles, insurance, second meetings: $155.75

OM6 C15 IM 5. 6. 7. 8. 9. 10.

Review all output: Correct rejects and incorrect output: Reconcile incomplete collateral report: Handle dealer problem calls; address associate problems; research and communicate information: Compensate for system downtime: Conduct training:

$2,243.62 $425.00 $78.34 $2,500.00 $519.01 $1,500.00

Loan Payment 1. Receive, inspect, and process payments: $800.00 2. Respond to inquiries when no coupon is presented with payments: $829.65 Loan Payoff 1. Receive, inspect, and process payoff and release documents: $224.99 2. Research payoff problems: $15.35 Classification: Credit checks Review documents Make corrections Prepare tickler file Review output Correct rejects Reconcile incomplete report Handle dealer calls Compensate for system downtime Conduct training Receive and inspect payments Respond to inquiries Receive and inspect release documents Research payoff problems

Appraisal $2,675.01 Appraisal $3,000.63 Internal failure $1,032.65 Appraisal $155.75 Appraisal $2,243.62 Internal failure $425.00 Internal failure $78.34 External failure $2,500.00 Internal failure $519.01 Prevention $1,500.00 Appraisal $800.00 External failure $829.65 Appraisal $224.99 External failure $15.35

Total Prevention costs: $1,500 Total Appraisal costs: $9,100 Total Internal failure costs: $2,055 Total External failure costs: $3,345

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Appraisal activities appear to be keeping failure costs relatively low; however, better prevention should allow the company to reduce appraisal and save a substantial amount of cost. 14. Describe some examples of poka-yoke in consumer products or manufacturing or service processes different from the ones cited in the chapter. Poka-yoke (POH-kah YOH-kay) is an approach for mistake-proofing processes using automatic devices or methods to avoid simple human error. Students can find numerous examples similar to those described in the text, and should try to derive new applications in their own lives. Some examples might be creating a checklist for studying for an exam, setting an alert on a cell phone before class as a reminder to put it on vibrate, coffee pots that shut off after a predetermined amount of time, backing up your hard drive automatically, etc. My favorite poka-yoke is ask students how many different ways they can insert their flash drive into their PC or camera card into their digital camera? 15. Refer to the automobile repair flowchart in Exhibit 7.5 in Chapter 7. Identify three activities where a potentially serious service error may occur, suggest performance measures for each of these three activities in the flowchart, and poka-yokes that might prevent such errors from occurring. One of the most obvious potential errors is the accuracy of the mechanic diagnosing the problem (s). Missing a serious problem or misdiagnosing it could lead to an accident, even death. Metrics such as the number of call backs or returns or warranty claims per mechanic could be used in individual annual reviews and future training requirements. The best poka-yoke is expert training and hiring of

OM6 C15 IM outstanding mechanics. Other poka-yokes might include checklists, double mechanic sign off on the diagnosis for safety related problems, and software that checks and rechecks systems and does its own independent analysis. Accurate bills and customer appointments are other good points in the flowchart to address poka-yoke issues. Automobile part(s) availability is also critical since we do not want the customer and/or the vehicle to arrive only to find out we are short a part.

Case Teaching Note: Sunshine Enterprises Overview An entrepreneur, Abby Martin, must make short- and long-term decisions about how to manage and grow her restaurant business. The short-term issue is how to handle an extra $25 tip on a customer’s bill the customer says he did not authorize. The long-term decision is whether to pursue an aggressive growth strategy by adding twenty restaurants, do nothing, or something in between. Also, enough information is available in the case to compute the value of a loyal customer. The case assignment questions focus the student’s attention of these issues. Students are asked to draw a cause-and-effect diagram (Chapter 15) and compute the value of a loyal customer (Chapter 3). The first case question can be eliminated if you have not covered Chapter 15, the third question can be eliminated if you have not covered Chapter 3. This case takes about 45 minutes to teach on the board. Case Questions and Brief Answers 1. Draw a cause-and-effect diagram for the possible causes of the $25 tip service. Select one possible root cause from your diagram and explain how you would investigate and fix it. The case presents the following information w/r to possible causes of the $25 tip service upset. • The customer is responsible to tip properly, add the bill and tip correctly, write legibly, retain the second receipt, and drink alcohol responsibility. • The employee is responsible to type the bill in the register/computer correctly, go back to the customer if the tip is unreadable and verify the correct amounts, and to be honest. • The restaurant manager is responsible to investigate the store’s receipt history and find this transaction, audit the source of the error if possible such as a miss-typed decimal or extra zero, and contact the Credit Card Company and customer to resolve the issue. • The credit card company, a third party provider in this value chain, is responsible to provide records of the electronic transaction, help resolve the issue, and issue a debt or credit to the customer and/or restaurant if needed.

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The cause-and-effect diagram (not shown) should have at least four major branches – customer, employee, manager, and credit card Company with appropriate subbranches. The fishbone diagram provides a “framework for root cause analysis.” Students may add other sub-branches and possible root causes based on their experience. Ideally a team of employees would work on eliminating certain sub-causes by their research and identify a couple of potential major root causes. For example, if the restaurant manager finds the signed sales receipt and it shows a $2.50 tip then it is likely the employee typed it in the register wrong. If this is the “root cause” then one possible action plan is to (a) credit the customer’s credit card for $22.50, (b) call the customer and apologize and explain the tip was typed in incorrectly by the waiter, (c) mail this customer coupons for a free dinner for the inconvenience this service upset caused (i.e., service recovery discussed in Chapter 6) and (d) thank the customer for their business. Another poka-yoke is to set up the software so the waiter/waitress has to put the tip amount in twice much like with PC passwords. 2. What is the average value of a loyal customer (VLC) at Abby’s restaurants (see Chapter 3)? What is the best way to increase revenue given your VLC analysis? If you do not cover OM2 Chapter 3 then skip this assignment question. There is more VLC analysis here than you should expect from the students except maybe honor students. Lunch prices - $10 to $20 and dinner prices $20 to $30 so if we assume lunch and dinner are equally likely the average meal price is ($15 + $25)/2 = $20. The contribution margin to profit and overhead is 35 percent. The repurchase frequency is once every two months or 6 and the customer defection rate averages 7.5% so the buyers life cycle is 1/defection rate = 1/.075 = 13.3 years. In Chapter 3 the equation is VLC = P*CM*RF*BLC (Equation 3.2) so as a base case we have VLC = ($20)(.35)(6)(13.3) = $558.6 per year. Therefore, Sunshine restaurants enjoy a high VLC with considerable loyalty and repeat business. It pays to have loyal customers. VLC numbers are averages and include seasonal as well as local customers. One way to improve this VLC analysis would be to do a survey of seasonal versus local customers and see more precisely the relative size of the local versus seasonal revenue sources. The Excel table below summarizes a few “what if” w/r to the VLC. Example Data Table "What Ifs" w/r to Repurchase Frequency and Customer Defection Rate 560 1

0.02 560 1 2

0.02 $350 $700

0.04 $175 $350

0.06 $117 $233

0.075 $93 $187

0.08 $88 $175

0.1 $70 $140

0.12 $58 $117

0.0

$17

OM6 C15 IM 3 4 5 6 7 8 9 10 11 12

$1,050 $1,400 $1,750 $2,100 $2,450 $2,800 $3,150 $3,500 $3,850 $4,200

$525 $700 $875 $1,050 $1,225 $1,400 $1,575 $1,750 $1,925 $2,100

$350 $467 $583 $700 $817 $933 $1,050 $1,167 $1,283 $1,400

$280 $373 $467 $560 $653 $747 $840 $933 $1,027 $1,120

$263 $350 $438 $525 $613 $700 $788 $875 $963 $1,050

$210 $280 $350 $420 $490 $560 $630 $700 $770 $840

$175 $233 $292 $350 $408 $467 $525 $583 $642 $700

One lesson from this type of analysis is at one visit per year and a 12% customer defection rate the VLC is only $58 while at 12 visits per year and a defection rate of only 2% the VLC jumps to $4,200. It pays to provide excellent food and service quality as captured by these two VLC variables, and of course, service management skills are needed to do this. Great food and service pay off!!! The following Excel Data Table shows that price is a more powerful variable in the VLC computations than decreasing operating costs (i.e., increasing contribution to profit and overhead). For example, if Abby could increase prices by an average of $5 to $25 per meal AND decrease operating costs by 5% (i.e., increase the contribution margin to 40%) all else remaining the same, then the VLC goes from the base case of $560 to $800. These types of numbers can be multiplied by customer counts to get an estimate of total revenue for different action plans. Example Data Table "What Ifs" w/r to Price and Contribution Margin

$560 $10 $15 $20 $25 $30 $35 $40

0.2 $160 $240 $320 $400 $480 $560 $640

0.25 $200 $300 $400 $500 $600 $700 $800

0.3 $240 $360 $480 $600 $720 $840 $960

0.35 $280 $420 $560 $700 $840 $980 $1,120

0.4 $320 $480 $640 $800 $960 $1,120 $1,280

0.45 $360 $540 $720 $900 $1,080 $1,260 $1,440

0.5 $400 $600 $800 $1,000 $1,200 $1,400 $1,600

These data tables are for faculty; undergraduates are not expected to do such tables; MBAs maybe. 3. Critique the current “informal” quality control system. What changes and improvements do you recommend if Sunshine expands to 20 restaurants? The current quality control system is typical of entrepreneurs with a limited number of sites. They focus on face-to-face interaction with customers and employees, and audit food and service quality, as well as sales and financial results. The approach to quality control is more informal and inherent in the entrepreneur hands-on approach.

OM6 C15 IM Abby analyses customer faces, posture, and body language – a behavioral approach. One advantage of Abby’s direct oversight is problems are not distorted by the chain of command in Abby’s informal QC system. As the business grows and adds more sites, the nature of the quality control function changes considerably. Firms like McDonalds and Bonefish define and monitor quality and customer service more formally with standardized performance measure systems, required employee training courses on topics like empowerment and statistical quality control, structured recognition and reward systems, and so on. One idea is to read the paragraph in the case on how Abby informally monitors quality in her restaurants now and then compare to a more formal McDonald’s type of approach. One way to provide a framework for deciding whether to expand to twenty sites or not is to draw the following diagram on the board, explaining it as you go (optional).

Strategy A

Strategy C

Number of Sites

Strategy B Number of Site Goods & Services Strategy A is to keep the number of goods and services roughly constant and expand the number of sites. McDonald’s and others fit this general strategy using a great deal of standardization in all their systems (accounting, operations, training, human resource management, marketing, equipment and facility design, and so on). Once the goods and services bundle is basically set including facility design and layout, this is a “cookie cutter” approach to growth. Strategy B is to keep the number of sites roughly constant and focus on providing superior goods and services. This is the strategy that Abby adopted. For Sunshine Enterprise’s six restaurants this includes high food and service quality, clean facilities, music, and bands on many nights. Quality is the #1 competitive priority for Sunshine.

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There are many successful businesses that have followed Strategy A or B. Strategy C is difficult, if not impossible, to implement successfully. Here, a business is constantly changing their goods and services bundle, operating systems, and facility design and layout while expanding to more and more sites. It is a recipe for failure. Webvan is an example of a failed business using Strategy C. Quality control is quite different for an organization with hundreds or thousands of sites. The small entrepreneurial business uses a more informal approach whereas larger organizations must use much more formal systems such as at Burger King, McDonald’s, and Outback. Whether to franchise or not is another management growth decision. Strong franchising agreements allow the business to grow more rapidly than they otherwise could. A strong corporate quality control monitoring system must be in place for franchising to work effectively. 4. What are your short- and long-term recommendations? Explain your rationale for these recommendations. Students must decide exactly how to handle the service upset, whether to expand or not and by how much, and what is the best way to increase restaurant revenues. Short-term Actions • Resolve the $25 tip service upset (how, step by step, who does what and when) • Disseminate what was learned w/r to the $25 tip upset to all six restaurant sites • Use Seven Tools and check sheets for restaurant quality control (train, teams, etc.) • Look for ways to increase the value of a loyal customer • Do a short customer survey that sits on each table (design, collect, and analyze by restaurant) • Begin to build a data base on types of customers per restaurant and demand patterns, and type of service upset and how resolved by store Long-term Actions • Hire secret dinner’s to audit restaurant performance – food and service quality •

Develop written procedure manuals and job descriptions and performance standards especially if they expand

•

Install an electronic billing system

•

Maybe purchase some of this cheap land now but do not build restaurants yet.

•

Work toward a more formal and standardized restaurant control system IF Sunshine expands.

OM6 C15 IM •

Train other managers to do Abby’s job (succession development and planning)

Postscript (you may or may not want to reveal this) The short-term service upset was solved by the following action (service recovery) plan. (1) The restaurant manager investigated the $25 tip error and found the waiter had miss-typed it in the register. (2) The manager credits the customer’s credit card for $22.50. (3) The customer was called and the manager apologized, obtained the customer’s address and mailed him a free lunch/dinner coupon. (4) The waiter was a core member of their staff and the manager believed the service upset was an honest mistake so no action was taken against the employee. (5) All restaurant managers were informed of the service upset and all employees were told to double check bills and tip amounts when possible (i.e., disseminate this service upset and recovery lesson at one site to all sites, learn from mistakes). Abby Martin, the entrepreneurial owner of six restaurants and a hotel, decided not to expand on the west coast of Florida over the long-term. She decided that the current size of her businesses allowed her to monitor, control, and manage them effectively. If they expanded to more restaurants she recognized accounting and financial control systems would need to be standardized, marketing and advertising would need a corporate and local emphasis, and operating and training policies and programs would need to be standardized. It was best to focus on a fixed set of business sites and do the very best with building customer loyalty and increasing revenue, and build capability for the next business cycle upturn. The management and system skills to manage a few sites (Sunshine Enterprises) versus multiple sites (McDonald’s, Olive Garden, etc.) are very different. Many entrepreneuriers make the fatal mistake of expanding sites rapidly without adequate controls or losing control due to weak franchise agreements. Abby recognized these pitfalls of expansion and focused on premium service at a small number of sites that were controllable and profitable. One lesson is an informal quality control approach/system is not scalable to multiple sites!

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OM6 Chapter 16: Quality Control and SPC Discussion Questions 1. Think about the net promoter score question, "What is the likelihood that you would recommend a company such as a restaurant, airline, or online service?" What factors would drive you to give a 9 or 10 to this question? Base your answer on a specific product or service encounter that you have experienced. The text describes net promoter scoring as follows: Today, many firms use a metric called the net promoter score (NPS) , which was developed by (and is a registered trademark of) Fred Reichheld, Bain & Company, and Satmetrix, to measure customer loyalty. The metric is based on one simple question, “What is the likelihood that you would recommend us?” evaluated on a scale from 0 to 10. Scores of 9 or 10 are usually associated with loyal customers who will typically be repeat customers (“promoters”); scores of 7 or 8 are associated with customers who are satisfied but may switch to competitors (“passives”); and scores of 6 or below represent unhappy customers who may spread negative comments (“detractors”). Promoters are less price sensitive and are more profitable, whereas detractors are more price sensitive, defect at higher rates, and consequently are less profitable. NPS is the difference in the percentage of promoters and detractors, and is claimed to correlate strongly with market and revenue growth. Scores exceeding 50 percent are considered good, and outstanding companies often have scores in the 70 to 90 percent range. Students will provide many examples and the question forces them to “identify key performance criteria.” For example, some of the criteria for judging airline performance are: price, convenience of the flight schedule (i.e., not overnight, takeoff at 6 am or midnight), cost to check baggage (if any), whether seats are assigned or open for all, ontime reliability, layover time, loyalty programs, VIP airport lounge, employee empathy and friendliness, safety record, availability of Wi-Fi and other entertainment options, food, and so on). 2. Discuss some examples of common and special causes of variation in your daily life (for example, at school or at home). Special (or assignable) cause variation arises from external sources that are not inherent in the process, appear sporadically, and disrupt the random pattern of common causes. Common cause variation is the inherent way the process is design and what it is reasonably capable of. One example is commuting to and from school or work; common causes would include traffic lights, variations in traffic volumes, slight differences in departure times, and so on; special causes would be traffic accidents or severe weather. Other examples students might cite are variation in food served in restaurants (amount of fries or pizza toppings) that would vary because of common causes in food preparation; or missing items stemming from such special causes as a new chef.

OM6 C16 IM 3. Hospital administrators wanted to understand and better control the waiting time of patients in the emergency department (ED). To do this, they constructed x-bar and Rcharts by sampling the waiting times of the first five patients admitted to the ED at the beginning of each shift (7 a.m., 3 p.m., and 11 p.m.). What do you think of this approach? Will it provide the information the hospital administrators seek? How might the sampling process be improved, and what would you recommend? This was an actual experience encountered by one of the authors. The purpose of control charts is to understand the state of the process over time. Clearly 3 samples per day is insufficient for such a dynamic activity as an emergency room, as the patient demand will most likely fluctuate significantly over the course of a 24 hour day (rush hour accidents, sports injuries on the weekends, etc.). Also, shift changes usually have different characteristics as nurses transfer information to new shifts, which might increase the wait at those points in time. A better sampling process would be to sample patients on an hourly basis, for example. If sampling costs are high then every other hour. Another reasonable sampling plan suggested by students is to sample each shift at the beginning, middle, and end of their shift resulting in a total of 9 samples per day. 4. Suppose that you were monitoring the time it takes to complete order transactions at a call center. Discuss what might cause such out-of-control conditions as a trend, shift in the mean, or cycles in an x-bar chart in this situation. An upward trend might occur as time passes during the day and more and more people begin to call in. A shift in the average time might be the result of a new employee, new technology, or new training. Cycles can occur over time because more people may call during lunch time or early evening hours and few would call early in the day, during working hours, or late at night. 5. Find a customer satisfaction survey from a restaurant or a hotel. How do the questions relate to the five dimensions of service quality introduced in Chapter 2? Discuss how the survey results could be used to control quality. What types of quality control charts might be used?

Service quality is consistently meeting or exceeding customer expectations (external focus) and service delivery system performance (internal focus) for all service encounters. Many companies, including Amazon.com, Federal Express, and Nordstrom, have worked hard to provide superior service quality to their customers. Service-quality measures are based primarily on human perceptions of service collected from customer surveys, focus groups, and interviews. Chapter 3 introduced these five key dimensions to assess service quality; items in the survey are listed as they reflect these dimensions: 1. Tangibles—Physical facilities, uniforms, equipment, vehicles, and appearance of employees (i.e., the physical evidence).

OM6 C16 IM Cleanliness Restrooms clean & supplied? Dining area & utensils clean? Portions Taste Atmosphere 2. Reliability—Ability to perform the promised service dependably and accurately. Was the service prompt? 3. Responsiveness—Willingness to help customers and provide prompt recovery to service upsets. Service 4. Assurance—Knowledge and courtesy of the service providers, and their ability to inspire trust and confidence in customers. 5. Empathy—Caring attitude and individualized attention provided to its customers. Employee attitude Most questions deal with tangibles of the food and restaurant. There are no specific questions on assurance (for example, was the server able to answer questions about the menu?) Charts might be used to monitor the ratings, such as proportion of “excellent” ratings, or the average responses if translated into a simple 1- 4 numerical scale. Problems and Activities Note: an asterisk denotes problems for which an Excel spreadsheet template on the OM6 Web site may be used. Problem data sets are also available on the OM6 Web site. 1.

Develop a “personal quality checklist” on which you tally nonconformances in your personal life (being late for work or school, not completing homework on time, not getting enough exercise, and so on). What type of chart would you use to monitor your performance? This idea was promoted by an AT&T executive as a means of getting himself (and later other employees) to think about their personal performance. See Harry V. Roberts and Bernard F. Sergesketter, Quality is Personal: A Foundation for Total Quality Management, New York: The Free Press, 1993. A c-chart might be used to count the number per day.

Bill & Becky Travel, Inc. is a full service travel agency. Data in the worksheet C16P2 in the OM6 Data Workbook shows results for the question “Would you recommend us to a 3

OM6 C16 IM friend?” from 200 customers who were sampled during one week. Count the number of responses at each level (1 through 10) and determine the number of and percentage of customers at the promoter, passive, and detractor levels. The original data is for 200 customers and the first ten observations are as follows. Bill & Becky Travel Customer Number

NPS Rating 9 9 7 8 6 7 7 7 6 8

1 2 3 4 5 6 7 8 9 10

The net promoter score (NPS) and results are as follows. Rating Number 1 1 2 2 3 3 4 5 5 9 6 22 7 26 8 25 9 50 10 57

Detractors Passives Promoters NPS

42 51 107

21.0% 25.5% 53.5%

32.5%

The percentage of detractors and passives are rather high (46.5%) and the NPS is 32.5%, indicating that the company should focus more on its customers to exceed their expectations and provide a better experience. Scores over 50% are considered good and top industry performers NPS scores are in the 70 to 90% range. 3.

Thirty samples of size 4 of the customer waiting time at a call center for a health insurance company resulted in an overall mean of 14.7 minutes and average range of 0.9 minutes. Compute the control limits for x - and R-charts. From Appendix B: With n = 4 then A2 = 0.729, D3 = 0, D4 = 2.282 4

OM6 C16 IM For the R-chart: UCL= 2.282(0.9) = 2.0538 LCL = 0 For the x chart: UCL = 14.7 + 0.729(0.9) = 14.7 + 0.656 = 15.356 LCL = 14.7 - 0.729(0.9) = 14.7 – 0.656 = 14.04 4.* Thirty samples of size 3, available in the worksheet C16P4 in the OM6 Data Workbook were taken from a machining process over a 15-hour period. Construct control charts using the Excel template xBar&R-chart. Verify the Excel calculations of the control limits by hand using the formulas in the chapter. Does the process appear to be in statistical control? Why or why not? Mean = 3.624; Average range = 0.682; A2 = 1.023; D4 = 2.574 x-bar chart: LCL = 3.624 – 1.023*.682 = 2.927 UCL – 3.624 + 1.023*.682 = 4.322 R-chart: LCL = 0 UCL = 2.574*.682 = 1.755 Portions of the spreadsheet template are shown below:

OM6 C16 IM

The R-bar chart appears to be in statistical process control but the x-bar chart seems to have a shift up (for the last 10 samples). The company might want to investigate why this is happening. 5.*

Tri-State Bank is investigating the processing time for loan applications. Samples were taken for 25 random days from 4 branches. These data can be found in the worksheet C16P5 in the OM6 Data Workbook. Construct control charts using the Excel template xBar&R-chart. Verify the Excel calculations of the control limits by hand using the formulas in the chapter. Does the process appear to be in statistical control? Why or why not? Portions of the spreadsheet template are shown below:

LCLx-bar Center UCLx-bar

7.19928 18.63 30.06072

OM6 C16 IM

LCLrange Center UCLrange

0 15.68 35.78176

The average processing times (x-bar chart) are quite consistent; however, there appears to be considerable variability in the R-chart among the branches. The last R-bar chart sample is outside of the control limits. Ask your students “What might cause the R-chart variability?” Closer inspection of the data will reveal significant differences in the processing times for different branches; branch 3, for example, has longer processing times, and the differences should be investigated. 8

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Twenty-five samples, each consisting of 200 loan applications at a bank, resulted in a total of 40 applications that had some type of error. Compute the control limits for a pchart. p-bar = 40/[(25)(200)] = 40/5,000 = 0.008 standard deviation = sqrt[0.008(1-0.008)/200] = .0063 UCL = .008 + 3(.0063) = 0.0269 LCL = .008 – 3(.0063) = -0.0109 so set LCL = 0

7.* Eightly insurance claim forms are inspected daily for 25 working days, and the number of forms with errors are recorded in the worksheet C16P7 in the OM6 Data Workbook. Construct a p-chart using the Excel template p-Chart. Verify the Excel calculations of the control limits by hand using the formulas in the chapter. If any special causes are identified, remove them from the data and construct a revised control chart. p-bar = 48/[(80)(25)] = 0.024 standard deviation = sqrt[.024(1-0.024)/80] = .0171 UCL = .024 + 3(.0171) = 0.0753 LCL = .024 - 3(.0171) = -0.0273 so set LCL = 0 On average, this insurance claim process generates 2.4% errors. Portions of the Excel template are shown below (differences in formula calculations due to rounding):

Attribute (p) Chart

Fraction nonconforming Lower control limit

Fraction nonconforming

0.1400 0.1200 0.1000

0.0800 0.0600 0.0400 0.0200 0.0000

1 3 5 7 9 1113151719212325272931333537394143454749

Sample number

OM6 C16 IM

p-Chart This spreadsheet is designed for up to 50 samples. Enter data only in yellow cells. Some resizing or rescaling of the chart may be needed. Sample size Number of samples Average (p-bar)

0.024

Sample 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Number Nonconforming 2 1 0 3 0 1 0 2 0 1 3 0 10 2 1 4 0 3 8 1 0 2 0 2 2

80 25

Fraction Standard Nonconforming Deviation LCLp CL UCLp 0.0250 0.017111 0 0.024 0.0753 0.0125 0.017111 0 0.024 0.0753 0.0000 0.017111 0 0.024 0.0753 0.0375 0.017111 0 0.024 0.0753 0.0000 0.017111 0 0.024 0.0753 0.0125 0.017111 0 0.024 0.0753 0.0000 0.017111 0 0.024 0.0753 0.0250 0.017111 0 0.024 0.0753 0.0000 0.017111 0 0.024 0.0753 0.0125 0.017111 0 0.024 0.0753 0.0375 0.017111 0 0.024 0.0753 0.0000 0.017111 0 0.024 0.0753 0.1250 0.017111 0 0.024 0.0753 0.0250 0.017111 0 0.024 0.0753 0.0125 0.017111 0 0.024 0.0753 0.0500 0.017111 0 0.024 0.0753 0.0000 0.017111 0 0.024 0.0753 0.0375 0.017111 0 0.024 0.0753 0.1000 0.017111 0 0.024 0.0753 0.0125 0.017111 0 0.024 0.0753 0.0000 0.017111 0 0.024 0.0753 0.0250 0.017111 0 0.024 0.0753 0.0000 0.017111 0 0.024 0.0753 0.0250 0.017111 0 0.024 0.0753 0.0250 0.017111 0 0.024 0.0753

Based on the control limits, we would expect a maximum of about 7.5% errors. Samples 13 and 19 are outside of the control limits and are most likely due to a special cause. If these are removed (by simply deleting the cells in column B of the template), the revised control chart is shown next and is now in control. It is assumed that an improvement team was set up to investigate samples 13 and 19 and a root cause was found and fixed. The team may have used all of the tools and concepts of Chapters 15 and 16. 10

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In the template, be sure that students realize that when deleting 2 points, the number of samples is now only 23!

p-Chart This spreadsheet is designed for up to 50 samples. Enter data only in yellow cells. Some resizing or rescaling of the chart may be needed. Sample size Number of samples Average (p-bar)

80 23 0.016304348

Sample 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Number Nonconforming 2 1 0 3 0 1 0 2 0 1 3 0 2 1 4 0 3 1 0 2 0 2 2

Fraction Standard Nonconforming Deviation LCLp CL UCLp 0.0250 0.014159 0 0.016 0.0588 0.0125 0.014159 0 0.016 0.0588 0.0000 0.014159 0 0.016 0.0588 0.0375 0.014159 0 0.016 0.0588 0.0000 0.014159 0 0.016 0.0588 0.0125 0.014159 0 0.016 0.0588 0.0000 0.014159 0 0.016 0.0588 0.0250 0.014159 0 0.016 0.0588 0.0000 0.014159 0 0.016 0.0588 0.0125 0.014159 0 0.016 0.0588 0.0375 0.014159 0 0.016 0.0588 0.0000 0.014159 0 0.016 0.0588 0.0250 0.014159 0 0.016 0.0588 0.0125 0.014159 0 0.016 0.0588 0.0500 0.014159 0 0.016 0.0588 0.0000 0.014159 0 0.016 0.0588 0.0375 0.014159 0 0.016 0.0588 0.0125 0.014159 0 0.016 0.0588 0.0000 0.014159 0 0.016 0.0588 0.0250 0.014159 0 0.016 0.0588 0.0000 0.014159 0 0.016 0.0588 0.0250 0.014159 0 0.016 0.0588 0.0250 0.014159 0 0.016 0.0588

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Attribute (p) Chart

Fraction nonconforming Lower control limit

Fraction nonconforming

0.0700 0.0600 0.0500 0.0400 0.0300 0.0200 0.0100 0.0000 1 3 5 7 9 1113151719212325272931333537394143454749

Sample number

This process is now in statistical process control with an average of 1.6% errors (i.e., p-bar). 8.* An Internet service provider (ISP) measures the proportion of peak period time when a customer is likely to receive busy signals. Data on the number of busy signals received from samples of 500 calls over a 30-day period can be found in the worksheet C16P8 in the OM6 Data Workbook. Construct and interpret a p-chart for these data. Portions of the Excel template are shown below:

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The process appears to have shifted considerably around sample 16. This might represent a technology issue or a staffing issue (perhaps several customer service representatives were on vacation). In any event, the proportion of busy signals has clearly increased, and the ISP should investigate this before customer satisfaction is affected in the long term. 9.

A fast food franchise tracked the number of errors that occurred in customers’ orders. These included wrong menu item, wrong size drink, lack of condiments, wrong price total, and so on. Some orders may have more than one error. In one week, 1500 orders were filled, and a total of 72 errors were discovered. Find the control limits for a c-chart. Is order accuracy good or bad in your opinion? c-bar = average number of errors/order = 72/1500 = 0.048 UCLc = c + 3 c = 0.048 + 30.048 = 0.705 LCLc = c − 3 c = 0.048 - 30.048 = -0.609, so use 0 This is a fairly good, although not world-class, level of performance. On average, there are 4.8% errors/order.

10.* Data showing the number of errors per thousand lines of code for a software development project are given in the worksheet C16P10 in the OM6 Data Workbook. Construct a c-chart and interpret the results. Portions of the Excel template c-Chart are shown next.

OM6 C16 IM

On average, the process generates c-bar = 14.65 errors per 1,000 lines of code. Statistically, the number of errors should range from 3.1 to 26.13. Sample #7 exceeds the upper control limit, so this process is not in statistical control. The reason for the high value for sample #7 should be investigated. In any event, having this many errors in software coding is probably not acceptable, and the project manager should take steps to understand the root causes and reduce the incidence of errors. 11.* A mail-order prescription drug vendor measured the number of errors per standard order being picked in their distribution center. Data can be found in the worksheet C16P11 in the OM6 Data Workbook. Construct a c-chart and interpret the results. What practical implications do these results have?

OM6 C16 IM

Note that in calculating the lower control limit using the formula in the book, the value turns out negative, so 0 is used.

The process appears to be in control; however an order with 3 errors or more should trigger investigation. Nevertheless, every effort should be made to reduce the number of errors to zero, especially considering that they may affect patient’s health. Also, point out to students that when errors are zero, this is an opportunity to discover “best practices.” That is, what is different on the days with zero errors? Is Mary the supervisor instead of Bill? Is a different procedure on those days used? Is this the first or second 15

OM6 C16 IM shift? Is there a difference in product mix on these days such as simple versus complex orders? 12. The worksheet C16P12 in the OM6 Data Workbook provides 5 examples of control charts. Interpret the patterns in each and determine if the processes are in control. If not, state the type of out-of-control condition that you identify (for example, points outside of the control limits, shifts, trends, and so on.) Chart 1 Averages Lower control limit Upper control limit Center line

X-bar Chart 7.5

Averages

7 6.5 6 5.5 5 4.5 4 3.5 3 1

Sample number

This chart appears to show a shift upward starting around sample 16. Chart 2 R-Chart

Ranges Lower control limit Upper control limit Center line

3.5

Ranges

3 2.5 2 1.5 1 0.5 0 1

13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49

Sample number

This chart exhibits a downward trend starting around sample 15.

OM6 C16 IM

Chart 3 Averages Lower control limit Upper control limit Center line

X-bar Chart 8

Averages

7.5 7 6.5 6 5.5 5 4.5 4 3.5 3 1

Sample number

This chart has a clear point outside of the control limits. Chart 4 Averages Lower control limit Upper control limit Center line

X-bar Chart 7.5

Averages

7 6.5 6 5.5 5 4.5 4 3.5 3 1

Sample number

This chart appears to be in control. Chart 5

OM6 C16 IM Averages Lower control limit Upper control limit Center line

X-bar Chart 7.5

Averages

7 6.5 6 5.5 5 4.5 4 3.5 3 1

Sample number

This chart seems to be exhibiting some cyclical behavior; the data go up, then down then up and down again. 13. A specification for a spacer plate used in a machine tool has specifications LSL = 0.05 and USL = 0.10 cm in thickness. A sample of 100 parts found  = 0.067 and  = 0.021. Compute and interpret the process capability indexes Cp, Cpl, Cpu, and Cpk. Cp = (USL – LSL)/6 sigma = (0.10 – 0.05)/[(6)(0.021)] = 0.05/0.126 = 0.397 Cpl = ( – LSL)/3 sigma = (0.067 – 0.05)/[(3)(0.021)] = 0.017/0.063 = 0.270 Cpu = (USL – )/ 3 sigma = (0.1 – 0.067)/0.063 = 0.033/0.063 = 0.524 Cpk = min{0.524, 0.27} = 0.27 Reinforce the point that the Cp numerator is the “design specification range” and the dominator is “actual process” performance. Process capability (0.397) is poor and not capable. The process is not centered on the specification target of 0.075 since the mean is 0.067 and the Cpl and Cpu differ greatly. The manager should try to bring the process back on center of the target specification and should evaluate the process immediately. It may be necessary to “stop” the process until it can be improved, especially if the process has to do with customer or patient safety. Why produce out-of-spec product that will require addition appraisal, internal and external failure (cost of quality) costs? Cp indexes are part of a mangers decision support system! 14.* Use the data in Problem 4 to calculate Cp , Cpl , Cpu, and Cpk , assuming that the specifications are 3.75 ± 1.25. Interpret the results for the manager of this process. Using the Process Capability Excel template, we obtain the following:

OM6 C16 IM

The overall capability indexes is marginal, but the lower index suggests that there is a problem meeting the lower specification. 15.* The worksheet C16P15 in the OM6 Data Workbook provides sample times in hours for processing and shipping orders from a Web-based retailer. The retailer advertises that orders are shipped within 4 hours of receipt. What is the capability of the process to achieve this standard? Explain your conclusions.

OM6 C16 IM

Note that although no values are outside of the specification limits, the capability indexes are less than one. This is because the standard deviation is used in the formula and the calculations assume a normal distribution. In this case, the histogram suggests that the distribution is not normal. Thus, the indexes are not truly representative of the situation. The instructor should discuss the importance of understanding assumptions behind statistical procedures.

OM6 C16 IM Case Teaching Note: Goodman Tire and Rubber Company Overview The case describes an automobile tire manufacturer that uses statistical process control to monitor the product quality of the tires the produce. The case data is available in the OM6 Data Workbook on-line. The case asks students to examine the distribution of the data (for example, how does it compare to the specification limit cited in the case?). Some students might address normality of the data. The histogram is somewhat symmetrical but the tails of the distribution are not what one would expect for normality (the sample size is relatively small and this cannot be concluded without advanced statistical tests). This is beyond the scope of the text. Advanced discussions of SPC do address issues with nonnormal data since highly non-normal distributions can affect results. A Google search on “statistical process control non-normal distributions” results in about 500,000 hits with many consulting firms offering their services. Many recommend transforming the original data such as a lognormal distribution, individual charts, chi-square goodness of fit tests, assume gamma or Weibull distributions, and multivariate control charts. You might simply tell your students that there are statistical process control methods for non-normal distributions but they require a master’s degree or beyond to understand these methods, they are messy, and may or may not provide better insights than we produce in this SPC analysis. The case questions also require students to perform an x-bar and r-bar chart analysis, and process capability analysis. Although the R-chart and x-bar chart show some odd patterns, technically they are in statistical process control given that all sample means are within the upper and lower control limits. However, the process capability analysis concludes the process is slightly off center and not capable. So you have the situation where the r- and x-bar charts are in SPC, yet the process is not capable of meeting the design specifications. Given that tire specs are related to customer safety, one management action is the process should be “stopped” until the “root cause” can be identified and fixed Case Questions and Brief Answers 1. Draw a histogram of these data. What can you conclude (if anything) about the distribution of the tread wear?

OM6 C16 IM

Histogram 20 18 16

Frequency

12 10 8 6 4 2 0 16.00

20.00

24.00

28.00

32.00 36.00 Cell Upper Limit

40.00

44.00

48.00

52.00

The distribution of the data is somewhat symmetrical but the 14 observations between 16 to 20 skew the tails of the distribution as well as the 6 observations between 40 to 44. Students should recognize that some tread wear has exceeded the recommended design specifications. This will be formalized with process capability analysis in case question 4. Also, while the data do not appear to be normally distributed, we cannot rule it out without more sophisticated statistical tests, as the sample size is small. The previous histogram uses a cell size of 4 while the following charts use a cell size of 3 millimeters. The non-normality of the tails of the distribution are even more pronounced in this histogram. Frequency Distribution and Histogram

Data Minimum

17.000

Data Maximum

43.000

Enter number of cells (10 or less) Number of Cells Cell

Enter smallest and largest limits for the frequency distribution. The lower limit should be slightly less than the data minimum. The upper limit should be slightly larger than the data maximum. Lower limit 22.000 Upper limit

10 From -

34.000

Cell width To Frequency (inclusive) 16.00 22

1.200

OM6 C16 IM

1 2 3 4 5 6 7 8 9 10

Infinity 16.00 19.00 22.00 25.00 28.00 31.00 34.00 37.00 40.00 43.00

19.00 22.00 25.00 28.00 31.00 34.00 37.00 40.00 43.00 46.00

13 4 8 12 14 9 5 4 6 0

2. Construct x-bar and R charts for these data. Is the production process in control?

OM6 C16 IM X-bar and R-Chart

Copyright © 2014 Cengage Learning Not for commercial use. This spreadsheet is designed for up to 50 samples, each of a constant sample size from 2 to 10. Enter data only in yellow cells Charts are displayed below the calculations. Some resizing or rescaling of the charts may be required. Number of samples (<= 50) Sample size (2 - 10)

25 3

Grand Average Average Range

28.43 11.84 DATA 1 2 3 4 5 6 7 8 9 10

1 31 42 28

A2 D3 D4 d2 1.023 0 2.574 1.693 2 26 18 35

3 25 30 34

4 17 25 21

5 38 29 35

6 41 42 36

7 21 17 29

8 32 26 28

9 41 34 33

10 29 17 30

11 26 31 40

12 23 19 25

13 17 24 32

14 43 35 17

15 18 25 29

16 30 42 31

17 28 36 32

18 40 29 31

19 18 29 28

20 22 34 26

21 18 24 30

22 24 28 19

23 27 32 20

24 39 26 19

25 17 32 27

Average LCLx-bar Center UCLx-bar

33.67 26.33 29.67 21 34 39.67 22.33 28.67 36 25.33 32.33 22.33 24.33 31.67 24 34.33 32 33.33 25 27.33 24 23.67 26.33 28 25.33 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 16.31 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 28.43 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54 40.54

Range LCLrange Center UCLrange

14 17 9 8 9 6 12 6 8 13 14 6 15 26 11 12 8 11 11 12 12 9 12 20 15 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 11.84 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48 30.48

R-Chart

Ranges Lower control limit

Upper control limit Center line

35 30

Ranges

25 20

15 10 5 0 1

9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49

Sample number The R-chart is in statistical process control since all points fall within the control limits. There is no discernable pattern in the plot of sample means for the R-chart.

OM6 C16 IM

The X-bar chart might appear to be in statistical process control. However, there appears to be a downward shift since samples #19 to #25 are all below the centerline (x-bar) and the probability of this happening is (0.5)7 = 0.0078, indicating that tread wear is decreasing (which is good!). If this trend continues, then it might indicate that better material is being used, or some process change occurred that results in tires that do not wear out as quickly. 3. Provide two examples of each of the four major categories of quality costs applicable to this situation (i.e., prevention, appraisal, internal and external failure costs). Prevention – frequent calibration of tire making equipment, checking raw material quality levels, frequent training equipment operators, quality design planning, training equipment operators in quality control methods, develop and improve data collection and measurement systems, working with tire designers on reasonable design specifications Appraisal – continuous SPC data collection and monitoring, inspection of raw materials, inspection of finished goods, inspection of equipment, testing of finished product, maintenance and repair of equipment Internal failure – scrap and rework costs, corrective action costs to fix a root cause, equipment downtime due to poor output quality or unplanned equipment repair External failure – product liability claims, warranty claims, customer complaints and returns, the cost of customer goodwill and impact on future sales, and recall costs

OM6 C16 IM 4. What are the process capability indexes for this process to meet design specifications? What do you recommend? (Hint: Compute the standard deviation of these data, and use Equations 16.9-16.12.) Process Capability Analysis This template is designed to handle up to 150 observations. Enter data only in yellow cells. Nominal specification Upper specification limit Lower specification limit DATA 1 2 3 4 5 6 7 8 9 10

28 34 22 1 31 42 28 43 35 17

Process Capability Index Calculations Average Standard deviation

2 26 18 35 18 25 29

3 25 30 34 30 42 31

4 17 25 21 28 36 32

5 38 29 35 40 29 31

6 41 42 36 18 29 28

Cp Cpl Cpu Cpk

28.4267 7.2507

7 21 17 29 22 34 26

8 32 26 28 18 24 30

9 41 34 33 24 28 19

10 29 17 30 27 32 20

11 26 31 40 39 26 19

12 23 19 25 17 32 27

13 17 24 32

0.27584 0.29545 0.25622 0.25622

We used the process capability OM6 template to compute the standard deviation of 7.251 mm and then graph the histogram and computed the capability indices. The Cp = (34-22)/43.51 = 0.276 which is much less than 1.0. That is, the process is not capable and tires will not all meet the 60-month lifetime! This may result in excessive warranty (external failure) costs. A Kaizen event should take place until the root cause is identified and fixed. The Cpu = (USL – u)/3σ = (34-28.43)/(3*7.251) = 5.57/21.753 = 0.256 The Cpl = (u – LSL)/3σ = (28.43 - 22)/(3*7.251) = 6.43/21.753 = 0.296 Therefore, the process is slightly off center, closer to the USL, and not capable.

OM6 C16 IM

Frequency Distribution and Histogram Data Minimum Data Maximum

Enter smallest and largest limits for the f The lower limit should be slightly less tha The upper limit should be slightly larger t Lower limit 22.000 Upper limit 34.000 Cell width 1.714

17.000 43.000

Enter number of cells (10 or less) Number of Cells

Cell

From To (inclusive) Frequency -Infinity 16.00 0 16.00 20.00 14 20.00 24.00 7 24.00 28.00 16 28.00 32.00 19 32.00 36.00 9 36.00 40.00 4 40.00 44.00 6 44.00 48.00 0 48.00 52.00 0 52.00 56.00 0

20 18 16 14

Frequency

1 2 3 4 5 6 7 8 9 10

20 18 16

Frequency

12 10 8 6 4 2 0 20.00

24.00

28.00

32.00 36.00 Cell Upper Limit

40.00

44.00

48.00

10 8 6

Histogram

16.00

52.00

OM6 C16 IM

A Few Summary Points • • • •

• •

Always check the empirical (actual) distribution to check on the statistical process control assumption of normality. Use histograms and statistical tests such as chisquare. As long as the empirical (actual) distribution is symmetrical you are at least in the ballpark of meeting the assumption of normality. The larger the sample size the better chance you have of meeting the assumption of normality so take a second larger sample, and see if you get the same results. Given that tire design specs are related to customer safety and long term warranty claims, one management action is to “stop” the process until the “root cause” can be identified and fixed. The root cause could be the raw materials from the supplier, changes in production procedures or equipment such as too high of a temperature or equipment calibration issues, new equipment operators that are not properly trained, and so on. The process is not capable and tires will not all meet the 60-month lifetime warranty! This may result in excessive warranty (external failure) costs. You might simply tell your students that there are advanced statistical process control methods for non-normal distributions but they require a master’s degree or beyond to understand these methods, they are messy, and these advanced methods may or may not provide better insights than we produce in this basic SPC analysis. THE END!

OM6 C17 IM

OM6 Chapter 17: Lean Operating Systems Discussion Questions 1.

Provide some examples of different types of waste in an organization with which you are familiar, such as an automobile repair shop or a fast-food restaurant. In a fast food restaurant, for example, we often see overproduction (food sitting under hot lamps with no immediate sale), customer waiting, incorrect and under- and over cooked orders that must be discarded, employees running around the kitchen not having clearly defined jobs, and so on. Students can identify many other examples in their areas of interest and experience. Exhibit 17.1 provides many generic examples and Toyota examples of waste are cited in the chapter.

Compare the lean service system of Southwest Airlines to a full service airline such as United Airlines or British Airways on the following: (a) airplane boarding process, (b) cabin service, (c) ticket transfer to other Southwest flights, (d) frequent flyer program, (e) baggage handling, (f) seat assignment system, and (g) service encounters.

Operating System Boarding process

Southwest Full Service Airline Stand in line in A.B, and C boarding priority zones First class boards first, board by assigned seat rows Cabin service No in-flight meals due to shorter routes, drinksIn-flight and meals especially on long flights peanuts only Ticket transfer to other SW flights Ticketless travel, if miss flight use ticket Paper and electronic ticketing, complex relater and no charge reservation system and rebooking fees Frequent flyer program Simple free flight after 8 paid flights but loyalty Complex point systems and rewards program (with points) being implemented Baggage handling Luggage-fly-free Mostly checked baggage-charge/fees Seat assignment No assigned seats but A, B, C group boardingSystem to assign seats Service encounters Cross-trained employees, friendly and fun Jobs defined by unions with little crossgames, tell jokes -- flight attendants, training, professional boarding, etc.

Recycle Technologies manufacturers and sells recycled antifreeze that is 20 percent cheaper and has a carbon footprint about 80 percent smaller than new antifreeze made from original raw materials. The company is trying to reduce waste in the traditional antifreeze supply chain. Would you buy this recycled antifreeze and put it into your vehicle? Explain the pros and cons of your decision. Some pros are “going green and saving the planet”, reducing global waste and the need for many raw materials, lower price, and less energy required to remanufacture versus find and source raw materials, produce, etc. Cons of buying recycled antifreeze include the remanufactured antifreeze may “harm” my engine, new is always better than old, and is there a warranty identical to the new antifreeze. You can also work into the discussion of topic of product labels including carbon footprint information such as how much carbon dioxide emissions per gallon of new versus recycled antifreeze.

OM6 C17 IM 4.

Do you think applying operations management concepts and methods such as Six Sigma and lean principles can reduce U.S. health care costs? Explain. Provide examples that show how OM can help the U.S. health care industry. The resounding answer is yes. There are many examples of waste in the U.S. health care system that currently is 15 to 18 percent of Gross Domestic Product (GDP). If this percentage goes to 20 percent, as some forecast, it will bankrupt many U.S. corporations as they compete in a global marketplace. A computer search of articles on health care, hospitals, waste, Six Sigma, and lean practices will result in many good examples. One hospital, for example, thinks it can reduce electric power, water, and paper product consumption by 20 percent over a three-year improvement initiative. Students will find many examples of where six sigma and lean principles are being applied to health care. For example, take a look at "The Elephant in the Operating Room," by Greg Brue, Quality Digest, June 2005, pp. 49-55. You can also tie this in to government health care initiatives if you want. OM skills are the keys to making health care processes more efficient!

What types of “setups” do you perform in your work or school activities? How might you reduce the setup times? Some examples might be gathering all materials needed to study for an exam, booting up a computer and locating all necessary files to do an assignment, or making up a schedule for the day. For the computer example, putting all materials in a single class folder and automatically launching programs might reduce set up times. Other student examples include the time to boot up your computer, commuting to school, faculty member getting video setup before class, setup time for exams, and gathering all class materials prior to leaving the residence. Students will probably have many other creative ideas from their work and school experiences. The 5Ss can also be worked into this discussion—sort, set in order, shine, standardize, and sustain.

Problems and Activities 1.

Interview a manager at a local company that uses JIT. Report on how it is implemented and the benefits the company has realized. Many companies use JIT so it should not be difficult to find one. Suppliers, original equipment manufacturers, broadcasting, and retail companies are possibilities. Managers are usually strong proponents of the process so students can learn a lot from talking with them.

Research JIT practices and how they impact purchasing. How do you think JIT systems affect purchasing functions and practices? Answer this question in a short paper of no more than two typed pages. JIT practices make purchasing a much more demanding job. Fast transport time, frequent and sometimes small order sixes, minimal inventory, global markets and suppliers, new product introductions, certified suppliers, vendor managed inventory in retail stores, real-time on-line

OM6 C17 IM status of decision variables, delays in the global supply chain, and so on place great demands on the supply chain and its purchasing managers and employees. A pull supply chain (make what you sell only) is a very demanding situation. 3.

Research and briefly describe one or two lean initiatives in service organizations and then make an argument for or against adopting lean principles in service businesses. What is different about applying lean in a factory versus a service situation? Describe your findings in a two-page paper. Starbucks is a good example of trying to adopt lean principles in a service business with mixed results. The CEO noted, “The majority of cost reductions we’re achieved come from a new way of operating and serving our customers. Over the quarter, we began to rollout our “better way” initiatives—a series of process improvements in our stores using lean principles. We’re improving customer engagement. ” Service speed increased, cost were dramatically reduced, waste was eliminated, and customer service results had mixed results. Many customers complained that the human experience had become unsatisfactory. You might ask your students, “Is lean best suited to assembly lines and goods-producing factories, not service-providing organizations?” Lean is based on an assumption of repeatable routines but are Starbucks service encounters repeatable? The seven differences between goods and services in Chapter 1 is a good place to anchor this discussion.

Research and write a short paper on the impact of global supply chains on JIT. Use Exhibit 17.3 to focus student attention. You can ask the students “How do each of these JIT characteristics and best practices work when the supply chain is global?” Long global supply chains are problematic for JIT success and require more global buffer inventories, longer lead times, disaster planning, and dual sourcing to reduce risks, and so on. If you Google “JIT global sourcing” you reveal about 800,000 hits so there is plenty of information for the students. One article that you might find interesting is: “Just‐in‐time and logistics in global sourcing: an empirical study,”Ajay Das; Robert B. Handfield, International Journal of Physical Distribution & Logistics Management, Volume 27 (3/4): 16 Emerald Publishing – April 1, 1997. Other information is as follows: The manufacturing process produces and supplies products to the distribution channels based on past forecasts. Manufacturing processes must be flexible to respond to market changes and must accommodate mass customization. Orders are processes operating on a just-in-time (JIT) basis in minimum lot sizes. Also, changes in the manufacturing flow process lead to shorter cycle times, meaning improved responsiveness and efficiency in meeting customer demand. Activities related to planning, scheduling and supporting manufacturing operations, such as work-in-process storage, handling, transportation, and time phasing of components, inventory at manufacturing sites and maximum flexibility in the coordination of geographic and final assemblies postponement of physical distribution operations.

OM6 C17 IM 5.

Choose one of the lean tools and approaches from Section 2 of this chapter and Research and write a short paper (2 pages maximum) on how organizations use this tool, and provide specific examples. This might entail the 5s, visual controls, single minute exchange of dies (SMED), single piece flow, continuous improvement and quality at the source, and total productive maintenance.

Search the Internet for manufacturing or service tours similar to the ones in this chapter. Classify their practices according to the four lean principles in a manner similar to the examples. The text describes Timken and Southwest Airlines using the four basic lean principles: 1. elimination of waste 2. increased speed and response 3. improved quality 4. reduced cost The objective of this question is to apply lean principles to an organization of interest to students such as restaurants, universities, hospitals, and manufacturers. One student answered this question for a newspaper with many interesting issues such as sustainability, limited shelf life, time-pressures, and how the paper used the four lean principles to improve operational performance.

Search the Internet for images of visual controls. Select five of them and explain how they contribute to achieving one of the four principles of lean operating systems. If you search under Images on Google for “visual controls,” many pages pop up. Students should select some meaningful examples. Here is one example that shows production line output data that provides workers information on performance and can help improve speed and response.

Here is another (health care) focused on improving quality:

OM6 C17 IM

A catalog order-filling process can be described as follows: [endnote: Modeled after an example in Soren Bisgaard and Johannes Freiesleben. “Six Sigma and the Bottom Line,” Quality Progress, Vol. 37, No. 9, September 2004, 57-62.] Telephone orders are taken over a 12-hour period each day. Orders are collected from each person at the end of the day and checked for errors by the supervisor of the phone department, usually the following morning. The supervisor does not send each one-day batch of orders to the data processing department until after 1:00 p.m. In the next step—data processing—orders are invoiced in the one-day batches. Then they are printed and matched back to the original orders. At this point, if the order is from a new customer, it is sent to the person who did the customer verification and setup of new customer accounts. This process must be completed before the order can be invoiced. The next step—order verification and proofreading—occurs after invoicing is completed. The orders, with invoices attached, are given to a person who verifies that all required information is present and correct to permit typesetting. If the verifier has any questions, they are checked by computer or by calling the customer. Finally, the completed orders are sent to the typesetting department of the print shop. a. Develop a flowchart for this process (see Chapter 7).

OM6 C17 IM

b. Identify opportunities for improving the process using lean principles. The most serious problem from the standpoint of customer service is the potential for a 12hour delay before an order reaches the supervisor for error checking, and another 3-4 hours may be required before entry into the computer. Obviously too much checking and handling of the order occurred, and much of it was many hours after the customer and order information had originally been taken. Suggestions for improvement include: a) processing small batches of orders (perhaps within 1-2 hours, or less); b) building in error checking, perhaps through direct entry of telephone orders into the computer; c) processing information needed for customer verification and setup of new accounts at the time the order is taken; d) having the phone department supervisor simply audit or sample orders for errors; e) developing a 6

OM6 C17 IM computerized method of matching orders and invoices, so that manual verification is not required; generating an exceptions report after step (e), with proofreading required for printing information that cannot be computerized, if order verification and proofreading is a vital step. 9.

A team at a hospital studied the process of performing a diagnostic CT scan. The current process can be described as follows. The CT tech enters a “send for patient” request into a computer when the CT is available for the next patient. The computer prints a request for transport and an orderly is assigned to take the patient for the scan. The orderly walks to radiology and gets the ticket and patient information. The orderly takes the elevator to the patient’s unit and goes to the nurse’s station, locates the nurse in charge and obtains the patient’s chart. He or she signs out the patient and walks to the patient’s room and waits for a nurse to help transfer the patient. The patient is transferred to a mobile bed and then taken to the elevator and brought to radiology. The chart is given to the CT technician while the patient waits in the hall. When the CT is ready, the patient is moved to the CT machine and the scan is performed. The orderly is called back to take the patient back to his or her room. Draw a flowchart of this process, identify the value-added and non-value added activities, and describe how lean thinking can be applied to shorten the throughput time to perform the CT scan. Students will draw a flowchart similar to Exhibit 7.7. They may or may not be able to identify value and non-value added time but they definitely can apply the four lean principles to this situation. Lean Principles Eliminate Waste

Value & Non-Value Added Discussion Issues Why print out a hard copy scan ticket? Why not read scan ticket from hand held device or PC? Why does process require a patient bed transfer (two beds)? Why not take bed in room (no wheels?) to radiology?

Increase Speed and Response

Timely pickup by orderly of scan ticket; orderly trying to find nurse; orderly and nurse must obtain patient’s chart (why not electronic medical records?); elevators take time; the process is reversed when taking patient back to their room. Service management skills for both orderly and nurse since they are in high contact with patient and family; patient waits in the hallway (not good service quality); clinical quality requires accurate patient medical records; patient privacy in transport and waiting in hallway; safety is always a concern during patient transfer; can orderly use service elevators, not the public use elevators. Partially electronic and paper based information flows that need improvements. Are two beds necessary? Labor intensive process with much waiting in practice.

Improve Quality

Reduce Cost

10. Some companies use a technique called heijunka, which is a Japanese term that refers to production smoothing in which the total volume of parts and assemblies are kept as constant as possible. Research and write a short paper (2 pages max) about this technique and how it relates to lean principles. Try to illustrate a case study of a company that has used it.

OM6 C17 IM

A Google search reveals about 60,000 hits for “heijunka.” For lean managers who accept the notion that leveling by volume and mix produces benefits throughout the value stream, the problem remains of how to control production so that true heijunka (leveling) is consistently achieved. Toyota came up with a simple answer many years ago in the form of the heijunka box. A typical heijunka box has horizontal rows for each member of a product family, in this case five. It has vertical columns for identical time intervals of production, in this case 20 minutes. Production control kanban are placed in the slots created, in proportion to the number of items to be built of a given product type during a time interval.

In this example, the shift starts at 7 a.m. and kanban are withdrawn by a material handler every 20 min. for distribution to the pacemaker point along the value stream. (In a lean production system of this type, there is only one pacemaker point along the value stream where production instructions are introduced. From that point back up the stream, parts are replenished at each break in continuous flow by means of simple pull loops from upstream parts supermarkets.) In the first 20 min., the value stream will produce one kanban of Type A, two kanban of Type B, one kanban of Type C and one kanban of type D. Whereas the slots represent the timing of material and information flow, the kanban in the slots each represent one pitch of production for one product type. (Pitch is takt time multiplied by pack- out quantity. This concept is important because it represents the minimum amount of material that can be moved from one operation to the next, and the number of items called for by a kanban are sized to this amount.) In the case of Product A, the pitch is 20 min., and there is one kanban in the slot for each time interval. However, the pitch for Product B is 10 min., so there are two kanban in each slot. Product C has a pitch of 40 min., so there are kanban in every other slot. Products D and E share a production process with a pitch of 20 min. and a ratio of demand for Product D versus Product E of 2:1. Therefore, there is a kanban for Product D in the first two

OM6 C17 IM intervals of the shift, and a kanban for Product E in the third interval, and so on in the same sequence. Used as illustrated, the heijunka box consistently levels demand by short time increments, 20 min. in this case. This is in contrast to the mass-production practice of releasing a shift’s, or aday's or a week's worth of work to the production floor. Similarly, the heijunka box consistently levels demand by mix. For example, it ensures that Product D and Product E are produced in a steady ratio in small batch sizes. Production process stability introduced by leveling makes it vastly easier to introduce lean techniques ranging from standard work to continuous flow cells. As the mura (unevenness in productivity and quality) and muri (overburden of machines, managers and production associates) introduced by traditional production control recede, muda (waste) declines as well. When every process is leveled by volume and mix, it is a different world for employees -who are no longer overburdened; for customers -- who get better products on the date promised; and for manufacturers -- who get to keep the money saved when muda, mura and muri are all reduced. This information was excerpted from “Heijunka: Leveling Production,” published in “Manufacturing Engineering” magazine, August 2006. 11. Research and write a short paper (two pages maximum) on applications of the 5S principles in service organizations, such as a hospital. If possible, provide some pictures that illustrate the results of using the 5S principles A Google search of “5s hospitals” reveals over 6 million hits, and of course, the 5s is part of implementing lean systems in hospitals. The Lean Enterprise Institute (www.lean.org), for example, provides case studies on dental labs, hospitals, pharmacies, insurance, etc. One excerpt from Quality Digest, “Athens Hospital Improves Processes by Implementing Lean in Laboratory,” Georgia Institute of Technology, is as follows: http://www.qualitydigest.com/inside/twitter-ed/athens-hospital-improves-processesimplementing-lean-laboratory.html “We wanted the Healthcare Performance Group to provide the training, the structure, and the facilitation for a period of time to do a 5S project in the lab. By using the 5S system— sort, straighten, shine, standardize, and sustain—we thought we could significantly improve the efficiency and effectiveness of the laboratory,” explains Jim Pirkle, Athens Regional’s associate director of quality services. “Originally we were going to begin the project in one area, but we wanted each of the section supervisors to be involved so it could be a whole lab culture change.” “Employees say this is now a much better place to work, and there is not as much clutter or

OM6 C17 IM confusion. In regard to patient safety, that’s a significant benefit,” Pirkle says. “As a result, we’ll have better patient outcomes as we become more accurate and timely.” In particular, the 5S project increased the lab’s storage capacity by 64 percent, freed up counter space by 30 percent, and reduced body fluid processing times from 12 minutes to four minutes. Other results include reduced inventory and supply costs, decreased stock on hand, and greater clarity in the lab environment. Projected savings from reduced steps and time to complete work total more than $15,000. 12. Tooltron Manufacturing uses a Kanban system for a component. Daily demand is 425 units. Each container has a combined waiting and processing time of 1.5 day. If the container size is 35 and the alpha value (a) is 12 percent, how many kanban card sets should be authorized? What is the maximum authorized inventory? Using Equation 17.1 we have K = d*(p + w)(1 + )/C = 425(1.5)(1 + .12)/35 = 20.4 or 21 Kanban cards should be authorized. The maximum authorized inventory is K*C = 21*35 = 1,116 units. You might also use this simple problem to discuss “what if” scenarios regarding increases and reductions in processing and wait times, impact of changes in order size, safety factors, and so on. Exhibit 17.3 can be integrated into this discussion too. 13. Lou’s Bakery has established that JIT should be used for chocolate chips due to the high probability of the kitchen heat melting the chips. The average demand is 150 cups of chocolate chips per week. The average setup and processing time is 1/4 day. Each container holds exactly two cups. The current safety stock factor is 5 percent. The baker operates six days per week. a. How many Kanbans are required for the bakery? Using Equation 17.1 we have K = d*(p + w)(1 + )/C = (150 cups/week/(6 days/week))(.25 days)(1 + .05)/2 = 3.28 ≈ 3 Kanbans (remember setup and processing time is in days and demand is in weeks) b. What is the maximum authorized inventory? Maximum authorized inventory = K*C = 3*2 = 6 cups c. If the average setup and processing time is increased to 3/8ths of a day due to a process change, what are the answers to (a) and (b)? K = d*(p + w)(1 + )/ C = (150 cups/week/(6 days/week)) (.375 days)(1 + .05) = 4.9 ≈ 5 Kanbans 2 cups

OM6 C17 IM Maximum authorized inventory = K*C = 5*2 = 10 cups By increasing p + w, inventory is increased from 6 to 10. 14. Due to rapid changes in technology, a telecommunications manufacturer decides to produce a router using just-in-time methods. Daily demand for the router is 17 units per day. The routers are built on racks that hold four at a time (i.e., the container size). Total processing and waiting time is 3.75 days. The process manager wants a safety factor of only 5 percent. a.

How many Kanbans are required? K = d*(p + w)(1 + )/C 17 Kanbans

= (17 units/day)(3.75 days)(1 + 0.05)/4 = 16.7 or about

What is the maximum authorized router inventory? Maximum authorized inventory = K*C = 17*4 = 68 units

If you assume that one-half of the racks are empty and one-half full at any given time, what is the average inventory of routers? Average inventory = maximum inventory divided by 2 = 68/2 = 34 units.

What are the answers to a to c if due to process improvements the total processing and waiting time is reduce from 3.75 to 2.75 days? K = d*(p + w)(1 + )/C 13 Kanbans

= (17 units/day)(2.75 days)(1 + 0.05)/4 = 12.3 or about

Maximum authorized inventory = K*C = 13*4 = 52 units Average inventory = maximum inventory divided by 2 = 52/2 = 26 units. By reducing p + w, inventory is reduced from 34 to 26 or 30.8% (8/26). 15. An automobile transmission manufacturer is considering using a JIT approach to replenishing its stock of transmissions. Daily demand for transmission #230 is 55 transmissions per day and they are built in groups of six transmissions. Total assembly and waiting time is two days. The supervisor wants to use an alpha value (α) of 1, or 100 percent. a. How many Kanbans are required? K = d*(p + w)(1+ )/C= (55 trans/day)(2 days)(1 + 1)/6 = 36.7 Kanbans or about 37 b. What is the maximum authorized inventory?

OM6 C17 IM Maximum authorized inventory = K*C = 37*6 = 222 transmissions c. What are the pros and cons of using such a high alpha value ()? Pros - provides safety stock for emergency situations and process breakdowns, keeps internal and external customers and suppliers happy, not really JIT. Cons - high inventory levels with increased number of Kanbans, may require more debt financing of inventory, defeats the objectives of JIT systems, clutters up shop floor and warehouse, higher risk of transmission obsolescence, costly practice, and there is no numerical method to determine why it is set at 100%.

Case Teaching Notes: Community Medical Associates Overview Community Medical Associates (CMA) is a large urban health care system with two hospitals, 25 satellite health centers, and 56 outpatient clinics. CMA had 1.5 million outpatient visits and 60,000 inpatient admissions the previous year. Long patient waiting times, uncoordinated clinical and patient information, and medical errors plagued the system. Doctors, nurses, lab technicians, managers, and medical students in training were very aggravated with the labyrinth of forms, databases, and communication links. Accounting and billing were in a situation of constant confusion and correcting medical bills and insurance payments. The complexity of the CMA information and communication system overwhelmed its people. Today, CMA uses an integrated operating system that consolidates over 50 CMA databases into one. Health care providers in the CMA system now have access to these records through 7,000 computer terminals. The next phase in the development of CMAs integrated system was to connect it to suppliers, outside labs and pharmacies, other hospitals, and to doctor's home computers, that is, the entire value chain. The case allows the students to apply lean principles to a large and complex health care network and think about the nature of the value chain. This case is best assigned to individual students or student teams and the class discussion can range from 20 to 30 minutes depending on what the instructor wants to emphasize. Like many cases in the OM text, we try to get students out of the goods-producing factory and into a service-providing organization.

Case Questions and Brief Answers 1. Explain how CMA used the four principles of lean operating systems to improve performance. One objective of this question is to have students apply lean principles to a complex health care situation. The table below highlights some of the answers to this question. Most students or student teams develop a table similar to the one below.

OM6 C17 IM

Lean Principles Eliminate Waste

Increase Speed and Response

Improve Quality

Reduce Cost

CMA Examples Consolidate 50 databases into one (actual to ideal), new database reduced paper usage by one-half, transcription labor, less space for filing cabinets, labor relogs, eliminate some hand-written physician notes, physicians and staff log on and off separate systems (setup and changeover time) 2 minute patient record retrieval times (faster processing times), physician notes transcribed in less than 48 hours and sometimes same day, labor relogs (reduced setup and changeover times) Physician diagnosis (clinical quality) based on complete set of information, improved database security and quality of information, reduced patient wait times and non-diagnosis due to lack of information and more time with patients (service quality), ease of physician audit of electronic records, eliminate incomplete records scattered in multiple locations and data bases, eliminate knowledge bottlenecks Reduced database maintenance costs, reduced paper cost, reduced patient record retrieval costs (i.e., an example of e-commerce in action)

Example: Kaiser Permanente implemented a $4 billion e-health care system for their services. They note in one sentence “Handicapped by a paper-based information nonsystem that just about every other industry has left behind, health care is in a massive communication morass that cries out for technological intervention and help.” 2.

Using information from the case, sketch the original paper-based value chain and compare it to a sketch of the modern electronic value chain that uses a common database. Explain how the performance of both systems might compare.. Students will draw many different structures based on their background and experience. Two example student flowcharts are shown below. Students will also draw a broader view of the value chain based on Exhibits 2.1, 2.2, and 2.3. Both narrow and broad views of CMA's value chain can be discussed. One student example CMA Current State

OM6 C17 IM

Patient Enters

Yes Is patient complete medical record available?

Physician hand written notes and patient treatment

Medical records, insurance and billing entered into many of 50 databases

Medical files stored in multiple locations (clinic, hospital, pharmacy, etc.)

No Patient Delay or Reappointment

The paper-based system with many data sets is slow, huge opportunity for errors, and generates a very high cost of poor quality in terms of clinical and service quality. Some students will draw the paper based system in a series fashion and then draw the future state with a central hospital database as the hub and all else connected to the hub in a circle. Others use the pre- and post-production framework of Chapter 2 to define before and after states. One student example CMA Future State

Patient Enters

Yes Is patient Complete medical record available?

Physician notes Electronically entered and patient treatment

Medical records, insurance and billing entered into one common database

Patient medical files stored in one location and accessible via 7,000 computer terminals

No Patient Delay or Reappointment

Connecting the CMA system to pharmacies, suppliers, home health care firms, other out-of-network clinics and hospitals, and insurance firms in the value chain are examples of synchronizing more parts of the value chain. One undergraduate student team wrote below their diagrams “The performance of the value chain was improved by eliminating hand-written notes, combining all the databases into one centralized system, and storing patient files electronically so that all information could be accessed at one time by all medical facilities and service-providers, allowing for faster information flow, and therefore, improved patient (customer) service.” Also, some student teams did a value-added and non-value added table citing work activities in each column (sort of table format for value stream mapping). Of course, the case does not provide dollar costs per work activity so a full value stream map cannot be done. 14

OM6 C17 IM

Probably the best approach to answer Q#2 is to draw the original paper-based system as a value chain that has linear (serial) and parallel activities (as above) and draw the modern electronic value chain as a common data base (big circle) surrounded by multiple users all feeding into the central and common data base. Also, make the point in class that information systems and processes are highly integrated or you can’t have one without the other! A plug for ISOM majors and expertise! 3.

What is a total annual record retrieval cost savings with the old (paper-based) versus new (electronic) systems? The numbers in OM3 have been changed from previous OM editions. Old System Costs Total Outpatient Record Retrieval Cost = 1,500,000*($4.46)(1.4) = $9,366,000 Total Inpatient Record Retrieval Cost = 60,000*($4.46)(4.8) = $1,284,480 Total Annual Patient Record Retrieval Costs = $10,650,480. New System Costs Total Outpatient Record Retrieval Cost = 1,500,000*($1.32)(1.4) = $2,772,000 Total Inpatient Record Retrieval Cost = 60,000*($1.32)(4.8) = $380,160 Total Annual Patient Record Retrieval Costs = $3,152,160. Total Annual Record Retrieval Savings = $10,650,480 - $3,152,160 = $7,498,320. The instructor should point out to the students at some point during the class discussion that this dollar savings focuses on the "information system" that supports physician diagnosis and implementation, and patient health.

Does this CMA improvement initiative have any effect on sustainability? If so, how? If not, why? Yes, reducing waste such as less paper and transport and energy costs, for example, are categories of environmental sustainability (see Exhibit 1.6). Social sustainability is also improved with better patient diagnosis, community quality of life, and medical audit trails and transparency. Finally, economic sustainability is improved by better use of resources, emergency preparedness, creating good jobs, and saving $7.5 million dollars. You might want to show Exhibit 1.6 in class as a basis for discussion.

Using lean principles, can you simultaneously improve the speed and quality while reducing waste and costs? What are the tradeoffs? Justify. Speed of system increase

OM6 C17 IM Clinical and service quality improves While costs are reduced The principles of Six Sigma, Lean, Cost of Poor Quality, Continuous Improvement, and so on, all argue for simultaneous improvements, so the answer is yes. See, for example, Quality is Free, by Philip Crosby, for example. Another issue is how does the new information system improve patient security and privacy or does it?

Teaching Plan (1) Explain how CMA used the four principles of lean operating systems to improve performance. (2) Using information from the case, sketch the original paper-based value chain and compare it to a sketch of the modern electronic value chain that uses a common database. Explain how the performance of both systems might compare. (3) What is a total annual record retrieval cost savings with the old (paper-based) versus new (electronic) systems? (4) Does this CMA improvement initiative have any effect on sustainability? If so, how? If not, why? (4) Using lean principles, can you simultaneously improve the speed and quality while reducing waste and costs? What are the tradeoffs? Justify. You can end the case by saying something about how information systems and operations (process and value chain) knowledge and expertise are converging for many organizations. That is, informating (automating) a poorly designed process is often a source of failure in practice. THE END!

OM6 C18 IM

OM6 Chapter 18: Project Management Discussion Questions 1.

Identify at least five additional examples of projects that are not cited in this chapter. Students might identify the following “projects” -- waste management, building a solar field, disaster management planning, building a MRI facility, planning a swim meet, installing an electronic medical record system in a hospital or clinic, building a sports stadium, planning your weddings, launching a new advertising or training program, building a new product such as iPad, iPod, iPhone, etc.

Exhibit 18.2 lists a number of impediments to project success. or eliminate these impediments?

How might you minimize

The objective of this question is to illustrate that project management is much more than the mechanics of CPM and PERT. In fact, the communication and behavioral aspects of project management are frequently cited as the most troublesome areas. For example, illdefined project objectives begin with senior managers clearly defining what they want and why; in fact, it should be measurable. You might mention that when banks acquire other financial institutions, for example, banking systems must be integrated. The best project managers typically know their industry, processes and CPM methods but they should also be some of the organization’s very best “people managers.” 3.

The local chapter of the Project Management Institute is planning a dinner meeting with a nationally known speaker, and you are responsible for organizing it. How could the methodology discussed in this chapter help you? First you must define the work breakdown structure such as major activities like contact and invite the speaker, plan speaker travel arrangements and greeting, reimburse speaker fees, book a conference center room, select dinner menu, negotiate and sign food and beverage service contract, name tag desk activities, video and audio setup, and security. Next you obtain time estimates per activity and define precedence relationships. A project team checks and rechecks this information and CPM can be used or at least a Gantt Chart (see Exhibit 18.9 and 18.10). Even if the project planner does not use CPM as an on-going monitor of project implementation much of the benefit of CPM is derived by this up front planning stage. Students should try to identify the activities that must be performed, their sequence (precedence relationships), and perhaps times required. The end product of this question should be a project network. The website for the Project Management Institute is www.pmi.org.

The calculations in PERT allow you to determine the probability that as project will be completed. Suppose you calculate that the probability a project will be completed by a target deadline is only 0.25. What steps might you take if you were the project manager? Would your decisions be different if the probability was calculated as 0.75? Would you be willing 1

OM6 C18 IM to take a 25% risk of failing to complete the project on time? First, check the integrity of your project input data including precedence relationships. Are they correct? If the probability and methods are correct, then major management action is required with a 25% chance of completing the project on time such as renegotiate the project due date, redefine the work break down structure, reallocate resources to critical activities to speed things up, and see what can be done to reduce activity time variances for CP activities. Not many managers would be willing to take on a project with only a 0.25 chance of completion on time. The decision would be different if the probability is 0.75, much less radical with respect to moving and reallocating resources, checking and revising activity times and variances, etc. 5.

Crashing in the Critical Path Method assumes that the cost of crashing an activity is linearly proportional to the amount of time the activity is crashed; that is, the rate of cost increase is constant (see Exhibit 18.12). Is this a reasonable assumption? Why or why not? How might the concepts of economies and diseconomies of scale help to address this issue? Fixed activity costs and learning curve effects, for example, can alter the assumption of linear crashing costs. Long and short activity times and project activity times can also challenge this assumption of linearity with increasing or decreasing economies of scale.

Problems and Activities 1. Research and write a short paper (2 pages maximum) on the skills needed to be a successful project manager. A great place to begin this research is searching for the topics identified in Exhibit 18.2 – Contributors and Impediments to Project Success. For example, if you do a Google search on “project definition” you receive over 470,000 hits and the term “project management” provide over 900,000 hits on topics ranging from project team structure to software to the Project Management Institute (www.pmi.org) web site. 2.

Mary is planning her wedding and develops the following preliminary information. Activity A (select wedding date) B (select wedding location) C (guest list, whose attending) D (select entertainment) E (choose catering) F (wedding day) a.

Immediate Predecessor none none A, B A A, C D, E

Draw the network for this project.

Estimated Normal Time 3 week 4 weeks 4 weeks 3 weeks 2 weeks 0 weeks

OM6 C18 IM

What is the critical path(s)? Immediate Predecessor

---

Time Earliest (weeks) Start 3 0

Earliest Finish 3

Latest Start 1

Latest Finish Slack 4 1

---

A, B

A, C

D, E

Activity A

Critical path is B-C-E-F c. d. e.

What is the project completion time? 10 weeks What activity has the most slack? Activity D with 4 weeks What wedding activities did Mary leave out of her analysis? List them and now redraw the project network (but do NOT try to assign activity times or work out the new solution). What did you learn? This is about as simple as it gets for a wedding project. Other example project activities include: photography, flowers, bridesmaids dresses, grooms suits, music, transportation, wedding program printing, invitation printing, mailing, and location of reception. 3

OM6 C18 IM The OM6 template includes a Gantt chart as shown below. You might want to inform the students that the following all contain the similar information: (a) network diagram forward and backward pass ES, EF, LS, LF, (b) a table of ES, EF, LS, LF, and (c) a Gantt chart. Gantt charts are the most useful in practice such as showing foundation, plumbing, electrical, and painting contractors where they stand regarding a construction project.

Gan Chart 0

A B C D E F

Perhaps the most well-known software for project management is Microsoft ProjectTM. Investigate its capabilities and write a short paper (2 pages maximum) that describes its features. Students can go to www.microsoft.com/project and click on the product information link. They can view demos and case studies, and “how to” links that describe its capabilities.

Develop a small example consisting of no more than ten activities and illustrate the ideas, rules, and mechanics of forward and backward passes through the project network to compute the critical path. Students should be encouraged to make the example realistic to a problem they are familiar with and not simply an abstract example. A few student examples include planning a wedding, coordinating a vacation, setting up a golf tournament, camping out, planning a prom date or fraternity dinner, and so on.

Find an application of project management in your own life (for example, in your home, fraternity, or business organization). List the activities and events that comprise the project, and draw the precedence network. What problems did you encounter in doing this?

OM6 C18 IM This is designed to get students thinking about applying project management techniques. Activity times, work breakdown structure, and precedent relationships are the very first things students need to define and verify. 6.

Rozales Manufacturing Co. is planning to install a new flexible manufacturing system. The activities that must be performed, their immediate predecessors, and estimated activity times are shown below. Draw the project network and find the critical path computing early and late start days, early and late finish days, and activity slack. Estimated Immediate Activity Time Activity Description Predecessors (days) A B C D E F G H I J K L

Analyze current performance Identify goals Conduct study of existing operation Define new system capabilities Study existing technologies Determine specifications Conduct equipment analyses Identify implementation activities Determine organizational impacts Prepare report Establish audit procedure Dummy ending activity

-A A B B D C, F C H E, G, I H J, K

4 2 6 7 8 7 12 9 8 2 3 0

Here, L is the ending (dummy) activity with zero time. Immediate Time Earliest Earliest Latest Activity Predecessor (days) Start Finish Start A --4 0 4 0

Latest Finish 4

Slack 0

OM6 C18 IM D

C,F

E,G,I

J, K

Critical path is A-B-D-F-G-J-L with a final project completion time of 34 days. The largest activity slack is for E at 18 days.

Gan Chart 0

A B C D E F G H I J K L

7. A computer-system installation project consists of eight activities. The immediate predecessors and activity times in weeks are shown below.

Activity

Immediate Predecessor

Activity Time 6

OM6 C18 IM A B C D E F G H

--A B, C C, D E B F, G

6 3 2 3 6 3 9 3

a. Draw the network for this project. b. What are the critical-path activities? c. What is the project completion time?

Activity A

Immediate Time Predecessor (days) --6

Earliest Start 0

Earliest Finish 6

Latest Start 0

Latest Finish 6

Slack 0

---

B, C

C, D

F.G

Critical path is A-C-D-E-F-H. Project completion time is 23. We work one or more CPM problems on the board, first setting up, then doing a forward pass, and next a backward pass and then analyze the results.

OM6 C18 IM

Gan Chart 0

A B C D E F G H

Environment Recycling, Inc. must clean up a large automobile tire dump under a state environmental cleanup contract. The tasks, durations (in weeks), costs, and predecessor relationships are shown as follows: Activity Immediate Predecessors Time A --5 B A 8 C A 7 D -6 E B, D, C 8 F D 3 G D 3 H E 4 I F, G, H 6 a.

Draw the project network.

OM6 C18 IM

Identify the critical path(s).

Activity A

Immediate Time Predecessor (days) --5

Earliest Start 0

Earliest Finish 5

Latest Start 0

Latest Finish 5

Slack 0

---

B,D,C

F,G,H

Critical path is A-B-E-H-I c.

What is the total project completion time? Completion time = 31.

Two international banks are integrating two financial processing software systems as a result of their merger. Preliminary analysis and interviews with all parties involved resulted in the following project information. The “systems integration team” for this project plans to define and manage this project on two levels. The following activities represent an aggregate view, and within each activity is a more detailed view with subtasks and project networks defined. All times are in weeks. Activity Immediate Predecessors Time

A B C D E

— A A B, C C

3 1 2 3 5 9

OM6 C18 IM F G H I a. b. c.

C 3 E 7 E, F 5 D, G, H 8 Draw the project network. Identify the critical path. What is the total project completion time and total cost?

Activity A

Immediate Time Predecessor (days) --3

Earliest Start 0

Earliest Finish 3

Latest Start 0

Latest Finish 3

Slack 0

B,C

E,F

D,G,H

Critical path is A-C-E-G-I. Completion time is 25 weeks. 10. A competitor of Kozar International, Inc. has begun marketing a new instant-developing film project. Kozar has had a similar product under study in its R&D department but has not yet been able to begin production. Because of the competitor’s action, top managers have asked for a speedup of R&D activities so that Kozar can produce and market instant film at the earliest possible date. The predecessor information and activity time estimates in months are shown in the next column.

OM6 C18 IM

Activity A

Immediate Predecessors ---

Optimistic Time 1

Most Probable Time 1.5

B, C

3.5

6.5

C, D, E

6.5

7.5

11.5

a. b.

Pessimistic Time 5

Draw the project network. Develop an activity schedule for this project using early and late start and finish times, compute activity slack time, and define the critical activities.

Using the 3-point estimates of times, we obtain: Activity A B C D E F G

Mean 2 4 2 5 6 8 9

Variance 0.44 0.11 0.11 0.25 1.78 0.69 1.78

Activity A

Immediate Time Predecessor (days) --2

Earliest Start 0

Earliest Finish 2

Latest Start 0

Latest Finish 2

Slack 0

B,C

OM6 C18 IM F

C,D.E

Critical path is A-B-E-G; completion time is 21 months. 11. Construct an early-start-date Gantt chart for the computer-system installation project described in Problem 7. As a project manager, where would you focus your attention, given your analysis?

Activity A

Immediate Time Predecessor (days) --6

Earliest Start 0

Earliest Finish 6

Latest Start 0

Latest Finish 6

Slack 0

---

B, C

C, D

F.G

OM6 C18 IM

Gan Chart 0

A B C D E F G H

Critical path is A-C-D-E-F-H. Project completion time is 23. There is very little slack in the schedule, so the project manager would want to ensure that the activities remain on schedule. Instructors should ensure that students "see" the connection between the critical path network, table, and Gantt Chart (i.e., trace out the critical path on the chart). 12. Suppose that some of the activities in the Environment Recycling, Inc. situation in Problem 8 can be crashed. The table below shows the crash times and costs associated with performing the activities at their original (normal) times and also for the crash times. Find the total project completion time and lowest cost solution if the state wants to complete the project three weeks early. Activity Predecessor(s) Normal Time Crash Time Normal Cost A --5 4 $ 400 B A 8 6 1,800 C A 7 6 800 D -6 5 600 E B, D, C 8 6 1,700 F D 3 2 800 G D 3 2 500 13

Crash Cost $ 750 2,200 1,100 1,000 2,200 1,000 650

OM6 C18 IM H I

E F, G, H

4 6

3 5

400 900

600 1,300

Activity A

Immediate Time Predecessor (days) --5

Earliest Start 0

Earliest Finish 5

Latest Start 0

Latest Finish 5

Slack 0

---

B,D,C

F,G,H

Critical path is A-B-E-H-I. Completion time = 31. Total normal cost = $7,200. Activity Normal Time Crash Time

Normal Cost

Crash Cost

Crash cost/week

$400

$750

$350

1800

2200

$200

800

1100

300

600

1000

400

1700

2200

250

800

1000

200

500

650

150

400

600

200

900

1300

400

OM6 C18 IM Crashing options on the critical path (shown in red above) Crash A by 1 week: $350 Crash B by 2 weeks: $400 ($200/week) Crash E by 2 weeks: $500 ($250/week) Crash H by 1 week: $200 Crash I by 1 week: $400 To reduce completion time to 28 weeks, we have multiple options. Typically, select the activity with the smallest crashing rate first. Thus, we can choose B or H. Suppose we choose B to crash for 2 weeks:

Activity A

Immediate Time Predecessor (days) --5

Earliest Start 0

Earliest Finish 5

Latest Start 0

Latest Finish 5

Slack 0

---

B,D,C

F,G,H

Note that this only reduces the project time by one week since we have a new critical path, A-C-E-H-I with a completion time of 30. We would have gotten the same solution by crashing B for only 1 week at a cost of $200 and which would have resulted in multiple critical paths.

Activity A

Immediate Time Predecessor (days) --5

Earliest Start 0

Earliest Finish 5

Latest Start 0

Latest Finish 5

Slack 0

---

B,D,C

F,G,H

OM6 C18 IM

By crashing E for 2 weeks we have:

Activity A

Immediate Time Predecessor (days) --5

Earliest Start 0

Earliest Finish 5

Latest Start 0

Latest Finish 5

Slack 0

---

B,D,C

F,G,H

The total cost of this option is $700. Students might try other sequences to seek a better solution. 13. The table below shows the crash times, and normal and crash costs for the international bank systems integration project described in Problem 9. What is the total project completion time and lowest-cost solution if the bank wants to complete the project 2 weeks early? Activity Predecessor

A B C D E F G H I

— A A B, C C C E E, F D, G, H

Normal Time

Crash Time

Normal Cost

3 1 2 3 5 3 7 5 8

1 1 2 1 4 2 5 4 5

$1,000 4,000 2,000 5,000 2,500 2,000 4,500 3,000 8,000 Total

$32,000

Crash Cost

$ 6,000 4,000 2,000 6,000 3,800 3,000 8,500 3,800 17,000

OM6 C18 IM

Activity A

Immediate Time Predecessor (days) --3

Earliest Start 0

Earliest Finish 3

Latest Start 0

Latest Finish 3

Slack 0

B,C

E,F

D,G,H

Critical path is A-C-E-G-I. Completion time is 25 weeks. Total normal cost = $32,000. Activity Normal Time Crash Time

Normal Cost

Crash Cost

Crash cost/week

1000

6000

$2500

4000

2000

5000

6000

500

2500

3800

1300

2000

3000

1000

4500

8,500

2000

3000

3800

800

8000

17,000

3000

Activity D is the lowest cost per week crash but it is not on the critical path. 17

OM6 C18 IM Options: 1. crash A by 2 weeks for a cost of $5000 2. crash G by 2 weeks for a cost of $4000 3. crash I by 2 weeks for a cost of $6000 4. crash E (lowest crash cost/week) by 1 week and G (next-lowest crash cost/week) by 1 week at a cost of $3300 The key is to ensure that no other path becomes critical as we crash. The lowest cost crash option is #4 (E by 1 and G by 1 for a total crash cost of $3,300). Total project cost is now $32,000 + $3,300 = $35,300. 14. The table below shows estimates of activity times (weeks) for a project:

Activity

Optimistic Time

Most Probable Time

A B C D E F G

4 2.5 6 5 6 1 8

5 3 7 5.5 7 3 10

Pessimistic Time 6 3.5 8 9 8 5 12

Suppose that the critical path is A-C-E-F-G. What is the probability that the project will be completed a. b. c. d.

within 33 weeks? within 30 weeks? in more than 31 weeks? in 32 weeks? Activity Mean Variance A 5 0.111 B 3 0.028 C 7 0.111 D 6 0.444 E 7 0.111 F 3 0.444 G 10 0.444 H 8 1.778

The expected completion time for the critical path is 32; the variance along the critical path sums to 1.221, so the standard deviation is 1.105. a. z = (33 – 32)/1.105 = 0.905. Probability = 0.817 (approx. by interpolation) (If students select 0.82894, they are using the z table incorrectly!) 18

OM6 C18 IM b. z = (30 – 32)/1.105 = -1.81. Probability = .035 c. z = (31 – 32)/1.105 = -.905. Probability = (approx.) 1 – 0.183 = 0.817 d. Since 32 is the mean, this probability is 0.5 15. The table below shows estimates of the optimistic, most probable, and pessimistic times for the situation described in Problem 10. What is the probability the project will be completed in time for Kozar to begin marketing the new product within 27 months? Most Immediate Optimistic Probable Pessimistic Activity Predecessors Time Time Time A --1 1.5 5 B

B, C

3.5

6.5

C, D, E

6.5

7.5

11.5

Using the 3-point estimates of times, we obtain: Activity A B C D E F G

Mean 2 4 2 5 6 8 9

Variance 0.44 0.11 0.11 0.25 1.78 0.69 1.78

OM6 C18 IM

Activity A

Immediate Time Predecessor (days) --2

Earliest Start 0

Earliest Finish 2

Latest Start 0

Latest Finish 2

Slack 0

B,C

C,D.E

Critical path is A-B- F-G; completion time is 29 months. Variance of the critical path is 3.02. Assuming a normal distribution, the probability of completion in 27 months is calculated as: z = (27 – 29)/sqrt(3.02) = -1.15 Probability = 0.125. There is only a small chance of meeting this deadline.

Case Teaching Note: Alternative Water Supply – Single Project Introduction Gordon Rivers, the City Manager of Saratoga, Florida and Jay Andrews, the project manager for Major Design Corporation (MDC), must manage this project. “We need the ‘intake and transmission main’ designed, bid, and completed in 35 weeks. The City of Saratoga has a future $2 million dollar federal grant riding on the project getting done on time,” Mr. Rivers said. Jay nodded in agreement. Mr. Rivers continued by saying, “Jay, the project needs to come in on-schedule and within the budget. Now take this schedule back and figure out how we are going to do it.” Notice that the case does not provide how long the current project takes (which is 40 weeks). Therefore, the student needs to do a basic CPM analysis and compute the total normal costs, critical path, activity slacks, and current project completion time. Then they must crash the project from 40 to 35 weeks and eventually two paths become critical and require the crashing of both CPs. Project Description The objective of the project is to design a fully functional surface water intake that is protective of the environment, will last at least 30 years, and will have a low life cycle cost (i.e. capital, maintenance, and energy consumption). For this type of project, engineering design accounts for 20 percent of total project cost. The design stage is also important because the decisions 20

OM6 C18 IM made during design lock in 80 percent or more of the life cycle costs of the project. describes each project activity and provides the data below.

The case

Alternative Water Supply (AWS) – Single Project

Precedence

Regular Time (weeks)

Conceptual Design

none

$30,000

$33,500

Preliminary Design

$52,000

$58,000

$59,000

$76,000

Final Design Environmental Permit Application Preparation

$48,000

$58,200

Environmental Permit Review and Approval

$38,000

Activity ID

Description

Crash Time (weeks)

Normal Cost Estimate

Crash Cost Estimate

Building Permit Application Preparation

$35,000

$38,000

Building Permit Review and Approval

$6,000

Property Acquisition

$90,000

$115,000

Bid Project

C, H

$6,000

Construction Start (Dummy Activity)

G, I

Decisions and Analysis Jay manages about a half dozen engineering projects at any one time so he asks you to analyze this project for ways to complete the project in 35 weeks. Jay would like to meet with you tomorrow to discuss the results of your analysis. To organize your analysis you outline the following steps. 1. Draw the project network diagram and determine the normal time to complete the project, activity slack times, the critical path(s), and total project costs (i.e., baseline your project) using Critical Path Method. 2. Determine the best way to crash the project to complete it in 35 weeks with revised activity slack times, critical path(s), and total project costs. Provide reasoning as to how all crashing decisions were made.

OM6 C18 IM

See the OM5 C18 Case TN Excel File for CPM diagrams from 40 to 35 weeks. networks are pasted below.

Two

OM6 C18 TN - AWS -- Single Project Excel CPM Models + Crashing

TN Exhibit 1A - AWS -- Single Project -- Baseline Network Diagram - Project Complete in 40 Weeks

0 0

35 1

0 16

40 0

ST LS

40 0

Legend

34 6

TN Exhibit 1F - AWS -- Single Project -- Baseline Network Diagram - Project Complete in 35 Weeks

0 0

31 0

Crash B by 2 weeks at $6,000

Crash A by 1 week at $3,500

Crash H by 2 week at $25,000

35 0

Crash C by 1 week at $5,667 TOTAL = $40, 167

35 13

4 17

31 4

0 0

OM6 C18 IM

The total cost to achieve a 35 weeks project completion date is $404,167 by crashing A by 1 week, B by 2 weeks, H by 2 weeks, and C by 1 week. Total crash costs are $40,167 and total normal plus crash costs are now $404,167. Notice that two paths eventually become critical paths (i.e., A-B-H-I-J and A-B-C-I-J) and therefore both need to be crashed (H by 1 week and C by 1 week) to get to 35 weeks. As the project is crashed make sure the students recognize that more resources are required including moving resources from slack activities to critical path activities. In the initial CPM problem, activities D, E, F, and G all have 4 weeks of slack time. Activity C has 1 week of slack time. 3. Activity times with the greatest uncertainty are Activities D, E, and H. Describe conceptually how you could model this uncertainty in activity times. (You do not have the necessary data to actually do this numerically.) The sole objective of this question is to highlight the issue for students of what can the modeler do if the uncertainty of the activity time is highly uncertain. Property acquisition (H) and environmental permitting (D and E) activities represent the greatest uncertainty. PERT, of course, is one way to try to build uncertainty into the analysis but it requires more data and assumptions. Even if you don’t cover PERT you can at least spend 5 minutes explaining how it might be used here. Ask your students, “Can reasonable estimates of optimistic, most likely, and pessimistic times be obtained? Are they valid?” Do activities with huge uncertainty render CM and PERT useless? Later, you find the actual post script for the case and the huge variance in planned versus actual completion time for property acquisition is why they were delayed about one year and did not gain the $2 million federal grant! 4. What are your final recommendations? 1

Crash the project to 35 weeks as previously defined so as not to lose the opportunity for $2 million dollars of federal grant money.

The total cost of the 35 week project is $404,167.

Use a Gantt chart to communicate to project practitioners (easy to understand).

Ensure that the necessary resources are available and used to crash the project to 35 weeks.

Whereas other project activities are somewhat within the control of the MDC firm, please note that activities D, E, and H are beyond the control of the MDC firm, and therefore, they must develop “back-up plans” in case these activities fall behind. This 23

OM6 C18 IM might include allocating more expert labor to these tasks (i.e., sustainability engineers, lawyers, etc.) but even this action may not keep these activities on schedule. Other case issues 1 A short discussion of the actual water resource project and its impact on the environment might be in order. Economic, environment, and social sustainability issues are involved in the project. Ask the students to briefly describe each. 2 Postscript: The actual project was delayed about one year due to activities property acquisition (H) delays. The city missed their opportunity for the federal funding grant of $2 million dollars. (Federal grants often have an expiration date and this was the case here.)

OM6 – SC A OM6 Supplementary Chapter A: Work Measurement, Learning Curves, and Standards Problems, Activities, and Discussions (1)

Do you think the following jobs require standard times? Explain your reasoning. a. Carpet installers b. Software programmers c. Cable T.V. installers d. Hotel maids e. Bank tellers f. Airline flight attendants g. Dentists h. Medical doctors i. Restaurant reservations j. Telephone call center representatives Yes. Most repetitive jobs that do not require high levels of customization or professional expertise can most likely use standard times. These would include carpet installers (based on square feet), hotel maids (number of standard rooms) , airline flight attendants (passing out drinks and snacks, and number of passengers) and restaurant reservations. Most other jobs listed here are not as highly repetitive.

(2)

What sample sizes should be used for these time studies? a. There should be a .90 probability that the value of the sample mean is within 2 minutes, given that the standard deviation is 4 minutes. z = 1.645 (1.645)2(4)2 n = --------------- = 10.82 or 11 (2)2 b. There should be a 95 percent chance that the sample mean has an error of 0.10 minutes or less when the variance is estimated as 0.50 minutes.

OM6 – SC A z = 1.96 (1.96)2(.5) n = --------------- = 192.08 or 193 (.1)2

(3)

Compute the number of observations required in a work-sampling study if the standard deviation is 0.2 minute and there should be a 90 percent chance that the sample mean has an error of (a) 0.15 minute, (b) 0.05 minute, and (c) 0.005 minute. a. (1.645)2(.2)2 n = ---------------- = 4.8 or 5 (.15)2 b. (1.645)2(.2)2 n = ---------------- = 43.296 or 44 (.05)2 c. (1.645)2(.2)2 n = --------------- = 4329.6 or 4330 (.005)2

OM6 – SC A (4)

Exhibit A.10 shows a partially completed time-study worksheet. Determine the standard time for this operation. In the chart below, C.T. stands for cumulative time; E.T. stands for (not extraterrestrial!) element time; N.T. stands for normal time Work element --------A C.T. E.T.

1 --.09 .09

2 3 4 --- --- --.12 .08 .11 .12 .08 .11

5 --.10 .10

6 --.09 .09

7 --.13 .13

8 9 --- --.12 .13 .12 .13

sum avg rat. N.T. --- ---- ---- ---.97 .108 1.05 .113

C.T. E.T.

.23 .14

.18 .21 .20 .16 .13 .09

.24 .14

.22 .13

.26 .13

.25 .25 .13 .12

1.17 .13

1.00 .130

C.T. E.T.

.46 .23

.49 .46 .44 .21 .25 .24

.47 .23

.47 .25

.49 .23

.46 .48 .21 .23

2.08 .231

.90 .208

C.T. E.T.

.61 .15

.66 .62 .59 .17 .16 .15

.69 .22

.67 .20

.67 .18

.66 .70 .20 .22

1.65 .183

.85 .156

C.T. E.T.

.70 .09

.74 .72 .68 .08 .10 .09

.79 .10

.80 .13

.76 .78 .09 .12

.81 .11

.91 .101 1.00 .101

C.T. .30 .28 .26 .31 .28 .29 .26 .28 .28 E.T. 1.00 1.02 .98 .99 1.07 1.09 1.02 1.06 1.09

2.54 .282 1.10 .310 sum 1.018

Allowances: personal 5%; fatigue 5%; delay 5% Standard time = 1.018(1+.15) = 1.171

(5)

Using a fatigue allowance of 20 percent, and given the following time-study data obtained by continuous time measurement, compute the standard time.

Activity Get casting Fix into fixture Drilling operation Unload Inspect Replace

Cycle of Observation Performance 1 2 3 4 5 Rating 0.21 2.31 4.40 6.45 8.59 0.95 0.52 2.59 4.66 6.70 8.86 0.90 1.52 3.65 5.66 7.60 9.90 1.00 1.73 3.83 5.91 7.96 9.95 0.95 1.98 4.01 6.15 8.21 10.30 0.80 2.10 4.20 6.25 8.34 10.42 1.15

OM6 – SC A Normal Activity 1 2 3 4 5 Avg. PR Time ------------ ---- ---- ---- ---- ---- ------ ----- ------get casting 0.21 0.21 0.20 0.20 0.25 0.214 0.95 0.2033 fix in fixt. 0.31 0.28 0.26 0.25 0.27 0.274 0.90 0.2466 drill opn. 1.00 1.06 1.00 0.90 1.04 1.000 1.00 1.0000 unload 0.21 0.18 0.25 0.36 0.04 0.208 0.95 0.1976 inspect 0.25 0.18 0.24 0.25 0.35 0.254 0.80 0.2032 replace 0.12 0.19 0.10 0.13 0.12 0.132 1.15 0.1518 -----Normal time 2.0025 plus allowances (20%) 0.4005 -----2.4030 (Note: a good analyst should question the data for the inspection activity in cycle 5. The low value in comparison to the other cycles might have been the result of a recording error. Data are not always correct!) (6)

Provide the data missing from the following information. Time is in minutes.

Actual Time 10.6 7.8 7.5 2

Normal Time _____ 7.2 _____ _____

Standard Time _____ _____ 7.98 _____

Performance Rating 1.04 _____ 1.05 1.10

Fatigue Allowance 20% 15% _____ 20%

Actual Time 10.6 7.8 7.5 2.0

Normal Time 11.024 7.2 7.785 2.200

Standard Time 13.2288 8.28 7.98 2.64

Performance Rating 1.06 .923 1.05 1.10

Fatigue Allowance 20% 15% 2.44% 20%

(7)

A part-time employee who rolls out dough balls at a pizza restaurant was observed over a 40-hour period for a work-sampling study. During that time, she prepared 550 pieces of pizza dough. The analyst made 50 observations and found the employee not working four times. The overall performance rating was 1.10. The allowance for the job is 15 percent. Based on these data, what is the standard time in minutes for preparing pizza dough? Effective number of hours worked = 40(46/50) = 36.8 hours © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM6 – SC A Output during this period = 550 pieces Actual time per piece= 36.8(60)/550 = 4 minutes per piece Normal time = actual time x performance rating = 4(1.1) = 4.4 minutes Standard time = 4.4(1.15) = 5.06 minutes (8)

How many observations should be made in a work-sampling study to obtain an estimate within 10 percent of the proportion of time spent changing tools by a production worker with a 99 percent probability? (2.575)2(.5)(.5) n = --------------------- = 166 (.5 is the most conservative estimate of p) (.10)2

(9)

Linda Bryant recently started a small home-construction company. In an effort to foster high quality, rather than subcontracting individual work, she has formed teams of employees who are responsible for the entire job. She has contracted with a developer to build 20 homes of similar type and size. She has four teams of workers. The first homes were built in an average of 145 days. How long will it take to complete the contract if an 85 percent learning curve applies? Assuming that each team builds five homes, the total number of days can be found using the table of cumulative values for learning curves: 145(4.0311) = 584.5 days Assuming 300 working days per year, this is about 2 years.

(10)

A manufacturer has committed to supply 16 units of a particular product in 4 months (that is, 16 weeks) at a price of $30,000 each. The first unit took 975 hours to produce. Even though the second unit took only 750 hours to produce, the manufacturer is anxious to know: a. if the delivery commitment of 16 weeks will be met, b. whether enough labor is available (currently 500 hours are available per week), c. whether or not the venture is profitable. Apply learning-curve theory to each of those issues. Assume the material cost per unit equals $22,000; labor equals $10 per labor-hour, and overhead is $2,000 per week. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM6 – SC A b = -ln(0.75)/ln 2 = 0.415

The delivery schedule can be met.

The available labor force will be utilized almost fully.

material costs = 22000(16) = 352,000 labor costs = 7637(10) = 76,370 overhead (15 wks.) = 15(2000) = 30,000 total costs = $458,370 unit cost = 458,370/16 = $28648.125 unit revenue = $30,000 unit profit = 30,000 - 28648 = $1352

OM6 – SC A

The State versus John Bracket Case Study Teaching Note Overview Work study data is presented in case exhibits indicating the performance of four different employees doing the same job as Mr. Bracket and Mr. Bracket's job performance. Are the revised daily production quotas for Mr. Bracket of 300 invoices/day valid? The answer is probably yes. The case highlights the importance of work measurement and its methods and procedures as the only objective way to evaluate job performance. Case Questions and Brief Answers 1. Who’s case is justified—Mr. Davis or Mr. Bracket? Explain. The data Mr. Davis had for justifying raising Mr. Bracket’s quota is shown in Exhibit A.11. Samples #1 to #4 represent four different commission employees doing the same job as Mr. Bracket-- processing commission invoices. These data result in an average normal time per invoice of 1.0915 minutes [(1.265 + 1.221 + 1.003 + 0.877)/4]. With an allowance factor of 20% the standard time is 1.3098 (1.0915*1.2) minutes per invoice or 45.81 per hour. During a typical 7-hour workday an average employee could process 320.66 invoices per day assuming a one-hour lunch break. A similar study was performed for Mr. Bracket’s invoice processing productivity; these results are shown in Exhibit A.12. These data result in an average normal time per invoice of 1.722 minutes [(1.808 + 1.452 + 2.032 + 1.595)/4]. With an allowance factor of 20% the standard time is 2.066 (1.722*1.2) minutes per invoice or 29.04 per hour. During a typical 7-hour workday Mr. Bracket could process 203.29 invoices per day assuming a onehour lunch break. Based on these performance data and assuming the study was conducted correctly, Mr. Bracket clearly has a productivity problem. The other four benchmark employees are producing 321 invoices/day versus Mr. Bracket's 203 invoices/day. Management is justified in raising Mr. Bracket's daily production quota. 2. What other issues should be considered? The episode at the beginning of the chapter has one troublesome comment, which is "Bracket is always late for work, plays games on the computer, violates our dress code, and is generally disliked by his peer employees." Students may see the comment as management's bias against Mr. Bracket which may be true. However, work study results are based on objective facts and standard work © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM6 – SC A measurement procedures and methods, and Mr. Bracket's daily productivity is too low. 3. Would you present these data in court? Why or why not? The issue for the student is the integrity of the work study. Was the study conducted in an objective and equitable way? These are the questions Mr. Bracket's attorney will ask? Given the case data one should conclude the answer the work study was conducted in a correct and profession way. What are the characteristics of a good work study? • • • • • •

Adequate sample size (no information given in case so assume OK) Multiple performance raters (no information given in case so assume OK) Job tasks clearly defined. Work study best for repetitive tasks. Adequate and fair allowance factor used. Accurate computations and procedures.

One issue students may identify is that the performance rating by outside raters for the four employees ranged from 1.00 to 1.20 while for Mr. Bracket they ranged from 0.75 to 1.00. Mr. Bracket's expert witness may challenge these human judgment based performance ratings. As long as the multiple raters have experience in this business and are independent of the organization with no apriori bias, the ratings should be viewed as reasonable. 4. What are your final recommendations? Most students will recommend maintaining the revised production quota for Mr. Bracket of 300 invoices/day. Teaching Plan 1. 2. 3. 4. 5.

Who’s case is justified—Mr. Davis or Mr. Bracket? Explain. What other issues should be considered? Would you present these data in court? Why or why not? What are the characteristics of a good work study? What are your final recommendations?

OM4 SC C OM4 Supplementary Chapter C: Modeling Using Linear Programming Problems, Activities, and Discussions (1)

The Erlanger Manufacturing Company makes two products. The profit estimates are $35 for each unit of product 1 sold and $50 for each unit of product 2 sold. The labor-hour requirements for the products in the three production departments are shown in the following table. Product Department 1 2 A 1.50 3.00 B 2.00 1.00 C 0.25 0.25 The departments’ production supervisors estimate that the following number of labor-hours will be available during the next month: 450 hours in department A, 325 hours in department B, and 50 hours in department C. a. Develop a linear programming model to maximize profits. b. Find the optimal solution. How much of each product should be produced, and what is the projected profit? c. What are the scheduled production time and slack time in each department? a. Max 35 Prod1 + 50 Prod2 1.5 Prod1 + 3 Prod2  450 2 Prod1 + 1 Prod2  325 .25 Prod1 + .25 Prod2  50 Prod 1, Prod 2  0

OM4 SC C b.

c. All the labor time is used in departments A and C; department B has 350 hours of slack. (2)

M&D Chemicals produces two products sold as raw materials to companies manufacturing bath soaps, laundry detergents, and other soap products. Based on an analysis of current inventory levels and potential demand for the coming month, M&D’s managers have specified that the total production of products 1 and 2 combined must be at least 350 gallons. Also, a major customer’s order for 125 gallons of product 1 must be satisfied. Product 1 requires 2 hours of processing time per gallon, and product 2 requires 1 hour; 600 hours of processing time are available in the coming month. Production costs are $2 per gallon for product 1 and $3 per gallon for product 2. a. Determine the production quantities that will satisfy the specified requirements at minimum cost. b. What is the total product cost? c. Identify the amount of any surplus production. a. Prod1 and Prod2 = number of gallons of each to produce min 2 Prod1+ 3 Prod2 Prod1  125 Prod1 + Prod2  350 2 Prod1 + Prod2  600 Prod1, Prod 2  0

OM4 SC C

b. Total cost = $800 c. There is surplus of 125 gallons of product 1 over the amount required for the major order (3)

Photo Chemicals produces two types of photograph-developing fluids. Both products cost Photo Chemicals $1 per gallon to produce. Based on an analysis of current inventory levels and outstanding orders for the next month, Photo Chemicals managers have specified that at least 30 gallons of product 1 and at least 20 gallons of product 2 must be produced during the next two weeks. They have also stated that an existing inventory of highly perishable raw material required in the production of both fluids must be used within the next two weeks. The current inventory of the perishable raw material is 80 pounds. Although more of this raw material can be ordered if necessary, any of the current inventory that is not used within the next two weeks will spoil—hence the management requirement that at least 80 pounds be used in the next two weeks. Furthermore, it is known that product 1 requires 1 pound of this perishable raw material per gallon and product 2 requires 2 pounds per gallon. Since the firm’s objective is to keep its production costs at the minimum possible level, the managers are looking for a minimum-cost production plan that uses all the 80 pounds of perishable raw material and provides at least 30 gallons of product 1 and at least 20 gallons of product 2. What is the minimum-cost solution? Min 1Prod1 + 1 Prod2 1Prod1  30 1Prod2  20 1Prod1 + 2 Prod2  80 Prod1, Prod 2  0 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM4 SC C

(4)

Managers of High Tech Services (HTS) would like to develop a model that will help allocate technicians’ time between service calls to regular-contract customers and new customers. A maximum of 80 hours of technician time is available over the two-week planning period. To satisfy cash flow requirements, at least $800 in revenue (per technician) must be generated during the two-week period. Technician time for regular customers generates $25 per hour. However, technician time for new customers generates an average of only $8 per hour because in many cases a newcustomer contact does not provide billable services. To ensure that newcustomer contacts are being maintained, the time technicians spend on newcustomer contacts must be at least 60 percent of the time technicians spend on regular-customer contacts. Given these revenue and policy requirements, HTS would like to determine how to allocate technicians’ time between regular customers and new customers so that the total number of customers contacted during the two-week period will be maximized. Technicians require an average of 50 minutes for each regular-customer contact and 1 hour for each new-customer contact. Develop a linear programming model that will enable HTS to determine how to allocate technicians’ time between regular customers and new customers. Let R = time allocated to regular customer service, N = time allocated to new customer service Max 1.2R + N R + N  80 25R + 8N  800 -.6R + N  0 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM4 SC C R, N  0

(5)

Hilltop Coffee manufactures a coffee product by blending three types of coffee beans. The cost per pound and the available pounds of each bean are given in the following table: Bean 1 2 3

Cost/Pound Available Pounds $0.50 500 $0.70 600 $0.45 400

Consumer tests with coffee products were used to provide quality ratings on a 0-to-100 scale, with higher ratings indicating higher quality. Productquality standards for the blended coffee require a consumer rating for aroma to be at least 75 and a consumer rating for taste to be at least 80. The aroma and taste ratings for coffee made from 100 percent of each bean are given in the following table: Bean Aroma Rating Taste Rating 1 75 86 2 85 88 3 60 75 It is assumed that the aroma and taste attributes of the coffee blend will be a weighted average of the attributes of the beans used in the blend. a. What is the minimum-cost blend of the three beans that will meet the quality standards and provide 1,000 pounds of the blended coffee product? b. What is the bean cost per pound of the coffee blend? © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM4 SC C

B1, B2, B3 = number of pounds of each bean to use in the blend Min .5B1 + .7B2 + .45B3 75B1 + 85B2 + 60B3  75000 86B1 + 88B2 + 75B3  80000 B1  500 B2  600 B3  400 B1 + B2 + B3 = 1000

(6)

Production routing. Lurix Electronics manufactures two products that can be produced on two different production lines. Both products have their lowest production costs when produced on the more modern of the two production lines. However, the modern production line does not have the capacity to handle the total production. As a result, some production must be routed to the older production line. Data for total production requirements, production-line capacities, and production costs are shown in the table at the top of page C27. Formulate an LP model that can be used to make the production routing decision. What are the recommended decision and the total cost? (Use notation of the form x11 units of product 1 produced on line 1.) min 3.2x11 + 5x12 + 2.5x21 + 4.1x22 x11 + x12  500 x21 + x22  700 x11 + x21  790 x12 + x22  620 xij  0 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM4 SC C

(7)

The Two-Rivers Oil Company near Pittsburgh transports gasoline to its distributors by truck. The company has recently received a contract to begin supplying gasoline distributors in southern Ohio and has $600,000 available to spend on the necessary expansion of its fleet of gasoline tank trucks. Three models of trucks are available, as shown in the table at the bottom of the page. The company estimates that the monthly demand for the region will be 550,000 gallons of gasoline. Due to the size and speed differences of the truck models, they vary in the number of possible deliveries or round-trips per month; trip capacities are estimated at 15 per month for the Super Tanker, 20 per month for the Regular Line, and 25 per month for the Econo-Tanker. Based on maintenance and driver availability, the firm does not want to add more than 15 new vehicles to its fleet. In addition, the company wants to purchase at least three of the new Econo-Tankers to use on the short-run, low-demand routes. As a final constraint, the company does not want more than half of its purchases to be Super Tankers. a. If the company wants to satisfy the gasoline demand with minimal monthly operating expense, how many models of each truck should it purchase? b. If the company did not require at least three Econo-Tankers and allowed as many Super Tankers as needed, what would the optimal strategy be? S = number of super tankers purchased R = number of regular line tankers purchased E = number of econo-tankers purchased

OM4 SC C Min 550S + 425R + 350E 67000S + 55000R + 46000E  600,000 15(5000)S + 20(2500)R + 25(1000)E  550,000 or 75000S + 50000R + 25000E  550,000 S + R + E  15 E3 S  0.5(S + R + E) S, R, E  0

(8)

An appliance store owns two warehouses and has three major regional stores. Supply, demand, and transportation costs for refrigerators are provided in the following table: Store 1 2 Demand

Warehouse A B 6 8 12 3 20 50

C 5 7 50

Supply 80 40

a. Set up the transportation tableau. b. Find an optimal solution using Excel.

OM4 SC C

(9)

Forbelt Corporation has a one-year contract to supply motors for all refrigerators produced by the Ice Age Corporation. Ice Age manufactures the refrigerators at four locations around the country: Boston, Dallas, Los Angeles, and St. Paul. Plans call for these numbers (in thousands) of refrigerators to be produced at the four locations. Boston 50 Dallas 70 Los Angeles 60 St. Paul 80 Forbelt has three plants that are capable of producing the motors. The plants and their production capacities (in thousands) follow: Denver 125 Atlanta 75 Chicago 150 Because of varying production and transportation costs, the profit Forbelt earns on each lot of 1,000 units depends on which plant produced it and to which destination it was shipped. The accounting department estimates of the profit per unit (shipments are made in lots of 1,000 units) are as follows:

OM4 SC C

Produced at Denver Atlanta Chicago

Boston 7 20 8

Shipped to Dallas Los Angeles 11 8 17 12 18 13

St. Paul 13 10 16

Given profit maximization as a criterion, Forbelt would like to determine how many motors should be produced at each plant and how many should be shipped from each plant to each destination.

10. Develop and solve a linear programming model for crashing the Wildcat Software Consulting problem in Chapter 18. To construct a linear programming model for the crashing decision, we define the following decision variables: xi = finish time of activity i yj = amount of crash time used for activity j Note that the normal-time project cost (obtained by summing the column of normal costs in Exhibit 18.11) does not depend on what crashing decisions we will make. As a result, we can minimize the total project cost (normal costs plus crashing costs) by minimizing the crashing costs. Thus, the linear programming objective function becomes min 400yA + 500yB + 250yC + 50yD + 1200yE + 1100 yG + 1000yI.

OM4 SC C The linear programming constraints that must be developed include those that describe the network, limit the activity crash times, and result in meeting the desired project-completion time. Of these, the constraints used to describe the network are perhaps the most difficult, being based on the conditions that 1. The start time of an activity must be greater than or equal to the activitycompletion times for all activities leading into that event. 2. An activity time is equal to its normal time less the length of time it is crashed. To begin, the completion times for activities A and B are simply their normal time less crash time: xA = 3 – yA xB = 5 – yB Activity C’s finish time must be at least as large as the finish time for activities A and B plus the crashed activity time. Thus, xC  xA + 2 – yC xC  xB + 2 – yC Continuing through the network, we obtain: xG  xC + 4 – yG xD  xC + 6 – yD xE  xC + 5 – yE xH  xG + 3 xH  xD + 3 xF  xE + 3 xH  xF + 3 xI  xD + 4 – yI xI  xF + 4 – yI xJ  xH + 2 xK  xI + 2 xK  xJ + 2 The maximum allowable crash-time constraints follow. yA  2 yb  2 yC  1 yD  3 yE  2 © 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM4 SC C yG  1 yI  2 To account for the desired project completion time of 20 weeks, we add the constraint xK = 20. Adding the nonnegativity restrictions and solving this linear programming model , we obtain

This is the same as Crashing Option #1 in Chapter 18.

OM4 SC C

Holcomb Candle Teaching Note Overview This case presents a simple optimization scenario to determine the best number of candle products to produce to meet marketing contract requirements and limitations on raw material availability. Students need to develop an appropriate linear optimization model, solve it using Excel Solver, and interpret the results. Case Analysis Mathematical model Variables = number of candles per store, where LJ = large (8 oz.) jar, SJ = small (4 oz.) jar, LP = large (6 in.) pillar, SP = small (3 in.) pillar, and VP = votive pack. Maximize net profit = sales price – manufacturing cost = .24LJ+.19SJ+.23LP+.21SP+.17VP Subject to the constraints: .48LJ+.24SJ+.23LP+.23SP+.26VP<=8ft (shelf space) .48LJ>=2ft .23LP>=2ft .26VP>=1ft (minimum shelf requirements) (LJ+SJ)>=(LP+SP) (jars should be at least as many as pillars) (.5LJ+.25SJ+.5LP+.25SP+.3125VP)(15000)<=200,000 (wax) (.24LJ+.12SJ+.24LP+.12SP+.15VP)(15000)<=100,000 (fragrance) (.43LJ+.22SJ+.58LP+.33SP+.8VP)(15000)<=250,000 (wick) Note that the left hand side of these constraints equals the amount used per store times the number of stores. An Excel model with the optimal solution is shown below, followed by the Solver model:

OM4 SC C

Students should recognize that the display feet constraint is the “bottleneck” and limits the use of all available raw material. The sensitivity report, shown below, provides additional information. No small pillars are produced because it is not profitable to do so; the profit would have to increase by $0.02 per unit before it would be advantageous. This should lead to a discussion of marketing issues and product lines. While optimal, not producing any small pillars may put the firm at a competitive disadvantage from a customer satisfaction viewpoint. The effect on profit can be evaluated by adding a constraint specifying a minimum number of small pillars to produce per store.

OM4 SC C

The shadow price on display feet shows that by increasing the amount of display feet, profit per store can be increased. However, this can only be increased by 0.949 before a new solution would need to be found. Again, running a scenario by increasing the display feet from 8 to 9 would show the change in the solution; this is provided below. Note that some (but only a fraction) of small pillars has been added to the solution.

Instructors can use this to discuss marketing-operations relationships. Teaching Plan 1. How would you develop a mathematical model to allocate products to stores? 2. What is the optimal solution? 3. What implications does the solution have for operations? For marketing?

OM4 SC C 4. How can operations and marketing work together from an enterprise perspective?

OM6 – SC D OM6 Supplementary Chapter D: Simulation Problems, Activities, and Discussions (1)

The following data show the number of visitors to King’s Palace amusement park on a summer day (rounded to the nearest 1,000) during the last season: Number of Visitors 25,000 26,000 27,000 28,000 29,000 30,000 31,000 35,000

Frequency 5 7 9 15 23 28 10 3

a. Develop a relative frequency distribution for these data. b. Using the random numbers in row 7 of Appendix C, simulate attendance for a 15-day period. What is the average attendance? The total number of days (sum of frequencies) is 101. Thus, the relative frequency is the frequency/101. Because of rounding, an adjustment needs to be made so that the sum of the relative frequencies is 1.0 (we do this for the last row). Visitors -------25000 26000 27000 28000 29000 30000 31000 35000

Relative Frequency Random numbers ------------------------------.05 00-04 .07 05-11 .09 12-20 .15 21-35 .23 36-58 .28 59-86 .10 87-96 .03 97-99

Using 2-digit random numbers from row 7 of Appendix C (60960 89864 82258 19432 15131 39909), we obtain the following for 15 days of simulated operation:

OM6 – SC D

Day ---1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Random number --------------------60 96 08 98 64 82 25 81 94 32 15 13 13 99 09

Visitors -------30000 31000 26000 35000 30000 30000 28000 30000 31000 28000 27000 27000 27000 35000 26000

Average attendance = 29,400 (2)

Charlestown Electric Company is building a new generator for its Mt. Washington plant. Even with good maintenance procedures, the generator will periodically fail or break down. Historical figures for similar generators indicate the following relative frequency of failures during a year: Number of Failures 0 Relative Frequency 0.80

1 0.15

2 0.04

3 0.01

Assume the useful lifetime of the generator is 25 years. Use simulation to estimate the number of breakdowns that will occur in the 25 years of operation. Is it common to have five or more consecutive years of operation without a failure? To generate the number of failures for each year of simulated operation, use the following table: No. of failures -----------------0 1 2 3

Random numbers -----------------------00-79 80-94 95-98 99

OM6 – SC D

Students’ answers will vary depending on the random digits chosen. Since the expected value is 0.26, most students should get around 4 or 5 breakdowns over 25 years. (3)

A service technician for a major photocopier company is trained to service two models of copier: the X100 and the Y200. Approximately 60 percent of the technician’s service calls are for the X100 and 40 percent are for the Y200. The service-time distributions for the two models are as follows: X100 Time (minutes) 25 30 35 40

Relative Frequency 0.55 0.30 0.10 0.05

Y200 Time (minutes) 20 25 30 35

Relative Frequency 0.40 0.30 0.20 0.10

a. Show the random number intervals that can be used to simulate the type of machine to be serviced and the length of the service time. b. Simulate 20 service calls. What is the total service time the technician spends on the 20 calls? a.

Type of service call -----------------------X-100 Y-200

Random numbers ----------------------00-59 60-99

Time X-100 Random numbers --------------- -----------------------25 00-54 30 55-84 35 85-94 40 95-99 Time Y-200 --------------20 25 30 35

Random numbers -----------------------00-39 40-69 70-89 90-99

OM6 – SC D Answers will vary depending on the actually random digits used for the simulation. Based on expected values, the average time per call is approximately 27 minutes, so you would expect about 540 minutes for 20 calls, although considerable variability will exist. (4)

Bushnell’s Sand and Gravel (BSG) is a small firm that supplies sand, gravel, and topsoil to contractors and landscaping firms. BSG maintains an inventory of high-quality, screened topsoil for supplying the weekly orders for two companies: Bath Landscaping Service and Pittsford Lawn Care, Inc. BSG wants to determine how many cubic yards of screened topsoil to have in inventory at the beginning of each week to satisfy the needs of both its customers. The objective is to establish the lowest possible inventory level that would have a .95 probability of satisfying the combined weekly orders from both customers. The demand distributions for the two customers are as follows:

Bath Landscaping

Weekly Demand 10 15 20 25 30

Pittsford Lawn Care 30 40 50 60

Relative Frequency 0.20 0.35 0.30 0.10 0.05 0.20 0.40 0.30 0.10

Simulate 20 weeks of operation for beginning inventories of 70 and of 80 cubic yards. Based on your limited simulation results, how many cubic yards should BSG maintain in inventory? Discuss what you do in a full-scale simulation of this problem.

Bath Landscaping

Weekly Demand 10 15 20 25 30

Relative Frequency 0.20 0.35 0.30 0.10 0.05

Random Numbers 00-19 20-54 55-84 85-94 95-99

OM6 – SC D Pittsford Lawn Care 30 40 50 60

0.20 0.40 0.30 0.10

00-19 20-59 60-89 90-99

The following simulation uses the first two digits from column 1 for Bath and column 2 for Pittsford in Appendix C:

For a beginning inventory of 70, there is a 1 in 20 (95%) chance of not meeting demand, so it appears that this inventory level will meet the requirement. You might wish to reduce this value and determine if lower inventory levels can also satisfy the requirement. (5)

A project has four activities (A, B, C, and D) that must be completed sequentially in order to complete the project. The probability distribution for the time required to complete each of the activities is shown below.

OM6 – SC D

Activity A

B C

Activity Time (weeks) Probability 5 .25 6 .30 7 .30 8 .15 3 .20 5 .55 7 .25 10 .10 12 .25 14 .40 16 .20 18 .05 8 .60 10 .40

a. Use a random number procedure to simulate the completion time for each activity. Sum the activity times to establish a completion time for the entire project. b. Use the simulation procedure developed in part a to simulate 20 completions of this project. Show the distribution of completion times and estimate the probability that the project can be completed in 35 weeks or less. Activity Time (weeks) Probability 5 .25 6 .30 7 .30 8 .15

Random numbers 00-24 25-54 55-84 85-99

3 5 7

.20 .55 .25

00-19 20-74 75-99

10 12 14 16 18

.10 .25 .40 .20 .05

00-09 10-34 34-74 75-94 95-99

8 10

.60 .40

00-59 60-99

Activity A

OM6 – SC D

The following simulation uses the first two digits from columns 1 through 4 in Appendix C for the times for each of the four activities:

The probability of completing in 35 weeks or less is 14/20 = 0.7. (6)

Bristol Bikes, Inc. wants to develop an order-quantity and reorder-point policy that would minimize the total costs associated with its inventory of exercise bikes. The relative frequency distribution for retail demand on a weekly basis follows: Demand Probability

0 .20

1 .35

2 .25

3 .10

4 .05

5 .05

The relative frequency distribution for lead time follows: Lead Time (weeks) 1 Relative Frequency 0.10

2 0.20

3 4 0.60 0.10

OM6 – SC D

The inventory-holding costs are $1 per unit per week, the ordering cost is $20 per order, the shortage cost is $25 per unit, and the beginning inventory is 7 units. Using an order quantity of 12 and a reorder point of 5, simulate 10 weeks of operation of this inventory system. Demand 0 1 2 3 4 5

Random numbers 00-19 20-54 55-79 80-89 90-94 95-99

Lead time 1 2 3 4

Random numbers 00-09 10-29 30-89 90-99

Assume that orders are placed at the end of the week and arrive at the beginning of a week; thus, if an order is placed at the end of week 4 with a lead time of 3, it will arrive at the beginning of week 8. Here is one simulated example:

(7)

Paula Williams is currently completing the design for a drive-in movie theater in Big Flats, New York. She has purchased the land and is now attempting to determine the number of automobiles to accommodate. Each automobile location requires installing a speaker system at a total cost of $250 per location. From her experience with five other drive-ins she has been operating for eight years, Paula estimates that the nightly attendance will range from 100 to 500 automobiles with the relative frequencies given here. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM6 – SC D

Approximate Number of Automobiles Relative Frequency 100 0.10 200 0.25 300 0.40 400 0.15 500 0.10 a. Simulate 20 days of attendance for capacities of 300, 400, and 500. b. In the 20 days of simulated operations, how many daily demands of 300 would you have expected? Did you observe this many in your simulation? Should you have? Explain. c. After personnel and other operating costs, Paula’s average profit is $1 per car. Using your 20 days of simulated data, what is the average nightly profit for the capacities of 300, 400, and 500? How many days of operation will it take Paula to recover the speaker installation cost if all profits are allocated to this cost? Daily demand Random numbers ------------------ ----------------------100 00-09 200 10-34 300 35-74 400 75-89 500 90-99 a.

Answers will vary depending on the random numbers used.

b. We would expect .4(20) = 8 days of 300 attendance. Over a large sample we expect very close to a 40% frequency. Students might not observe this value due to the small sample size and chance variation. c. The total installation cost is $250(capacity). Dividing this by the total profit/day observed through the simulation gives the recovery period. One simulation is shown here using the first 2 digits of the last column in Appendix C:

OM6 – SC D

(8)

Mt. Washington Garage sells regular and unleaded gasoline. Pump 1 is a selfservice pump. Pump 2, a full-service pump, is used by customers who are willing to pay a higher cost per gallon to have an attendant pump the gas, check the oil, and so on. Both pumps can service one car at a time. On the basis of past data, the owner of the garage estimates that 70 percent of the customers select the self-service pump and 30 percent want full service. The arrival rate of cars for each minute of operation is given by the following probability distribution:

OM6 – SC D Number of Arrivals in 1 Minute of Operation 0 1 2 3 4

Probability .10 .20 .35 .30 .05

The time needed to service a car, which depends on whether the self-service or full-service pump is used, is given by the following probability distribution: Self-Service Pump Service Time (min.) 2 3 4 5

Probability .10 .20 .60 .10

Full-Service Pump Service Time min.) 3 4 5 6 7

Probability .20 .30 .35 .10 .05

Study the operation of the system with a 10-minute simulation. As part of your analysis, consider these types of questions. What is the average number of cars waiting for service per minute at both pumps? What is the average time a car must wait for service? Prepare a brief report for Mt. Washington Garage that describes your analysis and any conclusions you are able to draw. No. arrivals Random numbers --------------- ----------------------0 00-09 1 10-29 2 30-64 3 65-94 4 95-99 Type of service -----------------self full

Random numbers ----------------------00-69 70-99

Self-serv time -----------------2 3 4 5

Random numbers ----------------------00-09 10-29 30-89 90-99

OM6 – SC D

Full-serv time -------------------3 4 5 6 7

Random numbers ----------------------00-19 20-49 50-84 85-94 95-99

The following example shows results using 2 digit random numbers from Appendix C. Column 1 is used for arrivals, column 2 for whether each arrival wants self or full service, column 3 for self serve time, and column 4 for full serve time.

Clearly, the system cannot handle the demand and more pumps are needed. Customers will most likely leave rather than wait. (9)

Conduct a next-event simulation of the Lincoln Savings Bank using the arrival and service times given here. Customer 1 2 3 4 5 6 7 8 9 10

Arrival Time 3.37 3.51 4.32 5.12 6.21 6.65 6.67 9.07 11.33 11.82

Service Time 0.03 0.53 0.53 0.91 0.47 2.47 1.22 0.23 1.47 0.47

OM6 – SC D

Event Time -------------3.37 3.40 3.51 4.04 4.32 4.85 5.12 6.03 6.21 6.65 6.67 6.68 9.07 9.15 10.37 10.60 11.33 11.82 12.80 13.27 (10)

Customer ------------1 1 2 2 3 3 4 4 5 6 7 5 8 6 7 8 9 10 9 10

Event Type -------------Arrival Serv. compl. Arrival Serv. compl. Arrival Serv. compl. Arrival Serv. compl. Arrival Arrival Arrival Serv. compl. Arrival Serv. compl. Serv. compl. Serv. compl. Arrival Arrival Serv. compl. Serv. compl.

# wait. --------0 0 0 0 0 0 0 0 0 1 2 1 2 1 0 0 0 1 0 0

Server avail.? -----------------N Y N Y N Y N Y N N N N N N N Y N N N Y

Domoy Cycles, Inc. purchases a certain model of motorcycle for $5,778. To finance the purchase of this model, Domoy must pay an 18 percent annual interest rate on borrowed capital. This interest rate amounts to approximately $20 per cycle per week. Orders for additional units can be placed each week, but a minimum order size of 5 is required on any given order. It currently takes 3 weeks to receive a new shipment after the order is placed. The cost of placing an order is $70. If Domoy runs out of motorcycles in inventory, a shortage cost of $300 per unit is incurred. Currently, Domoy has 20 units of this model in inventory. Historical data showing the weekly demand follow. Assuming an order quantity of 15 and a reorder point of 10, perform a 12-week simulation of Domoy’s operation. Use the first 12 two-digit random numbers from row x of Appendix C, where x is the fourth digit of your Social Security number. Show your simulation results in a table.

OM6 – SC D

Number of Sales 0 1 2 3 4 5

Number of Weeks 2 5 12 20 10 3

Random number assignments: Number of Sales 0 1 2 3 4 5

Relative Frequency .04 .10 .23 .39 .19 .06

Random numbers 00-03 04-13 14-36 37-75 76-93 94-99

The following is an example simulation:

OM6 – SC D

This case involves determining the best reorder point and reorder level for a product whose demand varies randomly, and whose replenishment lead time is also random. The goal in this case is to design and execute simulation experiments to find an “optimal” solution, at least given the limitations of simulation. In particular, students must fully understand the Excel formulas for the Sound Systems spreadsheet, and this can become rather challenging. Case Analysis As suggested in the case, modifications to the Sound Systems spreadsheet model are easy. Students need to change the random number ranges for the demand and lead time distributions. However, for the lead time, there are only four values, so the range for the lookup table in column P must also be modified. In addition (and this is the hard part), the formulas in column G must be modified to reflect the possible values of the lead time. Specifically, beginning in G15, the formula should begin with: =IF(OR(AND(M9=”YES”,P9=6),AND(M10=”YES”,P10=5),… This cell may then be copied to those below it. Once these modifications are done, the spreadsheet may be used to simulate the problem. One issue students should recognize is the small number of simulated days in the Sound Systems spreadsheet. To get a better value for the average cost, the spreadsheet can be extended for a longer period of time (making the necessary modifications in the average cost/day in cell R4). This will reduce the variability in the results. Here is one set of evaluations for different order quantities and reorder points (using an Excel data table).

OM6 – SC D

Order Quantity

$ 26.15 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Reorder Point 2 3 $ 33.63 $ 34.59 $ 29.31 $ 35.20 $ 28.09 $ 28.12 $ 27.26 $ 25.51 $ 26.12 $ 24.15 $ 22.95 $ 20.83 $ 23.98 $ 13.04 $ 12.82 $ 21.35 $ 17.29 $ 11.74 $ 14.50 $ 18.08 $ 13.55 $ 22.35 $ 12.57 $ 11.98 $ 12.99 $ 17.90 $ 14.41 $ 12.35 $ 15.49 $ 21.58 $ 22.77 $ 18.68 $ 14.04 $ 10.35 $ 15.94 $ 20.26

4 $ 39.42 $ 28.02 $ 27.13 $ 24.97 $ 25.24 $ 20.48 $ 21.75 $ 19.99 $ 22.09 $ 14.06 $ 24.15 $ 18.01 $ 11.22 $ 14.34 $ 12.12 $ 23.06 $ 11.84 $ 11.72

5 $ 32.87 $ 34.68 $ 29.52 $ 18.79 $ 21.12 $ 17.45 $ 22.90 $ 14.15 $ 16.30 $ 13.41 $ 10.71 $ 9.96 $ 12.72 $ 11.44 $ 9.64 $ 10.61 $ 10.24 $ 11.03

6 $33.16 $27.04 $29.31 $26.02 $12.47 $12.37 $10.04 $11.75 $ 9.08 $13.06 $10.13 $18.99 $ 9.85 $19.18 $ 9.54 $11.17 $22.36 $17.10

7 $36.62 $28.87 $25.18 $24.21 $28.58 $24.32 $21.01 $11.13 $22.35 $23.74 $13.26 $ 9.76 $10.16 $10.13 $10.61 $10.89 $ 9.83 $10.99

8 $30.30 $27.61 $23.89 $14.90 $18.75 $22.52 $22.60 $15.78 $13.14 $16.58 $10.18 $ 9.92 $10.78 $13.04 $13.77 $10.19 $23.81 $23.42

Students answer’s will vary considerably if the simulations are replicated. This allows the instructor to discuss issues of variability in simulation and the need for multiple replications. The approach used should be the focus of the discussion rather than the actual answers or recommendations. Teaching Plan 1. How did you modify the Sound Systems spreadsheet? Specifically, how did you change formulas related to the different lead time distribution? 2. What is your recommendation for the reorder point and order quantity? 3. What impact does simulation variability have on your recommendation?

OM6 - SC E OM6 Supplementary Chapter E: Decision Analysis Problems, Activities, and Discussions (1)

Suppose a decision maker faced with four decision alternatives and four states of nature develops the profit-payoff table shown as follows: Decision d1 d2 d3 d4

State of Nature s1 s2 s3 14 9 0 11 10 8 9 10 10 8 10 11

s4 5 7 11 13

a. If the decision maker knows nothing about the chances or probability of occurrence of the four states of nature, what decision would be indicated by the maximax, maximin, and minimax-regret criteria? b. Which decision criterion do you prefer? Explain. Should the decision maker establish the most appropriate decision criterion before analyzing the problem? Explain. c. Assume the payoff table provides cost, rather than profit, payoffs. What is the recommended decision using the optimistic, conservative, and minimaxregret decision criteria? a. Decision Maximum Profit Minimum Profit d1 14 5 d2 11 7 d3 11 9 d4 13 8 maximax: d1 maximin: d3 Regret Matrix: d1 d2 d3 d4

s1 s2 s3 s4 Maximum regret 0 1 1 8 8 3 0 3 6 6 5 0 1 2 5 6 0 0 0 6 minimax regret: d3

OM6 - SC E b.

Choice is up to the decision maker based on his or her philosophy toward risk. Since different alternatives, yield different choices, this should be decided upon before analyzing any data.

c. Decision Maximum Cost Minimum Cost d1 14 5 d2 11 7 d3 11 9 d4 13 8 optimistic: d1 conservative: d2 or d3 Regret Matrix: s1 s2 s3 s4 Maximum regret d1 6 0 2 0 6 d2 3 1 0 2 3 d3 1 1 2 6 6 d4 0 1 3 8 8 minimax regret: d2 (2)

(3)

Suppose the decision maker in Problem 1 obtains information that enables probability estimates to be made: P(s1) = .4, P(s2) = .3, P(s3) = .2, P(s4) = .1. a. Use the expected value (EV) criterion to determine the optimal decision. b. Now assuming the entries in the payoff table are costs, use the EV criterion to determine the minimum-cost solution. a.

EV(d1) = 7.6; EV(d2) = 7.4; EV(d3) = 6.1; EV(d4) = 6.5. Choose d1

Choose d3

Southland Corporation’s decision to produce a new line of recreational products has resulted in the need to construct either a small plant or a large plant. The decision as to which size to select depends on the marketplace reaction to the new product line. To conduct an analysis, marketing managers have decided to view the possible long-run demand as low, medium, or high. The payoff table gives the projected profits in millions of dollars as follows: © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM6 - SC E

Decision Small plant Large plant

Long-Run Demand Low Medium $150 $200 50 200

High $200 500

a. Construct a decision tree for this problem and determine the best decisions using the maximax, maximin, and minimax-regret decision criteria. b. Assume that the best estimate of the probability of low long-run demand is .20, of medium long-run demand is .15, and of high long-run demand is .65. What is the best decision using the EV criterion? a.

OM6 - SC E

EV(d1) = .2(150) + .15(200) + .65(200) = 190 EV(d2) = .2(50) + .15(200) + .65(500) = 365 Recommended decision: d2 (large plant)

(4)

McHuffter Condominiums, Inc., of Pensacola, Florida, recently purchased land near the Gulf of Mexico and is attempting to determine the size of the condominium development it should build there. Three sizes of developments are being considered: small, d1, medium, d2, and large, d3. At the same time an uncertain economy makes it difficult to ascertain the demand for the new condominiums. McHuffter’s managers realize that a large development followed by a low demand could be very costly to the company. However, if McHuffter makes a conservative, small-development decision and then finds high demand, the firm’s profits will be lower than they might have been. With the three levels of demand—low, medium, and high—McHuffter’s managers prepared the payoff table as follows: Decision Small Medium Large

Demand (in Thousands of Dollars) Low Medium High $400 $400 $400 100 600 600 –300 300 900

If P(low) = .50, P(medium) = .35, and P(high) = .15, what decision is recommended by the EV criterion? EV(Small) = .5(400) + .35(400) + .15(400) = 400 EV(Medium) = .5(100) + .35(600) + .15(600) = 350 EV(Large) = .5(-300) + .35(300) + .15(900) = 390 Best decision is Small. (5)

The Gorman Manufacturing Company must decide whether to purchase a component part from a supplier or to manufacture the component at its own plant. If demand is high, it would be to Gorman’s advantage to manufacture the component. If demand is low, however, Gorman’s unit manufacturing cost will be high because of underutilization of equipment. The projected profit in thousands of dollars for Gorman’s make-or-buy decision is as follows: © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM6 - SC E

Decision Manufacture component Purchase component

Demand Low Medium $220 $40 210 45

High $100 70

The states of nature have these probabilities: P(low demand) = .35, P(medium demand) = .35, and P(high demand) = .30. Use a decision tree to recommend a decision.

EV(manufacture) = $121 EV(purchase) = $110.25 Best decision: manufacture © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM6 - SC E (6)

A firm produces a perishable food product at a cost of $10 per case. The product sells for $15 per case. For planning purposes, the company is considering possible demands of 100, 200, and 300 cases. If the demand is less than production, the excess production is discarded. If demand is more than production, the firm, in an attempt to maintain a good service image, will satisfy the excess demand with a special production run at a cost of $18 per case. The product, however, always sells at $15 per case. a. Set up the payoff table for this problem. b. If P(100) = .2, P(200) = .2, and P(300) 5 .6, should the company produce 100, 200, or 300 cases?

E.g., for production = 200 and demand = 100, sales of 100 @ $15 = $1500 less cost of 200 @ $10 = $2000, or a net of -$500. For production of 100 and demand of 200, sales of 200@ $15 = $3000 less cost of 100@ $10 = 1000 less special run of 100 @ $18 = -$1800, or a net of $200. b. Multiply the net profit by the probabilities of demand for each row of the payoff table: EV(100) = 80 EV(200) = 520 EV(300) = 600 Best decision is to produce 300. (7)

Sealcoat, Inc. has a contract with one of its customers to supply a unique liquid chemical product used in the manufacture of a lubricant for airplane engines. Because of the chemical process Sealcoat uses, batch sizes for the product must be 1,000 pounds. The customer has agreed to adjust manufacturing to the full-batch quantities and will order either one, two, or three batches every three months. Since production includes a one-month aging process, Sealcoat must make its production (how much to make) decision before the customer places an order. Thus the product demand alternatives are 1,000, 2,000, and 3,000 pounds, but the exact demand is unknown. Sealcoat’s manufacturing costs are $150 per pound, and the product sells at the fixed contract price of $200 per pound. If the customer orders more than Sealcoat has produced, Sealcoat has agreed to absorb the © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM6 - SC E added cost of filling the order by purchasing a higher-quality substitute product from another chemical firm. The substitute product, including transportation expenses, will cost Sealcoat $240 per pound. Since the product cannot be stored more than two months without spoilage, Sealcoat cannot inventory excess production until the customer’s next three-month order. Therefore, if the customer’s current order is less than Sealcoat has produced, the excess production will be reprocessed and will then be valued at $50 per pound. The decision in this problem is: How much should Sealcoat produce given the costs and the possible demands of 1,000, 2,000, and 3,000 pounds? From historical data and analysis of the customer’s future demands, Sealcoat has developed the probability distribution for demand as follows. Demand Probability 1,000 .3 2,000 .5 3,000 .2 a. Develop a payoff table for the problem. b. How many batches should Sealcoat produce every three months? a.

Example calculations: Produce 2000, demand 1000: Sales: 1000@ $200 = $200,000 Less Mfg. Cost: 2000@$150 = $300,000 Less shortage: 0@$240 = $0 Plus Salvage: 100)@$50 = $50,000 Net profit = -$50,000 b.

EV(1000) = $14,000 EV(2000) = $47,000 EV(3000) = -$15,000 Best decision: product 2000 lbs. (8)

A quality control procedure involves 100-percent inspection of parts received from a supplier. Historical records show the observed defect rates as follows. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM6 - SC E

Percent Defective Probability 0 .15 1 .45 2 .25 3 .15 The cost to inspect 100 percent of the parts received is $250 for each shipment of 500 parts. If the shipment is not 100-percent inspected, defective parts will cause rework problems later in the production process. The rework cost is $35 per each defective part. a. Complete the payoff table shown here, in which entries represent the total cost of inspection and reworking. Decision 100% inspection No inspection

Percent Defective 0 1 2 3 $250 $250 $250 $250 ? ? ? ?

b. The plant manager is considering eliminating the inspection process to save the $250 inspection cost per shipment. Do you support this action? Use EV to justify your answer. c. Show the decision tree for this problem. a.

Percent Defective Number of defects in batch 0 0 1 5 2 10 3 15

Decision 100% inspection No inspection b.

(9)

Cost 0 175 350 525

Percent Defective 0 1 2 3 $250 $250 $250 $250 0 175 350 525

EV(100% inspection) = $250 EV(no inspection) = $245 Best decision is no inspection

The R&D manager of the Beck Company is trying to decide whether or not to fund a project to develop a new lubricant. It is assumed that the project will be a major technical success, a minor technical success, or a failure. The © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM6 - SC E company estimates the value of a major technical success as $150,000, since the lubricant could be used in a number of products the company is making. If the project is a minor technical success, its value is estimated as $10,000, since Beck feels the knowledge gained will benefit some other ongoing projects. If the project is a failure, it will cost the company $100,000. Based on the opinion of the scientists involved and the manager’s own subjective assessment, the following probabilities are assigned: P(major success) = .15 P(minor success) = .45 P(failure) = .40 a. According to the EV criterion, should the project be funded? b. Suppose a group of expert scientists from a research institute could be hired as consultants to study the project and make a recommendation. Ifthis study would cost $30,000, should the Beck Company hire the consultants? a. s1 d1 150000 d2 0

10000 0

s3 -100000 0

Expected Value -13,000 0

Do not fund (d1) b.

Optimal decision strategy with perfect information. If s1, then d1; if s2, then d1; if s3, then d2. Expected value of this strategy is .15(150000) + .45(10000) + .4(0) = 27,000 EVPI = 27,000 - 0 = 27,000. Do not hire the consultants.

(10)

Consider again the problem faced by the Beck Company R&D manager (Problem 9). Suppose an experiment can be conducted to shed some light on the technical feasibility of the project. There are three possible outcomes of the experiment: I1 = prototype lubricant works well at all temperatures I2 = prototype lubricant works well only at temperatures above 10°F I3 = prototype lubricant does not work well at any temperature How would the decision tree be modified to include this information?

OM6 - SC E

Trendy’s Pies Case Study Overview This case uses the new product introduction decision tree shown in Exhibit E.6 as the basis for selecting a decision strategy for marketing a new product. Students need to compute payoffs associated with each strategy, compute expected values, identify the best strategy, and conduct sensitivity analyses on the probability estimates. Case Questions for Discussion

OM6 - SC E 1. Use these cost, revenue, and probability estimates along with the decision tree to identify the best decision strategy for Trendy’s Pies. The decision tree showing the payoffs, probabilities, expected values and decisions is given below. The best strategy is to introduce regionally. If the regional response is high, then market nationally; if low, remain regional (these decisions correspond to the branch numbers in the decision nodes). The expected value is $311,500. However, note that if they market nationally if the regional response is high, the actual outcomes will be either $470,000 or a loss of $80,000. Instructors can use this discuss limitations of expected value decision making for one-time decisions and concepts of risk.

OM6 - SC E 2. Suppose that Trendy is concerned about her probability estimates of the consumer response to the regional test market. Although her estimates are .7 for a high response and .3 for a low response, she is not very confident of these values. Determine how the decision strategy would change if the probability of a high response varies from .1 to .9 in increments of .1. How sensitive is the best strategy in part a to this probability assumption? The table below shows the national decision, high response decision, and overall expected value as the probability of high response changes. We see that for values of 0.7 and higher, the decision is to introduce regionally, whereas if the probability is .6 or lower, they should introduce nationally. Since the current value is at the threshold and is uncertain, students should question what decision is really best when risk is considered.

High response decision 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

National decision 2 2 2 2 2 2 2 2 2 2

Expected value 2 $ 311,500 1 $ 280,000 1 $ 280,000 1 $ 280,000 1 $ 280,000 1 $ 280,000 1 $ 280,000 2 $ 311,500 2 $ 346,000 2 $ 380,500

Teaching Plan 1.What is the best decision strategy for Trendy’s Pies? 2. What risks does Trendy’s face in adopting the best decision strategy? What are the limitations of decision trees for one-time decisions? 3. How does the decision strategy change if the probability of a high regional response varies?

OM6 SC B OM6 Supplementary Chapter B: Queuing Analysis Problems, Activities, and Discussions (1)

Trucks using a single-server loading dock have a mean arrival rate of 14 per day. The loading/unloading rate is 19 per day. a. What is the probability that the truck dock will be idle? b. What is the average number of trucks waiting for service? c. What is the average time a truck waits for the loading or unloading service? d. What is the probability that a new arrival will have to wait? e. What is the probability that more than three trucks are waiting for service?

a. b. c. d. e.

(2)

0.26 2.06 0.15 days 0.74 P(0) = .26 P(1) = (14/19)1(.26) = 0.192 P(2) = (12/19)2(.26) = 0.141 P(3) = (14/19)3(.26) = 0.104 P(trucks <= 3) = 0.697; therefore, the probability of more than three waiting = 1 – 0.697 = 0.303

Trosper Tire Company has decided to hire a new mechanic to handle all tire changes for customers ordering new tires. Two mechanics are available for the job. One mechanic has limited experience and can be hired for $7 per hour. It is expected that this mechanic can service an average of three customers per hour. A mechanic with several years of experience is also being considered for the job. This mechanic can service an average of four customers per hour, but must be paid $10 per hour. Assume that customers arrive at the Trosper garage at the rate of two per hour. © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM6 SC B

a. Compute waiting-line operating characteristics for each mechanic. b. If the company assigns a customer-waiting cost of $15 per hour, which mechanic provides the lower operating cost? a.

b. New mechanic = $15(L) + $7 = 15(2) + 7 = $37 per hour Experienced mechanic = $125(L) + $10 = 15(1) + 10 = $25 per hour (3)

Agan Interior Design provides home and office decorating assistance. In normal operation an average of 3 customers arrive per hour. One design consultant is available to answer customer questions and make product recommendations. The consultant averages 12 minutes with each customer. a. Compute operating characteristics for the customer waiting line. b. Service goals dictate that an arriving customer should not wait for service more than an average of 5 minutes. Is this goal being met? What action do you recommend? c. If the consultant can reduce the average time spent with customers to 8 minutes, will the service goal be met? a. 10 minutes = 60/12 = 5 customers per hour service rate

OM6 SC B

b. No, average waiting time is .3 hours or 18 minutes. Should try to increase the mean service rate for the consultant or hire a second person. c. 8 minutes = 60/8 = 7.5 customers per hour service rate

The average time in queue is 0.09 hours or about five and a half minutes, so the service goal is being met. (4)

Keuka Park Savings and Loan currently has one drive-in teller window. Cars arrive at a mean rate of 10 per hour. The mean service rate is 12 cars per hour. a. What is the probability that the service facility will be idle? b. If you were to drive up to the facility, how many cars would you expect to see waiting and being serviced? c. What is the average time waiting for service? d. What is the probability an arriving car will have to wait? © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM6 SC B e. What is the probability that more than four vehicles are waiting for service? f. As a potential customer of the system, would you be satisfied with these waiting-line characteristics? How do you think managers could go about assessing its customers’ feelings about the current system?

b. 5

0.17

c. d.

.42 hours 0.83

e. P(0) = .17 P(1) = (10/12)1(.17) = 0.142 P(2) = (10/12)2(.17) = 0.118 P(3) = (10/12)3(.17) = 0.098 P(4) = (10/12)4(.17) = 0.082 P(cars <= 4) = 0.44; therefore, the probability of more than four waiting = 1 – 0.44 = 0..56 f. Probably not. The number waiting and waiting times are quite high. Managers can easily instruct tellers to ask customers, but we suspect they will receive quite a large number of complaints! Tellers should convey this issue to management. (5)

To improve its customer service, Keuka Park Savings and Loan (Problem 4) wants to investigate the effect of a second drive-in teller window. Assume a mean arrival rate of 10 cars per hour. In addition, assume a mean service rate of 12 cars per hour for each window. What effect would adding a new teller window have on the system? Does this system appear acceptable?

OM6 SC B

The system has improved considerably. The average number of cars in the system is reduced from 5 to 1 and the average waiting time from 0.5 hours to 0.101 hours. (6)

Consider a two-server waiting line with a mean arrival rate of 40 per hour and a mean service rate of 60 per hour for each server. a. What is the probability that both servers are idle? b. What is the average number of cars waiting for service? c. What is the average time waiting for service? d. What is the average time in the system? e. What is the probability of having to wait for service?

OM6 SC B b. c. d. e. (7)

0.083 0.002 hours 0.019 hours 0.167

Big Al’s Quickie Carwash has two wash bays. Each bay can wash 15 cars per hour. Cars arrive at the carwash at the rate of 15 cars per hour on the average, join the waiting line, and move to the next open bay when it becomes available. a. What is the average time waiting for a bay? b. What is the probability that a customer will have to wait? c. As a customer of Big Al’s, do you think the system favors the customer? If you were Al, what would be your attitude toward this service level?

a. 0.022 hours b. 0.333 c. Only 1 of 3 customers have to wait, so this is probably acceptable. (8)

Refer to the Agan Interior Design situation in Problem 3. Agan is evaluating two alternatives: 1. use one consultant with an average service time of 8 minutes per customer; 2. expand to two consultants, each of whom has an average service time of 10 minutes per customer. If the consultants are paid $16 per hour and the customer waiting time is valued at $25 per hour, should Agan expand to the two-consultant system? Explain. 1 consultant: © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

OM6 SC B

Total cost = $25(.09) + 16 = $18.25 per hour 2 consultants:

Total cost = $25(.011) + 2(16) = $32.275 per hour Because the waiting times are not that significantly different, the one consultant system is clearly superior.

OM6 SC B

(9)

Design a spreadsheet similar to Exhibit B.3 to study changes in the mean service rate from 10 to 15 for λ = 9 passengers per minute.

(10)

Using the spreadsheet in Exhibit B.6 (Multiple-Server Queue.xlsx), determine the effect of increasing passenger arrival rates of 10, 12, 14, 16, and 18 on the operating characteristics of the airport security screening example.

OM6 SC B

Bourbon County Court Case Study Teaching Note Overview A government service, a county court house with a budget deficit, has only one photocopying machine for court use. Students must first do a basic single and multiple server queuing model analysis and interpret the results assuming a Poisson arrival distribution and an exponential service time distribution. In addition, the cost of different people waiting and the cost of the machine are also given and the student must evaluate the economics of the situation. An advanced and optional assignment (you decide) is to graph the actual arrival and service time data or use a software package such as Stat Fit to evaluate

OM6 SC B the fit of the real data to the assumptions of queuing models. The arrival data does fit the assumptions of the Poisson distribution but the service time distribution does not fit the assumptions of an exponential distribution very well. Hence, the queuing analysis may not be accurate and this leads the modeler to consider using simulation instead of queuing models. The instructor might also want to demonstrate the use of a software package to analyze this issue as a demo during class. In Supplemental Chapter D simulation you have the opportunity to model this simple service delivery system using a simulation model of your choice. Therefore, the case can require students to apply their queuing model knowledge and begin to understand why the modeler sometimes needs simulation instead of queuing models. Case Questions and Brief Answers (1)

Assuming a Poisson arrival distribution and an exponential service time distribution, apply queuing models to the case situation and evaluate the results. Single Server Queue Model Bourbon County Court Lambda

8.92

10.91

Probability system is empty

0.18

Average number in queue

3.66

Average number in system

4.48

Average time in queue Average waiting time in system

0.41

Probability arrival has to wait

0.82

0.50

The average wait time in the queue is .41 hours or 24.6 minutes which is an unacceptable service level. The other queuing performance statistics are equally bad. Other useful information for the single server model to use in class includes: P0 = .1824, P1 = .1491, P2 = .1219, P3 = .0997, P4 = .0815, P5 = .0666, P6 = .00545, P7 = .0445. Multiple Server Queuing Model Bourbon County Court Lambda

8.920

10.910

Number of servers

OM6 SC B Probability system is empty

0.420

0.439

0.441

Average number in queue

0.164

0.021

0.003

Average number in system

0.982

0.838

0.820

Average time in queue

0.018

0.002

0.000

Average waiting time in system

0.110

0.094

0.092

Probability arrival must wait

0.237

0.055

0.010

For a two server system, the average wait time in the queue is .018 hours or 1.08 minutes which is an acceptable service level. The other queuing performance statistics show a dramatic improvement in system performance. You might point out to students at some point these results indicate a nonlinear performance relationships inherent in the queuing models so do not expect result to be linear in nature. Other useful information for the two server model to use in class includes: P0 = .4196, P1 = .3431, P2 = .1403, P3 = .0573, P4 = .0234, P5 = .0096, P6 = .0039, P7 = .00016. (2)

What are the economics of the situation using queuing model analysis? Case Exhibit B.10 requires some knowledge of cost accounting and confronts the student with "What cost data do we use?" Cost of Copying Machine Some may assume the $18,600 is a sunk cost and use only the variable cost of $5/hour. But we will use a full cost model so ($18,600 per year/250 days/year) = $74.4/day and assuming 9 hours/day = $8.27/hour. Total copier cost/hour = $8.27 + $5.00 = $13.27 Cost of Customers Waiting Customer opportunity cost of waiting/hour = (.50)($18.75 + (.2)($22.50) + (.1)($28.40) + (.1)($30.80) + (.1)($100.00) = $29.80 For single server system, cost of waiting/customer = ($29.80/hour)(.41 hours waiting) = $12.22. For single server system, cost of server = $13.27. Total cost is $25.49. With a two server system, cost of waiting = ($29.80/hour)(.018 hours waiting) = $0.54. For the two server system, cost of servers = $26.54. Total cost is $26.08.

(3)

What are your final recommendations using queuing model analysis. From a purely economic standpoint, a single server is the lowest cost solution (about $1 cheaper) but since the total costs are very close, it really

OM6 SC B comes down to a policy decision. Does Bourbon County Court want a peripheral service--copying--to disrupt the primary service--court cases and system? These disruption and anxiety costs are not in the current economic analysis. Court is tough enough as it is without this annoying peripheral service. Most students will recommend buying a second photocopying machine based on similar economic and qualitative criteria. Of course, their assumptions will direct their final recommendations. (4)

Advanced Assignment (requires the use of a statistical package). Do the customer arrival and service empirical (actual) distributions in the case match the theoretical distributions assumed in queuing models? Students can set up frequency categories and develop graphs of the data in case Exhibits B.8 and B.9. Then they can look at the shapes of the Poisson and Exponential theoretical distributions and make some inferences by observation and overlaying graphs. More advanced statistical tests of how well the empirical and theoretical distributions match are possible using methods such as Chi-square tests. Most software statistical packages such as Stat Fit provide many advanced statistical tests and graphical ways to analyze these data.

The thin vertical bars indicate the shape of a Poisson distribution so the case arrival data in broader vertical bars is closely aligned with the theoretical distribution.

OM6 SC B

The thin curved line in the previous graph indicates the shape of a theoretical exponential distribution and the case service time data in histogram form is not so well aligned with the theoretical distribution. Therefore, simulation is a way to model this service system using the actual arrival and service time case data. SC D on simulation models this system using ProcessModel. Teaching Plan (1) (2) (3) (4)

Assuming a Poisson arrival distribution and an exponential service time distribution, apply queuing models to the case situation and evaluate the results. What are the economics of the situation using queuing model analysis? What are your final recommendations using queuing model analysis. Advanced Assignment (requires the use of a statistical package). Do the customer arrival and service empirical (actual) distributions in the case match the theoretical distributions assumed in queuing models?

Bracket International - The RFID Decision - Numerical Solution OM4 Example PayBack Computations

Sales Cost of Goods Sold Average Inventory Factory Operates Employee Annual Salary Miss Reads Bar Code % Miss Reads RFID % Average Miss Read Cost No. Items Scanned/Day

$78,000,000 $61,000,000 $14,000,000 260 days/year $55,000 0.020 0.002 $4.00 8,850 all 3 factories

No. Items Scanned/Yr

2,301,000 (8,850*260)

Bar Code Scan Time/Item (seconds) = No. Scan Seconds/Yr

Students often convert to hours so (23,010,000/3600) = 6392 hours and 6392/2000 = 3.2 people

23,010,000 [(10 sec/item)(260)(8850)]

One Full Time Equivalent Employee Time (Hours) per Year = One Full Time Equivalent Employee Time (Seconds) per Year = Direct FTE Labor Saved Due to Scan Time Reduction = Total Labor $ Saved Due to Scan Time Reduction =

2,000 7,200,000 (2,000*3600)

3.20 people (23,010,000/7,200,000) $175,771 (3.2*$55,000)

No of Miss Read Savings 41,418 (0.2 - .002)(23,010,000) $ Saved Due to Miss Read Reduction $165,672 (41,418)($4) Annual Cost Savings RFID Investment Costs Readers, Scnners, Tags New Operating Software Total Cost Simple Payback (years)

$341,443

$620,000 $480,000 $1,100,000

You do not have enough case information to do a NPV cash flow analysis over years 0 to n so a simple payback is most appropriate.

3.22 (annual cost savings/benefits)

These Excel templates accompany Collier/Evans, OM5, South-Western/Cengage Learning. Each template is on a separate worksheet. The templates and chapter references are summa Each template shows an example from the text; simply delete the data in the yellow cells to Specific instructions accompany each template. Template Break-Even VLC Statistical Analysis Taguchi Little's Law Location Analysis Center of Gravity Capacity Moving Average Exponential Smoothing ABC EOQ FQS Safety Stock FPS Safety Stock Single Period Inventory Agg. Plan - Level Agg. Plan - Chase Aggregate Planning Sequencing Six Sigma Pareto xBar&R Chart p-Chart c-Chart Process Capability Work Measurement Learning Curve Single Server Queue Multiple Server Queue Queue Simulation Inventory Simulation Decision Analysis

Chapter Reference 2 3 3 6 7 9 9 10 11 11 12 12 12 12 12 13 13 13 14 14 15 16 16 16 16 Supplementary Chapter A Supplementary Chapter A Supplementary Chapter B Supplementary Chapter B Supplementary Chapter D Supplementary Chapter D Supplementary Chapter E

ollier/Evans, OM5, South-Western/Cengage Learning. sheet. The templates and chapter references are summarized below. om the text; simply delete the data in the yellow cells to apply to a new problem. h template. Description Computes a break-even point and optimal outsourcing decision Computes the value of a loyal customer (VLC) Computes basic statistical measures and a frequency distribution and histogram Computes the Taguchi loss function and economic tolerance Computes flowtime, throughput or work-in-process using Little's Law Computes total costs to determine least cost location for production Finds and plots the center of gravity Computes capacity measures Calculates and plots moving average forecasts. Calculates and plots exponential smoothing forecasts. Conducts ABC inventory analysis. Finds the economic order quantity and plots the cost functions Computes safety stock and reorder point for fixed quantity inventory systems Computes safety stock and reorder point for fixed period inventory systems Finds the optimal ordering quantity for a single period inventory system with uniform or normal demand Evaluates aggregate planning using a level production strategy Evaluates aggregate planning using a chase production strategy General template for aggregate planning Computes flowtime, lateness, and tardiness for job sequencing problems Computes DPU, dpmo, and sigma level Finds and plots a Pareto distribution Plots an x-bar and R-chart for quality control Plots a p-chart for quality control Plots a c-chart for quality control Computes process capability measures and a frequency distribution and histogram Calculates normal and standard times for work measurement studies Computes the time to produce the first 100 units for a learning curve Calculates measures for a single server queue Calculates measures for a multiple server queue Performs a single server queuing simulation for discrete arrival and service time distributions Performs a fixed quantity inventory simulation Computes decision strategies for payoff tables for both minimize and maximize objectives

r normal demand

Outsourcing Break-Even Analysis Enter data only in yellow cells.

Production volume

12,000

Fixed cost Unit variable cost

$250,000.00 $20.00

Unit cost

$35.00

Total In-House Production Cost Total Outsourced Cost Cost difference (In-House - Outsourced) Optimal Decision

$490,000.00 $420,000.00 $70,000.00 Outsource

Produced In-House

Outsourced

A B C D E F G H I J K 1 Statistical Analysis 2 This template is designed to handle up to 500 observations. Enter data only in yellow cells. 3 4 DATA 1 2 3 4 5 6 7 8 9 10 5 1 25.51 25.50 25.49 25.50 25.50 25.48 25.50 25.50 25.49 25.52 6 2 25.49 25.51 25.51 25.51 25.50 25.50 25.50 25.51 25.50 25.50 7 3 25.48 25.50 25.50 25.51 25.50 25.50 25.49 25.50 25.51 25.50 8 4 25.49 25.49 25.49 25.51 25.50 25.48 25.48 25.48 25.47 25.49 9 5 25.49 25.50 25.50 25.50 25.49 25.48 25.51 25.51 25.50 25.51 10 6 11 7 12 8 13 9 14 10 15 11 16 12 17 13 18 14 19 15 20 16 21 17 22 18 23 19 24 20 25 21 26 22 27 23 28 24 29 25 30 26 31 27 32 28 33 29 34 30 35 31 36 32 37 33 38 34 39 35 40 36 41 37 42 38

43 44 45 46 47 48 49 50 51 52 53 54

A 39 40 41 42 43 44 45 46 47 48 49 50

L 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42

25.498 25.500 0.011 50 25.470 25.520

P Q Frequency Distribution and Histogram Enter smallest and largest limits for the frequency distribu The lower limit should be slightly less than the data minim The upper limit should be slightly larger than the data max Enter number of cells (10 or less) Number of Cells 7 Cell 1 2 3 4 5 6 7 8 9 10

From -Infinity 25.450 25.460 25.470 25.480 25.490 25.500 25.510 25.520 25.530 25.540

L 43 44 45 46 47 48 49 50 51 52 53 54

Histogram

Frequency

bution and Histogram 1 2 for the frequency distribution below. nd largest limits 3 less than the data minimum. hould be slightly 4 larger than the data maximum. should be slightly 5 Lower limit 25.450 cells (10 or less) 6 Upper limit 25.520 7 Cell width 0.010 8 9 To (inclusive) Frequency 10 25.450 0 11 25.460 0 18 12 25.470 1 16 13 25.480 6 14 25.490 10 14 15 25.500 17 12 16 25.510 13 10 17 25.520 3 18 25.530 0 8 19 25.540 0 6 20 25.550 0 21 4 22 2 23 24 0 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42

25.450 25.460 25.470 25.480 25.490 25.500 25.510 25.520 Cell Upper Limit

R 43 44 45 46 47 48 49 50 51 52 53 54

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 2525.520 25.530 25.540 25.550 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42

Value of a Loyal Customer Enter data only in yellow cells.

Revenue per unit Percent contribution margin to profit and overhead Repurchase frequency (purchases/year) Defection rate

$100.00 50% 0.25 0.4

Buyer's life cycle VLC

2.50 $31.25

Taguchi Loss Function Enter data only in yellow cells.

Calculation of k for the Loss Function Deviation from target Loss associated with deviation k

0.15 $20.00 $888.89

Loss Calculation for a Specific x Target specification, T Dimensional value, x k Loss

1.875 1.925 $888.89 $2.22

Economic Design Specifications Target specification, T k Cost of inspection and adjustment Break-Even Tolerance Lower specification limit Upper specification limit

1.875 $888.89 $5.00 0.075 1.800 1.950

Little's Law

Enter any two of the three values only in the yellow cells and the spreadsheet will calculate the third. Throughput (R) 50 Flow time (T) 0.16666667 Work-in-process (WIP) Throughput (R) Flow time (T) Work-in-process (WIP)

8.33

Location Analysis Enter data only in yellow cells. The template is designed for up to 5 locations.

Data

Location 5

Location 1 Location 2 Location 3 Location 4 Fixed Costs $165,000.00 $125,000.00 $180,000.00 Direct material cost/unit $8.50 $8.40 $8.60 Direct labor cost/unit $4.20 $3.90 $3.70 Overhead/unit $1.20 $1.10 $1.00 Transportation cost/unit $0.80 $1.10 $0.95

Annual Production Total Costs Fixed Costs Direct material cost Direct labor cost Overhead Transportation cost Total

50000 Location 1 Location 2 Location 3 Location 4 $165,000.00 $125,000.00 $180,000.00 $425,000.00 $420,000.00 $430,000.00 $210,000.00 $195,000.00 $185,000.00 $60,000.00 $55,000.00 $50,000.00 $40,000.00 $55,000.00 $47,500.00 $900,000.00 $850,000.00 $892,500.00

Least-cost location Location 2

Location 5

Center of Gravity Enter data only in yellow cells. The template is designed for up to 10 locations. x-Coordinate y-Coordinate 58 96 80 70 30 120 90 110 127 130 65 40

Volume 400 300 200 100 300 100

Center of Gravit 140 120

y-Coordinate

Name Hamilton Kingsport Chicago Pittsburgh New York Atlanta

100 80 60

40 20 0

Center of Gravity

76.29

98.14

Center of Gravity

x-Coordinate

100

120

140

Capacity Measurement Enter data only in yellow cells. The template is designed for up to 10 work orders.

Work Order Setup Time Processing Time Order Size Single tooth crown 1st appt. 15 90 2 Single tooth crown 2nd appt. 10 30 1 Tooth whitening 5 30 4 Partial dewnture 1st appt. 20 30 3 Partial denture 2nd appt. 10 20 0 Partial denture 3rd appt. 5 30 2

Total Percentage

Copyright © 2014 Cengage Learning Not for commercial use. Total Total Setup Time Processing Time Total Time 30.00 180.00 210.00 10.00 30.00 40.00 20.00 120.00 140.00 60.00 90.00 150.00 0.00 0.00 0.00 10.00 60.00 70.00

130.00 21.31%

480.00 78.69%

610.00 100.00%

Moving Average Forecasting

Enter data only in yellow cells. The template is designed for up to 20 observations and k = 2, 3, or 4. Periods in moving average, k (2, 3, or 4)

Time Period Observation Forecast 1 172 2 217 3 190 #N/A 4 233 193.00 5 179 213.33 6 162 200.67 7 204 191.33 8 180 181.67 9 225 182.00 10 250 203.00 11 151 218.33 12 218 208.67 13 #N/A 14 #N/A 15 #N/A 16 #N/A 17 #N/A 18 #N/A 19 #N/A 20 #N/A Next period forecast - Time period: 13 206.33

Error

Error^2

#N/A 40.00 -34.33 -38.67 12.67 -1.67 43.00 47.00 -67.33 9.33 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A

#N/A 1600.00 1178.78 1495.11 160.44 2.78 1849.00 2209.00 4533.78 87.11 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A

MSE

1457.33

Moving Average Forecast 300 250 200

150 100 50 0 1

Time Period

Observation

Forecast

Exponential Smoothing Forecasting

Enter data only in yellow cells. The template is designed for up to 20 observations. Smoothing constant

0.2

Time Period Observation Forecast 1 172 172.00 2 217 172.00 3 190 181.00 4 233 182.80 5 179 192.84 6 162 190.07 7 204 184.46 8 180 188.37 9 225 186.69 10 250 194.35 11 151 205.48 12 218 194.59 13 #N/A 14 #N/A 15 #N/A 16 #N/A 17 #N/A 18 #N/A 19 #N/A 20 #N/A Next period forecast - Time period: 13 199.27

Error 45.00 9.00 50.20 -13.84 -28.07 19.54 -8.37 38.31 55.65 -54.48 23.41 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A MSE

Cengage Learning

ervations.

Error^2 2025.00 81.00 2520.04 191.55 788.04 381.91 69.99 1467.44 3096.44 2968.44 548.18 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A 1285.28

Exponential Smoothing Forecast 300 250 200 150

100 50 0 1

Time Period

Observation

Forecast

ABC ABC Inventory Analysis

Copyright © 2014 Cengage Learning Not for commercial use. Enter data only in yellow cells; the template is designed for up to 20 items. After entering the data, right click on any value in column D; choose Sort > Sort Largest to Smallest. Projected Projected Item Usage Dollar Usage Number Annual Unit Cost Annual 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

15000 6450 5000 200 20000 84 800 300 10000 2000 5000 3250 9000 2900 800 675 1470 8200 1250 2500

Cumulative Dollar Usage

$5.00 $20.00 $45.00 $12.50 $35.00 $250.00 $80.00 $5.00 $35.00 $65.00 $25.00 $125.00 $0.50 $10.00 $15.00 $200.00 $100.00 $15.00 $0.16 $0.20

$75,000.00 $129,000.00 $225,000.00 $2,500.00 $700,000.00 $21,000.00 $64,000.00 $1,500.00 $350,000.00 $130,000.00 $125,000.00 $406,250.00 $4,500.00 $29,000.00 $12,000.00 $135,000.00 $147,000.00 $123,000.00 $200.00 $500.00

Total

$2,680,450.00

Page 27

$75,000 $204,000 $429,000 $431,500 $1,131,500 $1,152,500 $1,216,500 $1,218,000 $1,568,000 $1,698,000 $1,823,000 $2,229,250 $2,233,750 $2,262,750 $2,274,750 $2,409,750 $2,556,750 $2,679,750 $2,679,950 $2,680,450

Cumulative Cumulative Percent Percent of Total of Items 2.80% 7.61% 16.00% 16.10% 42.21% 43.00% 45.38% 45.44% 58.50% 63.35% 68.01% 83.17% 83.33% 84.42% 84.86% 89.90% 95.39% 99.97% 99.98% 100.00%

5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%

ABC

Page 28

Cost

A B C D E 1 Economic Order Quantity Model Copyright © 2014 Cengage Learning 2 Enter the data only in the yellow cells. Not for commercial use. 3 4 Annual Demand Rate 24000.00 Inventory Costs 5 Ordering Cost $38.00 6 Unit Cost $12.00 7 Carrying Charge Rate 0.18 $3,000.00 8 9 Economic Order Quantity 918.94 $2,500.00 10 Order cost $992.45 11 Inventory cost $992.45 $2,000.00 12 Total cost $1,984.90 $1,500.00 13 14 Sensitivity Analysis $1,000.00 15 Enter any order quantity to evaluate the cost 16 and compare with EOQ $500.00 17 Order Quantity 1 18 Order cost $912,000.00 $0.00 19 Inventory cost $1.08 20 Total cost $912,001.08 21 Order quantity 22 EOQ Benefit $910,016.18 23 24 25 26 27 28 29 Chart Calculations 30 Order Quantity Order cost Inventory cost Total cost 31 459 $1,984.90 $496.23 $2,481.13 32 551 $1,654.09 $595.47 $2,249.56 33 643 $1,417.79 $694.72 $2,112.50 34 735 $1,240.56 $793.96 $2,034.53 35 827 $1,102.72 $893.21 $1,995.93 36 919 $992.45 $992.45 $1,984.90 37 1011 $902.23 $1,091.70 $1,993.93 38 1103 $827.04 $1,190.94 $2,017.98 39 1195 $763.42 $1,290.19 $2,053.61 40 1287 $708.89 $1,389.43 $2,098.33 827

735

643

551

459

A 41

1378

B $661.63

C $1,488.68

D $2,150.31

Order cost Holding cost Total cost

1378

1287

1195

1103

1011

919

827

1 2 3 4 Inventory Costs 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Order quantity 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

Fixed Order Quantity Inventory System with Uncertain Demand Enter the data only in the yellow cells.

Average Annual Demand Ordering Cost Unit Cost Carrying Charge Rate Lead time (weeks) Standard deviation of weekly demand Service level

15000.00 $45.00 $3.80 0.20 2.00 71.00 0.95

Economic Order Quantity Order cost Inventory cost Total cost

1332.78 $506.46 $506.46 $1,012.92

Average demand during lead time Standard deviation during lead time z-value Safety stock Reorder point

576.92 100.41 1.64 165 742

Fixed Period Inventory System with Uncertain Demand Enter the data only in the yellow cells.

Average Annual Demand Ordering Cost Unit Cost Carrying Charge Rate Lead time (weeks) Standard deviation of weekly demand Service level

15000.00 $45.00 $3.80 0.20 2.00 71.00 0.95

Economic Order Quantity Order cost Inventory cost Total cost

1332.78 $506.46 $506.46 $1,012.92

Review period (weeks, rounded up) Optimal replenishment level without safety stock Standard deviation of demand during T+L z-value Safety stock M-Level

5 2019.23 187.85 1.64 309 2328

14 Cengage Learning

Single Period Inventory Model Enter the data only in the yellow cells. Item cost Selling price Sale price

$40.00 $60.00 $30.00

Cs Cu P(demand <= Q*)

$10.00 $20.00 0.67

Uniform Distribution Minimum Maximum Optimal order quantity Q*

350.00 650.00 550.00

Normal Distribution Mean Standard deviation Optimal order quantity Q*

500.00 50.00 521.54

Agg Plan - Level

A B C D 1 Aggregate Planning - Level Production Strategy Copyright © 2014 Cengage Learning 2 Enter the data only in the yellow cells. Not for commercial use. 3 4 Production cost ($/unit) $70.00 5 Inventory holding cost ($/unit) $1.40 6 Lost sales cost ($/unit) $90.00 7 Overtime cost ($/unit) $6.50 8 Undertime cost ($/unit) $3.00 9 Rate change cost ($/unit) $5.00 10 Normal production rate (units) 2200 11 Ending inventory (previous Dec.) 1000 12 13 14 Cumulative 15 Month Demand Demand Production 16 January 1500 1,500 2,200 17 February 1000 2,500 2,200 18 March 1900 4,400 2,200 19 April 2600 7,000 2,200 20 May 2800 9,800 2,200 21 June 3100 12,900 2,200 22 July 3200 16,100 2,200 23 August 3000 19,100 2,200 24 September 2000 21,100 2,200 25 October 1000 22,100 2,200 26 November 1800 23,900 2,200 27 December 2200 26,100 2,200 28 Average 2,175.00 29 30 Production Inventory Lost Sales 31 Month Cost Cost Cost 32 January $ 154,000.00 $ 2,380.00 $ 33 February $ 154,000.00 $ 4,060.00 $ 34 March $ 154,000.00 $ 4,480.00 $ 35 April $ 154,000.00 $ 3,920.00 $ 36 May $ 154,000.00 $ 3,080.00 $ 37 June $ 154,000.00 $ 1,820.00 $ 38 July $ 154,000.00 $ 420.00 $ 39 August $ 154,000.00 $ $ 45,000.00 40 September $ 154,000.00 $ 280.00 $ -

Page 36

Agg Plan - Level

A 41 42 43 44 45

October $ November $ December $ Totals $

B 154,000.00 154,000.00 154,000.00 1,848,000.00

Page 37

$ $ $ $

C 1,960.00 2,520.00 2,520.00 27,440.00

D $ $ $ $

45,000.00

Agg Plan - Level

A 46

Total cost

B $ 1,920,440.00

Page 38

Agg Plan - Level

Cengage Learning 1 2 3 4 5 6 7 8 9 10 11 12 13 Cumulative 14 Product Ending 15 Availability Inventory 16 3,200 1,700 17 5,400 2,900 18 7,600 3,200 19 9,800 2,800 20 12,000 2,200 21 14,200 1,300 22 16,400 300 23 18,600 0 24 21,300 200 25 23,500 1,400 26 25,700 1,800 27 27,900 1,800 28 Maximum 3,200 29 30 Overtime Undertime 31 Cost Cost 32 $ $ $ 33 $ $ $ 34 $ $ $ 35 $ $ $ 36 $ $ $ 37 $ $ $ 38 $ $ $ 39 $ $ $ 40 $ $ $

Lost Sales 0 0 0 0 0 0 0 500 0 0 0 0

Rate Change Cost -

Page 39

Agg Plan - Level

E 41 42 43 44 45

$ $ $ $

F -

$ $ $ $

G -

$ $ $ $

Page 40

Agg Plan - Chase

A 1 Aggregate Planning - Chase Demand Strategy 2 Enter the data only in the yellow cells. 3 4 Production cost ($/unit) 5 Inventory holding cost ($/unit) 6 Lost sales cost ($/unit) 7 Overtime cost ($/unit) 8 Undertime cost ($/unit) 9 Rate change cost ($/unit) 10 Normal production rate (units) 11 Ending inventory (previous Dec.) 12 13 14 15 Month 16 January 17 February 18 March 19 April 20 May 21 June 22 July 23 August 24 September 25 October 26 November 27 December 28 Average 29 30 31 Month 32 January $ 33 February $ 34 March $ 35 April $ 36 May $ 37 June $ 38 July $ 39 August $ 40 September $

Page 41

Demand 1500 1000 1900 2600 2800 3100 3200 3000 2000 1000 1800 2200 2,175.00 Production Cost 35,000.00 $ 70,000.00 $ 133,000.00 $ 182,000.00 $ 196,000.00 $ 217,000.00 $ 224,000.00 $ 210,000.00 $ 140,000.00 $

Cumulative Demand 1,500 2,500 4,400 7,000 9,800 12,900 16,100 19,100 21,100 22,100 23,900 26,100

Inventory Cost -

Agg Plan - Chase

A 41 42 43 44 45 46

October $ November $ December $ Totals $

B 70,000.00 126,000.00 154,000.00 1,757,000.00

Total cost $

1,835,050.00

Page 42

C $ $ $ $

Agg Plan - Chase

D E F Copyright © 2014 1 Cengage Learning Not for commercial 2 use. 3 4 5 6 7 8 9 10 11 12 13 Cumulative 14 Product Ending 15 Production Availability Inventory 16 500 1,500 0 17 1,000 2,500 0 18 1,900 4,400 0 19 2,600 7,000 0 20 2,800 9,800 0 21 3,100 12,900 0 22 3,200 16,100 0 23 3,000 19,100 0 24 2,000 21,100 0 25 1,000 22,100 0 26 1,800 23,900 0 27 2,200 26,100 0 28 Maximum 0 29 30 Lost Sales Overtime Undertime 31 Cost Cost Cost 32 $ $ $ 5,100.00 $ 33 $ $ $ 3,600.00 $ 34 $ $ $ 900.00 $ 35 $ $ 2,600.00 $ $ 36 $ $ 3,900.00 $ $ 37 $ $ 5,850.00 $ $ 38 $ $ 6,500.00 $ $ 39 $ $ 5,200.00 $ $ 40 $ $ $ 600.00 $

Page 43

Lost Sales 0 0 0 0 0 0 0 0 0 0 0 0

Rate Change Cost 8,500.00 2,500.00 4,500.00 3,500.00 1,000.00 1,500.00 500.00 1,000.00 5,000.00

Agg Plan - Chase

D 41 42 43 44 45 46

$ $ $ $

E -

$ $ $ $

24,050.00

$ $ $ $

F 3,600.00 1,200.00 15,000.00

Page 44

$ $ $ $

G 5,000.00 4,000.00 2,000.00 39,000.00

Aggregate Planning

A B C 1 Aggregate Planning 2 Enter the data only in the yellow cells. This template is designed so that you can experiment with production 3 4 Production cost ($/unit) $70.00 5 Inventory holding cost ($/unit) $1.40 6 Lost sales cost ($/unit) $90.00 7 Overtime cost ($/unit) $6.50 8 Undertime cost ($/unit) $3.00 9 Rate change cost ($/unit) $5.00 10 Normal production rate (units) 2200 11 Ending inventory (previous Dec.) 1000 12 13 14 Cumulative 15 Month Demand Demand 16 January 1500 1,500 17 February 1000 2,500 18 March 1900 4,400 19 April 2600 7,000 20 May 2800 9,800 21 June 3100 12,900 22 July 3200 16,100 23 August 3000 19,100 24 September 2000 21,100 25 October 1000 22,100 26 November 1800 23,900 27 December 2200 26,100 28 Average 2,175 29 30 Production Inventory 31 Month Cost Cost 32 January $ 82,250.00 $ 945.00 33 February $ 152,250.00 $ 2,590.00 34 March $ 152,250.00 $ 2,975.00 35 April $ 152,250.00 $ 2,380.00 36 May $ 152,250.00 $ 1,505.00 37 June $ 152,250.00 $ 210.00 38 July $ 152,250.00 $ 39 August $ 152,250.00 $ 40 September $ 152,250.00 $ 245.00

Page 45

Aggregate Planning

A 41 42 43 44 45 46

October $ November $ December $ Totals $

B 152,250.00 152,250.00 152,250.00 1,757,000.00

Total cost $

1,941,560.00

Page 46

C $ $ $ $

1,890.00 2,415.00 2,380.00 17,535.00

Aggregate Planning

1 ed so that you2can experiment with production levels in column D to identify good solutions. 3 4 5 6 7 8 9 10 11 12 13 Cumulative 14 Product Ending Lost 15 Production Availability Inventory Sales 16 1175 2,175 675 0 17 2175 4,350 1,850 0 18 2175 6,525 2,125 0 19 2175 8,700 1,700 0 20 2175 10,875 1,075 0 21 2175 13,050 150 0 22 2175 15,225 0 875 23 2175 18,275 0 825 24 2175 21,275 175 0 25 2175 23,450 1,350 0 26 2175 25,625 1,725 0 27 2175 27,800 1,700 0 28 Maximum 2,125 29 30 Lost Sales Overtime Undertime Rate Change 31 Cost Cost Cost Cost 32 $ $ $ 3,075.00 $ 5,125.00 33 $ $ $ 75.00 $ 5,000.00 34 $ $ $ 75.00 $ 35 $ $ $ 75.00 $ 36 $ $ $ 75.00 $ 37 $ $ $ 75.00 $ 38 $ 78,750.00 $ $ 75.00 $ 39 $ 74,250.00 $ $ 75.00 $ 40 $ $ $ 75.00 $ -

Page 47

Aggregate Planning

D 41 42 43 44 45 46

$ $ $ $

153,000.00

E $ $ $ $

F -

$ $ $ $

Page 48

G 75.00 75.00 75.00 3,900.00

$ $ $ $

10,125.00

Aggregate Planning

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

Page 49

Aggregate Planning

41 42 43 44 45 46

Page 50

Aggregate Planning

Page 51

Sequencing

Job 1 2 3 4 5 6 7 8 9 10

Processing Time 7 3 5 2 6

Average Due Date 11 10 8 5 17

Sequence 4 2 3 5 1

Processing Time 2 3 5 6 7

Due Date 5 10 8 17 11

Flowtime Lateness 11.20 1.00

Tardiness 2.80

Flowtime Lateness 2 -3 5 -5 10 2 16 -1 23 12

Tardiness 0 0 2 0 12

Six Sigma Calculations Enter data only in yellow-shaded cells. Number of defects discovered Number of units Number of defect opportunities/unit

Defects per unit (DPU) 0.000375 Total number of defect opportunities 12800 Defects per million opportunities (dpmo) 234.375 Sigma level 4.99800633

Pareto Chart Enter names in column A and frequencies in column B. Enter data only in yellow cells; the template will char Then use the Excel sort procedure to sort the data in columns A and B only from largest to smallest on colum Name Internal failure Appraisal External failure Prevention

Amount Percent of Total 410000 46.96% 340000 38.95% 90000 10.31% 33000 3.78%

450000 400000 350000

Frequency

300000

Total

873000

250000 200000 150000 100000 50000 0

Pareto Chart

X-bar and R-Chart

Copyright © 2014 Cengage Learning Not for commercial use. This spreadsheet is designed for up to 50 samples, each of a constant sample size from 2 to 10. Enter data only in y Charts are displayed below the calculations. Some resizing or rescaling of the charts may be required. Number of samples (<= 50) Sample size (2 - 10) Grand Average Average Range

30 3 31.88 10.8

DATA 1 2 3 4 5 6 7 8 9 10

1 31 42 28

A2 D3 D4 d2 1.023 0 2.574 1.693 2 26 18 35

3 25 30 34

4 17 25 21

5 38 29 35

6 41 42 36

7 21 17 29

8 32 26 28

Average LCLx-bar Center UCLx-bar

33.67 26.33 29.67 21 34 39.67 22.33 28.67 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93

Range LCLrange Center UCLrange

14 0 10.8 27.8

17 0 10.8 27.8

9 0 10.8 27.8

8 0 10.8 27.8

9 0 10.8 27.8

X-bar Chart 50 45

Averages

40 35

6 0 10.8 27.8

12 0 10.8 27.8

6 0 10.8 27.8 Averages Lower control limit Upper control limit Center line

Averages

40 35 30 25 20 15 10 5 0 1

9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39

Sample number

DO NOT MODIFY THIS TABLE n 2 3 4 5 6 7 8 9 10

Control Chart Factors A2 D3 D4 d2 A3 B3 B4 1.88 0 3.267 1.128 2.659 0 3.267 1.023 0 2.574 1.693 1.954 0 2.568 0.729 0 2.282 2.059 1.628 0 2.266 0.577 0 2.114 2.326 1.427 0 2.089 0.483 0 2.004 2.534 1.287 0.03 1.97 0.419 0.076 1.924 2.704 1.182 0.118 1.882 0.373 0.136 1.864 2.847 1.099 0.185 1.815 0.337 0.184 1.816 2.97 1.032 0.239 1.761 0.308 0.223 1.777 3.078 0.975 0.284 1.716

m 2 to 10. Enter data only in yellow cells may be required.

9 41 34 33

10 29 17 30

11 26 31 40

12 23 19 25

13 17 24 32

14 37 35 17

15 18 25 29

16 30 42 31

17 28 36 32

18 40 29 31

19 18 29 28

20 22 34 26

21 36 22 26

22 29 37 31

36 25.33 32.33 22.33 24.33 29.67 24 34.33 32 33.33 25 27.33 28 32.33 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 8 0 10.8 27.8

13 0 10.8 27.8

14 0 10.8 27.8

6 0 10.8 27.8

15 0 10.8 27.8

Averages Lower control limit Upper control limit Center line

20 0 10.8 27.8

11 0 10.8 27.8

12 0 10.8 27.8

8 0 10.8 27.8

11 0 10.8 27.8

12 0 10.8 27.8

14 0 10.8 27.8

R-Chart

30 25

8 0 10.8 27.8

Ranges

20 15 10 5

39 41 43 45 47 49

0 1

9 11 13 15 17 19 21 23 25 27 29 31 33

Sample number

23 40 35 46

24 34 44 42

25 31 37 39

26 41 45 34

27 36 41 34

28 35 49 40

29 38 45 40

30 42 44 32

40.33 40 35.67 40 37 41.33 41 39.33 #N/A #N/A #N/A #N/A #N/A #N/A 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 11 0 10.8 27.8

10 0 10.8 27.8

8 0 10.8 27.8

11 0 10.8 27.8

Ranges Lower control limit

Upper control limit Center line

7 0 10.8 27.8

14 0 10.8 27.8

7 0 10.8 27.8

12 #N/A #N/A #N/A #N/A #N/A #N/A 0 0 0 0 0 0 0 10.8 10.8 10.8 10.8 10.8 10.8 10.8 27.8 27.8 27.8 27.8 27.8 27.8 27.8

33 35 37 39 41 43 45 47 49

number

#N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 20.83 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 31.88 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 42.93 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A 0 0 0 0 0 0 0 0 0 0 0 0 0 0 10.8 10.8 10.8 10.8 10.8 10.8 10.8 10.8 10.8 10.8 10.8 10.8 10.8 10.8 27.8 27.8 27.8 27.8 27.8 27.8 27.8 27.8 27.8 27.8 27.8 27.8 27.8 27.8

p-Chart This spreadsheet is designed for up to 50 samples. Enter data only in yellow cells. Some resizing or rescaling of the chart may be needed. Sample size Number of samples Average (p-bar)

0.539

Sample 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Number Nonconforming 22 36 19 32 23 20 26 35 25 30 33 22 26 34 31 24 23 27 32 19

50 20

Fraction Standard Nonconforming Deviation LCLp CL UCLp 0.4400 0.070495 0.3275 0.539 0.7505 0.7200 0.070495 0.3275 0.539 0.7505 0.3800 0.070495 0.3275 0.539 0.7505 0.6400 0.070495 0.3275 0.539 0.7505 0.4600 0.070495 0.3275 0.539 0.7505 0.4000 0.070495 0.3275 0.539 0.7505 0.5200 0.070495 0.3275 0.539 0.7505 0.7000 0.070495 0.3275 0.539 0.7505 0.5000 0.070495 0.3275 0.539 0.7505 0.6000 0.070495 0.3275 0.539 0.7505 0.6600 0.070495 0.3275 0.539 0.7505 0.4400 0.070495 0.3275 0.539 0.7505 0.5200 0.070495 0.3275 0.539 0.7505 0.6800 0.070495 0.3275 0.539 0.7505 0.6200 0.070495 0.3275 0.539 0.7505 0.4800 0.070495 0.3275 0.539 0.7505 0.4600 0.070495 0.3275 0.539 0.7505 0.5400 0.070495 0.3275 0.539 0.7505 0.6400 0.070495 0.3275 0.539 0.7505 0.3800 0.070495 0.3275 0.539 0.7505

c-Chart This spreadsheet is designed for samples of up to 50 units Enter data only in yellow cells. Some resizing or rescaling of the chart may be needed.

Unit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

1.8 1.341640786 Number of Nonconformances 2 3 0 1 3 5 3 1 2 2 0 1 0 2 4 1 2 0 3 2 1 4 0 0 3

LCLc

CL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

#N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A

UCLc 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 1.8 5.8249 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A

7 6

Number of defects

Average (c-bar) Standard deviation

5 4 3 2 1 0 1

36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

#N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A

Number of defects Lower control limit Upper control limit Center line

Attribute (c) Chart

Sample number

mber of defects wer control limit per control limit

A B C D E F G H I J K 1 Process Capability Analysis 2 This template is designed to handle up to 150 observations. Enter data only in yellow cells. 3 4 Nominal specification 10.7 5 Upper specification limit 10.9 6 Lower specification limit 10.5 7 8 DATA 1 2 3 4 5 6 7 8 9 10 9 1 10.650 10.800 10.500 10.800 10.700 10.800 10.750 10.650 10.850 10.650 10 2 10.750 10.850 10.800 10.800 10.700 10.700 10.850 10.700 10.800 10.550 11 3 10.750 10.700 10.650 10.800 10.650 10.650 10.750 10.650 10.500 10.800 12 4 10.600 10.650 10.650 10.700 10.600 10.750 10.800 10.850 10.650 10.650 13 5 10.700 10.750 10.700 10.750 10.550 10.700 10.850 10.700 10.750 10.600 14 6 10.600 10.900 10.850 10.750 10.650 10.650 10.600 10.750 10.750 10.600 15 7 10.600 10.750 10.800 10.700 10.600 10.850 10.850 10.850 10.800 10.850 16 8 10.750 10.750 10.700 10.700 10.700 10.600 10.650 10.850 10.750 10.650 17 9 10.650 10.650 10.750 10.800 10.650 10.900 10.650 10.750 10.700 10.750 18 10 10.600 10.600 10.750 10.800 10.750 10.850 10.750 10.750 10.700 10.650 19 20 Process Capability Index Calculations Cp 0.768 21 Average 10.7171 Cpl 0.833 22 Standard deviation 0.0868 Cpu 0.702 23 Cpk 0.702 24 25 26 27

L M N O P Q 1 Copyright © 2014 Cengage Learning nly in yellow cells. 2 Not for commercial use. 3 4 5 6 7 8 11 12 13 14 15 9 10.800 10.650 10 10.700 10.850 11 10.750 10.800 12 10.700 10.600 13 10.750 10.700 14 10.650 10.650 15 10.850 10.800 16 10.700 10.650 17 10.700 10.700 18 10.600 10.650 19 20 21 22 23 24 25 26 27

R S T Frequency Distribution and Histogram Data Minimum Data Maximum

10.500 10.900

Enter number of cells (10 or less) Number of Cells 8 Cell 1 2 3 4 5 6 7 8 9 10

From -Infinity 10.45 10.51 10.58 10.64 10.70 10.76 10.83 10.89 10.95 11.01

To (inclusive) 10.45 10.51 10.58 10.64 10.70 10.76 10.83 10.89 10.95 11.01 11.08

Frequency

U V W X Y Z AA 1 2 Enter smallest and largest limits for the frequency distribution. 3 The lower limit should be slightly less than the data minimum. 4 The upper limit should be slightly larger than the data maximum. 5 Lower limit 10.450 6 Upper limit 10.950 7 Cell width 0.063 8 9 Frequency Histogram 10 0 11 2 50 12 2 45 13 13 40 14 47 15 24 35 16 16 30 17 14 25 18 2 20 19 0 20 0 15 21 10 22 5 23 24 0 25 10.45 10.51 10.58 10.64 10.70 10.76 10.83 26 Cell Upper Limit 27

10.89

AC 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

10.95

11.01

Activity

ACTIVITY A A 1 2 B B 3 C C 4 D 5 E D 6 F E 7 G H F 8 9 I G 10 J K H 11 12 I 13 J 14 15 K

START 0 0 5 7 7 12 7 15 15 18 20

TIME 3 5 2 6 5 3 4 3 4 2 2

Work Measurement

A B C D E F G 1 Work Measurement 2 Enter data only in yellow-shaded cells. This template is designed for up to 10 work elements. 3 4 5 Work element Rating Observation 1 2 3 6 1 1.00 Cumulative time 0.03 0.03 0.02 Get housing and stem 7 Element time 0.03 0.03 0.02 8 2 Screw in stem 1.10 Cumulative time 0.13 0.15 0.14 9 Element time 0.10 0.12 0.12 10 3 Get and insert washer 1.00 Cumulative time 0.24 0.25 0.26 11 Element time 0.11 0.10 0.12 12 4 Get and insert screw 1.00 Cumulative time 0.32 0.33 0.36 13 Element time 0.08 0.08 0.10 14 5 Tighten screw 0.97 Cumulative time 0.48 0.50 0.54 15 Element time 0.16 0.17 0.18 16 6 Place assembly in tray 1.00 Cumulative time 0.51 0.53 0.58 17 Element time 0.03 0.03 0.04 18 7 Cumulative time 19 Element time 20 8 Cumulative time 21 Element time 22 9 Cumulative time 23 Element time 24 10 Cumulative time 25 Element time 26

Page 76

Work Measurement

1 d for up to 102work elements. 3 4 5 4 5 6 6 0.03 0.04 0.03 7 0.03 0.04 0.03 8 0.16 0.13 0.12 9 0.13 0.09 0.09 10 0.29 0.23 0.21 11 0.13 0.10 0.09 12 0.38 0.33 0.30 13 0.09 0.10 0.09 14 0.53 0.50 0.45 15 0.15 0.17 0.15 16 0.56 0.54 0.49 17 0.03 0.04 0.04 18 19 20 21 22 23 24 25 26

7 0.04 0.04 0.14 0.10 0.24 0.10 0.32 0.08 0.51 0.19 0.54 0.03

8 0.04 0.04 0.16 0.12 0.26 0.10 0.33 0.07 0.52 0.19 0.55 0.03

9 0.03 0.03 0.15 0.12 0.27 0.12 0.37 0.10 0.58 0.21 0.62 0.04

Normal 10 Sum Average Time 0.03 0.03 0.32 0.03 0.032 0.13 0.10 1.09 0.11 0.120 0.22 0.09 1.06 0.11 0.106 0.31 0.09 0.88 0.09 0.088 0.49 0.18 1.75 0.18 0.170 0.52 0.03 0.34 0.03 0.034

Sum

Page 77

0.550

Allowances Standard Time

Work Measurement

T 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

20% 0.66

Page 78

Learning Curve

Enter the data only in the yellow cells. This template is designed to compute the production time for the fir A chart of the unit time and cumulative average time is given to the right of the tables. Enter the % learning curve as a whole number, e.g., 80 or 90. First unit % learning curve

3500 90%

0.1520

Unit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Time Cumulative Time Cum. Avg. Time 3500 3500 3500.0 3150.0 6650.0 3325.0 2961.7 9611.7 3203.9 2835.0 12446.7 3111.7 2740.5 15187.2 3037.4 2665.5 17852.7 2975.5 2603.8 20456.5 2922.4 2551.5 23008.0 2876.0 2506.2 25514.3 2834.9 2466.4 27980.7 2798.1 2430.9 30411.6 2764.7 2399.0 32810.6 2734.2 2370.0 35180.6 2706.2 2343.4 37524.0 2680.3 2319.0 39843.0 2656.2 2296.4 42139.4 2633.7 2275.3 44414.6 2612.6 2255.6 46670.2 2592.8 2237.1 48907.4 2574.1 2219.8 51127.2 2556.4 2203.4 53330.5 2539.5 2187.8 55518.4 2523.6 2173.1 57691.5 2508.3 2159.1 59850.6 2493.8 2145.7 61996.3 2479.9

Unit 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

pute the production time for the first 100 units. of the tables.

Time Cumulative Time Cum. Avg. Time 2133.0 64129.3 2466.5 2120.8 66250.1 2453.7 2109.1 68359.2 2441.4 2097.9 70457.0 2429.6 2087.1 72544.1 2418.1 2076.7 74620.8 2407.1 2066.7 76687.6 2396.5 2057.1 78744.6 2386.2 2047.8 80792.4 2376.2 2038.8 82831.1 2366.6 2030.0 84861.2 2357.3 2021.6 86882.8 2348.2 2013.4 88896.2 2339.4 2005.5 90901.7 2330.8 1997.8 92899.5 2322.5 1990.3 94889.8 2314.4 1983.0 96872.8 2306.5 1975.9 98848.8 2298.8 1969.1 100817.8 2291.3 1962.3 102780.2 2284.0 1955.8 104736.0 2276.9 1949.4 106685.4 2269.9 1943.2 108628.6 2263.1 1937.1 110565.7 2256.4 1931.2 112496.8 2249.9

Unit 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75

Time Cumulative Time 1925.4 114422.2 1919.7 116341.9 1914.1 118256.0 1908.7 120164.7 1903.4 122068.1 1898.2 123966.3 1893.1 125859.4 1888.1 127747.5 1883.2 129630.7 1878.4 131509.0 1873.7 133382.7 1869.0 135251.7 1864.5 137116.2 1860.0 138976.3 1855.7 140832.0 1851.4 142683.3 1847.1 144530.5 1843.0 146373.4 1838.9 148212.3 1834.9 150047.2 1830.9 151878.1 1827.0 153705.2 1823.2 155528.4 1819.4 157347.8 1815.7 159163.6

Unit 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100

Time Cumulative Time Cum. Avg. Time 1812.1 160975.7 2118.1 1808.5 162784.1 2114.1 1804.9 164589.1 2110.1 1801.5 166390.5 2106.2 1798.0 168188.6 2102.4 1794.6 169983.2 2098.6 1791.3 171774.5 2094.8 1788.0 173562.4 2091.1 1784.7 175347.2 2087.5 1781.5 177128.7 2083.9 1778.4 178907.0 2080.3 1775.2 180682.3 2076.8 1772.2 182454.4 2073.3 1769.1 184223.5 2069.9 1766.1 185989.6 2066.6 1763.1 187752.8 2063.2 1760.2 189513.0 2059.9 1757.3 191270.3 2056.7 1754.5 193024.8 2053.5 1751.7 194776.4 2050.3 1748.9 196525.3 2047.1 1746.1 198271.4 2044.0 1743.4 200014.8 2041.0 1740.7 201755.5 2037.9 1738.0 203493.6 2034.9

4000 3500 3000 2500 2000

1500 1000 500 0

1 4

Cum. Avg. Time 2243.6 2237.3 2231.2 2225.3 2219.4 2213.7 2208.1 2202.5 2197.1 2191.8 2186.6 2181.5 2176.4 2171.5 2166.6 2161.9 2157.2 2152.6 2148.0 2143.5 2139.1 2134.8 2130.5 2126.3 2122.2

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100

Learning Curve

Unit Number

Time Cum. Avg. Time

A B C D E F 1 Single Server Queueing Model Copyright © 2014 Cengage Learning 2 Enter the data only in the yellow cells. Not for commercial use. 3 4 Lambda 9 5 Mu 10 6 7 Probability system is empty 0.10 8 Average number in queue 8.10 9 Average number in system 9.00 10 Average time in queue 0.90 11 Average waiting time in system 1.00

J 1 2 3 4 5 6 7 8 9 10 11

A 1 Multiple Server Queueing Model 2 3 Lambda 4 Mu 5 6 Number of servers 7 Probability system is empty 8 Average number in queue 9 Average number in system 10 Average time in queue 11 Average time in system 12 Probability arrival must wait 13 14 15 Lookup table (do not modify) 16 17 18

2 0.379 0.229 1.129 0.025 0.125 0.279

3 0.403 0.030 0.930 0.003 0.103 0.070

4 0.406 0.004 0.904 0.000 0.100 0.014

5 0.407 0.001 0.901 0.000 0.100 0.002

6 0.407 0.000 0.900 0.000 0.100 0.000

7 0.407 0.000 0.900 0.000 0.100 0.000

8 0.407 0.000 0.900 0.000 0.100 0.000

0 1.000

1 2 0.900 0.405 1.900 0.405

3 0.122 2.305 0.122

4 0.027 2.427 0.027

5 0.005 2.454 0.005

6 0.001 2.459 0.001

9 10

7 0.000 2.459 0.000

J 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

8 0.000 2.460 0.000

Queue Simulation A B C D E F G 1 Single Server Queueing Simulation Copyright © 2014 Cengage Learning 2 Enter the data only in the yellow cells. Not for commercial use. 3 This template is designed to allow up to 8 random number intervals 4 for the arrival and service time distributions. 5 6 Arrival Distribution Service Time Distribution 7 Random Number Number of Random Number Number of 8 Interval Arrivals Interval Arrivals 9 0 0.55 0 0 0.5 1 10 0.55 0.8 1 0.5 0.8 2 11 0.8 0.9 2 0.8 0.95 3 12 0.9 0.95 3 0.95 1 4 13 0.95 1 4 14 15 16 17 18 Random Number of Server Random Service Number 19 Time Period Number Arrivals Available? Number Time Waiting 20 0 21 1 0.550 0 YES 0 22 2 0.087 0 YES 0 23 3 0.891 2 YES 0.486 1 1 24 4 0.762 1 YES 0.352 1 1 25 5 0.662 1 YES 0.993 4 1 26 6 0.857 2 NO 3 27 7 0.003 0 NO 3 28 8 0.378 0 NO 3 29 9 0.922 3 YES 0.372 1 5 30 10 0.702 1 YES 0.133 1 5 31 11 0.894 2 YES 0.572 2 6 32 12 0.233 0 NO 6 33 13 0.892 2 YES 0.324 1 7 34 14 0.510 0 YES 0.611 2 6 35 15 0.901 3 NO 9 36 16 0.892 2 YES 0.987 4 10 37 17 0.084 0 NO 10 38 18 0.631 1 NO 11 39 19 0.535 0 NO 11 40 20 0.397 0 YES 0.619 2 10 41 21 0.880 2 NO 12 42 22 0.585 1 YES 0.769 2 12 43 23 0.380 0 NO 12

Page 87

Queue Simulation

44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86

A 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66

B 0.780 0.532 0.683 0.773 0.860 0.275 0.307 0.565 0.404 0.807 0.706 0.005 0.582 0.943 0.826 0.971 0.528 0.927 0.275 0.884 0.845 0.335 0.961 0.929 0.162 0.400 0.660 0.502 0.612 0.875 0.783 0.370 0.347 0.399 0.019 0.492 0.412 0.473 0.092 0.984 0.883 0.716 0.390

C 1 0 1 1 2 0 0 1 0 2 1 0 1 3 2 4 0 3 0 2 2 0 4 3 0 0 1 0 1 2 1 0 0 0 0 0 0 0 0 4 2 1 0

D YES YES YES YES YES NO YES NO YES NO YES NO NO YES NO YES YES YES NO YES YES NO NO NO YES YES NO NO YES YES YES NO YES YES NO NO YES NO YES YES YES YES YES

Page 88

E 0.143 0.093 0.170 0.326 0.519

F 1 1 1 1 2

0.787

0.619

0.921

0.666

0.221 0.079 0.759

1 1 2

0.076 0.973

1 4

0.458 0.949

1 3

0.330 0.445 0.577

1 1 2

0.455 0.939

1 3

0.727

0.304 0.047 0.457 0.417 0.367

1 1 1 1 1

G 12 11 11 11 12 12 11 12 11 13 13 13 14 16 18 21 20 22 22 23 24 24 28 31 30 29 30 30 30 31 31 31 30 29 29 29 28 28 27 30 31 31 30

Queue Simulation

87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120

A 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100

B 0.795 0.497 0.475 0.387 0.517 0.018 0.258 0.267 0.992 0.747 0.264 0.488 0.866 0.443 0.600 0.731 0.375 0.968 0.344 0.426 0.002 0.437 0.040 0.351 0.522 0.829 0.859 0.928 0.589 0.216 0.851 0.952 0.023 0.130

C 1 0 0 0 0 0 0 0 4 1 0 0 2 0 1 1 0 4 0 0 0 0 0 0 0 2 2 3 1 0 2 4 0 0

D YES YES YES NO NO YES YES YES YES NO NO NO YES YES NO YES YES NO YES NO YES YES NO NO YES YES NO NO YES YES NO NO YES YES

Page 89

E 0.224 0.220 0.805

F 1 1 3

0.303 0.008 0.305 0.990

1 1 1 4

0.365 0.590

1 2

0.492 0.685

1 2

0.537

0.424 0.910

1 3

0.485 0.937

1 3

0.236 0.897

1 3

0.469 0.682

1 2

G 30 29 28 28 28 27 26 25 28 29 29 29 30 29 30 30 29 33 32 32 31 30 30 30 29 30 32 35 35 34 36 40 39 38

Number Waiting 45 40

35 30 25 20 15 10 5 0

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61

H 4 Cengage Learning 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Service 19 Completion? 20 21 NO 22 NO 23 YES 24 YES 25 NO 26 NO 27 NO 28 YES 29 YES 30 YES 31 NO 32 YES 33 YES 34 NO 35 YES 36 NO 37 NO 38 NO 39 YES 40 NO 41 YES 42 NO 43 YES

Queue Simulation

Time Period

Page 90

Queue Simulation

44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86

H YES YES YES YES NO YES NO YES NO YES NO NO YES NO YES YES YES NO YES YES NO NO NO YES YES NO NO YES YES YES NO YES YES NO NO YES NO YES YES YES YES YES YES

Page 91

Queue Simulation

87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120

H YES YES NO NO YES YES YES YES NO NO NO YES YES NO YES YES NO YES NO YES YES NO NO YES YES NO NO YES YES NO NO YES YES NO

Page 92

Queue Simulation O

58 61 64 67 70 73 76 79 82 85 88 91 94 97 100

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 ber Waiting 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43

Page 93

Inventory Simulation

A B C D 1 Inventory Simulation 2 Enter the data only in the yellow cells. 3 This template is designed to allow up to 8 random number intervals for the demand and lead time distri 4 5 Demand Distribution 6 Random Number Interval Demand 7 0 0.5 0 8 0.5 0.75 1 9 0.75 0.9 2 10 0.9 0.95 3 11 0.95 1 4 12 13 14 15 16 Lead Time Distribution 17 Random Number Interval Lead Time 18 0 0.2 1 19 0.2 0.3 2 20 0.3 0.7 3 21 0.7 0.9 4 22 0.9 1 5 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 Page 94

Inventory Simulation A 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

D 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Page 95

Inventory Simulation

E F G H I J K L M 1 Copyright © 2014 Cengage Learning 2 Not for commercial use. llow up to 8 random 3 number intervals for the demand and lead time distributions. 4 5 Order Quantity 5 Order Cost $40.00 6 Reorder Point 3 Holding Cost $0.20 7 Initial Inventory 5 Back Order Cost $100.00 8 9 Beg Order Units End Back Order 10 Day Inv Rec'd Rec'd R.N. Dmd Inv Order Placed? 11 1 5 0 0.767 2 3 0 YES 12 2 3 0 0.023 0 3 0 NO 13 3 3 0 0.873 2 1 0 NO 14 4 1 0 0.688 1 0 0 NO 15 5 0 0 0.730 1 -1 1 NO 16 6 -1 YES 5 0.507 1 3 0 NO 17 7 3 0 0.106 0 3 0 YES 18 8 3 0 0.291 0 3 0 NO 19 9 3 0 0.483 0 3 0 NO 20 10 3 YES 5 0.943 3 5 0 NO 21 11 5 0 0.242 0 5 0 NO 22 12 5 0 0.718 1 4 0 NO 23 13 4 0 0.316 0 4 0 NO 24 14 4 0 0.530 1 3 0 YES 25 15 3 0 0.315 0 3 0 NO 26 16 3 0 0.954 4 -1 1 NO 27 17 -1 YES 5 0.987 4 0 0 NO 28 18 0 0 0.395 0 0 0 YES 29 19 0 0 0.396 0 0 0 NO 30 20 0 0 0.706 1 -1 1 NO 31 21 -1 0 0.177 0 -1 0 NO 32 22 -1 YES 5 0.968 4 0 0 NO 33 23 0 0 0.317 0 0 0 YES 34 24 0 0 0.300 0 0 0 NO 35 25 0 0 0.541 1 -1 1 NO 36 26 -1 0 0.874 2 -3 2 YES 37 27 -3 YES 5 0.745 1 1 0 NO 38 28 1 0 0.500 0 1 0 NO 39 29 1 YES 5 0.863 2 4 0 NO 40 30 4 0 0.992 4 0 0 YES 41 31 0 0 0.652 1 -1 1 NO 42 32 -1 0 0.713 1 -2 1 YES 43 33 -2 YES 5 0.763 2 1 0 NO Page 96

Inv Pos 8 8 6 5 4 3 8 8 8 5 5 4 4 8 8 4 0 5 5 4 4 0 5 5 4 7 6 6 4 5 4 8 6

Inventory Simulation

44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

E 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

F 1 0 1 0 0 -3 5 5 5 5 5 5 5 5 3 7 7

G YES

YES

H 0 5 0 0 0 10 0 0 0 0 0 0 0 0 5 0 0

I 0.696 0.977 0.693 0.215 0.948 0.865 0.227 0.242 0.194 0.074 0.165 0.107 0.378 0.790 0.645 0.463 0.852

J 1 4 1 0 3 2 0 0 0 0 0 0 0 2 1 0 2

Page 97

K 0 1 0 0 -3 5 5 5 5 5 5 5 5 3 7 7 5

L 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 0 0

M NO NO YES NO YES NO NO NO NO NO NO NO NO YES NO NO NO

N 5 1 5 5 7 5 5 5 5 5 5 5 5 8 7 7 5

Inventory Simulation O P Q R 1 2 3 4 5 6 7 Average cost/day $ 31.25 8 9 Lead Hold Order 10 R.N. time Cost Cost 11 0.944 5 $ 0.60 $ 40.00 12 $ 0.60 $ 13 $ 0.20 $ 14 $ $ 15 $ $ 16 $ 0.60 $ 17 0.467 3 $ 0.60 $ 40.00 18 $ 0.60 $ 19 $ 0.60 $ 20 $ 1.00 $ 21 $ 1.00 $ 22 $ 0.80 $ 23 $ 0.80 $ 24 0.434 3 $ 0.60 $ 40.00 25 $ 0.60 $ 26 $ $ 27 $ $ 28 0.714 4 $ $ 40.00 29 $ $ 30 $ $ 31 $ $ 32 $ $ 33 0.728 4 $ $ 40.00 34 $ $ 35 $ $ 36 0.616 3 $ $ 40.00 37 $ 0.20 $ 38 $ 0.20 $ 39 $ 0.80 $ 40 0.361 3 $ $ 40.00 41 $ $ 42 0.651 3 $ $ 40.00 43 $ 0.20 $ -

Short Cost $ $ $ $ $ 100.00 $ $ $ $ $ $ $ $ $ $ $ 100.00 $ $ $ $ 100.00 $ $ $ $ $ 100.00 $ 200.00 $ $ $ $ $ 100.00 $ 100.00 $ -

Total Cost $ 40.60 $ 0.60 $ 0.20 $ $ 100.00 $ 0.60 $ 40.60 $ 0.60 $ 0.60 $ 1.00 $ 1.00 $ 0.80 $ 0.80 $ 40.60 $ 0.60 $ 100.00 $ $ 40.00 $ $ 100.00 $ $ $ 40.00 $ $ 100.00 $ 240.00 $ 0.20 $ 0.20 $ 0.80 $ 40.00 $ 100.00 $ 140.00 $ 0.20

Page 98

Inventory Simulation

44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

0.356

0.044

0.018

Q $ $ 0.20 $ $ $ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 0.60 $ 1.40 $ 1.40 $ 1.00

R $ $ $ 40.00 $ $ 40.00 $ $ $ $ $ $ $ $ $ 40.00 $ $ $ -

S $ $ $ $ $ 300.00 $ $ $ $ $ $ $ $ $ $ $ $ -

T $ $ 0.20 $ 40.00 $ $ 340.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 40.60 $ 1.40 $ 1.40 $ 1.00

Page 99

Decision Analysis Enter the data only in the yellow cells. This template is designed to allow up to 5 decision alternatives and future events. Enter names of decision alternatives and future events in the appropriate cells in column A or K and row 7. P Profit Payoff Table Decision Alternative Conventional machine Automated machine

Future Events Low High $15,000.00 $21,000.00 $9,000.00 $35,000.00

Probability Opportunity Loss Matrix Decision Alternative Conventional machine Automated machine

Future Events Low High $0.00 $14,000.00 $6,000.00 $0.00

Maximax Decision Maximin Decision Opportunity Loss Decision

Automated machine Conventional machine Automated machine

e cells in column A or K and row 7. Probabilities are optional.

Maximum Minimum Expected Value $21,000.00 $15,000.00 $35,000.00 $9,000.00

Cost Payoff Table Decision Alternative

Probability

Maximum $14,000.00 $6,000.00

Opportunity Loss Matrix Decision Alternative

Minimin Decision Minimax Decision Opportunity Loss Decision

Future Events Maximum

$0.00 $0.00 $0.00

Minimum

Expected Value

Hudson Jewelers (A) "Welcome to Hudson Jewelers,” the Naples, Florida jewelry store attendant said with a smile. “I’m Bill; let me know if I can answer any questions you may have.” “I’m browsing with my fiancé,” the customer responded. “Oh! So, you two are getting married. Congratulations! What’s your name?” as Bill extends his hand to shake hands. “My name is Lilly and this is my husband to-be, Lester. “Well, if you need my help, please let me know,” Mr. Hudson said as he walked behind the counter at about 1:30 pm. “Would you like a glass of wine while you browse?” Mr. Hudson asked. “No, thank you,” as Lester noticed for the first time a small wine rack and comfortable leather chairs in the back corner of the store. Lilly and Lester continued looking at engagement rings, as Bill gave them space. After about ten minutes, Lester asked Mr. Hudson, “I noticed your big high-definition television with that beautiful wedding ring rotating. What is this?” “It is a 3D software system that allows you to co-design your own ring. You can pick out the diamond(s) and mount them on any ring you want. Once the entire ring is finalized our manufacturer will produce it.” “Can we sit down and see how it works?” Lilly asked Mr. Hudson. The three of them began to design a prototype ring, with Mr. Hudson answering questions. Mr. Hudson and Lilly were beginning to establish a friendly relationship based on trust. All of the ring designs could be stored on the computer for future reference. A diamond became a symbol of social status and wealth in India about 3,000 years ago. De Beers, a diamond mining and production company, began to market diamonds in the 1900s with slogans like “A diamond is a girl’s best friend,” and “A diamond is forever.” De Beers’s advertisements promoted the idea that those who do not buy diamond jewelry must not love their partners as much as those who do. One modern De Beers ad states, “She already knows you love her. Now everyone else will, too.” A century of advertising and branding, and billons of dollars in industry advertisements, has made a diamond a symbol of “eternal love.” While Mr. Hudson and Lilly exchanged ideas about alternative ring designs, Lester ______________________________________________________________________________________ *This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management, Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @ January, 2015, Fort Myers, Florida.

asked Mr. Hudson’s daughter, Jasime, what was the time. “It’s 3 pm,” Jasime replied. “Whew! I need a break,” Lester responded as he stood up from his chair. Everyone laughed at Lester’s comment as the clock kept ticking. “OK, I’ll hurry,” Lilly said as she glanced at Lester. Lester walked around the store for a few minutes and then sat back down to reenter the “design your own ring” conversation. By 4 pm everyone was exhausted after discussing an array of ring design questions, answers, and ‘what ifs’. However, Lester and Mr. Hudson now had a much better idea of what Lilly wanted in an engagement ring. Jasime had been listening to the three-way discussion but decided not to join the conversation at this time. Two ring designs were stored on the computer. “I’ll have my daughter Jasime work on these designs,” Mr. Hudson said. “I am good with the software but my daughter is the CAD expert. She will call our diamond and ring dealers and make sure what we have designed can be manufactured at your target price,” Mr. Hudson continued. “Mr. Hudson,” Lester asked as he was walking toward the door, “Is your inventory lower because of this custom design capability?” Mr. Hudson replied with a positive nod, “Yes, definitely. It is a high-risk business to stock lots of diamonds and jewelry at the store. With the 3D/CAD system, I think we do a better job of matching our physical inventory to customer needs and trends. We have less security, loan, and insurance risk using CAD. We also see new trends that our customers may want using CAD. And the customers seem to enjoy designing their own unique jewelry.” Exhibit 1.1 provides example customer comments during one month. As Lilly and Lester began to leave the store, thanking Mr. Hudson and Jasime for their help, Betty, Mr. Hudson’s wife entered the store and was introduced. Hudson Jewelers was a true one-store, family business. Lilly and Lester crossed 5th Avenue to a restaurant and discussed their first computer-aided engagement ring design experience. Lilly was excited about the prospect of having a one-of-a-kind ring as they drank a glass of wine. After three more visits to Hudson’s Jewelers the final ring design was done with everyone’s approval. Jasime and Mr. Hudson carefully went over every aspect of the ring design to assure agreement. For example, the CAD technology allowed Lilly and Lester to ______________________________________________________________________________________ *This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management, Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @ January, 2015, Fort Myers, Florida.

see several alternative designs with gold or platinum prongs to hold a yellow diamond. Checks were written and the final ring design was electronically sent to the manufacturer. One month later Hudson Jewelers called Lilly and Lester, and they went to the store to pick up their engagement ring. As they entered the store Betty and Bill Hudson and Jasime greeted Lilly and Lester by name. “Are you ready to see your ring?” Jasime asked in a joyful voice. “Yes, we are so excited,” Lilly responded. Mr. Hudson asked Lester to come to the backroom safe. He unlocked the safe and gave the ring to Lester. “Can we put it in a box?” Lester asked. “Sure.” Lester took the box and ring and walked into the storefront and gave Lilly the ring with a kiss on the cheek. Lilly opened the box and the ring sparkled under the high intensity lights of the store. “Oh! It is so perfect,” Lilly said as she hugged Lester. Mr. Hudson then said, “We have some presents for you,” as he handed Lester a bottle of champagne and Lilly a small picture album that summarized how the ring was designed and manufactured step by step. It showed a 3D line drawing of the ring, a wax model of the ring that was used in production, the raw casting with platinum and gold prongs without the diamonds, and finally the completed ring from several viewpoints. The couple thanked everyone and walked across the street to their favorite restaurant to celebrate this memorable experience. Hudson Jewelers is open from 10 am to 5 pm Monday through Saturday and closed Sunday. Two nights per week (usually Tuesday and Friday) they stay open until 8 pm. Also, customer appointments are made at any time the customer wants. Customer visits, as documented in Exhibit 1.2, are seasonal; the hot summer months being the lowest demand and the winter months the highest. Customers (called snowbirds) from northern countries or states move to the southern tip of Florida to avoid harsh winters. Snowbirds begin to arrive in October, followed by a pause during the holiday season of November and December. Peak season is January to April when the population of Lee and Collier counties almost doubles. Mr. and Mrs. Hudson, their daughter Jasime, and sometimes her husband, Thomas Navey, work in the store. Mr. Hudson and Jasime Navey are the expert jewelers with Mrs. Hudson and her son-in-law filling in with friendly service but no particular jewelry expertise. Thomas Navey works full-time for the Collier County government. A typical staffing ______________________________________________________________________________________ *This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management, Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @ January, 2015, Fort Myers, Florida.

schedule for Tuesday is shown in Exhibit 1.3. The current store “staffing schedule” is based on two criteria. The first criterion is that either Bill or Jasime must be on duty at the store so an expert jeweler is always available for customers. Second, Hudson Jewelers is a familyowned business with no other hired staff. Store inventory follows demand, with an average inventory in low season of $1 to $3 million, and in high season, $3 to $6 million. During some weeks in peak season jewelry inventory can peak at $15 to $20 million for short periods, due to customer special orders. Store display space is limited with the CAD system taking up floor space. Mr. Hudson would like to have more jewelry display space to show more moderate priced jewelry. Insurance rates are high and dependent on store security arrangements and inventory levels. The store has two fireproof safes bolted to the floor that weight over 8,000 pounds each. Security cameras are numerous and directly tied into a 24-hour security firm. Computer-Aided Design Since the 1970s, computer-aided design (CAD), computer-aided-engineering (CAE) and computer-aided-manufacturing (CAM) enable corporations to design and/or manufacture a wide variety of items such as industrial parts, buildings, furniture, airplanes, landscapes, and kitchens. Today, many firms have achieved complete integration of their design and production functions into what we now call computer-integrated systems. Designers can design, analyze, test, and simulate product design options before products physically exist, and then actually produce them, such as with Boeing’s 777 Dreamliner airplanes. Also, 3D/CAD and 3D printing are expanding the frontier of designing parts almost instantaneously such as gears, toys, heart values, and even building materials. Today CAD technology has made its way into the design of custom jewelry either online or in-the-store. The customer and/or in-store CAD expert go through a step-by-step computer led process to co-design the jewelry. For a diamond wedding ring, for example, the size, clarity, color, cut, price, and shape of the diamond are first selected; followed by choosing the setting, such as a single gold band of a certain thickness with matching prongs to hold the diamond. Once the virtually designed ring is created, it can be rotated to any angle and even placed on a virtual male or female hand. This ring design can be stored as ______________________________________________________________________________________ *This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management, Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @ January, 2015, Fort Myers, Florida.

‘design option 1’, followed by other design options; and then portrayed side-by-side on the high-definition television screen. And of course, alternative ring designs can be e-mailed to friends and family worldwide. Once the ring design is finalized, the customer provides a deposit before Hudson Jewelers sends it to the manufacturer. The Global Value Chain for Diamonds A simple way to view the major stages of the diamond value chain is exploration, mining, rough diamonds, polished diamonds, and customer jewelry. It is normally 18 to 36 months from the time a diamond is mined until it reaches a retail store. Rare or large stones often reduce this processing time by one-half. The supply chain is global since no one country or company performs all the work required to bring a diamond to its final resting place – customer jewelry. About one-half of rough diamonds are used in industrial applications such as oil and gas drilling equipment and metal cutting tools. The major stages of the global value chain for diamonds can be defined in numerous ways but usually consists of the following stages. Exploration A diamond is a unique pyramidal structure of carbon atoms. Billions of years ago heat and pressure deep inside the earth created natural diamonds. The ancient Greek word for diamond means “unbreakable.” Historically, much of the diamond industry involves African countries and sometimes the exploitation of native people. Russia and Africa account for 70 percent of the world’s diamond reserves. Major corporations that focus on diamond mining, production, and sales include DeBeers, with about 37% market share. DeBeers is a Kimberley, South Africa based corporation with mines and facilities in South Africa, Tanzania, Botswana, and Namibia. ALROSA is a Russian state-owned corporation with about 30% market share, and with mines and facilities in Russia and Angola. Rio Tinto is an Australian corporation that mines diamonds, iron, copper, uranium, aluminum, gold, and coal, with about a 5% global market share in diamonds. Its mines and facilities are in Australia, Zimbabwe, Africa, and Canada. Other firms such as Aber, BHP Billiton, and Leviev compete in the diamond industry. Mining ______________________________________________________________________________________ *This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management, Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @ January, 2015, Fort Myers, Florida.

The two major ways to mine rough diamonds are an open-pit method, where rock and soil at the surface are excavated; and underground mining. First-level sorting is done at this stage, to separate gem-quality stones from obvious industrial grade stones. The controversies begin at this stage of the diamond value chain. The 2006 movie Blood Diamond, for example, starring Leonardo DiCaprio, Jennifer Connelly, and Djimon Hounsou, highlighted militant groups and corrupt governments trying to get their share of “blood diamond” revenues to fund revolutions and wars. Conflict-free diamonds are supposed to be free of other injustices such as child labor, smuggling, worker exploitation, and sexual violence. And, of course, ethical supply chains try to prevent all of the previous cited issues, plus worker accidents, environmental pollution, deceitful grading of diamonds, deforestation, poverty, low wages, and so on. Sorting and Grading The basic criteria for grading diamonds include size (carats), color, shape, and quality. At this stage second-level sorting and grading begins at separate locations from the mines. About 20-25 percent of rough diamonds are used in the retail value chain while the rest are used for industrial proposes. Human eyes, hands, and expertise assess the quality and value of most diamonds. Advanced machines do some of the sorting and grading process for smaller stones. But sorting and grading diamonds is not an exact science even with current industry regulations and quality standards. Cutting and Polishing Centers The Four C’s – Cut, Color, Clarity, and Carat weight – are used to further classify diamonds at a production facility, located in cities like Dubai, New York, Johannesburg, Hong Kong, London, Tel Aviv, Antwerp, and Mumbai. Diamond defects and errors can take many forms in this industry: impurities, optical flaws, mixed colors, crystal flaws, cutting mistakes, and non-ethical diamonds. The cutter must decide how best to cut the rough diamond to remove defects, keep the most carat weight possible, and make the diamond as perfect as possible. Normally, by the end of this stage one-half to two-thirds of the rough diamond is waste. For example, a ten-carat rough diamond might result in a three- to five-carat diamond ______________________________________________________________________________________ *This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management, Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @ January, 2015, Fort Myers, Florida.

that can be set in customer jewelry. Much of the waste is used in industrial diamond applications or by the cutters themselves for cutting and polishing. During the Great Recession smaller diamond cutters and polishers went out of business while larger firms gained market share. Cutting and polishing costs-per-carat range from about $100 in Antwerp, New York, and Tel Aviv; to $10 to $50 in India, China, and Thailand. The quality of a rough diamond can be enhanced or hindered by the way the rough diamond is cut and polished. High-quality rough diamonds of over 20 carats almost always go to the world’s best cutters and polishers. Trading Centers A current industry trend is the consolidation of cutting and polishing with trading centers into a “diamond hub” in cities like New York, Tel Aviv, Antwerp, Dubai, and Mumbai. Major producers like DeBeers sell most of their diamonds based on long-term contracts to a select group of buyers and sellers. Long-term contracts provide price and demand stability, predictable buyers and sellers, and large sales volumes. Trading centers and producers are sometimes accused of forming price-controlled cartels by holding back diamond stocks (reserves) to maintain retail prices. Another way to limit supply in the global diamond market is for major producers to sell diamonds only to their “site holders.” A site holder can be a company or individual who can only buy direct from major producers. If all reserves of diamonds were released, supply would greatly exceed demand, and diamond prices would plummet. However, new sales channels are emerging that take advantage of Internet capabilities such as on line auctions and virtual sales platforms. Sales take many forms such as face-toface negotiations, take-it-or-leave it on line offers at fixed prices, live on line auctions with multiple bidding rounds, and time limited on line auctions. In addition, physical diamond auctions take place at Sotheby’s and Christie’s. Jewelry Manufacturing Manufacturing transforms cut, polished, and graded diamonds into customer jewelry. Often a custom setting for the stones includes pouring hot metal into a ring or jewelry mold; and/or metal machine fabrication, milling, and polishing. Standard diamond ring production ______________________________________________________________________________________ *This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management, Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @ January, 2015, Fort Myers, Florida.

exhibits both job and flow shop characteristics while custom jewelry is a job shop. Diamond defects can be hidden by the clever design of customer jewelry. Here the jewelry artist or customer designs how the finished diamond will be displayed. Over $50 billion in value is added at the jewelry manufacturing and retail store stages. Retailing In the diamond value chain, Tiffany & Company and Cartier are two examples of luxury goods retailers that enjoy high margins. The price per carat (value) of a typical diamond usually increases eight to ten times from mining to retail store as each stage of the value chain adds its profit margin. After the original sale, most diamonds don’t wear out so they are resold (recycled) many times within the value chain. The “diamond is forever” slogan also applies to generating repeat sale profits. To further complicate customer- and trading-center buying decisions, diamond buyers must cope with whether the diamond is synthetic. In one audit by the International Gemological Institute with a sample of 1,000 stones over one-half were found to be synthetic diamonds. Moreover, the synthetic diamonds had human-engineered flaws to make them appear as natural stones. Only expert gemologists with special equipment can tell the difference between a natural and synthetic stone. From the viewpoint of natural diamond producers, synthetic diamond pollution is an ever-increasing industry problem. A four-carat synthetic diamond might sell for a few hundred dollars. In addition, synthetic diamond producers argue their diamonds are brighter and clearer than natural stones, and the only true ethical diamonds. The Kimberley Process Certification Scheme (KPCS) A multitude of industry-related associations, governments, and corporations have adopted quality and sustainability standards, trade regulations and laws, and certification programs to ensure no conflict or blood diamonds enter their value chain. But diamond traceability along the value chain is very poor. Few diamond producers or retailers actually investigate the route their diamonds take along the supply chain. Diamond smugglers and corrupt governments often certify diamonds without complete investigations while worker exploitation and environmental pollution continues. ______________________________________________________________________________________ *This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management, Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @ January, 2015, Fort Myers, Florida.

In 2003 in Kimberly, South Africa the KPCS was designed to certify rough diamond shipments as “conflict-free” and prevent conflict diamonds from entering the value chain. This initiative has been somewhat successful but fake KPCS certification documents have been found throughout the value chain. A recent initiative is to etch a serial number on each non-conflict diamond with a laser that is not visible to the human eye. The KPCS process is criticized for focusing on front-room customer perceptions, not back-room supply chain practices.

______________________________________________________________________________________ *This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management, Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @ January, 2015, Fort Myers, Florida.

Note: The instructor must assign the case question(s) below depending on what topics you have covered, what the instructor wants to emphasize, and whether the questions are for individual or team assignments or a capstone course project.

Case Discussion Questions and Chapter I. Chapter 1: Operations Management and Value Chains 1. Use one of the three value chain frameworks discussed in this chapter to characterize the diamond value chain. How does this value chain gain a customer? How does it create value? How does it keep a customer? 2. Research what major diamond producers are doing regarding social, environment, and financial sustainability practices. Visit corporate annual reports, for example. Provide two or three examples. 3. Write a short two-page paper on “blood diamonds” and/or “ethical diamonds.” Define each and explain the positives and negatives for this social sustainability issue. What should be the role of diamond producers? What is the role of operations managers in this industry? Chapter 2: Measuring Performance in Value Chains 1. What is the value of a loyal customer for a billionaire who frequents Hudson Jewelers every February given the following information? She buys jewelry for her extended family every other year when they visit Naples. Assume the following: Customer retention rate – 80% Contribution Margin = 0.55 Price per purchase = $200,000 Chapter 3: Operations Strategy 1. Define and draw the customer benefit package and state Hudson Jewelers’ strategy; rank order its competitive priorities, order qualifiers, and order winners; and state the ways they gain competitive advantage. 2. Evaluate a customer's retail store experience in terms of search, experience, and credence attributes. Provide some examples and explain why they can be classified as search, experience, and credence attributes. 3. Define in detail the attributes of “value” when buying and co-designing a $50,000 ______________________________________________________________________________________ *This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management, Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @ January, 2015, Fort Myers, Florida.

wedding ring. What creates a buying experience that would delight the customer? Chapter 4: Technology and Operations Management 1. What are the advantages and disadvantages from the service provider’s (jeweler’s) perspective of using “design your own ring” 3D/CAD technology at the retail store level? What are the risks from the customer’s viewpoint? 2. Research jewelry retail store software programs and summarize their capabilities in terms of customer relationship management, accounting, point of sale, inventory management, payment systems, and customer loyalty programs. Provide references. Chapter 5: Goods and Service Design 1. Hudson Jeweler's current layout design includes the CAD system and television screen in the front room of the jewelry store. Walk-in customers enjoy seeing jewelry designs rotate on the television screen. Customers have little privacy as they co-design and discuss their custom-designed jewelry in the front room. Other customers in the store can listen to the conversation, and sometimes stand right behind them. Evaluate the following three-store design and layout remodeling options by answering questions (a) to (c). See the case study for break-even details. (I) Keep the Current Layout Fixed Cost = $5,000 based on CAD square footage to total store square footage. Variable Cost = $0.20 cents per customer visit ($2,620/year divided by 13,104 visits/year) to update CAD software, insurance, maintenance, and employee CAD training. (II) Move Current CAD into a Single New Private Design Room Fixed Cost = $12,000 to build a new CAD design room inside store and move current CAD system to the new room and furnish. Variable Cost = $0.24 cents per visit ($3,145/13,104) to update CAD software, insurance, maintenance, and employee CAD training, and room stero speaker and music, fire sprinkler maintenance, and lighting in the design room. Option II frees up 49 square feet of store space for one additional front room jewelry display case but decreases the space for comfortable leather chairs by one-half, so there would be space for only one chair plus the wine rack. Fourteen square feet of extra display space ______________________________________________________________________________________ *This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management, Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @ January, 2015, Fort Myers, Florida.

would be available in the store. Based on last year’s revenue, each square foot of jewelry display space generated $30,090. (III) Do Option II Plus Build a Second CAD Design Room & Buy a Second CAD System Fixed Cost = $27,000 to build two new CAD design rooms inside the store and move current CAD system into one new room, and buy a second new CAD system and install in the second room. Variable Cost = $0.38 cents per visit ($4,980/13,104) to update two CAD software, insurance, maintenance, and employee CAD training, and two room stero speakers and music, two fire sprinklers maintenance, and lighting in the two design rooms. Option III frees up 49 square feet of store space for one additional front room jewelry display case but eliminates the space for the wine rack or any comfortable leather chair(s). The space currently dedicated to the wine rack and two leather chairs plus the CAD system, desk, and chair located in the front room is now two private CAD design rooms. (a) Use economic analysis to evaluate these three options. (b) What are the economic and non-economic advantages and disadvantages of each of the three options? (c) What is your final recommendation to Mr. Hudson? Justify. Explain. 2. Define (a) the servicescape for Hudson Jewelers using the three dimensions as subheadings, and (b) the nature of Hudson Jewelers’ service encounters. 3. Propose a “service guarantee” for Hudson Jewelers. What exactly will you guarantee? Should it be explicit in writing or simply an implicit, non-written guarantee, or is it better not to do it at all? Explain and justify your logic. Chapter 6: Supply Chain Decisions 1. Explain whether the global diamond supply chain a push or pull system, and whether the global diamond supply chain is an efficient or responsive system for make-to-order and make-to-stock jewelry. Provide examples to justify your reasoning. 2. Research the extent of vertical integration in the global (seven-stage) diamond supply chain? Provide examples of forward and backward integration and the extent to which this is practiced in today’s value chain? In this industry, what is the impact of vertical integration? ______________________________________________________________________________________ *This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management, Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @ January, 2015, Fort Myers, Florida.

Chapter 7: Process Selection, Design, and Analysis 1. Research the parts of the diamond value chain and then answer the following question: How would you describe the type of process used for (a) exploration, (b) diamond mining, (c) sorting and grading, (d) cutting and polishing centers, (e) trading centers, (f) jewelry manufacturing, and (g) retail stores? You might want to use the terminology of the product-process matrix and service positioning matrix, for example. 2. Given the simplified process work activities shown in Case Exhibit 1.4, draw the process flowchart, and then answer the following questions. You must allocate the work content in Case Exhibit 1.4 to manufacturing, CAD, service, front room, and back room to gain insights into where and how this work is accomplished. a. For this process, what is the total time in minutes (or equivalent fraction of a day) to create one woman’s codesigned wedding ring? b. For this process, what is the total manufacturing time in minutes (or equivalent fraction of a day) to create one woman’s codesigned wedding ring? c. For this process, what is the total CAD time in minutes (or equivalent fraction of a day) to create one woman’s codesigned wedding ring? d. For this process, what is the total service (other than CAD) time in minutes (or equivalent fraction of a day) to create one woman’s codesigned wedding ring? e. For this process, what are the total front room and back room times in minutes (or equivalent fraction of a day) to create one woman’s c-designed wedding ring? f. What insights do you gain by evaluating the work content of this process and answering questions (a) to (e)? g. What is the maximum number of customers per hour that can be served for Activity B (CAD Demo & Jewelry Concept) if two employees are in the store? Assume each employee works at 100% utilization. 3. Write a job description for a new employee at this store. 4. Assume that during Lilly’s and Lester’s last visit to the retail store everything was as described in the case, except the final bill was not ready and Mr. Bill Hudson had lost some of the paperwork documenting the price of the ring and diamonds. After a 45-minute wait, Lilly and Lester had figured out a final bill. What is the impact of this “billing service upset” at the end of the customer’s buying experience? Is billing a primary or peripheral process? 5. Design an ideal diamond-ring customer experience from beginning to end (i.e., make a list of 10 to 20 steps in the job and process design). Explain what must happen and what must not happen. ______________________________________________________________________________________ *This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management, Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @ January, 2015, Fort Myers, Florida.

Chapter 8: Facility and Work Design 1. Design and draw the layout for your high-end jewelry store. Critique its strengths and weaknesses. (Make use of concepts in Chapters 4, 5, 7 and 8.) Chapter 9: Forecasting and Demand Planning 1. Given the seasonal nature of demand at Hudson Jewelers depicted in Case Exhibit 1.2, how would you forecast future demand for customer visits? What criteria will you use to determine a “good” forecast? What methods would you use, and why? What is your final recommendation with respect to a forecasting method? Chapter 10: Capacity Management 1. Explain how capacity is measured at the following stages of the diamond value chain: (a) mining, (b) cutting and polishing, (c) jewelry manufacturing for custom and standard jewelry, and (d) the retail store? (There can be multiple measures so make sure you define the unit of measure.) Chapter 11: Managing Inventories 1. Research global supply and demand for diamonds and how it affects prices. What role do “diamond reserves” (inventory) play in determining prices? Explain. What do you think the demand-supply curves for diamonds looks like? Try to sketch it out. 2. What are the detailed components of inventory holding costs in this situation? What other factors might influence holding costs, such as security costs, obsolescence costs, and others. What is your estimate of inventory carrying costs as a percentage of item value? Explain your reasoning. Chapter 12: Supply Chain Management and Logistics 1. Research short- and long-term risks in the global diamond supply chains and write a short paper (maximum of 3 pages) defining what these risks are and how they are mitigated by major diamond producing corporations. 2. Obtain the annual report of a major diamond producer such as DeBeers, ALROSA, Rio Tinto, BHP Billiton, and perform a cash-to-cash conversion cycle analysis of their business. What did you find out? Explain. Implications? Chapter 13: Resource Management ______________________________________________________________________________________ *This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management, Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @ January, 2015, Fort Myers, Florida.

1. Customer demand at Hudson Jewelers (i.e., customer visits) is highly seasonal, as case Exhibit 1.2 illustrates. In the context of aggregate planning options (Section 13-2 and Exhibit 13.2), what types of decisions concerning resources does this service business have to make? Write a short paper of no more than two typed pages on these issues. Chapter 14: Operations Scheduling and Sequencing 1. Develop a staff schedule like case Exhibit 1.3 for ONLY Tuesday during peak demand (i.e. week 8 in case Exhibit 1.2). Assume the maximum service standard (rate) is ten customers per hour per store employee. (You will have to allocate Tuesday’s demand over the day and time periods) What are the advantages and disadvantages of your store-staffing schedule? Would you hire non-family employees to staff this single store? Justify. Chapter 15: Quality Management 1. What “cost of quality” criteria (i.e., prevention, appraisal, internal failure, and external failure costs) might be included in an analysis at the following stages of a global diamond supply chain---mining, cutting and polishing centers, and retail jewelry store? Explain. Provide examples. Chapter 16: Quality Control and SPC 1. Research and acquire the criteria for diamond appraisals and critique these criteria in terms of objectivity, measurement, and overall accuracy. Are diamond quality criteria as specific and measureable as for manufactured parts? Explain. 2. Develop a p-chart for the diamond blemish and inclusion data found in case Exhibit 1.5 documenting the quality of the diamonds on “clarity and defects” coming from two different diamond mines (suppliers) – one in Asia and one in Africa. What do you conclude? Chapter 17: Lean Operating Systems 1. Write a short paper (maximum of two pages) on how the four principles of lean operating systems are applied to diamond mining. 2. If you were to design a jewelry store based only upon the four principles of lean operating systems - elimination of waste, increased speed and response, improved quality, and reduced cost - what would it look like? Incorporate OM concepts and methods used throughout this textbook, such as mission and strategy, competitive priorities, process type, service guarantees, supply chain, and so on as appropriate, into your discussion. ______________________________________________________________________________________ *This case was prepared by Dr. David A. Collier, Eminent Scholar, Alico Chair in Operations Management, Lutgert College of Business, Florida Gulf Coast University, Fort Myers, Florida. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise, without the permission of Mr. Collier. Copyright @ January, 2015, Fort Myers, Florida.

Chapter 18: Project Management 1. The exhibit below shows the project work activities for designing custom jewelry using computer aided design (CAD). Draw the network diagram and determine the project completion time, critical path(s), activity slack times, and a Gantt chart for the project. Summarize you insights. What is missing from the activity time estimates?

Exhibit 1.1 Example Hudson Jewelers Customer Comments (Source: store comment cards)

No one has a ring like our custom-designed wedding rings. Thanks so much! I thought it was too risky to design our rings on-line by ourselves with no expert knowledge, so that is why I bought from Hudson Jewelers. Mr. Hudson’s daughter, Jasime, is great with this software, and she helped us through several improvement cycles until we got the design “perfect.” The Hudson’s work with you on price. You set a target price and they will help you discover designs that match that price. And they can help you finance the ring(s). Thank you. Mr. Hudson and his family are friendly and let you set the pace. They don’t rush you. And they know the jewelry business inside and out. They called diamond dealers in New York and London on our behalf to check on prices and cuts. Although I bought from you, I forgot to ask if your store only sells certified non-conflict diamonds. I hope so. I was disappointed with the paperwork your store provided me on my new wedding ring appraisal. There was no conflict-free certification and when I asked you said “No, none came with the diamonds.” The high definition 3D pictures are stunning and bring the ring to life. When Jasime took a picture of my left hand and then put our ring on my hand virtually, I was sold. She changed colors (gold or platinum) and diamond pin locations virtually on that high definition TV so I could see what I liked best. Wow! Bill was rather shocked when I ask him, “Have you ever sold a blood diamond?” His answer was “Not to my knowledge.” We co-designed the ring that fit my personality perfectly. Stunning and unique forever!

Exhibit 1.2 Hudson Jewelers Customer Visit Counts (Demand)

Week No. Visits 1 (January) 171* 2 268 3 467 4 490 5 564 6 (February) 479 7 445 8 587 9 576 10 (March) 524 11 547 12 462 13 456 14 (April) 422 15 450 16 393 17 342 18 (May) 291 *Limited store hours

Week 19 20 21 22 (June) 23 24 25 26 (July) 27 28 29 30 (August) 31 32 33 34 (Sept) 35 36

No. Visits 211 143 108 80 57 91 63 97 86 57 68 51 74 51 103 108 91 68

Week 37 38 (Oct) 39 40 41 42 43 (Nov) 44 45 46 47 48 (Dec) 49 50 51 52

No. Visits 103 114 148 194 165 228 239 279 314 342 251 211 325 291 262 97*

Total Customer Visits = 13,104 Average/Week Visits = 252.0 Maximum Visits = 587 Minimum Visits = 51 Standard Deviation = 169.7

Exhibit 1.3 Hudson Jewelers Tuesday Store Staff Schedule+

+An Excel model of all case exhibits accompanies the case and can be provided by the instructor. *Using Equation 7.2 Utilization = Demand Rate/[Service Rate*Number Servers) or assume 100% = 11/[5*N] or N = 2.2 employees

Exhibit 1.4 Hudson Jewelry Simplified Process Work Activities and Flowchart

Activity

Predecessor

A B C D E F G H I J K L M N

none A B B C, D E F G G I H, J K L M

Fraction of a Work Total Day%* Minutes* Customer 1st Store Visit CAD Demo & Jewelry Concept 3 Co-Design Jewelry Sessions^ Price Quote and Discussion CAD Jewelry Design Approval Partial Payment Release Final Jewelry Order Stone (Wholesale) Jeweler Wax Jewelry Mold Metal Pouring & Polishing Final Production Completed Delivery - Customer Pickup Final Payment Celebration (Wine, Toast, etc)

0.025 0.04 0.36 0.03 0.08 0.02 0.025 0.2 0.3 0.25 0.25 0.04 0.02 0.05

12 19.2 172.8 14.4 38.4 9.6 12 96 144 120 120 19.2 9.6 24

Total

1.69

811.2

^Assumes 3 co-design improvement cycles (3 times 0.12). *Assumes a 480 minute work day (i.e., 0.025*480 = 12 minutes). %The 480 minute workday is computed from 420(4/6) +600(2/6) = 480 average minutes/day.

Exhibit 1.5 Blemish and Inclusion Count Data for p-chart for Asia versus Africa Suppliers* Sample Number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Asia Supplier 33 24 30 40 27 36 21 29 33 41 38 22 44 29 30 28 23 29 39 20

African Supplier 22 36 19 32 23 20 26 35 25 30 33 22 26 34 31 24 23 27 32 19

*The sample size for each sample is 50 diamonds in the 1.0 to 1.5 carat range.

OM6 TN Hudson Jewelers Case

Hudson Jewelers Case Study Teaching Note A recently engaged couple enters a Hudson Jewelers store and discovers a computeraided-design (CAD) system to design custom rings of all types. The case describes the entire “service experience” including co-designing the ring, its manufacture, the store delivery process, and a generic view of the diamond value chain that can be the basis for a discussion of social, environmental, and financial sustainability. Students are challenged to define the customer benefit package augmented with this new CAD technology, define the strategy and rank order of competitive priorities, draw a pre- and post-service view of the value chain, consider the advantages and disadvantages of the “design your own ring” service experience, understand the role of the servicescape and service encounter design in creating the total customer experience, what are the core (key) processes at the retail (store) level, and in the global diamond value chain. Depending on what OM chapters you have covered when you do this case, students may also use OM concepts such as “What Do OM Managers Do?” (Chapter 1) such as staffing and forecasting customer demand, supply chain management, facility layout and design, technology, purchasing, quality control, process design, front and backroom job design, resource management, service encounter design, scheduling, and sustainability. The case can also be used to demonstrate the application of concepts such as the seven differences between goods and service (see Chapter 1) such as customers participate in many service processes, activities, and transactions (co-production), service management and technology skills required of employees, biztainment, social sustainability and child labor in diamond mines, and so on. Also, instructors can make up their own assignment questions. The instructor can scatter the case assignments out throughout the semester or take the last week or two of a semester to focus on the case. Or the case can be used as a course project where the instructor assigns case questions that he/she wants to focus on. Please note that we expect undergraduate students to only cite a few points per question, not the comprehensive lists provided in this teaching note. Graduate student answers are expected to be more comphrehesive with examples and more managerial insights. Also, most of us will search and buy diamonds in our lives, so this case helps everyone (faculty, students) be smarter when buying these stones. Teaching Strategy ALL INSTRUCTORS SHOULD READ THE CASE AND THE ENTIRE TEACHNING NOTE BEFORE ASSIGNING CASE QUESTIONS TO STUDENTS. STUDENT ANSWERS ARE VERY MUCH DEPENDENT ON WHAT OM MATERIAL THEY HAVE COVERED AND WHEN. THE CHALLENGE IS TO APPLY OM CONCEPTS AND METHODS TO THE GLOBAL DIAMOND INDUSTRY. You may decide to use parts or none of the 34 Hudson Jewelers case study questions. We use different questions in different semesters and we use HJ case questions on topics we want to emphasize during the semester. We have never used more than 6 to10 questions during a semester and those were divided among case teams. 1

OM6 TN Hudson Jewelers Case Student team presentations and/or teach parts of the case using the assignment questions on the board with everyone participating are ways to generate discussions about this case. We use a team approach where odd numbered teams do one set of three assignment questions and even numbered teams do a different set of case questions. The report is graded but not the informal student presentations as they flip through their typed report on a classroom view master. Below are key parts that are included in the course syllabus. Example course syllabus explanation *Odd numbered teams hand in and answer certain questions from the Hudson Jewelers case posted on CANVAS. Even numbered teams hand in and answer different questions about this integrative supply chain case study. Please see what questions odd and even teams answer on the next few pages of the syllabus. Repeat the question at the top of your answer page and then answer it. Thanks! Example class assignment 7

Tues/Jan 27

- Team Prepare Hudson Jewelers Case Hand-in. Answer Questions #X, #Y, and #Z. A maximum of six-page write-up by answering the case questions in a Q and A format. Even numbered teams hand in this assignment.

Please note that there are other cases on the OM6 web site besides Hudson Jewlers and end-ofchapter cases! And, of course, the end of chapter case studies. Chapter 1: Operations Management and Value Chains 1. Use one of the three value chain frameworks discussed in this chapter to characterize the diamond value chain. How does this value chain gain a customer? How does it create value? How does it keep a customer? For example, the pre- and post-production value chain model is depicted in Exhibit 1.7. The challenge for students is “to apply” this “value chain paradigm” to the case study. The list below is some of what you might expect to see given student experiences. Pre-Production Services • Global supplier and purchasing negotiation (price of diamonds and rings) 2

OM6 TN Hudson Jewelers Case • • • • • • • • • • • •

Employee service management and technology (CAD) training (family business) Free wine bar and leather sofas in store Sales and marketing skills (cross-sell, buy up, etc.) Financing (via third parties like banks or jewelry trade-in credits) Customer jewelry trade-ins, appraisals, and conflict-free certifications Physical product warranties and guarantees Service guarantees Security processes and capabilities (video cameras, safes, alarms) Free ring cleaning and minor repair (build trust for future business) Insurance (in-store and during transport—high risk) Technical consulting on stone quality, ring settings, and value (i.e., a job shop) Customized co-design of jewelry via in-store CAD (basically a family consulting business built on trust)

Global Value Chain Processes • Forecasting demand at store and industry level • Store job design and training (technology and service management skills) • Retail jewelry store layouts and process flow integration • Global purchasing (order raw materials, grade diamonds, negotiate) • Quality standards for stones and gems (associations, grading, fraud, judgment versus measurable specifications, high performance quality versus consistent quality) • Primary production processes (mining, grading stones, cutting and polishing, secure transport, molds and forging, jewelry final assembly some flow shop and others job shop) • Inventory and warehouse management of stones and jewelry settings (limit supply versus demand, reserve diamond inventory, fraud) • Security processes and capabilities (in-store and in-transit) • Global payment systems (lines of credit, pay or ship first) • Global insurance (risk of miss-shipments, lost stones, robbery and break-ins) • Technology (CAD in the front room, front and back room security systems, stone grading equipment, continuous mining equipment) • Outsourcing certain production work (mining, grading, cutting and polishing, wax molds, security, financing) • Environmental Sustainability (waste, energy, transportation, technology, air quality, and product design processes) • Social Sustainability (community, product safety, ethics and government, workforce health and safety) Post-Production • Warranty and claims processing • Jewelry appraisal services and documents • In-store and on-line billing and payment • Warehouse and inventory management (in-store and throughout value chain) • In-store service encounter design (co-design, trust via moments of truth, ring presentation and celebration, wine, happiness) 3

OM6 TN Hudson Jewelers Case • • • • •

Recycle process for old customer jewelry Customer loyalty initiatives (free dinners, future discounts) Secure transportation services for mines, factories, warehouses, and stores Technical consulting services (appraisals, co-design jewelry, trade-ins) Sales and Marketing Experiences Post Deliver (mailing list, future discounts, free cleaning and repair)

The diamond supply chain described in the make-to-order Hudson Jewelry case s study is a “pull” type of supply chain. Undergraduate students will only point out a few of these – you will have to help them “see” these pre- and post-production goods and services. Of course, the key OM issue here is each of the above goods or services requires one or more processes to create and deliver it! Students may also use the input-output model of a value chain based on Exhibit 1.6, but this is not a case assignment question. Input-output Value Chain View of Hudson Jewelers

Suppliers Mining, Insurance, Financing Appraisals, Training, Security, Packaging

Inbound Shipping and Transport Third party truckers and security firms airplanes

Factories Fabricatio n, Standard, Customize d Processes, Assembly

Outbound Shipping To Retail Stores Airplanes, Security, Trucks

Retail Stores Service Encounter s, Sales & Marketing, Co-Design Jewelry

Customers Great & Unique Customer Experience

2. Research what major diamond producers are doing regarding social, environment, and financial sustainability practices. Visit corporate annual reports, for example. Provide two or three examples. Corporate annual reports in the jewelry diamond industry are good places to research this question. This is an open-ended question so expect a wide variety of student or team responses. Ask your class, “What should corporations in this industry be doing to promote environmental, social, and financial sustainability?” What are corporations doing? What should they be doing? Who audits sustainability results?

OM6 TN Hudson Jewelers Case

Social Sustainability • Petra Diamonds has a complete sustainability program including helping local communities where they have operations (i.e., mine closure plans, water management, energy use, provide employment to remote locations, mining rights, social compliance matrix, and so on. • Champion local and national regulations on protecting the environment • Enforce the Kimberly non-conflict diamond system • Seal non-conflict diamonds in tamper proof containers • Register diamond shipments within the global and country economies • Breeding programs for endangered animals and fishes • DeBeers Canada has a sustainability policy that helps ensure the rights of aboriginal people including burial grounds, best work practices, and religious sites. • DeBeers Canada support for local mining communities called “Social Investment.” • DeBeers develops with local communities joint sustainability plans for soil, vegetation, wildlife, air quality, and water and energy conservation. • DeBeers post mining system (called Environmental Management System) tries to identify and mitigate a productive, self-sustaining, and hazard free post-mining environment (site). Environmental Sustainability • Reduce mining footprint (square area) on surface • Minimize waste alluvial and storage • Maintain biodiversity by planting and culturing endangered plants on or around the mining site • Fund loss of fish habitat by sponsoring new lakes, preserves, and water recycling • Black Diamond Company has a sustainability program that encourages continuous reductions in energy, water, and chemical use • Diavik Diamond Mine in Canada sues underground haul trucks that use special energy efficient engines, recycle waste oil, decreased 10,000 tons of carbon dioxide generation in 2014, and built a wind farm. 5

OM6 TN Hudson Jewelers Case Financial (Economic) Sustainability • Long-term land – use planning around mines • Champion protected areas • Constant risk management regarding sustainability strategy, policy, and results • Provide local jobs, pay taxes, and support the local and national economy • Support infrastructure improvements such as roads, airstrips, power plants, and railroads • DeBeers donates a percentage of its pre-tax profits to community causes in countries it operates in---1 to 3.5 percent. Supposedly, DeBeers paid $3 billion to African countries overall in 2013. 3. Write a short two-page paper on “blood diamonds” and/or “ethical diamonds.” Define each and explain the positives and negatives for this social sustainability issue. What should be the role of diamond producers? What is the role of operations managers in this industry? See the answer to Question #2 above. Blood diamonds finance armed conflicts and civil wars. Worst cases include the conflicts in Angola and Sierra Leone (1991-2000). The conflict in the later displaced one-half of Sierra Leone’ population of five million and claimed the lives of 75,000 people. The 2006 film titled Blood Diamonds starring Leonardo DiCaprio raised awareness of this issue in public arenas. Ethical diamonds are certified to be free of violations in child labor, environmental pollution, worker exploitation, regulated work environments and labor laws, meet legal and regulatory requirements, poor working conditions, and so on, including financing revolution, civil wars, and armed conflicts. Note that the question asks students to define both! Blood diamonds are a subset of non-ethical diamonds. Diamond related corporations and the global diamond industry should promote improved sustainability practices. Global sourcing (purchasing), for example, can improve by “certifying diamonds” (much like Honda certifies a supplier) are ethical diamonds. Brilliant Earth built their reputation on trying to guarantee ethical gems. (See answer to Case Question # 6 on reverse logistics and Brilliant Earth). Students will also cite a series of USA Executive Orders and regulations like the Clean Diamond Trade Act in 2003 that banned blood and non-ethical diamonds but most of these actions did little to stop their illegal trade. Other issues students will discuss may include: • Child labor • Forced labor • Employee and vendor safety 6

OM6 TN Hudson Jewelers Case • • • • • • •

Employee health ISO Standards such as ISO-9001 (quality management), ISO-14000 (Environmental Management), and ISO-26000 (Social Responsibility Guidelines). Work hours Compensation Discrimination Rights of collective bargaining Supplier and company “certification” on sustainability issues

OM managers have a responsibility to champion ethical jewelry and diamonds throughout the supply chain. Ask your class, Do OM managers have responsibility for environmental sustainability? Social sustainability? The answer is yes in everyday operating decisions and for top management in terms of defining corporate and operational strategy and policy on sustainability. Students can apply the concepts in Exhibit 1.12 to a jewelry store and its supply chain. They will discover that many stones are not traceable through the value chain, counterfeit conflict-free stones with documentation exist, pollution from mining exist, the Kimberley Process Certification Scheme is a nice idea with good intentions but to-date it has not worked so well, the value chain is packed with substitute and fraudulent blood, synthetic, and conflict stones; diamonds and gems don’t wear out, and therefore, might be centuries old and sold and resold many times, and so on. It is a value chain with many sustainability issues. Environment Sustainability (waste management, energy optimization, transportation optimization, technology upgrades, air quality, sustainable product design) • • • • • • • • • • •

Black Diamonds Vendor Code defines standards for working conditions, safety, and production process that must be environmentally responsible. Some companies along the diamond supply chain use the Higgs Index to measure the environmental impact of their brands, facilities, and products. Black Diamond uses wind power to generate its energy for laser cutters, equipment, lighting, and CNC machines. Dominion Diamond adjusts its underground mine temperature to minimize greenhouse gas emissions yet keep people and equipment comfortable. 3D CAD at the retail store level is a technology upgrade but it uses much energy. Over fifty percent of a typical rough diamond is waste. (Where does it go?) Good and bad waste management examples exist for mines, cutting and polishing, and jewelry assembly. Diamonds are a sustainable product design in the sense they are reusable. The carbon footprint for global stone and jewelry transport is unknowable but value chain corporations could do more to reduce it. Mining and jewelry manufacturing need a sustainability strategy on pollution, water and energy management, and so on. Corporate plans for soil, vegetation, wildlife, air quality, water, and energy are a few areas of concern. 7

OM6 TN Hudson Jewelers Case •

DeBeers increased water recycling by 13% in one year without any change to operations.

Social Sustainability (product safety, workforce health and safety, ethics and governance, community) • •

•

Petra Diamonds supports funding for the prevention, treatment, and education of villages surrounding their mines for diseases such as HIV, tuberculosis, and malaria. Diamond and gem mines (i.e., suppliers) are notorious for bad work practices such as mine accidents, child labor, long working hours, fraud and bribes to country officials, and so on. Product safety, workforce health and safety, ethics and governance, and contributing to the quality of life of their community are all part of social sustainability. Students will provide examples of good and bad social sustainability practices. At the other end of the value chain retail stores normally make positive contributions to social sustainability such as sponsoring scholarships and student internships, goodwill projects via local Chamber of Commerce and other business associations, sponsor street parades and school events, and so on. Kimberley Certificates of Authenticity are better than nothing but they are not counterproof.

Economic Sustainability (performance excellence, financial management, resource management, emergency preparedness) • • •

Performance excellence, financial management, resource management, and emergency preparedness are the four sub perspectives. Security costs all along this value chain are high compared to consumer goods value chains such as Target, Wal-Mart, and Kroger. Students will discover much on the web and library about how value added increases as stones are processed along the value chain.

OM6 TN Hudson Jewelers Case Chapter 2: Measuring Performance in Value Chains 1. What is the value of a loyal customer for a billionaire who frequents Hudson Jewelers every February given the following information? She buys jewelry for her extended family every other year when they visit Naples. Assume the following: Customer retention rate – 80% Contribution Margin = 0.55 Price per purchase = $200,000 Customer retention rate – 80% Repurchase frequency = 0.5 Contribution Margin = 0.55 Price per purchase = $200,000 Customer defection rate = 1 – retention rate = 1 – 0.8 = 0.2 Buyer’s life cycle = 1/defection rate = 1/0.2 = 5 years Value of this Loyal Customer = $200,000*0.55*.5*5 = $275,000 Value of a Loyal Customer Enter data only in yellow cells. Revenue per unit $200,000.00 Percent contribution margin to profit and overhead 55% Repurchase frequency (purchases/year) 0.5 Defection rate 0.2 Buyer's life cycle 5.00 VLC $275,000.00 2. Design an individual “service plan” for this “AAAA” customer. A service plan for a super A customer might include: • • • • • •

mailing or e-mailing to this customer upcoming jewelry pieces displayed at the store in November to March every year, train all employees to know this person and their family by name, build a family profile of wants, needs, names, and behavior that all employees can access in a backroom file, train all store employees on this persons loyalty and need for super duper service, query this customer for private appointments either at their seaside home or at the store including CAD co-designed pieces of jewelry if they come to the store to pick up the jewelry, give them their favorite wine ($1,000 plus), have all Hudson family attend and celebrate, etc. 9

OM6 TN Hudson Jewelers Case The Ritz-Carlton and other high-end service systems maintain “customer profiles” for their “A” customers. Formal customer profiles for A customers is a good idea for HJ. Chapter 3: Operations Strategy 1. Define and draw the customer benefit package and state Hudson Jewelers’ strategy; rank order its competitive priorities, order qualifiers, and order winners; and state the ways they gain competitive advantage. Example Dual CBP Students Might Draw

Peripheral Goods Peripheral Retail Store Service Display Cases Financing And Lighting Peripheral Goods Peripheral High End Packaging Service Profession Primary Good Primary Service al (Rings, (The process is Expertise Packaging, the service & Peripheral Wine, etc.) vice versa.) Service (trust, Peripheral Peripheral Goods co-design) Service (Free wine bar and leather sofas)

Strategy:

Security systems and insurance)

Create a wonderful life time customer experience using employee service management knowledge and skills augmented by technology to co-design jewelry that helps the customer celebrate life’s special events.

Order Qualifiers:

Product quality, value chain capability that requires flow shop and job shop processes; owner and employee jewelry/industry knowledge and expertise, a physical store with an excellent servicescape and location, quick and secure access to stones and jewelry to support a make-toorder strategy.

Order Winners:

Service quality (the entire customer experience), design flexibility and customization, employee service management and CAD technology skills, proof of conflict-free diamonds, wine bar, use computer-aideddesign (CAD) to co-produce the customer’s rings and jewelry, product variety (customer sees thousands of alternative ring designs and mountings), fit customer tastes and target price range.

OM6 TN Hudson Jewelers Case The instructor must clarify “customer wants and needs” versus “CBP attributes designed by management to fill a want or need” prior to assigning this question. For example, a want and need is a “safe place to sleep” while electronic keys, hotel cameras, locked hotel outside doors, security guards, heavy room doors with deadbolt and chain locks, and so on are the CBP attributes that fulfill this want and need. Students will not be as complete or concise as the answers here but it is your job as classroom moderator to clarify these ideas and have a fun class discussion. Make sure students use the “terminology of OM” as they answer these questions, not “the-man-on-the-street” terminology. How would you rank order the competitive priorities for this business? • • • • • • •

#1a Flexibility/customization (co-designed, one-of-a-kind jewelry, make-to-order strategy) - Or rank #1b –This is really design AND resource flexibility! #1b Service quality (employee CAD and service management skills, build customer relationships and trust) #2 Product quality (diamonds, rings, jewelry) and #3 Innovation (besides CAD, customer also sees a much wider variety of mountings and styles). #4 Time (make-to-order strategy means customer is willing to wait, long lead times) #5 Price/cost (i.e., typical pricing strategy is what the market will bear) #6 Post sale service (warranty, free appraisals and ring cleaning, picture album, wine gifts, etc.)

Competitor jewelers may define their business as “selling make-to-order jewelry,” a physical product perspective void of service management practices. This is a very limited vision of the business. At the other extreme is a “service management” view of the business sometimes called “a total customer experience” vision of the business. Here extraordinary service management skills and CAD (technology) skills and capability allow the customer to co-design their one-of-a-kind ring or jewelry. Also, ask the class, “If you had $100 to spend what part is for physical goods versus service and the experience of co-designing your own jewelry?” Most students answer $80 physical goods to $20 for the memorable and total service experience. If you have class time, you can also contrast Hudson’s make-to-order strategy with a make-tostock strategy. A make-to-stock strategy includes long store display cases with hundreds of rings and diamonds for quick purchase, progressive price points, and what-you-see-is-what you-get. Of course, bricks and mortar jewelry stores cannot display million of jewelry combinations like on web sites and with CAD. Remember, IBM is the "Solutions Company" and there are other examples where the traditional goods-producing firm redefined itself from a service perspective such as General Electric manufacturing jet engines with twenty year service contracts, Caterpillar manufacturing heavy equipment with five to ten year service contracts, and cell phone companies selling a bundle of goods (i.e., the physical cell phone) and services (i.e., a multi-year service contract, iTunes, etc.) 11

OM6 TN Hudson Jewelers Case You would almost give the customer the physical product to get the long-term service contract! And, margins are normally higher on services than goods. 2. Evaluate a customer's retail store experience in terms of search, experience, and credence attributes. Provide some examples and explain why they can be classified as search, experience, and credence attributes. I. Order Qualifiers are basic customer expectations are generally considered the minimum performance level required to stay in business. Much like Search attributes that follow! What do we have to offer the customer to even be in the business? That is, the basics, minimal value chain and process capability. II. Order Winners are goods and service features and performance characteristics that differentiate one customer benefit package from another, and win the customer’s business. Much like experience and credence attributes. • • • • •

Service-provider establishes a personal relationship between buyer and seller (Trust). Ring symbolizes eternal love (intangible human perception) Co-design ring is more unique and personal experience Possible explanation of Value (Price) is Total Value = 70% to 80% goods-content + 30% to 20% Co-design unique and personal experience. Customer chooses between a customized jewelry buying experience (say, Hudson Jewelers) versus a standardized one (say, Kay Jewelers or Jared’s Jewelry)

III. Search attributes are those that a customer can determine prior to purchasing the goods and/or services. These attributes include things like color, price, freshness, style, fit, feel, hardness, and smell. • • • • • • • • • • • • •

Store location Store hours open/closed Ring size Store web page (a prior screening and searching) Four Cs – carat weight, style, cut, and color Choice of metal – platinum, gold, silver Customer expects a ring box at delivery Prices on different stones, settings, etc. Store servicescape Store layout Store safety and security (assumed by customer) Customer expects jewelry knowledge and expertise provided by service-provider. Service-provider basic jewelry knowledge and expertise

IV. Experience attributes are those that can be discerned only after purchase or during 12

OM6 TN Hudson Jewelers Case consumption or use. Examples of these attributes are friendliness, taste, wearability, safety, fun, and customer satisfaction. Remember services are experienced. And the process is the service and vice versa. • • • • • • •

Jewelry delivery, pickup, and celebration process with wine, photo album, champagne, toast, etc. (a pre-defined process established by store management, a surprise! Adding biztainment to the buying experience!) First visit customer-greeting process (friendly, warm, begin to build trust, introduce the family, etc.) Co-design the jewelry (a professional service process) CAD visual display in front room of store (exciting, visual, color, customer participation, etc.) Service-provider service management skills Customer appointments like a job shop (not a flow shop) Jewelry development time (processing time to co-design the jewelry)

V. Credence attributes are any aspects of a good or service that the customer must believe in, but cannot personally evaluate even after purchase and consumption. Examples include the expertise of a surgeon or mechanic, the knowledge of a tax advisor, or the accuracy of tax preparation software. • • • • • •

Jewelry appraisals (trust that final jewelry is proper quality and value for the price). Are diamonds “blood diamonds?” Synthetic diamonds? Ethical diamonds? Service-provider jewelry knowledge and expertise (certified, years in business, CAD expertise, etc.). Accurate sorting and grading within diamond value chain. Customer trusts that there are no substitutions along the value chain (mining, distributor, jewelry manufacture, retail store, etc.) Purchasing a life-long durable good documenting a major life event, therefore, customer wants value, purity, and honesty. Management’s objective is to make the customer feel wonderful about the entire buying experience and final piece of jewelry! Happy customers!

3. Define in detail the attributes of “value” when buying and co-designing a $50,000 wedding ring. What creates a buying experience that would delight the customer? What is value? Value is Perceived Benefits divided by Price (Cost). What attributes below go in the numerator? Price (cost) goes in the denominator! What creates value here? • •

Design flexibility (mass customization) Product variety (customer sees tens of thousands of alternative ring designs and mountings via CAD versus hundreds via a traditional non-CAD store) 13

OM6 TN Hudson Jewelers Case • • • • • • • • • • • • • • • • • • • • • • • • • • •

Introduce 3D design technology to the retail store Co-production and design of a manufactured good Fit customer style preferences and target price range Memorable total service experience that adds value Share the risk of design (co-production) High customer contact Customer control Keep pace with jewelry trends and styles in a make-to-order strategy 3D CAD technology is installed in the “front room” of a retail store One-of-a-kind design justifies higher price and profit margins Employee service management skills Free wine bar and leather sofas in store Financing (via third parties like banks or jewelry trade-in credits) Customer jewelry trade-ins Physical product warranties and guarantees Service guarantees Security processes and capabilities (video cameras, safes, alarms) Free ring cleaning and minor repair (build trust for future business) Technical consulting on stone quality, ring settings, and value (i.e., a job shop) Customized co-design of jewelry via in-store CAD (basically a family consulting business built on trust) Quality standards for stones and gems (associations, grading, fraud, judgment versus measurable specifications, high performance quality versus consistent quality) Warranty and claims processing Jewelry appraisal services and documents In-store and on-line billing and payment In-store service encounter design (co-design, trust via moments of truth, ring presentation and celebration, wine, happiness) Recycle process for old customer jewelry Customer loyalty initiatives (free dinners, future discounts)

Also, ask the class, “If you had $100 to spend what part is for physical goods versus service and the experience of co-designing your own jewelry?” Most students answer $80 physical goods to $20 for the memorable and total design-your-own-ring service experience. And for some customers, a one-of-a-kind custom made and co-designed piece of jewelry is a life-time experience; a sign of love, partnership and friendship, and therefore, the 80/20 would be reversed! One student write-up organized the numerator with the following five attributes with “Price” in the denominator. 1.) Creativeness- By sitting down and creating your own custom designed ring for nearly 4-5 hours, it brings out the more creative side from a customer, rather than looking at a limited supply of rings at a classic jeweler store. Customers can pick though thousands of options between the color and cut of the stone, the setting for the diamond, and practically endless 14

OM6 TN Hudson Jewelers Case selections of other ways to customize the ring. 2.) Uniqueness – Customers don’t have a 100% guarantee that their custom designed ring is one of a kind, however the chances decrease nearly entirely. The buying experience is also one of a kind, as the owners of the family ran business are with you every step of the way; offering wine and while they design their 99.99% unique ring. 3.) Responsibility- The customer must have full trust in the jeweler and his store to make a longterm investment like a custom designed ring. The jewelry has a responsibility to the customer to uphold that trust and to also make the purchase experience to be devoted to the satisfaction of the customer in the short-run and long run. The company also has a responsibility 4.) Convenience---the CAD machine is a new piece of technology many customers are unaware what to expect when creating their ring with it for the first time. The machine is complex to use without proper training, and this shows since only two employees have the skill and knowledge to create a ring. This could be a factor in production the company can take a look towards to revaluate and train more employees on the CAD to increase production. 5.) Differentiate--- To make buying a $50,000 custom designed ring Hudson’s Jeweler use people skills and family values to make the experience of a one of a kind purchase that the customer will remember and treasure forever. By being a family-ran business Hudson’s Jeweler can create a comfortable environment when picking out your ring. For instance they offer free wine and an inviting sitting area to make customers feel at ease when going through with various critical decisions for a personal custom ring. Chapter 4: Technology and Operations Management 1. What are the advantages and disadvantages from the service provider’s (jeweler’s) perspective of using “design your own ring” 3D/CAD technology at the retail store level? What are the risks from the customer’s viewpoint? Advantages • Design flexibility (mass customization) • Build customer loyalty • Product variety (customer sees tens of thousands of alternative ring designs and mountings via CAD versus hundreds via a traditional non-CAD store) • Introduce 3D design technology to the retail store • Co-production and design of a manufactured good • Fit customer style preferences and target price range • Memorable total service experience that adds value • Share the risk of design (co-production) • High customer contact • Less in-store inventory and risk of jewelry obsolescence • Lower insurance and inventory • Customer control • Use customer labor (self-service) • Keep pace with jewelry trends and styles in a make-to-order strategy • 3D CAD technology is installed in the “front room” of a retail store 15

OM6 TN Hudson Jewelers Case •

One-of-a-kind design justifies higher price and profit margins

Disadvantages • Warranty and claims policy when things go wrong (customer doesn’t like the custom designed ring once it is delivered; technology documents the design but what was manufactured was not as expected) • Long hours of co-designing the ring uses valuable employee time so you need resource flexibility • Some customers take many hours over many visits to decide on a final design as the order due date approaches • A huge extra expense (COST) of CAD for a traditional jewelry store • Store layout may need to be changed to accommodate CAD and it’s employees (maybe a private separate design room for example) • 3D/CAD expert(s) must always be on-duty in the store (an additional type of store labor skill often requiring appointments) – limits growth and multiple store locations • Can’t fill customer wants and needs for their target price range (need to buy up) • Cost of software updates and equipment maintenance and repair • Customer behavior is ever changing and some customers can be very difficult to work with and change their minds daily • Much higher skill levels (i.e. jewelry expert plus a CAD technology expert---can limit store expansion to multiple sites due to the salary of such a highly skilled employee). What are the risks from the customer’s viewpoint? • Some of the disadvantages are risks to the customer. • The customer actually buys unethical or blood or synthetic diamonds. • The customer has little technical expertise here so they “trust” the service-provider (jeweler) who may have totally different tastes, wants and needs, etc. • Once partial or full payment is make (often in advance) all the risks fall on the customer. Basically, the order is released to manufacturing! • Long processing times. The jewelry may not be ready in time for the wedding, for example. On-time delivery! David’s Bridal magazine did a survey and found 57% of women are unhappy with their engagement ring. 2. Research jewelry retail store software programs and summarize their capabilities in terms of customer relationship management, accounting, point of sale, inventory management, payment systems, and customer loyalty programs. Provide references. Students will discover many retail software packages available that do these functions such as ERPLY, EDGE, GEMINI, GENVISION, CHAINDRIVE, MICO-BIZ, MATRIX CAD, and Visual Retail Plus. Much of classroom discussion can focus on customer loyalty programs, for example, for high end customers including electronic notification of sales, high end events, trends, and new jewelry pieces. Post-sale follow-up using a “high tech, soft touch” approach fits this make-to-order jeweler. 16

OM6 TN Hudson Jewelers Case •

Accounting: Sales figures for previous day, current day, previous week, month to date and year to date are all available through the software. Real Time QuickBooks integration as well as Microsoft GP, which gives businesses complete control over finances, inventory and business intelligence information.

•

Point of Sale: Features the full capability of a touch screen interface for ease of use, as well as the ability for trade-ins on a single screen. Integration of images of product when entered into system. The POS system can print precise reports on sales, inventory reports, and money giving Hudson Jewelers a comparative advantage over competitors.

•

Inventory Management: GEMINI allows for multi-location inventory consisting of; diamonds, jewelry, settings, workshop materials, and giftware. Increasing Outsourcing will allow tracking by quantity, weight and carat, tracking of WIP labor and materials, as well as transfers intra and inter store. This allows for more control over store inventory.

•

Payment Systems: A large variety of payment options and systems work with GEMINI. Using multiple forms of payments, out of country currency, layaway and gift cards/certificates are some of the forms of payments available. On the associates’ side, there is the ability to split commission up to three ways.

•

Customer Loyalty Programs: GEMINI has the ability for a customer loyalty program or a point based system. Loyalty programs allow the business to endure having high contact with the customers overall improving the customer experience. This allows for customers to earn points towards future purchases and increases repeat business.

OM6 TN Hudson Jewelers Case

Example) - Visual Retail Plus Cites 1.) http://www.possoftwareguide.com/pos-summary.asp?ProductID=54 1. Customer Relationship Management- The ability to store customer information - Can keep track of previous purchases - Print chopping coupons and use gift cards towards purchases - Used at many different retail locations (creates customer familiarity) 2. Inventory Management - Seasonal planning (can calculate recommendations for new orders while tracking inventory and providing recommendations for future sales and available storage for inventory based off previous years. - Ability to track inventory by categories/ classifications, departments, serial numbers and popularity of item - Very compatible with other inventory programs to keep integrated as one unit to create more organization 3. Point of sale- Automatic price changes can be made by time and date - Ability to search each item by vendor, serial number, subject, price or brand (Creates efficiency for both employees and customers) 4. Customer Loyalty Programs- Ability to swipe and authorize loyalty cards at POS - Frequent buyer program support is the ability to track points for each customer at each purchase 5. Accounting- Capable of performing payroll processing, which performs the necessary employee payroll, processing calculations, including tax withholding, overtime payments, positions worked, and year to date income amounts for all employees 18

OM6 TN Hudson Jewelers Case "We've Helped 267,182 Buyers Find the Right Software." Software Reviews from the Business Experts at Software Advice. N.p., n.d. Web. 10 Feb. 2015. "POS Software for Jewelry Stores." InfoTouch. N.p., n.d. Web. 10 Feb. 2015 "State-Of-The-Art Technology." The Edge for Jewelers. N.p., n.d. Web. 10 Feb. 2015. “The Experts and the Tools to Help You Get the Most Out of Your Business." The Edge for Jewelers. N.p., n.d. Web. 05 Feb. 2015. <http://theedgeforjewelers.com/features/pos/>. "GEMINI - Software for Jewelry Retail and Wholesale." GEMINI - Software for Jewelry Retail and Wholesale. N.p., n.d. Web. 5 Feb. 2015. <http://www.mpisystems.com/GEMINI.html>. "Global Diamond Demand Reaches Record Levels." Global Diamond Demand Reaches Record Levels. N.p., n.d. Web. 05 Feb. 2015. <http://www.debeersgroup.com/content/debeers/corporate/en/news/company-news/company-news/global-diamond-demandreaches-record-levels.html>. "Subjective Theory of Value." Wikipedia. Wikimedia Foundation, n.d. Web. 05 Feb. 2015. <http://en.wikipedia.org/wiki/Subjective_theory_of_value>. Chapter 5: Goods and Service Design 1. Hudson Jeweler's current layout design includes the CAD system and television screen in the front room of the jewelry store. Walk-in customers enjoy seeing jewelry designs rotate on the television screen. Customers have little privacy as they co-design and discuss their custom-designed jewelry in the front room. Other customers in the store can listen to the conversation, and sometimes stand right behind them. Evaluate the following three store design and layout remodeling options by answering questions (a) to (c). See the case study for break-even details. Instructors: Examine the BEA solutions and see if this assignment is appropriate for your students. The qualitative pros and cons of each option enhance class discussion. Read ALL before you assign this material. You decide! (I) Keep the Current Layout Fixed Cost = $5,000 based on CAD square footage to total store square footage. Variable Cost = $0.20 cents per customer visit ($2,620/year divided by 13,104 visits/year) to update CAD software, insurance, maintenance, and employee CAD training. (II) Move Current CAD into a Single New Private Design Room Fixed Cost = $12,000 to build a new CAD design room inside store and move current CAD system to the new room and furnish.

OM6 TN Hudson Jewelers Case Variable Cost = $0.24 cents per visit ($3,145/13,104) to update CAD software, insurance, maintenance, and employee CAD training, and room stereo speaker and music, fire sprinkler maintenance, and lighting in the design room. Option II frees up 49 square feet of store space for one additional front room jewelry display case but decreases the space for comfortable leather chairs by one-half, so there would be space for only one chair plus the wine rack. Fourteen square feet of extra display space would be available in the store. Based on last year’s revenue, each square foot of jewelry display space generated $30,090. (III) Do Option II Plus Build a Second CAD Design Room & Buy a Second CAD System Fixed Cost = $27,000 to build two new CAD design rooms inside the store and move current CAD system into one new room, and buy a second new CAD system and install in the second room. Variable Cost = $0.38 cents per visit ($4,980/13,104) to update two CAD software, insurance, maintenance, and employee CAD training, and two room stereo speakers and music, two fire sprinklers maintenance, and lighting in the two design rooms. Option III frees up 49 square feet of store space for one additional front room jewelry display case but eliminates the space for the wine rack or any comfortable leather chair(s). The space currently dedicated to the wine rack and two leather chairs plus the CAD system, desk, and chair located in the front room is now two private CAD design rooms. (a) Use economic analysis to evaluate these three options. Students may use the following breakeven analysis equations. F1 + VC1Q = F2 + VC2Q or Q = (F2 – F1)/(VC1 – VC2) TC = F + VCQ TR = PQ or PQ = F + VCQ or Q = F/ (P – VC) As the exhibit below shows Option II is best to maximize profit/revenue. Option #

Variable Cost/Visit

Fixed Cost

I. 0.20 $5,000 II. 0.24 $12,000 III. 0.38 $27,000 *TC = FC + VC(13,104) +Revenue = $30,090*14 = $421,260

Break Even Qty (Visits) 25,000 50,000 71,053

Total Cost*

Extra Revenue+

Net Profit (Loss)

$7,621 $15,145 $37,260

$0 $421,260 $421,260

($7,621) $406,115 $384,000

Marginal Cost Comparisons of 3 Options

OM6 TN Hudson Jewelers Case Option #

Change in Fixed Cost

I versus II

$7,000

Abs Change in Variable Cost (0.2 – 0.24) = 0.04

I versus III

$22,000

(0.2 – 0.38) = 0.18

II versus III

$15,000

(0.24 – 0.38) = 0.14

Marginal Breakeven Quantity (Q) $7,000/.04 = 175,000 $22,000/0.18 = 122,222 visits (lowest BEQ) $15,000/0.14 = 107,143 visits

The exhibit above attempts to do a marginal (incremental) cost breakeven quantity. Students may make other assumptions such as the percent of total customers that actually do CAD (i.e., CAD yield rate) or the average number of visits per CAD customer. All that is expected is the first table or something close to it. Based on the first exhibit Option II maximizes revenue while the second exhibit rules out Option 1 with Option II having the lowest incremental breakeven. The pairwise comparisons are similar to make/buy decisions using breakeven analysis. However the second exhibit analysis does not consider potential new revenue. Also, some student analysis applies payback years to these numbers and others will do a NPV over X years.

Once the qualitative issues are discussed and considered Option II is best. Here, strategic criteria dominate economic criteria. (b) What are the economic and non-economic advantages and disadvantages of each of the three options? Non-Economic Advantages & Disadvantages (I) Keep the Current Layout • • • • • • •

Front room CAD Display attracts customers into store (part of the servicescape!). Sign, symbols, and artifacts! Order winner! Differentiator! Creates opportunity for customer interaction (could be good or bad). Four people can sit down and have a glass of wine and relax (build customer relationships)—supports family culture! Lack of customer privacy when co-designing the jewelry---service encounter design! No additional revenue (big lost opportunity) No display space for more moderate priced jewelry Least risk

(II) Move Current CAD into a Single New Private Design Room • • •

Adds display area worth $421,000 in potential revenue (and display more mid and lower priced jewelry) Privacy of co-designing jewelry (a service experience that adds value) Adequate store staffing with CAD expertise 21

OM6 TN Hudson Jewelers Case • •

Maintains part of celebration part of buying experience and service encounter design (wine rack sofa, relax area, etc.) That is, biztainment! Changes the servicescape some.

(III) Do Option II Plus Build a Second CAD Design Room & Buy a Second CAD System • • • •

Eliminates celebration area (no wine racks, no sofa seating, etc.). Now wine would come from backroom but no place in front room to sit and build customer relationships. Only two store employees with CAD expertise. CAD expertise is a constraint on the final solution. Can we hire a non-family member? Impact? Training? Changes the servicescape radically—most risk Reduces the family atmosphere feeling of the store.

(c) What is your final recommendation to Mr. Hudson? Justify. Explain. Most students will recommend Option II. Option II “fits” the economic and noneconomic criteria of their current strategy. Option I is not aggressive and limits revenue growth while Option III is too radical a change from current strategy of a friendly family owned business that is different than corporate chains. Here, strategy dominates economics! This case question is a good opportunity to apply the following OM concepts/paradigms: • • • • • • •

High versus low contact All three dimensions of the servicescape (layout and functionality, ambient conditions, and signs, symbols and artifacts. Front versus back room layout Front and back room skills and expertise Service encounter design (and how it supports strategy) Technologies (CAD) role in all of the above How operational decisions support strategy.

2. Define (a) the servicescape for Hudson Jewelers using the three dimensions as subheadings, and (b) the nature of Hudson Jewelers’ service encounters. Ambient Conditions Made manifest by sight, sound, smell, touch, and temperature; to please the five human senses such as the aroma of a cup of coffee. • • • •

Lighting that makes the jewelry sparkle (in street side displays and in-store) A small wine rack with comfortable leather chairs in the back corner of the jewelry store (possibly the smell of cheese or wine) A big brilliant high definition television with a beautiful piece of jewelry rotating Calm classical music in the background signifying a relaxed atmosphere with a touch of elegance 22

OM6 TN Hudson Jewelers Case • •

Well dressed and groomed store service-providers (employees) Air-conditioned store in Naples, Florida.

Spatial layout and functionality How furniture, equipment, and office spaces are arranged; it also includes location, building facades and footprints, streets, and parking lots. • • • • • •

The high definition television with rotating 3D pictures of wedding rings is stunning and catches your eye (high tech but soft touch) Back corner wine rack and soft family room style leather chairs Glass top counters in side the store to display the jewelry Nine security cameras placed in front- and backrooms of the store External windows on two streets (corner lot) to display the jewelry Location (corner city block location with large glass windows to display jewelry, high visibility)

Signs, symbols, and artifacts Explicit signals that help communicate an image of the firm such as mission statements, diplomas and certifications, company logos, trophy case, an aquarium, art, letterhead, and company uniforms and dress and grooming. • • •

Security company logos and cameras Employee jewelry and appraisal certification diplomas Booklets on how the ring was design with step-by-step pictures (line drawings, wax production molds)

(b) Service encounter design focuses in the interaction, directly or indirectly, between the service provider(s) and the customer. Four key elements of Hudson Jeweler’s service encounter design are: Customer contact behavior and skills • high-contact system in the front-room especially co-designing jewelry (a very personal buyer-seller relationship built on trust and moments of truth) • service management skills that include operations and technical functions with human interaction skills and marketing cross selling. • Remember a “moment of truth” defined is Chapter 1 is any episodes, transactions, or experiences in which a customer comes in contact with any aspect of the delivery system, however, remote, and thereby has an opportunity to form an impression. Employee CAD skills, grooming, knowledge of the jewelry industry, and friendly and trustworthy service management skills are required by “customer facing” employees. • The employee’s in this family-owned business do both high and low contact work. Service-provider selection, development, and empowerment • Hudson Jewelers is a family owned business and that contributes to the customer’s sense of trust. The customer is not dealing with a corporate chain store. 23

OM6 TN Hudson Jewelers Case • •

Bill Hudson is the founder and owner but his daughter Jessica complements her dad’s expertise. Together the run the business, make decisions, select store employees, and run the business. There are no non-family store employees.

Recognition and reward • Family pride in obvious once the customer interacts with store employees. • As Mr. Marriott sated long ago, “Happy employees create happy customers.” Service recovery and guarantees • When things go wrong we have no evidence as to what Hudson Jewelers will do. • No explicit (written) service guarantees • No explicit service recovery plans and protocols. The service encounter activity sequences at Hudson Jewelers are customer-routed (see Exhibit 7.3). That is, management has a low degree of control over the sequence of service encounters, the encounters are unique, never to be repeated, and the customer commands a high degree of freedom and decision-making power throughout the sales, design and buying experience. 3. Propose a “service guarantee” for Hudson Jewelers. What exactly will you guarantee? Should it be explicit in writing or simply an implicit, non-written guarantee, or is it better not to do it at all? Explain and justify your logic. Notice the question asks to explain your logic and justify. Chapter 5 (Goods and Service Design) provides the following definitions. •

A service upset is any problem a customer has—real or perceived—with the service delivery system and includes terms such as service failure, error, defect, mistake, or crisis.

•

A service guarantee is a promise to reward and compensate a customer if a service upset occurs during the service experience.

•

Service recovery is the process of correcting a service upset and satisfying the customer. -Begin immediately after a service upset. -Document the process and train employees. -Listen to the customer and respond. Sympathetically. -Resolve the problem quickly, provide an apology, and offer compensation.

The role of a service guarantee is to reduce customer risks, increase value, and build trust in buying jewelry, and especially diamonds. Customers absorb the risk of customized jewelry. Most students will recommend an implicit guarantee focused on one or more of the following: • • •

Free lifetime appraisals (or some time limit like 90 days) Free lifetime jewelry cleanings Free lifetime resizing (or some time limit like one year) 24

OM6 TN Hudson Jewelers Case • • • • • •

Co-designed jewelry that is flawed at customer pickup (who made the mistake—jeweler, customer or manufacturer?) Fixing broken or damaged jewelry (product warranty) for free or charge for repair service. Here defining what is broken is difficult – scratches, cracks, breakage, tarnish, stone flaws, etc.) Offer jewelry insurance via the store if jewelry is stolen or lost Full or partial credit for returns (costly to jeweler!) No blood diamonds Ethical sourcing of all stones

The high-end customer market segment and store location on 5th Avenue argue for an implicit guarantee. Some students will recommend an explicit guarantee is writing to be given to the customer at the end of the process, say a pickup, along with a free complimentary appraisal and a celebration glass of wine. That is, the service guarantee is a part of the post sale service process. But the guarantee is not posted on the store wall or highlighted within the store. Chapter 6: Supply Chain Decisions 1. Explain whether the global diamond supply chain a push or pull system, and whether the global diamond supply chain is an efficient or responsive system for make-to-order and make-to-stock jewelry. Provide examples to justify your reasoning. • •

A push system produces goods in advance of customer demand using a forecast of sales and moves them through supply chain to points of sale where they are stored as finished goods inventory. A pull system produces only what is needed at upstream stages in the supply chain in response to customer demand signals from downstream stages.

•

Efficient supply chains are designed for efficiency and low cost by minimizing inventory and maximizing efficiencies in process flow. Examples: Wal-Mart and Proctor & Gamble.

•

Responsive supply chains focus on flexibility and responsive service and are able to react quickly to changing market demand and requirements. Examples: Nordstrom’s and Apple.

The following table summarizes the answers. You could write this table on the board during a class discussion. Make-to-Order (Custom) Make-to-Stock (Standard)

Pull Push

Responsive Efficient

Standard and costume jewelry make up 80 to 95% of the total diamond market based on market share or total sales. Customized jewelry is a much smaller part of the global diamond market catering to high-end customers. Standard jewelry take 18 to 36 months to reach the customer 25

OM6 TN Hudson Jewelers Case from the mine, while special high quality or large carat diamonds are expedited through the supply chain. Based solely on total sales (revenue) share, the global diamond supply chain is a push system controlled largely by DeBeers and a few other key companies (i.e., an oligopoly). The Internet and other competitors are changing this industry’s supply chain. Students will “apply” these four supply chain concepts to this industry and will explain and justify their logic. Sometimes, students will do this by the stages described in the case (i.e., exploration, sorting and grading, cutting and polishing, trading centers, manufacturing, and retailing), so be on the lookout for this type of response. For example, trading centers would be characterized, as “responsive” while mining is “efficient.” Also, sometimes students will cite industrial diamond production for commercial cutting tools and drilling equipment. 2. Research the extent of vertical integration in the global (seven-stage) diamond supply chain? Provide examples of forward and backward integration and the extent to which this is practiced in today’s value chain? In this industry, what is the impact of vertical integration? • • •

Vertical integration refers to the process of acquiring and consolidating elements of a value chain to achieve more control. Backward integration refers to acquiring capabilities toward suppliers, while forward integration refers to acquiring capabilities toward distribution or even customers. Outsourcing is the process of having suppliers provide goods and services that were previously provided internally.

You might behind by asking the class “What is the objectives of vertical integration?” Answer: To reduce costs, speed things up, and control processes and their value chains. The OM text cites firms like DuPont buying raw materials suppliers and integrating backwards while firms like Delta Airlines integrated forward by buying a jet fuel refinery. The challenge for students is to research the diamond value chain and its major stages (exploration, mining, sorting and grading, cutting and polishing, trading centers, manufacturing jewelry, and retail stores). •

The De Beers Group of Companies has a leading role in the diamond exploration, diamond mining, sorting and grading, polishing and cutting, trading centers, and diamond retail stores with about 1,500 Forevermark retail stores (forward integration toward the customer) , and industrial diamond manufacturing sectors. The company is currently active in every category of diamond mining: open-pit, underground, large-scale alluvial, coastal and deep sea (backward integration).[2] The company operates in 28 countries and mining takes place in Botswana, Namibia, South Africa and Canada. It is vertically integrated exhibiting both forward and backward integration. DeBeers is close to a 100% vertically integrated company owing part or all of the major supply chain stages! A very unique company and industry!

OM6 TN Hudson Jewelers Case • •

• • •

•

DeBeers also has experimented with “diamond recycling” (reverse logistics) with a few select retailers, where diamonds are cleaned up and recycled. Other competitors are much less integrated than DeBeers. For example, Tiffany’s has done backward integration by signing agreements and substantial equity investments with mines that produce rough diamonds. They also established Laurelton Diamonds in 2002 to source, cut, and polish Tiffany’s supply of rough diamonds. ALROSA, a Russian diamond company, with about 25-30% market share is also vertically integrated by doing exploration, mining, manufacturing, and retailing. Global Market for Luxury Goods (CAGR) is a good source for global demand projections. The main impact of vertical integration is the “control” of diamond supply, and therefore, prices. It is close to a pure monopoly or cartel or an oligopoly. For example, five mining companies control 85% of diamond production. Also, the top five companies control about 70% of total diamond supply based on dollar value. Internet capabilities are chaining the industry with e-auctions, virtual sales platforms and web sites, etc. The Internet is the disruptive technology.

OM6 TN Hudson Jewelers Case (c) sorting and grading – This process can be described as a flow shop (line flow) with machines that x-raying dirt, photo sensors detect the fluorescence of a diamond, and people assess the quality. Initial sorting is into industrial grade versus retail grade. If the assumption of large batches of dirt are inspected than one could also characterize the process as a job shop with large batches of alluvial. (d) cutting and polishing centers – classic job shop with significant setup time, low to moderate volume, batching, high workforce skills, many process routes with some repetitive steps, and so on. Errors here can destroy diamond value whereas perfect cuts can increase diamond value. Master cutters would be analogous to a partner in a CPA firm or the pilot flying a plane. Master cutters only do the custom high end rough diamonds. Regular cutters would cut much larger batches of more ordinary (standard) diamonds. (e) trading centers – these centers are often combined with cutting and polishing operations where negotiation of price, quality, sources, quantity, the four Cs, and so on. What goes on here is like a professional service such as stock trading or consulting. This is front room work that is moderately repeatable service-encounter activity sequence. Site holders act as a cap on market diamond supply. E-trading, virtual biding, and eauctions are beginning to break up these oligopolies. (f) jewelry manufacturing -- for custom jewelry with very high prices the processes are most likely a job shop with batch sizes of one to ten. Here molds are made, metal poured into the mold, and metal fabrication, milling, and polishing are done, and diamonds set. For standard jewelry with lower prices that most of us buy, a flow shop process is most likely. Here volume is in the hundreds to thousands. (g) retail stores –high contact and front room system where service management skills are required. Using the product-process matrix we would think of a job shop with a batch size of one or each customer as a project. Using the service positioning matrix the retail store is best described as a customer-routed service delivery system. 2. Given the simplified process work activities shown in Case Exhibit 1.4, draw the process flowchart, and then answer the following questions. You must allocate the work content in Case Exhibit 1.4 to manufacturing, CAD, service, front room, and back room to gain insights into where and how this work is accomplished. a. For this process, what is the total time in minutes (or equivalent fraction of a day) to create one woman’s codesigned wedding ring? b. For this process, what is the total manufacturing time in minutes (or equivalent fraction of a day) to create one woman’s codesigned wedding ring? c. For this process, what is the total CAD time in minutes (or equivalent fraction of a day) to create one woman’s codesigned wedding ring? d. For this process, what is the total service (other than CAD) time in minutes (or equivalent fraction of a day) to create one woman’s codesigned wedding ring? 28

OM6 TN Hudson Jewelers Case e. For this process, what are the total front room and back room times in minutes (or equivalent fraction of a day) to create one woman’s c-designed wedding ring? f. What insights do you gain by evaluating the work content of this process and answering questions (a) to (e)? g. What is the maximum number of customers per hour that can be served for Activity B (CAD Demo & Jewelry Concept) if two employees are in the store? Assume each employee works at 100% utilization. a. For this process, what are the average total work activities in days and minutes to create one woman’s co-designed wedding ring? SEE THE FOLLOWING EXCEL SPREADSHEET Students can work out identical solutions in eithers days or minutes so you might want to tell them what units of measure to use to avoid confusion. Students will allocate the work activities differently but the key is that they use this data to make insights into the entire diamond jewelry value chain. 1.69 days or 811.2 minutes of actual work content (processing time) or 100% of the total work content. b. For this process, what are the average total manufacturing days and minutes to create one woman’s co-designed wedding ring? What percentage of the total workload is your answer? 1.00 day or 480 minutes of actual work content (processing time) or 59.2% of the total work content. c. For this process, what are the average total CAD days and minutes to create one woman’s codesigned wedding ring? What percentage of the total workload is your answer? 0.48 days or 230.4 minutes of actual work content (processing time) or 28.4% of the total work content. d. For this process, what are the average total service (other than CAD) days and minutes to create one woman’s co-designed wedding ring? What percentage of the total workload is your answer? 0.210 days or 100.8 minutes of actual work content (processing time) or 12.4% of total work content. e. For this process, what are the average total front room and back room work activities in days/minutes to create one woman’s co-designed wedding ring? What percentage of the total workload is your answer? If we simply add CAD work activities to service activities we get:

OM6 TN Hudson Jewelers Case • • •

Front Room: 0.48 + 0.210 = 0.69 front room days or 230.4 + 100.8 = 331.2 minutes of actual work content (processing time) or 40.8% of total work content. Back Room: 1.00 days or 480 minutes of actual work content (processing time) or 59.2%. So, 59.2% of the total work content is backroom activities while the front room is 40.8%.

f. How do search, experience, and credence attributes apply to this work breakdown structure? Explain. Provide examples. • • •

Backroom activities focus on search attributes. Front room work activities are high in experience attributes. Jewelry, especially high-end custom jewelry, is high in credence attributes.

g. What insights do you gain by evaluating the work content of this process and answering questions (a) to (f)? • • • • • •

Students “see” where the most time and resources are used in the “overall” value chain. That is, how does this one retail store “fit” in the total value chain? Where managers need to do “service management, CAD, and front room” training and mistake proofing. The 811 minutes and 1.69 work days is the actual processing time, and does not include wait time (from competing orders, transit times, information delays and corrections, and customer delays) or setup times. Front room activities out number back room activities but backroom work takes much more total time. Front room activities shape customer perceptions and experiences. CAD work activities are often the bottleneck and a huge change in required employee skills. • The retail store is almost a 100% “service factory.” • The importance of customer service in the front room.

TN Table of Hudson Jewelry Work & Process Flow Activities Fraction of a Work Total Percentage Day* Minutes* of Total Time (%)

Activity Manufacturing Only H G I G J I K H, J CAD Only B C

A B

Stone (Wholesale) Jeweler Wax Jewelry Mold Metal Pouring & Polishing Final Production Completed Total

0.200 0.300 0.250 0.250 1.000

96.0 144.0 120.0 120.0 480.0

CAD Demo & Jewelry Concept 3 Co-Design Jewelry Sessions^

0.040 0.360

19.2 172.8

0.592

OM6 TN Hudson Jewelers Case E

C, D

Other Service Only A none D B F E G F L K M L N M

CAD Jewelry Design Approval Total

0.080 0.480

38.4 230.4

0.284

Customer 1st Store Visit Price Quote and Discussion Partial Payment Release Final Jewelry Order Delivery - Customer Pickup Final Payment Celebration (Wine, Toast, etc.) Total Grand Total

0.025 0.030 0.020 0.025 0.040 0.020 0.050 0.210 1.690

12.0 14.4 9.6 12.0 19.2 9.6 24.0 100.8 811.2

0.124 1.000

From the previous TN table we see that manufacturing related work activities make up 59.2% of the total process work content, CAD co-design is 28.4% and other services are 12.4%. Students may assign different work to different major categories but the objective here is they analyze “job design and work content.” h. What is the average number of customer per hour that can be served for Activity B (CAD Demo & Jewelry Concept) if two employees are in the store? Assume each employee works at 100% utilization. Service Rate = 60/19.2 = 3.125 customers/hour/employee Using Equation 7.2: 1.00 = DR/ [3.125 customer/hr.)*(2 employees)] or DR = 6.25 customers 3. Write a job description for a new employee at this store. The challenge here is writing a job description for three possible types of skills (a) service management, (b) jewelry expertise, and (c) CAD knowledge and skills. Service management skills include the simultaneous technical and operational skills (like operating CAD or a cash register), human interaction skills (patience, trustworthy, friendly, etc.), and marketing (cross- and up-selling) skills. One lesson for students is the minute you introduce technology (i.e., CAD) into the front room of a retail store, who is going to operate it? That is, technology changes job design, skills required, and who you hire. Below is one student example (notice no CAD experience). Ask the class, “Who operates CAD in the store when a customer asks to see a demonstration or co-design their jewelry?” The student response below is “A” for effort but she needs to recognize the demanding job skills required at Hudson Jewelers with service management skills, CAD, and industry experience.

OM6 TN Hudson Jewelers Case

OM6 TN Hudson Jewelers Case 4. Assume that during Lilly’s and Lester’s last visit to the retail store everything was as described in the case, except the final bill was not ready and Mr. Bill Hudson had lost some of the paperwork documenting the price of the ring and diamonds. After a 45minute wait, Lilly and Lester had figured out a final bill. What is the impact of this “billing service upset” at the end of the customer’s buying experience? Is billing a primary or peripheral process? Assign Question 4 or 5 but not both. The impact of this end-of-the-value chain “service upset” is negative. The entire customer buying experience had been extraordinary up to now but ends on an unsettling note. It could ruin (a) the customer’s perception of jeweler competence, (b) erode buyer-seller trust and their close relationship, (c) insult the customer by having to wait 45 minutes as the jeweler fumbles through their paperwork and computer, and (d) waste employee time possibly while other customers wait for service. Billing is always a primary process. Medical bills, for example, can upset the patient and family once the get home, and find the bills unpaid, incorrect, or overstated. This question is also a great time for students to make use of the concepts in Chapter 5 on (a) service encounter design, (b) service upsets and recovery, (c) high and low contact systems, and Chapter 7 concepts such as (a) make-to-order services, (b) job shop processes with Q =1 or since the jewelry is totally custom designed, a project, (c) use of the product-process and servicepositioning matrix, and (d) the hierarchical nature of work (task, activity, process, and value chain). What must happen at the end of the value chain is a good set of reinforcing service encounters (service encounter design). This includes the service-provider being professional, polite, and happy, fulfill customer wants and needs, and present an accurate bill. What must not happen is the opposite including errors along each step and ignoring other customers as they walk in the store. J.W. Marriott used a “service strategy” where the tried to “begin and end strong.” That is, they invested their limited improvement dollars in improving hotel check-in processes and check out processes. Here is where their research showed that over fifty percent of a hotel guests perception of service is created by the beginning and end of the service value chain. Continuous improvement recommendations include: Hudson jewelers should have a backup sales and pricing system (e- or hard copy) for all of its jewelry. They might also have a “check sheet” to ensure completeness for each step in the process.

OM6 TN Hudson Jewelers Case 5. Design an ideal diamond-ring customer experience from beginning to end (i.e., make a list of 10 to 20 steps in the job and process design). Explain what must happen and what must not happen. See the answer to Chapter 7, Question 4. What must happen at the end of the value chain is a good set of reinforcing service encounters (service encounter design). This includes the service-provider being professional, polite, and happy, fulfill customer wants and needs, and present an accurate bill. What must not happen is the opposite including errors along each step and ignoring other customers as they walk in the store. J.W. Marriott used a “service strategy” where the tried to “begin and end strong.” That is, they invested their limited improvement dollars in improving hotel check-in processes and check out processes. Here is where their research showed that over fifty percent of a hotel guests perception of service is created by the beginning and end of the service value chain. Students will use tables and flowcharts to define their major steps in the “ideal buying process.” One example is as follows:

OM6 TN Hudson Jewelers Case Chapter 8: Facility and Work Design 1. Design and draw the layout for your high-end jewelry store. Critique its strengths and weaknesses. (Make use of concepts in Chapters 4, 5, 7 and 8.) This question focuses more on OM Chapters 5 and somewhat on Chapters 5 and 8 (if you have covered it). In Chapter 5 the student has the opportunity to use and apply the following concepts in the design of their store: •

Service delivery System design includes • Facility location and layout • Servicescape • Process and job design • Technology and information support systems

•

Service encounter design focuses on the interaction, directly or indirectly, between the service provider and the customer • Principal elements - Customer contact behavior and skills - Service provider selection, development, and empowerment - Recognition and reward - Service recovery and guarantees High and low contacts Service management and CAD skills High cost of peripheral goods and services such as CAD, wine, and sofas.

• • •

LensCrafters is a good example for students to study before they design their own high-end jewelry store. Students will sometimes describe Hudson Jewelers correctly as an “retail store with an elaborate servicescape.” In OM Chapter 8 the student may make use of product, process, celluar or fixed-position layout concepts. Given that Hudson Jewelers is a job shop with batches of Q = 1, a process layout is best. Students will surprise you with their innovative layouts and customer flows such as circular and triangle shaped stores. Chapter 9: Forecasting and Demand Planning 1. Given the seasonal nature of demand at Hudson Jewelers depicted in Case Exhibit 1.2, how would you forecast future demand for customer visits? What criteria will you use to determine a “good” forecast? What methods would you use, and why? What is your final recommendation with respect to a forecasting method? Basic descriptive statistics are shown below followed by example Minitab outputs of (a) a histogram of customer visits (sort of normally distributed but histogram is very typical of a seasonal demand pattern where visit distribution is skewed), (b) a moving average forecast with n= 2 to 6 with MAPE, MAD, and MSD variance numbers, (c) a single exponential smoothing 35

OM6 TN Hudson Jewelers Case model with lower MAPE, MAD, and MSD numbers, (d) a double exponential smoothing model, (e) a time series plot of the data, (f) a simple linear regression model and graph, (g) a polynomial regression model and graph, and (h) Winters’ Multiplicative Model (not in textbook but fyi) with the lowest MAPE, MAD, MSD. Have fun with this assignment! And please remember we cover how to compute MSE, MAD, and MAPE in OM Chapter 9 on forecasting. Depending on student coursework and availability of forecasting software these results should get you started. Please note that the OM Worksheet and Templates available on the OM website have Excel models for moving average and exponential smoothing although they are limited to 20 time periods. Descriptive Statistics: Week, Visits Variable Week Visits

N 52 52

N* 0 0

Variable Week Visits

IQR 26.50 317.8

Mean 26.50 252.0 Skewness 0.00 0.52

SE Mean 2.10 23.5

StDev 15.15 169.7

Minimum 1.00 51.3

Q1 13.25 96.9

Median 26.50 219.4

Q3 39.75 414.7

Maximum 52.00 587.1

Kurtosis -1.20 -1.07

Histogram of Visits Normal 12

Mean 252.0 StDev 169.7 N 52

Frequency

8 6 4 2 0

-120

120

240 Visits

360

480

600

Hudson Jewelers Moving Average Results for Demand Data in Case Exhibit 1.2

OM6 TN Hudson Jewelers Case Moving Average Length 2 3 4 5 6

MAPE

MAD

MSD

28.2 31.4 34.6 39.2 44.8

54.3 56.2 58.5 61.7 67.9

5012 5270 5891 6254 7814

The moving average results indicate with N = 2 weeks we minimize MAPE, MAD, and MSD. See Minitab graphs that follow when N = 2 and 6. But note that the Winter’s model (shown in a graph later) results in MAPE = 6.87, MAD = 25.0, and MSD = 1960. Moving Average Plot for Visits 600

Variable Actual Fits

500

Moving Average Length 2 Accuracy Measures MAPE 28.16 MAD 54.26 MSD 5012.56

Visits

400 300 200 100 0 1

25 30 Index

OM6 TN Hudson Jewelers Case Moving Average Plot for Visits 600

Variable Actual Fits

500

Moving Average Length 6 Accuracy Measures MAPE 44.85 MAD 67.95 MSD 7814.43

Visits

400 300 200 100 0 1

25 30 Index

Smoothing Plot for Visits Single Exponential Method Variable Actual Fits

Visits

600 500

Smoothing Constant Alpha 1.13881

400

Accuracy Measures MAPE 25.09 MAD 45.69 MSD 3640.24

300 200 100 0 1

25 30 Index

OM6 TN Hudson Jewelers Case

Smoothing Plot for Visits Double Exponential Method 700

Variable Actual Fits

600

Smoothing Constants Alpha (level) 0.921605 Gamma (trend) 0.283053

Visits

500

Accuracy Measures MAPE 24.52 MAD 45.86 MSD 3779.21

400 300 200 100 0 1

25 30 Index

Plot of Original Data in Case Exhibit 1.2 Time Series Plot of Visits 600 500

Visits

400 300 200 100 0 1

25 30 Index

OM6 TN Hudson Jewelers Case Regression Analysis: Visits versus Week (next graph) The regression equation is Visits = 405.9 - 5.806 Week S = 146.557

R-Sq = 26.9%

Analysis of Variance Source DF SS Regression 1 394820 Error 50 1073945 Total 51 1468765

R-Sq(adj) = 25.4%

MS 394820 21479

F 18.38

P 0.000

Fitted Line Plot Visits = 405.9 - 5.806 Week 600

S R-Sq R-Sq(adj)

146.557 26.9% 25.4%

500

Visits

400 300 200 100 0 0

30 Week

Polynomial Regression Analysis: Visits versus Week (next graph) The regression equation is Visits = 603.2 - 27.74 Week + 0.4138 Week**2 S = 120.623

R-Sq = 51.5%

Analysis of Variance Source DF SS Regression 2 755817 Error 49 712948 Total 51 1468765

R-Sq(adj) = 49.5%

MS 377909 14550

F 25.97

P 0.000

Sequential Analysis of Variance Source DF SS F P Linear 1 394820 18.38 0.000 Quadratic 1 360997 24.81 0.000

OM6 TN Hudson Jewelers Case

Fitted Line Plot Visits = 603.2 - 27.74 Week + 0.4138 Week**2 600

S R-Sq R-Sq(adj)

500

120.623 51.5% 49.5%

Visits

400 300 200 100 0 0

30 Week

Winters' Method Plot for Visits Multiplicative Method 600

Variable Actual Fits

500

Smoothing Constants Alpha (level) 0.2 Gamma (trend) 0.2 Delta (seasonal) 0.2

Visits

400

Accuracy Measures MAPE 6.87 MAD 25.01 MSD 1959.65

300 200 100 0 1

25 30 Index

OM6 TN Hudson Jewelers Case Chapter 10: Capacity Management 1. Explain how capacity is measured at the following stages of the diamond value chain: (a) mining, (b) cutting and polishing, (c) jewelry manufacturing for custom and standard jewelry, and (d) the retail store? (There can be multiple measures so make sure you define the unit of measure.) (a) Mining – carat yield per alluvial ton, alluvial ton processed per day, machine execuating tonnage, carats per cubic meter, tonnage per truck, tonnage dug per shovel, gem carat weight per alluvial ton, (b) Cutting and polishing – total cutter hours per week, machine hours per week, finished carats per ton of rough diamonds, total carat weight processed per week, rework hours, (c) Jewelry manufacturing for custom jewelry – a job shop or project so hours available per month, resource input such as labor or machine hours per unit of time, etc. For standard jewelry --- a flow shop so number of jewelry pieces per year, units shipped per week, output per unit of time, etc. (d) Retail store – sales per employee, sales per square foot of store space, display area square footage, total hours store is open, number of full-time equivalent employees, safe cubic volume of storage, number of CAD custom jewelry systems, number of pieces of jewelry, Students must know the “process type” models (i.e., project, job shop, flowshop, and continuous flow) to best answer this question. If a job shop, input metrics dominate such as cutter hours available per week. If a flow shop, output metrics dominate such as units produced per year or carats per alluvial ton. Chapter 11: Managing Inventories 1. Research global supply and demand for diamonds and how it affects prices. What role do “diamond reserves” (inventory) play in determining prices? Explain. What do you think the demand-supply curves for diamonds looks like? Try to sketch it out. In 2013 global diamond jewelry reached its record high of $79 billion, with demand forecasted to continually grow into the second half of the 21st century. The diamond producers are a cartel (more so than oil cartels) that control prices via (a) the supply (reserves) of diamonds, (b) site holders, and (c) mining diamonds is slowly being depleted. India and China will lead diamond demand in the future as the price per carat is projected to increase. DeBeers did control 90% plus of the global diamond trade but today it is more like 80%, and slowly eroding. DeBeers is losing their monopoly power. Australia 270 million carats in reserve DR Congo 150 million carats in reserve Botswana 130 million carats in reserve 42

OM6 TN Hudson Jewelers Case South Africa 70 million in reserve Russia 40 million carats in reserve Other countries 90 million carats in reserve Total 750 million carats in global diamond reserves What would happen if all diamond reserves flooded the marketplace? Prices would drop greatly!!! Ask the students, “How is the Internet changing the demand – supply balance in the global diamond business? Is it disrupting the industry? How? And, of course, the answer is yes it is changing the diamond industry and slowly breaking up the diamond cartel. Students are surprised by the hold back of diamond inventories from the marketplace, so be prepared for discussions of “Is this legal?” “Is this ethical?” Also, note that existing diamonds are 100% recyclable so they reenter the global market place regularly, again and again. Only new diamonds are controlled by the cartel. Interesting point! Students will sometimes draw various demand-supply-revenue curves and show how diamond prices change with changes in demand/supply. Below are a couple of curves students pulled off the web and then explain what is happening.

OM6 TN Hudson Jewelers Case

Inelastic demand – The percentage change in quantity demanded is less than the percentage change in price. Quantity demanded changes proportionately less than price changes. For example, a 10% increase in price causes, say, a 5% reduction in quantity demanded. Elastic demand – The percentage change in quantity demanded is greater than the percentage change in price. Quantity demanded changes proportionately more than price changes. For example, a 5% increase in price causes, say, a 10% reduction in quantity demanded. Basically, supply is forecast to stay constant (the power of cartels) and constrained while demand from China and India will increase, and therefore, diamond prices will increase. Globally, diamonds and yachts sales are highly correlated with individual net worth and net disposable income. 2. What are the detailed components of inventory holding costs in this situation? What other factors might influence holding costs, such as security costs, obsolescence costs, and others. What is your estimate of inventory carrying costs as a percentage of item value? Explain your reasoning. Sources of the components of inventory carrying (holding) costs are the textbook plus what students might search for via the Internet. The components are as follows: •

Cost of capital --- money tied up in inventory, the opportunity cost of putting these funds 44

OM6 TN Hudson Jewelers Case to other uses, interest rates from loans, revolving credit, bonds, and the weighted cost of capital from the firm’s balance sheet. •

Variable labor costs – handling and moving inventory into and out of safes, display cases nightly, and so on.

•

Equipment and technology operation, updates, and maintenance --- point of sale, CAD, and store software updates and training variable costs.

•

Security costs – maintenance of safe, cameras, phone lines, alarms, video equipment, etc., armed security guard(s)

•

Taxes – on end-of-year inventory

•

Insurance – high due to security risks, on store and inventory

•

Storage space – store rent or lease and variable cost of safes

•

Shrinkage and theft – hopefully small items like gold chains, mountings, etc.

•

Obsolescence – slow moving SKUs, highly discounted SKUs so can sell or liquidate, gold and other metals that can be melted and recycled.

•

Utilities – electric 24/7 for the security system, backup generator maintenance, water for sprinkler systems and fire, sprinkler system maintenance.

Inventory carrying costs (ICC) range from a low of 10% to a high of 35% of SKU value. Hudson Jewelers ICC is toward the high end, say 30% of item value. Note that ICC should be estimated based on variable costs only (sometimes some semi-variable costs are included in ICC) as the EOQ is a marginal cost model. As the jewelry store does more and more customized jewelry and CAD co-designs, ICC is lower (i.e., less inventory in the store than traditional jewelers). A more make-to-stock jeweler with little or zero customization would tend to have higher ICC. Chapter 12: Supply Chain Management and Logistics 1. Research short- and long-term risks in the global diamond supply chains and write a short paper (maximum of 3 pages) defining what these risks are and how they are mitigated by major diamond producing corporations. A great place to begin to answer this question is Exhibits 12.3 and 12.4. The challenge for students is to apply these ideas to the diamond supply chain. They will search the web for some of these types of supply chain risks. Remember the question also asks, how these risks are mitigated? 45

OM6 TN Hudson Jewelers Case Exhibit 12.3 Tactical Supply Chain Risks and Possible Management Actions Tactical Risks Ways to Mitigate Tactical Risks INVENTORY RISKS • Inventory and warehouse stock outs • Add safety stock • Inventory backorders • Change order quantities • Imbalances between work centers • Reduce lead times • Carry extra capacity • Add more inventory buffers between stages (work-in-progress) CAPACITY RISKS • Equipment shortage • Lease/share extra equipment • Production capacity shortage • Schedule overtime • Overproduction • Multiple suppliers • Equipment breakdowns • Schedule under time • Employee shortages, strikes, and layoffs • Frequent preventive maintenance • Add temporary and backup (float pool) workers LOGISTICS and SCHEDULING RISKS • Supplier quality problems • Add safety stock • Supplier delivery problems • Change order quantities • Long order cycle lead times • Increase lead times • Poor transportation infrastructure by country • Extra local warehouse space • Increase quality control inspections • Hire new and/or multiple contract manufacturer(s) and supplier(s) • Partnerships with local transportation firms • Emergency and/or backup plans to ship by air, truck, ship, or rail by alternative shippers

Exhibit 12.4 Strategic Supply Chain Risks and Possible Management Actions Strategic Risks GLOBAL ECONOMIC RISKS

Ways to Mitigate Strategic Risks

OM6 TN Hudson Jewelers Case • • • • •

Population and wealth forecasts by country Monetary exchange rates and market size Regulations, taxes, and tariff laws by county Natural disasters such as earthquakes, tsunamis, volcanoes, hurricanes, and droughts. Workforce skills, pay, and availability

GOVERNMENT RISKS • Intellectual/Patent Rights and Protection • Man-made disasters such as wars, chemical spills, transportation accidents, political revolutions, government instability, and terrorist attacks.

• • • • • • • • • •

PRODUCT RISKS • Product modifications due to cultural differences • Major forecasting errors by product by country • Chronic inventory and/or capacity shortages • Goods and service (product) obsolescence

•

• • •

SECURITY RISKS • E-commerce system downtime • Cyber-security • Theft, fraud, and pay-off practices by country

• • •

Franchise and company owned store mix Virtual versus direct sales channel mix Facility locations (headquarters, R&D, factory, warehouse, service centers, distribution hubs, call centers, etc.) Disaster and emergency plans and predeployment of resources Multi-country sourcing of suppliers Championing social sustainability in host country Global legal team to defend infringement Facility locations (headquarters, R&D, factory, warehouse, service centers, distribution hubs, call centers, etc.) Disaster and emergency plans and predeployment of resources Multi-country out-sourcing to contract manufacturers and suppliers Better strategic planning and demand forecasting capability (i.e., hire experts, upgrade software and hardware data mining technology including social networks, etc.) Co-operative plans to share resources Hire more contract manufacturers and suppliers (outsourcing) Hedging inventory Technology upgrades and backup systems and sites Sourcing (hiring) criteria for workforce Corporate value and mission statements

2. Obtain the annual report of a major diamond producer such as DeBeers, ALROSA, Rio Tinto, BHP Billiton, and perform a cash-to-cash conversion cycle analysis of their business. What did you find out? Explain. Implications? Students need only the following information from an annual report to figure out the C2CC. Results will differ depending on the company and detail of the financial data. • Sales (Revenue) • Operating days per year • Cost of Goods Sold 47

OM6 TN Hudson Jewelers Case • • •

Inventory Accounts receivable Accounts payable

Chapter 13: Resource Management 1. Customer demand at Hudson Jewelers (i.e., customer visits) is highly seasonal, as case Exhibit 1.2 illustrates. In the context of aggregate planning options (Section 13-2 and Exhibit 13.2), what types of decisions concerning resources does this service business have to make? Write a short paper of no more than two typed pages on these issues. A two-level resource plan depicted in Exhibit 13.2 applies to Hudson Jewelers (HJ). The seasonal demand pattern is what makes resource planning difficult at HJ. Once demand strategies are set such as pricing and advertising (see Exhibit 13.3), the aggregate plans immediately disaggregate into detailed store staffing and equipment capacity and schedules. Store staffing decisions include how many employees to have on duty at any given time, whether to use under- or over-time, whether to hire extra non-family full or part-time employees, when to build jewelry inventory and when to reduce it, and whether the store needs 48

OM6 TN Hudson Jewelers Case one or two CAD workstations that would be almost idle in low season and in high demand during high season. Poor decision making with regard to CAD capacity, store staffing, and jewelry inventory can reduce customer satisfaction, repeat visits, and revenue. Students might also explain why many service businesses do not need an intermediate level of disaggregating aggregate plans. •

Most manufactured goods are discrete and are “built-up” from many levels of raw materials, component parts, and subassemblies. However, many services, such as credit card authorizations, a telephone call, a movie, or arriving at a bank teller window, are instantaneous or continuous and are not discrete. Hence, there is no need for multiple levels of planning for some services.

•

Services do not have the advantage of physical inventory to buffer demand and supply uncertainty, so they must have sufficient service capacity on duty at the right time in the right place to provide good service to customers, making short-term demand forecasting and resource scheduling absolutely critical.

Chapter 14: Operations Scheduling and Sequencing 1. Develop a staff schedule like case Exhibit 1.3 for ONLY Tuesday during peak demand (i.e. week 8 in case Exhibit 1.2). Assume the maximum service standard (rate) is ten customers per hour per store employee. (You will have to allocate Tuesday’s demand over the day and time periods) What are the advantages and disadvantages of your store-staffing schedule? Would you hire non-family employees to staff this single store? Justify. (Note: Please note that for service businesses such as Hudson Jewelers, Exhibit 13.2 applies, and therefore, intermediate (Level 2) planning is not necessary for service businesses. That is, aggregate plans are immediately disaggregated to detailed frontline resource (capacity) planning and scheduling decisions. • • • • • • •

Peak demand in case Exhibit 1.2 is week 8 at 587 customer visits per week. The store is open 10 am to 5 pm Monday, Wednesday, Thursday, and Saturday or 7 hours/day times 4 days = 28 hours. Tuesday and Friday the store is open from 10 am to 8 pm or 10 hours or 10 hours/day times 2 days = 20 hours, for a total of 48 hours per week or 2,880 minutes/week. To allocate weekly demand to Tuesday - (10/48)*587 = 122.3 customer visits for Tuesday or 12.23 customers per hour or 0.2038 customers per minute or 6.115 customer per 30minute period. Students must then allocate Tuesday’s demand over the 10-hour day (and therefore, all student solutions will be slightly different). We are grading the methodology, not an exact answer. With 1,380 staff minutes scheduled (staff capacity) including lunch breaks and demand load is Using Equation 7.2 where Utilization = Demand rate/(Service rate*No. of Servers). 49

OM6 TN Hudson Jewelers Case •

Below is a typical student staff schedule and answer fyi. Staffing Bill Hudson Jasime Navey Betty Hudson Thomas Navey Possible Staff A Possible Staff B

9:00

9:30

10:00 10:30 11:00 11:30 12:00 12:30 1:00 1:30 2:00 2:30 3:00 Start -------------------------------------------------------------------------------------(Lunch Lunch) ----------------------Start ------------ -------------------------------------------(Lunch Lunch) Start ----------------------------------------------

Available Minutes 0 0 30 30 30 30 60 60 60 60 Current # Staff 0 0 1 1 1 1 2 2 2 2 Target # Staff 0 0 1 1 1 1 2 2 2 2 Short/Excess (-/+) 0 0 0 0 0 0 0 0 0 0 537 customer visits for week 8 537/48 total hours that week = 5.6 customers per 1/2 hour Staffing 3:30 4:00 4:30 5:00 5:30 6:00 6:30 7:00 7:30 8:00 Bill Hudson ------------------------------------------- End Jasime Navey ------------------------------------------------------------------------------------------------------------------------------- End Betty Hudson ------------------------------------------- End Thomas Navey Start --------------------------------------------------------- End Possible Staff A Start ----------------------------------------------------------------------------------- End Possible Staff B

Totals

Available Minutes Current # Staff Target # Staff Short/Excess (-/+)

1,260 41 50 -9

90 2 2 0

90 3 4 -1

60 2 3 -1

60 2 2 0

We think that hiring an extra person from 4-8pm, would free up Jasime to work one on one with customer appointments and CAD.

• • • • • • • • •

What are the advantages and disadvantages of your store-staffing schedule? Advantages Payroll cost is low Keeping it family owned and operated Accountability Trust Disadvantages Just enough Employees to help Customers Not enough time to use CAD or special appointments Mr. Hudson is alone in the store for two hours (10am-12pm) Increase in possible theft Only Family working there (If there is a family emergency or event, entire store shuts down)

Would you hire non-family employees to staff this single store? No, because customers see the store as a family owned and operated, customers would lose on the experience and Hudson would save on taxes by staying family owned and operated. Also by hiring a non-family member you run the risk of the employee not treating customer’s right, theft, and getting along with other family members.

OM6 TN Hudson Jewelers Case The problem with hiring only family is: There is more selection of possible candidates if you hire non family, a non-family member might bring in something fresh, a new way of doing things, able to keep store running during a family event or emergency, might have more experience, no family drama, ability to work more shifts, and no stragglers. Chapter 15: Quality Management 1. What “cost of quality” criteria (i.e., prevention, appraisal, internal failure, and external failure costs) might be included in an analysis at the following stages of a global diamond supply chain---mining, cutting and polishing centers, and retail jewelry store? Explain. Provide examples. The challenge of this question is to “apply” the textbook cost of quality concepts to this industry. The four quality cost criteria times three stages of the diamond value chain results in 12 cost of quality situations to evaluate. The cost of quality refers to the costs associated with avoiding poor quality or those incurred as a result of poor quality. Cost of Quality Measurement—Four Categories •Prevention costs are those expended to keep nonconforming goods and services from being made and reaching the customer. •Appraisal costs are those expended on ascertaining quality levels through measurement and analysis of data to detect and correct problems. •Internal-failure costs are costs incurred as a result of unsatisfactory quality that is found before delivery of good or service to the customer. •External-failure costs are incurred after poor-quality goods or services reach the customer. Diamond Mining Cost of Quality Examples Prevention costs • Equipment maintenance (drilling and excavating machines, trucks, shovels, conveyors, etc.) • Correct permits to mine • Equipment operator hiring and training • Latest mining methods and practices • Safety training and drills • Emergency plans • Technical mining expertise to avoid cave ins and explosions Appraisal costs • Regulatory inspections and drills • Company inspections and drills • Mine productivity metrics, stone carat yields, etc. • Laboratory testing of alluvial and stones • Team quality improvement meetings and plans 51

OM6 TN Hudson Jewelers Case Internal-failure costs • Yield on carats per alluvial ton decrease (not a productive mine) • Excessive rough diamond inventory • Equipment downtime • Work stoppages • Employee grievances and litigation External-failure costs • Explosions and accidents (legal and liability claims) • Employee accidents and payouts • Employee complaint handling • Bad public press on labor laws, blood diamonds, sustainability practices, etc. Diamond Cutting and Polishing Cost of Quality Examples Prevention costs • Master and regular diamond cutter training and expertise • Cross-check diamond design and cutting plans • Hiring honest cutters and polishing (hiring process) • Polisher training and expertise • Security equipment (cameras, end of day employee searches, etc.) costs • Security procedures to prevent theft and lost diamonds • In coming check in processes • Out going processes Appraisal costs • In house appraisals • Carat audits • Inspections Internal-failure costs • Cutter errors and failures • Rework costs • Scrap diamonds and for industrial use • Theft and lost diamonds • Employee accidents and payouts • Employee complaint handling External-failure costs • Diamond and jewelry manufacturer • Retailer rejects diamond cut and value • Bad public press on labor laws, blood diamonds, sustainability practices, etc. Retail Jewelry Store Cost of Quality Examples Prevention costs • Staff service management training 52

OM6 TN Hudson Jewelers Case • • • • • • •

Staff CAD training and expertise Security equipment maintenance and updates Sometimes a security guard Staff quality improvement meetings Frequent CAD software and design option updates Qualified jewelry supplier and manufacturer Qualified stone supplier

Appraisal costs • Stone appraisal expertise • Proofing final CAD jewelry co-designs • Staff monitoring of accurate stone value and customer bills (information) • Security audits • Security checks for new employees Internal-failure costs • Customer claims • Rework • Warranty errors • Customer interaction service upsets • CAD system downtime • Lost CAD previous co-designs External-failure costs • Returns for a total or partial refund • Customer dissatisfaction with final co-designed jewelry (stop process) • Lost or misplaced stones • Cost to replace defective mountings, prongs, and stones • Lost sales as customer leaves store • Poor customer return rates (customer loyalty performance) • Store claims to their insurance provider Chapter 16: Quality Control and SPC 1. Research and acquire the criteria for diamond appraisals and critique these criteria in terms of objectivity, measurement, and overall accuracy. Are diamond quality criteria as specific and measureable as for manufactured parts? Explain. Color Diamond color can range from steel gray, white, blue, orange, red, green, pink, purple, brown, and black. Color is graded on a D to Z scale where D is colorless and Z is lightly colored (often a slight yellow hue). The clearer the diamond the more value it has in the retail market. Recently, colorful diamonds (called fancy color) have become more popular such as yellow or red diamonds. In the past, these diamonds had a limited retail market but now do! Diamond marketing has helped change people’s perceptions of what is an attractive diamond color. 53

OM6 TN Hudson Jewelers Case Carat Each carat weight is subdivided into 100 points. For example, a diamond that is 0.75 carats is a 75 pointer. Cut is all about attractive diamond proportions that are pleasing to the human eye. One carat equals 0.2 grams so one gram is equal to a five carat diamond. International traders also use diamond weight categories such as 1/3 a carat is any diamond in the 0.30 to 0.36 range or one carat is 1.00 to 1.19 range. Cut Possible diamond cuts or shapes include princess (square), cushion (oval), heart, pear, Radiant and Asscher (hexagons), emerald (rectangle), and oval. In addition, each part of the diamond has a name such as Table (top part of diamond) and Cultet (lower pointed tip of the diamond). How light moves through a diamond is very much a function of cut and color. For example, if a diamond is cut too flat it may lose some of its brilliance. If cut too deep, it may appear to dark.

Clarity The grading system includes these clarity categories: Flawless (FL) – no external blemishes or internal inclusions visible using a 10x magnification. Internal Flawless (IF) – no internal inclusions using 10x magnification but some minor external blemishes. Very Very Slightly Included (VVS1 and VVS2) – minor inclusions that are difficult to see using 10x. Very Slight Included – (VS1 and VS2) – diamond has noticeable inclusions using 10x 54

OM6 TN Hudson Jewelers Case magnification. Slight Included – (SI1 and SI2) – diamond has noticeable inclusions that are easy to see using 10x magnification. Included – (I1, I2, and I3) – diamond has obvious inclusions that are clearly visible using 10x or visible without magnification or have inclusions that threaten the long term viability of the stone such as possible fractures. Some suppliers such as DeBeers etch with lasers their Clarity grade on the diamond. Others etch a serial number on non-conflict diamonds. However, blood and non-ethical diamond traders can also do similar etching. Appraisals are about one half science and one half human judgment (art). That is why multiple raters is a good idea. Are diamond quality criteria as specific and measureable as for manufactured parts? Explain. Diamond quality criteria are specific with criteria like cut and carat weight being very measurable. However, color and clarity are more human judgment criteria. Only with multiple raters and some good statistics can we be as specific on these criteria as manufacturers. Most students will argue that diamond quality criteria are not as specific and measureable as manufactured parts such as cell phones, HD televisions, vehicle brake pads and tires, dishwashers, and so on. 2. Develop a p-chart for the diamond blemish and inclusion data found in case Exhibit 1.5 documenting the quality of the diamonds on “clarity and defects” coming from two different diamond mines (suppliers) – one in Asia and one in Africa. What do you conclude? You might want to go over the diamond criteria for “Clarity” defined in the previous question. Assuming the same diamond experts did the clarity grading for these two different mines, the conclusion is the Africa diamonds in this carat range are of higher quality. The p-chart for the African Supplier is below with p-bar = 0.539 and the control chart is random with no sample outside the control limits. One can conclude that for this sampling plan and assuming they were administered the same way, the African diamonds in this carat range of 1.0 to 1.5 carats are better (clearer) diamonds than the Asia supplier (mine). That is, 0.616 is greater than 0.539 plus the p-chart for the Asia Supplier is not in SPC, stable, somewhat erratic, etc.

OM6 TN Hudson Jewelers Case For Asia Supplier p-Chart This spreadsheet is designed for up to 50 samples. Enter data only in yellow cells. Some resizing or rescaling of the chart may be needed. Sample size Number of samples Average (p-bar)

Sample 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

50 20 0.616 Number Nonconforming 33 24 30 40 27 36 21 29 33 41 38 22 44 29 30 28 23 29 39 20

Fraction Nonconforming 0.6600 0.4800 0.6000 0.8000 0.5400 0.7200 0.4200 0.5800 0.6600 0.8200 0.7600 0.4400 0.8800 0.5800 0.6000 0.5600 0.4600 0.5800 0.7800 0.4000

Standard Deviation 0.068781393 0.068781393 0.068781393 0.068781393 0.068781393 0.068781393 0.068781393 0.068781393 0.068781393 0.068781393 0.068781393 0.068781393 0.068781393 0.068781393 0.068781393 0.068781393 0.068781393 0.068781393 0.068781393 0.068781393

LCLp 0.409655822 0.409655822 0.409655822 0.409655822 0.409655822 0.409655822 0.409655822 0.409655822 0.409655822 0.409655822 0.409655822 0.409655822 0.409655822 0.409655822 0.409655822 0.409655822 0.409655822 0.409655822 0.409655822 0.409655822

CL UCLp 0.616 0.616 0.616 0.616 0.616 0.616 0.616 0.616 0.616 0.616 0.616 0.616 0.616 0.616 0.616 0.616 0.616 0.616 0.616 0.616

0.8223441 0.8223441 0.8223441 0.8223441 0.8223441 0.8223441 0.8223441 0.8223441 0.8223441 0.8223441 0.8223441 0.8223441 0.8223441 0.8223441 0.8223441 0.8223441 0.8223441 0.8223441 0.8223441 0.8223441

OM6 TN Hudson Jewelers Case

The p-chart for the Asia Supplier is below with p-bar = 0.616 and the control chart is fairly random with samples 13 and 20 outside the upper control limit. And samples 14 to 18 are all below the centerline (i.e., no so random with probability equal to 0.03 (0.5)5. Also, note that sample 20 is slightly below the lower control limit. Three samples are close to the lower limit and that is good (less defects). Technically, the process is not in statistical process control. For the African supplier the p-chart is as follows: p-Chart African Supplier This spreadsheet is designed for up to 50 samples. Enter data only in yellow cells. Some resizing or rescaling of the chart may be needed. Sample size Number of samples Average (p-bar) Sample 1 2 3 4 5 6

50 20 0.539 Value 22 36 19 32 23 20

Fraction Nonconforming 0.4400 0.7200 0.3800 0.6400 0.4600 0.4000

Standard Deviation 0.070495248 0.070495248 0.070495248 0.070495248 0.070495248 0.070495248

LCLp 0.327514256 0.327514256 0.327514256 0.327514256 0.327514256 0.327514256

CL 0.539 0.539 0.539 0.539 0.539 0.539

UCLp 0.750485744 0.750485744 0.750485744 0.750485744 0.750485744 0.750485744 57

OM6 TN Hudson Jewelers Case 7 8 9 10 11 12 13 14 15 16 17 18 19 20

26 35 25 30 33 22 26 34 31 24 23 27 32 19

0.5200 0.7000 0.5000 0.6000 0.6600 0.4400 0.5200 0.6800 0.6200 0.4800 0.4600 0.5400 0.6400 0.3800

0.070495248 0.070495248 0.070495248 0.070495248 0.070495248 0.070495248 0.070495248 0.070495248 0.070495248 0.070495248 0.070495248 0.070495248 0.070495248 0.070495248

Attribute (p) Chart

0.327514256 0.327514256 0.327514256 0.327514256 0.327514256 0.327514256 0.327514256 0.327514256 0.327514256 0.327514256 0.327514256 0.327514256 0.327514256 0.327514256

0.539 0.539 0.539 0.539 0.539 0.539 0.539 0.539 0.539 0.539 0.539 0.539 0.539 0.539

0.750485744 0.750485744 0.750485744 0.750485744 0.750485744 0.750485744 0.750485744 0.750485744 0.750485744 0.750485744 0.750485744 0.750485744 0.750485744 0.750485744

Fraction nonconforming

0.8000 0.7000 0.6000 0.5000 0.4000 0.3000 0.2000 0.1000 0.0000 1 3 5 7 9 1113151719212325272931333537394143454749

Sample number

The p-chart for the African Supplier is with p-bar = 0.539 and the control chart is random with no sample outside the control limits. Technically, this p-chart is in statistical process control. One can conclude that for this sampling plan and assuming they were administered the same way, the African diamonds in this carat range of 1.0 to 1.5 carats are better (clearer) diamonds than the Asia supplier (mine). That is, 0.616 is greater than 0.539, the key metric in this SPC analysis. Advanced students might do a two-sample t-test to determine the statistical difference in these means.

OM6 TN Hudson Jewelers Case Chapter 17: Lean Operating Systems 1. Write a short paper (maximum of two pages) on how the four principles of lean operating systems are applied to diamond mining. Lean operating systems have four basic principles: 1. elimination of waste, 2. increased speed and response, 3. improved quality, and 4. reduced cost. Students will research diamond mining and discover two major types of mining as follows: Diamond mining – continuous flow for underground mines with big tunneling machines grinding out the soil and conveyers bringing the alluvial materials to the surface. This type of underground mining even has a name called continuous mining. Surface mining is much like a flow shop with batching (big trucks hauling materials away as mammoth shovels dig up the earth). The sequence of operations is similar and high volumes and little changeover/setup time for surface mining. See exhibits for more process type characteristics. De Beers, for example, is currently active in every category of diamond mining: open-pit, underground, and coastal and deep sea (backward integration). Diamond mines want to excavate the least amount of alluvial soil yet capture the most diamonds by weight. And, of course, they want to do it fast, a minimal cost, and replenish the mining area once the mine is closed (sustainability). The p-chart for the Asia versus African mines evaluated in Chapter 16 shows the quality difference (clarity only) between mines. Mining Productivity Metrics – carat yield per alluvial ton, alluvial ton processed per day, machine excavating tonnage, carats per cubic meter, tonnage per truck, tonnage dug per shovel, gem carat weight per alluvial ton, 2. If you were to design a jewelry store based only upon the four principles of lean operating systems - elimination of waste, increased speed and response, improved quality, and reduced cost - what would it look like? Incorporate OM concepts and methods used throughout this textbook, such as mission and strategy, competitive priorities, process type, service guarantees, supply chain, and so on as appropriate, into your discussion. This is the only question in the teaching note of 35 questions that we have not asked the students or student teams. This question may result in a student-designed virtual jewelry store or a street corner kiosk. Send us your student responses if you get a good one. Have fun with such an open ended and challenging question. You could use this question for a course project. Make sure you set a page limit. You decide. Chapter 18: Project Management

OM6 TN Hudson Jewelers Case 1. The exhibit below shows the project work activities for designing custom jewelry using computer aided design (CAD). Draw the network diagram and determine the project completion time, critical path(s), activity slack times, and a Gantt chart for the project. Summarize you insights. What is missing from the activity time estimates?

One student defined the table of activities and defined them as follows: ➢ ➢ ➢ ➢

Conceptualize Design by establishing goals, ideas, and budgets An Order is Placed with deposit so that the CAD design can be made into a wax model CAD Program illustrates any design to create wax model The CAD design is transferred to a milling machine or an RP (rapid-prototype) machine when ready to be made into wax. This technique of creating the wax from the hCAD file involves carving a solid block of wax with a computer-guided cutter. This is called Computer Aided Milling, or CAM. ➢ Once wax model receives payment balance, the ring will be ready to experience the manufacturing process ➢ Design Model is given to manufacturer or taken to backroom. ➢ The first step in the lost-wax casting process is using a vertical casting machine to produce enough pressure that forces the molten metal into the container and fills the form of the model. The wax model is placed within a receptacle and then is filled with investment; which is a plaster-like compound that hardens around the model. The CAD wax is invested exactly the same way as a traditional wax model. Once invested, the model is burnt out of the flask, creating a negative imprint of the piece. Here we see the centrifugal casting machine spinning molten metal into the void that was the wax model (the wax is lost in the process, hence the name). The ring is now in metal and will 60

OM6 TN Hudson Jewelers Case

➢ ➢ ➢ ➢ ➢ ➢

continue to completion using traditional hand finishing techniques (ChristopherDuquet.com). Finishing is done by hand where stones will be set One last final polish is made in order to bring the ring to its full beauty Manufacturer delivers product to retailer or is now ready to be moved out of backroom. Quality Control and Final Inspection are completed Retailer will package the ring Retailer will give the end consumer the ring

OM6 TN Hudson Jewelers Case

What is missing is actual waiting times at many of these activities such as the CAM or the casting process that can take many weeks in practice. A more realistic CPM work break down structure might include these waiting, ordering, manufacturing, and shipping times. Most custom designed rings in this store take 3 to 6 months to complete; expedited service can be completed in two months. Other possible student work activities include: • First Store Visit & Consultation • Complimentary Jewelry Consultation • CAD Demonstration • Price Quote and Negotiation • Preliminary Stone and Jewelry Selection (Sourcing) • CAD Co-Design Session(s) • CAD Jewelry Improvement Cycles • Payment Schedule • CAD Final Design Review and Sign-off • Manufacturing Wax Jewelry Models • Actual Production o CAD Final Design Sent to Manufacturer o Wax Model and moulds o Pour Metal o Source Final Stones o Delivery of Final Stones 62

OM6 TN Hudson Jewelers Case

• • • • • • •

o Cutting o Polishing o Setting o Assemble o Ship Delivery Promise Secure Shipping to Store Customer Store Pick-up Post-sale Follow-up Jewelry Warranty Jewelry Appraisal Service Guarantees

The End of Hudson Jewelers Teaching Note! Have Fun with the case and 34 questions!

J&L Packaging, Inc. Worksheet

Some students may do goods vs services only as below Dollars (in 1,000)

Sales Manufactured Goods Services Total Cost of Sales Manufactured Goods Services Total

$87,475 $18,619 $106,094

$25,818 $5,907 $31,725

Operating Expenses Research and Development Sales and Marketing Other Total

$17,619 $23,132 $6,182 $46,933

Obsolete Inventories Inventories Inventory + Obsolete Accounts Receivable Accounts Payable

$886 $4,906 $5,792 $7,593 $9,338

Manufactuered Goods w/o Obs

Total Total w/o Obs Inv with Obs Inv

Services

Cost of Goods Sold per Day

$86,060

$19,690

$105,750

Revenue per Day

$291,583

$62,063

$353,647

Inventory Day's Supply

57.0

46.4

54.8

Inventory Turnover

5.26

6.47

5.48

Acct. Receivable Days Supply(ARDS)

26.04

122.34

21.47

Acct. Payable Days Supply(APDS)

32.03

150.46

26.40

Cash-to-Cash Conversion Cycle = IDS + ARDS - APDS

51.02

-28.12

41.46

49.84

Blue Note Mortgage TN

Desired Throughput Hours Worked Per Day Days in Month

May 750 7 22

June 825 7 20

July 900 7 22

August 775 7 22 May

Products Product 1 Product 2 Product 3 Product 4 Product 5 Product 6 Product 7 Product 8 Product 9 Product 10 Total

Product Mix 22% 17% 13% 12% 10% 9% 7% 5% 3% 2% 100%

Hours Per File 3.60 2.00 1.70 5.50 4.00 3.00 2.00 2.00 1.50 4.00 FTE Load FTEs Required

Files/M onth 165 127.5 97.5 90 75 67.5 52.5 37.5 22.5 15 750

June

Hours Files/M Hours Required onth Required 594.00 181.50 653.40 255.00 140.25 280.50 165.75 107.25 182.33 495.00 99.00 544.50 300.00 82.50 330.00 202.50 74.25 222.75 105.00 57.75 115.50 75.00 41.25 82.50 33.75 24.75 37.13 60.00 16.50 66.00 2286.00 825.00 2514.60 14.84 17.96 15 18

July

August

Files/M Hours Files/M Hours onth Required onth Required 198.00 712.80 170.50 613.80 153.00 306.00 131.75 263.50 117.00 198.90 100.75 171.28 108.00 594.00 93.00 511.50 90.00 360.00 77.50 310.00 81.00 243.00 69.75 209.25 63.00 126.00 54.25 108.50 45.00 90.00 38.75 77.50 27.00 40.50 23.25 34.88 18.00 72.00 15.50 62.00 900.00 2743.20 775.00 2362.20 17.81 15.34 18 16

OM6 Chapter 2 Problem #2 Fed Ex Problem Number of Shipments/Day Total Number of Shipments Over 5 Days Complaints Reopen Damaged Pkgs International Invoice Adjustments Late Pickup Stops Lost Packages Missed Proof of Delivery Right Date Late Traces Wrong Day Late Total

70,000 350000 Weight 3 10 1 1 3 10 1 1 3 5

Percent of Total Weight 0.079 0.263 0.026 0.026 0.079 0.263 0.026 0.026 0.079 0.132

Number of Weighted Errors Average Errors 125 9.87 18 4.74 102 2.68 282 7.42 209 16.50 2 0.53 26 0.68 751 19.76 115 9.08 15 1.97 1645

Wt Average Percent of Total Shipments 0.00020925 0.02092481 Service Quality Indicator (SQI)

99.979

73.24

TN Exhibit 1 Tom's Auto Service

Store Managers Q1 Q2 Q3 Average

4.36 3.87 4.4 4.21

Standards of Performance Q4 4.66 Q5 4.43 Q6 4.13 Q7 4.54 Q8 4.2 Average 4.39 Employees Q9 Q10 Q11 Average

3.8 4.01 3.88 3.90

Facilities Q12 Q13 Average

4.84 4.79 4.82

Overall Experience Q14 Q15 Q16 Average

4.59 3.94 4.45 4.33

Base Case David Christopher, MD

Number of Surgeons = Days per Week = Surgery Hours per Day =

2 4 5

Surgery Minutes/Week/Dr.= 1200 Safety Capacity = 0.1 Surgery Minutes/Week/Dr.= 1080

Orthopedic Surgeon Mini-Case

Surgery Procedure

Setup Times

Fractured hip Fractured wrist Fractured ankle Hip replacement Knee replacement

20 20 20 30 30

Shoulder replacement Big toe replacement Rotator cuff repair Cartilage knee repair Fracture tibia/fibula Achilles tendon repair ACL ligament repair

40 20 20 20 20 20 20

Total Available Surgeon Capacity = Total Demand in Minutes = Excess +/Shortage - Minutes = Net Surgeon(s) Excess/Shortage

Number of Patients Scheduled Today Process Dr. Dr. Time A B

80 60 70 150 120

180 90 45 30 60 30 60

2160 1930 230 0.213

0 2 1 2 3

1 0 2 1 1 3 3

Totals

Total Setup Time

Total Process Time

Total Setup & Process Time

0 40 20 60 90

0 120 70 300 360

0 160 90 360 450

210 19.8%

850 80.2%

1060 100.0%

40 0 40 20 20 60 60

180 0 90 30 60 90 180

220 0 130 50 80 150 240

240 27.6%

630 72.4%

870 100.0%

450 23.3%

1480 76.7%

1930 100.0%

Hardy Hospital Case Study OM6 C11 (Revised - Case numbers changed from all previous case versions - see yellow)

Order Costs 3 labor hours per P.O. 4 SKUs per P.O. $24 per hour including benefits Order cost/SKU =

Inventory Holding Cost 36,750 sq ft @ $4.60/sq ft. = 5 warehouse personnel @ $32,000 each + 20% OH = Other costs

DAC

$169,050.00

$192,000.00 $ 400,000.00 $761,050.00 Average Value Inventory = $4,150,000.00 Holding Cost as % of Total Inv. = 18.34% Cost of Capital Funds (Bonds) = 8.90% Inv. Hold Cost as % of Item = 27.24% Cost

$18.00

Strike Disinfectant Current Order Quantity 200 (see footnote in case Exhibit 11.16) Weeks/Year 52 Weekly Demand 11.63 Std Dev Demand 8.02 Annual Demand 604.76 Order Leadtime 2 weeks Note: This solution is in Order Cost $18.00 gallons. Students may also Item Value ($84.20/4 Gallons) $21.05 per gallon work the case out in cases. Inv. % 0.2724 Cycle Service Level 97.00% Z-Value 1.88 SQRT No. EOQ = Round EOQ Up

3,797.08 61.62 62.00

Leadtime demand Safety Stock Reorder Point

23.3 21.3 44.6

Order Cost Inventory Hold Cost Total EOQ Cost

$175.58 $177.75 $353.32

Current Q = 200 gallons Order Cost Inventory Hold Cost Current Q Total Cost If Adopt EOQ Save

$54.43 $573.37 $627.80 $274.48

gallons

If you cover FPS Fixed Period System (T and M) T = EOQ/D = Demand T + L = Safety Stock T+L M = D(T+L)+SS

0.102

5.30 84.9 40.7 125.6

weeks

Exhibit 13.19 Greyhound Frequent Flyer Call Center Demand Data Time Period

Number of Calls Taken

Number of Busy Signal Calls Not Taken 0 0 0 0 2 1 0 4 3 3 1 0 2 3 6 7 5 3 3 4 0 0 1 0 2 0 0 0 0 0

Total Calls

15 16 45 60 62 71 77 84 75 81 69 79 66 80 76 92 85 73 78 67 62 54 51 37 48 42 32 26 22 19

Number of Abandon Calls by Customer 0 0 4 5 6 4 5 11 8 4 6 2 3 4 8 6 7 4 2 4 2 1 1 0 3 0 0 2 1 0

06:30 07:00 07:30 08:00 08:30 09:00 09:30 10:00 10:30 11:00 11:30 12:00 12:30 01:00 01:30 02:00 02:30 03:00 03:30 04:00 04:30 05:00 05:30 06:00 06:30 07:00 07:30 08:00 08:30 09:00 Totals Average Std Deviation Minimum Maximum

1744 58.1 22.9 15 92

103 3.4 2.8 0 11

50 1.7 2.0 0 7

1897 63.2 26.6 15 105

15 16 49 65 70 76 82 99 86 88 76 81 71 87 90 105 97 80 83 75 64 55 53 37 53 42 32 28 23 19

Exhibit 13.20 Greyhound Current CSR Staff Schedule for Horizon Airlines Service Rep 06:30 07:00 07:30 08:00 08:30 09:00 09:30 10:00 10:30 11:00 11:30 12:00 12:30 PM 01:00 01:30 02:00 1 X-------------------------------------------------------------------(----)----------------------------------(Lunch) (Lunch) -----------------------------------------------(----)------------------------2 X------------------------------------------------------------------------(----)------------------------------------------(Lunch) (Lunch) ------------------------------------------(----)----------------3 X--------- --------------------------------------------(----)------------------------------------------------(Lunch) (Lunch) ----------------------------(----)--------------------4 X--------------------------------------------(----)--------------------------------------------------------(Lunch) (Lunch) -------------------(----)--------------5 X-----------------------------------------------------------------------------------------------(----)--------------------(Lunch) (Lunch) --------------(----)----6 X----------------------------------------------------------------------(----)--------------(Lunch) (Lunch) -------------------(----) 7 X-------------------------------------(----)--------------------(Lunch) (Lunch) --------------8 X------------------------------------------(----)----------------------------(Lunch) (Lunch) 9 X---------------------------------------------------(----)-----(Lunch) (Lunch) 10 11 12 13 Avail CSR (Min) 60 60 90 150 150 150 150 180 210 210 180 180 180 150 135 180 Current # CSRs 2 2 3 5 5 5 5 6 7 7 6 6 6 5 4.5 6 Target # CSRs Short/Excess (-/+) Short/Excess (-/+)

Exhibit 13.8 Greyhound Frequent Flyer Call Mix

Type of HA Call

Redeem Problem Resolution Manage Accounts Travel Advice

Standard Percentag Stsd Time Time per e of Total per Call Call Calls (%)

115 175

61% 25%

70.15 43.75

240

19.2

180

10.8

Rapido Burrito - Customer Survey Data Customer Number 1 2

Menu was easy to read Order was prepared correctly Food was tasty Food was served hot

4 4 5 4

3 4 3 2

5 5 4 3

4 3 3 1

5 4 4 5

5 5 5 5

5 5 4 3

5 5 3 4

Employees were courteous and polite

Restaurant was clean Value for price paid Overall satisfaction Likely to dine with us again? Likely to recommend us to friends?

5 5 4 4 4

5 4 3 3 2

4 3 4 3 3

3 2 3 2 2

4 5 4 4 4

5 5 5 5 5

4 3 4 3 3

4.6

3.6

4.0

2.7

4.4

5.0

4.0

How often do you eat at Rapido Burrito? First time, less than once/month, 1-3 times a month, weekly, [1,2,3,4]

What was the main ingredient: chicken, beef, pork, beans [1,2,3,4]

Average score: items 1-7

Overall Satisfaction vs Average Scores on Items 1 6.0

Average 1-7 Scores

Customer survey responses

5.0 4.0 3.0 2.0 1.0 0.0

Overall Satisfaction

5 4 4 5

5 5 5 5

3 4 3 2

5 5 4 3

3 3 2 2

5 4 4 5

5 5 5 4

5 4 3 3

5 5 5 5

5 4 5 5

5 3 4 5

5 5 4 5

5 5 4 3

4 5 4 4 4

4 5 5 5 5

5 4 3 3 2

3 3 4 3 3

5 4 2 2 2

4 5 4 4 4

5 5 5 5 5

3 3 4 3 3

5 5 5 5 5

4 5 4 4 4

5 5 5 5 5

4 3 3 3 3

3 3 4 3 3

4.4

4.7

3.6

3.9

3.3

4.4

4.9

3.6

5.0

4.6

4.3

4.9

4.0

3.9

ge Scores on Items 1-7

Likelihood to Dine Again vs Overall SatisfactionR² = 0.779

R² = 0.7002

Likelihood to Dine Again

5 4 3 2

1 0 0

Overall Satisfaction

R² = 0.779

5 5 5 5

Avg Std. dev. 0.70 4.64 0.75 4.32 0.87 4.00 1.37 3.72

Customer survey responses Menu was easy to read Order was prepared correctly Food was tasty Food was served hot

Avg 4.64 4.32 4.00 3.72

4 3 3 1

5 4 5 5

4.16

0.55

Employees were courteous and polite

4.16

3 2 3 2 2

4 5 4 4 4

5 5 5 5 5

4.16 4.08 3.96 3.64 3.56

0.75 1.08 0.79 0.99 1.08

Restaurant was clean Value for price paid Overall satisfaction Likely to dine with us again? Likely to recommend us to friends?

4.16 4.08 3.96 3.64 3.56

2.7

4.6

5.0

4.15

0.66

2.44

Count #1 = 7

#2 = 6

2.04

Count #1 = 10

#2 = 7

Std. dev. 0.70 0.75 0.87 1.37 0.55 0.75 1.08 0.79 0.99 1.08

#3 = 6

#4 = 6

#3 = 5

#4 = 3

Rapido Burrito Weights of Burritos (Pounds) Sample Number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43

1.43 1.43 1.34 1.34 1.66 1.60 1.35 1.63 1.47 1.54 1.48 1.73 1.55 1.53 1.61 1.49 1.47 1.38 1.44 1.48 1.50 1.40 1.57 1.57 1.51 1.51 1.41 1.60 1.52 1.56 1.57 1.48 1.57 1.51 1.51 1.46 1.53 1.44 1.47 1.59 1.51 1.65 1.59

1.40 1.68 1.29 1.62 1.46 1.53 1.31 1.71 1.50 1.72 1.48 1.49 1.45 1.46 1.39 1.47 1.52 1.78 1.44 1.56 1.60 1.47 1.54 1.44 1.38 1.74 1.60 1.52 1.43 1.57 1.52 1.68 1.54 1.46 1.72 1.62 1.49 1.33 1.50 1.52 1.50 1.56 1.73

Sample Average 1.84 1.56 1.50 1.54 1.62 1.42 1.61 1.52 1.57 1.56 1.65 1.59 1.46 1.37 1.55 1.63 1.59 1.52 1.40 1.55 1.37 1.44 1.40 1.54 1.45 1.48 1.57 1.52 1.69 1.56 1.53 1.50 1.45 1.48 1.52 1.56 1.57 1.48 1.59 1.54 1.56 1.55 1.45 1.44 1.64 1.58 1.33 1.45 1.46 1.45 1.50 1.58 1.68 1.56 1.45 1.52 1.40 1.45 1.56 1.56 1.65 1.58 1.47 1.54 1.50 1.54 1.70 1.56 1.43 1.55 1.38 1.49 1.47 1.50 1.63 1.47 1.30 1.42 1.57 1.56 1.38 1.46 1.38 1.53 1.29 1.54

All samples Mean 1.51 Standard Deviation 0.108375 Minimum 1.29 Maximum 1.84

1.70 1.65 1.60 1.55 1.50 1.45 1.40 1.35 1.30 1.25 1.20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

44 45 46 47 48 49 50

1.33 1.42 1.39 1.53 1.60 1.32 1.44

1.38 1.49 1.48 1.67 1.47 1.39 1.48

1.32 1.49 1.50 1.38 1.42 1.54 1.49

1.34 1.47 1.46 1.53 1.50 1.42 1.47

1.25 1.30 1.35 1.40 1.45 1.50 1.55 1.60 1.65 1.70 1.75 1.80 1.85 1.90

40 35 30 25

Frequency

Bin

Bin Frequency Cumulative % 1.25 0 0.00% 1.30 3 2.00% 1.35 9 8.00% 1.40 16 18.67% 1.45 17 30.00% 1.50 34 52.67% 1.55 22 67.33% 1.60 23 82.67% 1.65 11 90.00% 1.70 7 94.67% 1.75 6 98.67% 1.80 1 99.33% 1.85 1 100.00% 1.90 0 100.00% More 0 100.00%

20 15

10 5 0 1.25

1.30

Sample Averages

15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

1.35

1.40

1.45

Histogram 120.00%

100.00%

80.00%

60.00%

40.00%

20.00%

0.00% 1.45

1.50

1.55

1.60

1.65

1.70

1.75

Bin Frequency

Cumulative %

1.80

1.85

1.90 More

OM4 C18 TN Exhibit AWS - Single Project Crash to 35 weeks

Activity ID A B C D E F G H I J

Description Precedence Conceptual Design none Preliminary Design A Final Design B Environmental Permit Application Preparation B Environmental Permit Review and Approval D Building Permit Application Preparation E Building Permit Review and Approval F Property Acquisition B Bid Project C, H Construction Start (Dummy Activity) G, I

Regular Time (weeks) 4 12 19 8 4 2 4 20 4 0

Normal Crash Time Cost (weeks) Estimate 3 10 16 5 4 1 4 18 4 0

Crash Cost Estimate

$30,000 $33,500 $52,000 $58,000 $59,000 $76,000 $48,000 $58,200 $38,000 $38,000 $35,000 $38,000 $6,000 $6,000 $90,000 $115,000 $6,000 $6,000 $0 $0

#######

Crash Weeks

Additional Crash Cost

Cash Cost per Week

$3,500 $6,000 $17,000 $10,200 $0 $3,000 $0 $25,000 $0 $0

$3,500 $3,000 $5,667 $3,400 $0 $3,000 $0 $12,500 $0 $0

Total Project Cost =

$404,167

1 2 3 3 0 1 0 2 0 0

# of Crashes Made 1 2 1

Additional Cost $3,500 $6,000 $5,667 $0 $0 $0 $0 $25,000 $0 $0

$40,167

TN Exhibit 1A - AWS -- Single Project -- Baseline Network Diagram - Project Complete in 40 Weeks

0 0

35 1

0 16

40 0

0 40

Legend

ST LS

40 0

34 6

TN Exhibit 1B - AWS -- Single Project -- Baseline Network Diagram - Project Complete in 39 Weeks

0 0

33 1

0 Crash B by 1 weeks= at $3,000

0 14

38 0

0 38

Legend

ST LS

32 6

38 0