Operations Management, 5th Edition Solution Manual by Ace Test Banks

Operations Management, 5th Edition

By Dan Reid

Reid & Sanders Operations Management, 5th edition

Instructor’s Manual

Chapter 1: Introduction to Operations Management

Overview This chapter provides the definition of operations management. The role and importance of operations management in an organization are described, along with operations decisions that are made by managers. The transformation process from inputs to outputs is introduced. The differences between manufacturing and services are described. The historical developments and current trends in operations management are discussed, including the impact of information systems. Finally, the interaction between operations management and other business functions are described.

Teaching Tips and Strategies I begin by giving examples of situations where the students have been affected by operations decisions. Then I define operations management. I explain how operations management is the foundation of the firm, which is supported by the business functions. I point out that this does not make the other functions any less important. However, businesses provide a product or service to customers. Many of the key decisions related to that product or service fall within the operations function. Students really enjoy the 7-minute clip I show from the movie “The Hudsucker Proxy” that demonstrates the different business functions in an organization (The idea for using this video clip came from Brown et al. 1996). This 1994 Warner movie includes the cast of Tim Robbins, Jennifer Jason Leigh, and Paul Newman. The scene I show, which is 63 minutes after the start of the movie, begins with the main character presenting the hula hoop to the board of directors in an effort to convince them to agree to make and sell it. Then the scene moves quickly back and forth between production, marketing, and accounting. The scene ends with a dramatic sales increase where kids literally run to a retailer to buy hula hoops. This can lead into a discussion about the different business functions. Next, I describe the differences and similarities between manufacturing and services and the transformation process. I briefly discuss all the types of operations decisions. Finally, I discuss the current trends in operations management. In class, I often ask students to name companies that dominate their sector through excellence in operations management. Students have little difficulty identifying companies that dominate their sectors. Often, Wal-Mart, McDonalds, and Dell are mentioned. I then ask them to tell me on what basis are these companies effective in terms of operations. Here students often have more difficulty. Separating operational excellence from other aspects of a well-run company is more difficult. Often, they mention marketing, pricing, or image. To get them back on track, I ask them to tell me what inputs are being transformed into what outputs and how their example excels in this. The examples of Dell transforming components to completed computers, and WalMart’s close relationship with Proctor & Gamble help them understand what a transformation process is.

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Linking operations management with other business functions None of my students major in operations management, so it is useful to put it in perspective and link it to other business functions. Several of the topics toward the end of the chapter can help. Using Figure, 1-11, I introduce the concept of the flow of information between operations and other business functions. I ask the class to come up with examples. I try to involve areas where students believe there is little link, such as marketing. I ask the students to come up with four items for a piece of information: 1) What function would have primary responsibility? 2) Why would this function need it? 3) What other function may need this information? 4) Why would they need it? For example, the amount of time it would take to complete accepted orders would be the responsibility of manufacturing. They would need it to schedule work. However, sales would also use this information to have an idea of how quickly a newly accepted order could be completed. Plan for the rest of the book and for the course The less than completely engaged student may find the semester to be just a sequence of unrelated topics. Figure 1-6 can give them some perspective. We start with strategic topics that have a long horizon and set the environment for later topics. We end with day-to-day and hourto-hour topics, such as sequencing and scheduling. I also point out that we cover forecasting before inventory because uncertainty of demand is what makes inventory control difficult. Introducing ERP The text introduces ERP in the section, Today’s OM Environment. The main discussion of ERP is in the Resource Planning chapter. Many students find it difficult to understand. I try to introduce some of the concepts here. For example, Figure 1-11 helps when talking about the need to share information across functions, and the supply chain material along with the John Wood links to the Practice section, help to introduce the topic of sharing among firms. I close out the discussion on ERP by pointing out that it is incredibly expensive to buy and install, but companies do. There must be significant value in doing so. Ethics One of the big issues in AACSB accreditation is ethics. The section on outsourcing will often lead to a spirited discussion. I ask the students to think in terms of who benefits and who does not. I ask them to consider the net benefit to the countries outsourcing and performing the work.

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War Stories The Relationship between Business Functions An executive at a gun manufacturer told me this story a number of years ago. He knew a VicePresident (VP) working for another gun manufacturer. The VP decided to sell bullets in boxes of 24 each. Before making this decision, the bullets were being sold in boxes of 20 each. He made this decision without consulting the operations manager and sold orders. When the operations managers were asked to process the orders, he was told that it would cost approximately $200,000 to change the setup of the machine that automatically filled the boxes with bullets. So, they ended up filling the orders by hand. Needless to say, the VP had to explain why the company had sold the most bullets ever, yet was losing money. He also did not take into account that one of their competitors consistently reacted to any changes made by gun manufacturers by cutting its prices in half and offering rebates (5% of total sales per year). The VP reacted by offering rebates as well. At the end of the year, he tried to unsuccessfully back out of the rebates. First, he decided not to offer the rebates at all. After being confronted by many lawyers representing customers, he decided to offer rebates on the difference between the sales of the last two years. After another confrontation with the lawyers, he reluctantly decided to stick to the deal, which further decreased the performance levels of the company.

Answers to Discussion Questions 1. Define the term operations management. Operations management manages the resources and the transformation processes needed to produce the company’s products and services. It involves managing people, machines, and information. 2. Explain the decisions operations managers make and give three examples. Operations managers must plan the production schedule. This entails deciding how much to produce and in what order. This information would be used to make purchasing and staffing decisions. Operations managers must manage inventory. They must arrange the inventory in the warehouse. They also facilitate the movement of inventory from the warehouse to the retail facilities or customers. Operations managers must also manage quality levels. This may include inspection of materials and the use of quality tools, such as control charts. 3. Describe the transformation process of a business. Give three examples. What constitutes the transformation process at an advertising agency, a bank, and a TV station? The transformation process involves taking the various inputs and transforming them into outputs. An advertising agency would transform the time of its staff into an advertising campaign. A bank may use the time of a teller, an input computer, and a bank branch to accept a deposit. A TV station could use the time of its production crew, the video equipment, and the studio to produce a news story.

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4. What are the three major business functions, and how are they related to one another? Give specific examples. The three major business functions are finance, marketing, and operations. Operations entail the production of a product or service and must manage the inputs to production such as workers' time, materials, and machine time to create airplane parts. Finance manages the assets—the building used for production, investments, and cash flows related to production, such as providing the required machines. Marketing generates sales of the product or service, such as finding customers for the proposed airplanes. 5. What are the differences between strategic and tactical decisions, and how are they related to each other? Strategic decisions are Decisions that set the direction for the entire company; they are broad in scope and long-term in nature. While tactical decisions are decisions that are specific and short-term in nature and are bound by strategic decisions. 6. Find an article that relates to operations management in either the Wall Street Journal, Fortune, or Business Week. Come to class prepared to share with others what you learned in the article. Students' answers will depend upon the article found. An example would be the recent articles discussing the problems the US automobile firms are facing, and are ultimately reducing the costs in producing their main outputs: automobiles and trucks. 7. Examine the list of Fortune magazine’s top 100 companies. Do most of these companies have anything in common? Are there industries that are most represented? Students should be able to find the list through their university library. While the top 100 contain firms in many different industries, students will probably notice that Oil, Finance, Retail, and Automobiles are heavily represented. 8. Identify the two major differences between service and manufacturing organizations. Find an example of a service and manufacturing company and compare them. Service organizations involve the customers in their operations to some degree, while manufacturing organizations do not. Manufacturing organizations produce a physical product that can be stored in inventory. Service organizations cannot create an inventory of the service since it is intangible. For example, Ford Motors is a manufacturer. It makes automobiles, customers have minimal contact with the operation, and they can create an inventory of vehicles. McDonalds is an example of a service organization. Customers go directly to the restaurant where they are served readily by the staff. 9. What are the three historical milestones in operations management? How have they influenced management?

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Three historical milestones that have influenced management are the Industrial Revolution, total quality management (TQM), and global competition. The Industrial Revolution changed production processes from a labor process to a machine process. TQM caused managers to be more focused on quality and preventing defects. Finally, global competition caused managers to further increase their focus on quality in order to compete in the global market. 10. Identify three current trends in operations management and describe them. How do you think they will change the future of OM? The lean systems concept is a current trend in operations management. This involves taking a total system approach to creating an efficient operation. This includes concepts such as justin-time (JIT), total quality management (TQM), continuous improvement, resource planning, and supply chain management (SCM). Companies are using the Internet to reach out to customers and suppliers directly. Amazon.com has been able to sell books and many other items directly from its warehouse. The Internet is changing how the supply chains work since we can now eliminate the “middle man” or distributor by selling directly from the factory to the end customer. Companies can also ease transactions between businesses, known as B2B commerce, by using electronic trading networks. Large information systems, called enterprise resource planning (ERP) systems, are allowing companies to increase efficiency. These large, sophisticated software programs coordinate, across the entire enterprise, the activities involved in producing and delivering products to customers. Each of these concepts makes intensive use of information and cooperation between partners. OM will most likely continue to be more information intensive and require greater cooperation among all the players in the value chain. 11. Define the terms total quality management, just-in-time, and reengineering. What do these terms have in common? Total quality management (TQM) is a philosophy that focuses on meeting the needs of the customer. TQM is not the inspection, but the prevention of defects. It involves everyone in the organization. Just-in-time is a philosophy that focuses on reducing inventory and other wastes, and is focused on producing the right number of items at the right time. Reengineering focuses on improving business processes in order to improve efficiency. Each of these techniques strives to allow more responsive and efficient production leading to higher quality and higher customer satisfaction.

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12. Describe today’s OM environment. How different is it from that of a few years ago? Identify specific features you think characterize today’s OM environment. Today’s OM environment is more global, more service oriented, and uses more information technology than that of a few years ago. Companies can outsource steps of their operation easily. Now even service operations are outsourced offshore. Information technology allows companies to cooperate more closely, create tighter supply chains, generate quicker response, and reduce wastage of resources. Also, lean systems: ERP, CRM, and cross-functional decision making. Specific features include greater outsourcing, greater use of information technology, and greater cooperation in the supply chain. 13. Describe the impact of e-commerce on operations management. Identify the challenges posed by e-commerce on operations management. E-commerce has greatly impacted the relations companies have with their suppliers and customers. This allows tighter co-operation with suppliers, which can lead to quicker and more accurate deliveries, and lower inventory. Suppliers can become involved with producers early in the product design. This can lead to better quality and lower production costs. E-commerce also creates better links between companies and their customers. This improves their ability to predict and provide what the customers want. Further, e-commerce shifts the balance between performing a task in-house and outsourcing. This has lead to greater outsourcing as companies focus more intensely on their core competencies. As communication and offshoring become easier, not only can a company reach wider markets, but they are also exposed to competition from wider markets and from firms in their markets that have improved their competitive position by effective use of the opportunities available through e-commerce. 14. Find a company you are familiar with and explain how it uses its operations management function. Identify what the company is doing correctly. Do you have any suggestions for improvement? Students’ responses will depend on the company chosen. Many undergraduate students have worked in food services, such as fast food restaurants and supermarkets. They should be able to identify how the materials are ordered and handled, how the operations are staffed, and how the customers are served. Answers to Case – Hightone Electronics, Inc. 1. Explain why operations management is critical to the success of a business. Why would developing an Internet-based business require different operations considerations for HEI? Is George Gonzales correct in his assessment that this would not be “business as usual”? Operations management is critical because it determines the quality of the product and the delivery performance of the product. Different operations management considerations would

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occur for HEI with Internet-based division for several reasons. First, they would need some procedure for processing the orders from the Internet. Products were offered for sale through a catalog that was mailed to prospective customers every four months. The addition of the Internet-based division increases the customer base. This would change their demand. So now they have to adjust forecasts and production plans accordingly. In addition, they may receive orders from abroad, and they would then have to deal with tariffs, duties, and customs. Yes, George Gonzales is correct in his assessment that this would not be “business as usual.” 2. Recall that HEI wishes to continue its reputation of high quality and service. Identify key operations management decisions that need to be considered. How different will these decisions be for the Internet-based business? The high level of service will be more difficult to deal with. They have built a reputation on delivering most items within 48 hours of the order. This will be more difficult since demand will increase once the Internet-based division is launched. Forecasting can no longer rely on past demand since it is not known for this division. They will have to rely on qualitative forecasting techniques for this division’s demand. They need to be prepared by having excess capacity. They should also increase their inventory levels before the new division is brought on line. Answers to Case – Creature Care Animal Clinic (A) 1.

Identify the operations management problems that Dr. Barr is having at the clinic. The two operations management problems described in the case are scheduling and inventory control. Scheduling problems include having both excess and inadequate staff. Inventory problems include stock-outs and obsolescence.

The schedule Dr. Barr set up worked well at the clinic where she was a resident. What are some of the reasons why it might not be working here? There are several factors that could make a schedule that worked at another clinic not work for Dr. Barr. The community may be different, with different working patterns and different pets.

Identify some of the reasons why the clinic is having inventory problems. There is no formal system to control inventory. The process of placing purchase orders is not centralized. The staff is ordering for their needs without coordination, policies, or knowledge of demand.

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What should Dr. Barr have done differently to avoid some of the problems she is currently experiencing? Dr. Barr should have planned her operations better. She should have studied her market in order to get a better idea of weekly and daily demand. She should have set processes in place to control inventory and to schedule staff.

What suggestions would you make to Dr. Barr now? Dr. Barr should now put in place procedures that allow the clinic to have better control over staff scheduling and inventory. The clinic should collect data so that they understand demand patterns, both demand for staff and demand for supplies. Once demands are known, the clinic should develop a scheduling system and inventory control that meets demands without excess expense.

Complete Manuals for the Interactive Cases also are available on the companion site: www.wiley.com/college/reid.

Interactive Learning The student version of the web site for this textbook includes PowerPoint chapter review, selected solutions, several interesting company tours, web links, and business simulations. These include several demonstration simulations that can be used to introduce topics in operations management. For example, the packaging line and tire manufacture simulations demonstrate the concept of transformation, and the bank and supermarket simulations demonstrate competition for scarce resources.

In Class Exercises I would like to thank Professor William A. Ruch for the use of this interesting exercise on the transformation process. The following exercise helps the students think about operations management issues for an item they are all familiar with – the backpack. The following exercise takes approximately 40 minutes for the students to answer in class by forming teams. I give it out at the end of class, while allowing enough time, so that students can leave as soon as they have completed the exercise. I give the students the option of working individually or in teams of up to five students. When I hand out copies of the exercise, I ask the students to take one copy per person and one copy per team. This way each student will have a copy of the assignment. I only require one copy per team to be submitted for grading.

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TRANSFORMATION EXERCISE

Instructor’s Manual

HAND IN ONE CLEAN COPY

Please provide names and signatures (only for team members who are present today): NAME (Print) SIGNATURE 1. 2. 3. 4. 5. One of the members of your team must have a backpack to carry books (if not, borrow one from another team). The purpose of this exercise is to get more specific about the inputs, transformation, and outputs that we read about in Chapter 1. Examine that backpack and then answer the following questions on the front and the back of this sheet. 1. What are the material inputs needed to make a backpack? Be specific. You should list at least six, maybe twelve or more depending on the design of your backpack.

2. What other MATERIAL (not equipment) inputs are needed that are necessary to produce and deliver the backpack to the customer, but are not part of the backpack itself?

3. What types of production workers (skills) are needed to manufacture the backpack? Name four or more like "material cutters."

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4. What types of equipment, tools, furnishings, etc. are needed?

5. Describe the PROCESS. In other words, what are the major steps necessary to produce the backpack? Begin with "ordering of raw material" and end with "deliver to the retailer."

6. Your primary output is the backpack. But what services do you provide to your customer along with the backpack? Name three or more.

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Reid & Sanders Operations Management, 5th edition

TRANSFORMATION EXERCISE ANSWER KEY One of the members of your team must have a backpack to carry books (if not, borrow one from another team). The purpose of this exercise is to get more specific about the inputs, transformation, and outputs that we read about in Chapter 1. Examine that backpack and then answer the following questions on the front and the back of this sheet. 1. What are the material inputs needed to make a backpack? Be specific. You should list at least six, maybe twelve or more depending on the design of your backpack. Zippers

Thread

Glue

Logo

Buckles (for adjusting straps) Padding for straps

Fabric for straps

Fabric for main parts of backpack 2. What other MATERIAL (not equipment) inputs are needed that are necessary to produce and deliver the backpack to the customer, but are not part of the backpack itself? Production inputs: Needle, Spools (that hold thread) Delivery inputs: Boxes, Mailing labels for boxes, tape to seal boxes, and covering to protect backpack during shipment 3. What types of production workers (skills) are needed to manufacture the backpack? Name four or more like "material cutters." Sewing workers Gluing staff Material handlers Assemblers Quality control staff 4. What types of equipment, tools, furnishings, etc. are needed? Sewing machine Cutting machine and/or scissors Plastic molding machine to make buckles Tables for workstations Chairs for workers

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5. Describe the PROCESS. In other words, what are the major steps necessary to produce the backpack? Begin with "ordering of raw material" and end with "deliver to the retailer." Ordering of raw material Make buckles Cut fabric Make straps Sew zippers to fabric Attach straps and buckles Glue logo on Inspection Pack in boxes Deliver to retailer 6. Your primary output is the backpack. But what services do you provide to your customer along with the backpack? Name three or more. (Customers are both retailers and students) • Customized backpacks (color, size, features, such as padded back, university logo) • Vendor managed inventory (VMI) – we manage the retailer’s inventory of our backpacks • Lifetime warranty on the backpack (repair, replacement) • Repair service • Web site that provides information on the variety of backpacks available, along with other information such as a retailer directory

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Chapter 2: Operations Strategy and Competitiveness

Overview This chapter explains the role and development of a business strategy. It also explains the role and development of operations strategy, and how the operations and business strategies are interrelated. Next, the chapter describes the competitive priorities of the operations function, the strategic role of technology, and finally, productivity measures.

Teaching Tips and Strategies I begin by listing and briefly describing each of the four competitive priorities listed below. For each one, I ask the students to give me an example. • Cost • Quality – consistency, high-performance design • Time – rapid, on-time • Flexibility – product, volume Students often have the most difficulty grasping the last of these – Flexibility. Often companies competing on flexibility are smaller and not well known. The examples given in the book are, indeed, smaller companies than those used for Cost, Quality, and Time. I point out that these operations are often what we call a job shop. We then discuss whether any student has visited a machine shop or done their own brake job where the discs or drums are needed to be turned. Often, a student has a family member who is a shade tree mechanic and can explain to the rest what we are talking about. Then I ask students to give examples of successful companies. Together, we determine which competitive priorities each company has focused on. This leads to the point of the need to excel in a few priorities and be adequate in the rest. I continue by discussing the need to match business strategy with operations strategy and, for existing companies, current strengths, or core competencies. We discuss what operational strengths existing companies have and the core competencies that companies value. Productivity is not Profitability Of all the concepts in this chapter, often students have the most difficulty with productivity. Students often have trouble separating productivity from profitability.

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It is important to stress that productivity is a measure of output vs. input, not price vs. cost. While students can usually grasp the difference when dealing with one input (such as number of pastries / hours of labor), they may get confused with multi-factor productivity where dollar values are used as a measure of quantities. It is important to stress that the dollar values are used so that we can weigh the impact of changes in the amount used of several inputs. So long as prices are stable, this works. If prices and quantities change at the same time, we will run into trouble. They may also believe that if productivity is up then so is profitability. The airline industry can be used to show how they may not be related. Once airlines were deregulated, the switch to a “hub-and-spoke” operation allowed many airlines to increase outputs (revenue passenger miles) while maintaining inputs (crew, aircraft, fuel) at or near the previous levels. However, around the same time the airlines entered a price war. The result was that, while they were more productive, they were charging much less per revenue passenger mile and, therefore, were also much less profitable. The formulas and sample problems in the book can exacerbate this problem. The measure of input used in the multi-factor cases is, indeed, dollars spent. I stress that this is done to allow us to add together dissimilar inputs. I also stress that it is only appropriate when the amounts purchased per dollar will be the same, such as two companies competing in the same market at the same time. When comparing a company’s current situation with the past or future, prices are likely to change, and not by the same amount for each input. Then, we would need to use a more robust method or adjust prices using producer price indexes for the inputs involved. Finally, I describe some key information from articles by Skinner (1969) and Stalk et al. (1992). Skinner provides a helpful explanation about the need to link operations decisions to business strategy. Stalk et al. compare the strategies of Wal-Mart and Kmart. This is good to discuss since Wal-Mart manages its operations effectively. It discusses the use of cross-docking, information technology, and coordinated operations.

War Stories Wal-Mart’s Success Stalk et al. (1992) point out the reasons for Wal-Mart’s success. It chose to focus on everyday low prices and quality. Wal-Mart successfully matched its operations decisions to this strategy. Stalk et al. point out its remarkable success, compared to its competitors. The key to its success in achieving its goals was its replenishment system. Wal-Mart uses “cross-docking” as the

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method of replenishment. Goods are delivered to Wal-Mart’s warehouses, where they are selected, repacked, and then dispatched to stores, often without ever sitting in inventory. Instead of spending valuable time in the warehouse, goods just cross from one loading dock to another in 48 hours or less. Cross-docking allows Wal-Mart to reduce shipping costs by using full truckloads. The goods are purchased by the truckload from the manufacturers. Then, full truckloads are packed at the warehouse with a variety of items from different manufacturers, to be delivered to a logical sequence of stores. The use of everyday low prices causes the demand to be more predictable than when sales promotions are used. Wal-Mart uses data mining to analyze the demand data. Also, they electronically share sales (POS) information with their manufacturers so that the manufacturers can react to changes in the demand of their products. In addition, the use of cross-docking allows them to replenish twice a week in an industry where the average replenishments are twice a month. This allows them to react more quickly to changes in demand in order to decrease the chance of stockouts. Wal-Mart continued The Stalk et al. (1992) paper also points out the logistic advantages of “low prices every day” over the use of price promotions. Low prices lead to more predictable demand. This makes ordering and coordinating shipments much easier. This makes it easier, and most likely less costly, to be a supplier to Wal-Mart. While Supply Chain Management will be discussed in a later chapter, it can be mentioned here that one of the most famous cases of an SCM concept, Vendor Managed Inventory, is the relationship between Wal-Mart and Proctor & Gamble for the stocking of Pampers. The Stalk paper also describes cross docking and mentions that most companies are unable to implement it because of the high demands of coordination. Meeting these coordination demands is an example of the use of information technology.

Answers to Discussion Questions in Textbook 1. Explain the importance of a business strategy. It is important for a company to have a clear plan of action since we are in a highly competitive, global environment. A clear strategy allows the company to work toward common goals. 2. Explain the role of operations strategy in a business. The role of operations strategy is to provide a plan for the best usage of resources in order to

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achieve the objectives set in the business strategy. These resources include employees, machines, technology, and information. 3. Describe how a business strategy is developed. A business strategy is developed after the company’s mission, an understanding of the market (environmental scanning), and the core competencies of the company have been identified. The mission involves the determination of what business to be in, who the customers will be, and how the company’s beliefs will define the business. Environmental scanning includes an examination of the current trends in the market, economy, political environment, and society, resulting in an identification of opportunities and threats. Finally, core competencies are the strengths of the company. The company should match its strengths to its business strategy. 4. Describe how an operations strategy is formulated from the business strategy. The operations strategy is formulated by first determining the competitive priorities of the firm. Then, these priorities are translated into production requirements related to the structure and infrastructure of the firm. The structure involves the decisions related to the design of the production process, while the infrastructure involves decisions related to the planning and control of the operation. 5. Explain what is meant by the term competitive priority and describe the four categories of competitive priorities discussed in the chapter. Competitive priorities are capabilities that the operations function can develop in order to give a company a competitive advantage in its market. The categories of competitive priorities are cost, quality, time, and flexibility. Cost involves a focus on keeping costs low. Quality focuses on the ability of the product or service to meet the specifications or requirements of the customer. The competitive priority of time focuses on speed of delivery and on-time delivery performance. Flexibility relates to the ability to offer a wide variety of goods or services. 6. Find an example of a company that makes quality its competitive priority. Find another company that makes flexibility its competitive priority. Compare these strategies. Toyota focuses on producing a quality car. It has one of the lowest defect rates in the industry. Dell promises rapid delivery of whatever configuration customers order. So they have focused on the flexible customization and delivery for customers.

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7. What is meant by the terms order qualifiers and order winners? Explain why they are important. Order qualifiers are competitive priorities that we must meet in order to be qualified to sell in that market. Order winners are those competitive priorities that will help us win orders. It is important to understand whether competitive priorities are order qualifiers or order winners since our decisions about priorities will determine our level of success. 8. Describe the three types of technologies. Explain the strategic role of technology. The three primary types of technologies are: product technology, process technology, and information technology. Product technology is any new technology developed by a firm, which allows the firm to offer improved products. New generations of cellular telephones are a current example. Process technology allows a firm to create goods and services more effectively. Cash register scanners are an example where supermarkets can process customers through the checkout line faster and keep better records of items sold. Information technology impacts communication, processing, and storage of information. An example of improved operations through this technology would be cross docking. These technologies improve products, processes, and coordination. Effective use of emerging technologies can give a firm a competitive advantage. Also, technology may require the company to rethink its strategy. 9. Describe the meaning of productivity. Why is it important? Productivity measures how efficiently an organization converts inputs into outputs. For example, can one automobile manufacturer produce more cars of the same size per factory employee? Productivity is important because it determines the cost structure. 10. Explain the three types of productivity measures. The three types of productivity measures are total productivity, partial productivity, and multifactor productivity. Total productivity utilizes all inputs and outputs in the calculation. Therefore, we are calculating the entire organization’s productivity. Partial productivity involves calculating the productivity for only one type of input, such as machines, labor, or materials. Finally, multifactor productivity is the ratio of outputs to several, but not all inputs.

See Solutions Manual for Answers and Solutions to Problems

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Answers to Textbook Case – Prime Bank of Massachusetts 1. Why is the operations function important in implementing the strategy of an organization? Explain why the changes put in place by Victoria Chen and her team can either hurt or help the bank. The operations function is important in implementing the strategy of an organization because it will determine how well the strategy is implemented. For example, having the wrong staffing level for the 24-hour customer service department would either cause costs to increase or customers to become frustrated by the long waiting times. The operations decisions will affect both the costs and the level of customer service provided, which could affect growth in demand. 2. Develop a list of changes for the operations function that should be considered by the bank. Begin by identifying operations management decisions that would be involved in operating a bank, for example, layout of facility, staff, and drive-through service. Then identify ways that they can be improved at Prime Bank in order to support the strategy focused on customer service. The operations management decisions that would be involved in operating a bank are the layout, staffing levels, and facilities. The bank should keep track of the waiting times during different time periods in order to improve the staffing levels. The design of the facility also affects waiting times. For example, the bank may want to add another drive-through lane in order to decrease waiting times. The case noted problems with the size of the parking lot. When the waiting times decrease, customers return quickly to their parking spot, thus freeing the spot for another customer. 3. Think of the improvements identified in answering question 2. How different would these improvements be if the bank had a strategy of cutting cost rather than supporting customer service? These improvements would be different if the strategy was to cut costs rather than support customer service. In that case, the bank would try to push customers to use the ATM in order to reduce the number of tellers on staff.

Answers to Textbook Case – Boseman Oil and Petroleum (BOP) 1. Identify the potential strategic advantages and disadvantages for BOP in outsourcing the boat logistics service to Logistics-Offshore. Explain the strategic implications of each.

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An advantage of outsourcing boat operations would be to allow BOP to concentrate on exploration and production activities. Since BOP had traditionally focused on these activities, they are assumed to be BOP’s core competencies and the source of their competitiveness. Logistics-Offshore specializes in boat operations. As this is their core competency, they may be able to offer these services more reliably and at a lower price than those offered by BOP. A disadvantage could be that BOP would no longer be in direct control of boat operations. While Logistics-Offshore would strive to keep its customers happy, BOP cannot expect to receive higher priority from other customers in the case of limited resources. 2. Identify the type of information Jeff Kessinger needs to gather and evaluate in order to make his decision. Kessinger needs to assess the cost and reliability of the two alternatives. He needs to know the costs incurred in running the boat operations at BOP, and whether they have faced any problems. He will then need to obtain a quote from Logistics-Offshore that documents their charges and their promised level of service.

Complete Manuals for the Interactive Cases also are available on the companion site: www.wiley.com/college/reid.

Interactive Learning The web links for chapter two include links to a large and small firm in aerospace, an association dealing with manufacturing, and links to two firms in air cargo. While Boeing and Sensenich are aerospace companies, their market, products, resources, and mission are quite different. Is this information readily available on their websites? An in-class visit to ame.org can highlight what the issues are in this field. Check the current stories’ titles in the Target magazine. The site also has a Career Center. Browse the current job openings to give students a feel for the jobs available in operations. Our students are usually quite motivated by the desire to land a well-paid, interesting job with a good firm.

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In-Class Exercises The following exercise takes approximately 45 minutes for the students to answer in class by forming teams. The operational decisions used to support the strategy may either be researched by the students or may involve educated guesses. The answers to the exercise will depend on the companies selected. I give it out at the end of class, while allowing enough time, so that students can finish and leave as soon as they have completed the exercise. I give the students the option of working individually or in teams of up to five students. When I hand out copies of the exercise, I ask the students to take one copy per person and one copy per team. This way each student will have a copy of the assignment. I only require one copy per team to be submitted for grading.

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STRATEGY EXERCISE

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HAND IN ONE CLEAN COPY

Please provide names and signatures (only for team members who are present today): NAME (Print) SIGNATURE 1. 2. 3. 4. 5.

The purpose of this exercise is to evaluate the strategies of several companies. Select two industries, such as restaurants or retailers, to evaluate for this exercise. For each industry, choose two companies to evaluate. 1. For the first industry, describe the strategy of the two companies you selected. What are their order winners?

2. Describe how the operational decisions of each company have been used to support the strategy.

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3. For the second industry, describe the strategy of the two companies you selected. What are their order winners?

4. Describe how the operational decisions of each company have been used to support the strategy.

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References Gardiner, S. C., Blackstone, J. H., Jr. and Gardiner, L. R., “The Evolution of the Theory of Constraints,” Industrial Management, 36(3), 1994, 13 – 16. Goldratt, E. M., It’s Not Luck, Croton-on-Hudson, NY: North River Press, 1994. Goldratt, E. M., The Haystack Syndrome, Croton-on-Hudson, NY: North River Press, 1990. Goldratt, E. M., and Cox, J., The Goal (2nd ed.). Great Barrington, MA: North River Press, 1992. Goldratt, E. M., and Fox, R. E., The Race, Great Barrington, MA: North River Press, 1986. Srikanth, M. L., and Cavallaro, Jr., H. E., Regaining Competitiveness: Putting The Goal to Work, Great Barrington, MA: North River Press, 1993. Skinner, Wickham, “Manufacturing – Missing Link in Corporate Strategy,” Harvard Business Review, May – June, 1969, 1 – 8. Stalk, George, Evans, Phillip and Lawrence E. Shulman, “Competing on Capabilities: The New Corporate Rules of Strategy,” Harvard Business Review, March - April, 1992, 57 - 69.

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Chapter 3: Product Design and Process Selection Overview. This chapter explains the definition, strategic impact and steps of product design. It discusses the use of break-even analysis to decide which product(s) to produce. This chapter also describes the different types of production processes and explains the steps used in process design and selection. It presents the process flowchart and the impact of technological advancements on process design. Finally, the issues of designing service operations are discussed.

Teaching Tips and Strategies. This chapter consists of two main segments: product design and process selection. I start by focusing on product design. I explain the strategic impact and steps. At times, I have demonstrated the House of Quality diagram, pointing out that it can be used for product design or quality improvements. I think it is important to demonstrate this diagram using a product or service that the students can relate to and for which they have some intuition, such as a food item or a class. When this type of example is used, students enjoy helping the instructor fill in the information in the diagram such as the relationships. Next, I discuss break-even analysis. I expand upon the break-even analysis presented by pointing out how to effectively use the calculation, since there are times when the assumptions made are not valid. For more information on this topic, please see the TOC Tips section for this chapter in the TOC supplement. Design for manufacture More students have experience trying to fix something than they do in producing (manufacturing) something. I solicit examples from the class of products that were difficult to repair because disassembly was not considered when the item was designed. Their examples will vary, but they usually have some. My example is an old car I had where the defroster fan was inexpensive, but the repair was not. To remove the inexpensive fan took more than 2 hours of shop time because of the way the dashboard was built around the fan. Concurrent engineering Many of the examples in design for manufacture and design for maintenance can be used to point out the value of concurrent engineering. I point out that all that inter-group consultation may cost

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time, but if it avoids designing a product that would be difficult to build or maintain, the company saves money in the long (or even intermediate) run. I explain the different types of processes, followed by examples of each. We discuss how to select the appropriate process. This discussion addresses the information needed to make the decision and the impact of the selected process on performance measures. I think it would be very helpful to use a practical exercise to focus students on discussing and understanding product design and process selection issues. I recently found an interesting article by Griffin (1997) which explains the use of origami to teach operations management. Griffin explains an active learning experiment in which students work in teams to produce origami figures. I think that this exercise would be effective to use when this material is taught (preferably near the beginning of semester) since it focuses on product and process design issues. It also provides a good transition into the other topics that will be introduced in more detail throughout the semester. The students will begin to assimilate the material, and ask questions related to this chapter and the material from future chapters. These questions can lead to interesting class discussions. Figure 3-2 presents break-even analysis as the choice between taking on a new proposal or not. Solved problem 2 expands this to the choice between two products. Process choice Students have a relatively easy time understanding project, and line processes. Many of my students have either worked in construction, or have friends and family members who have. Construction yields many easy to understand examples of a project process. Line processes are also easy to understand because the assembly line is well known in our culture. The examples of chemicals for repetitive process may be less familiar to students. Pasta making is easier to comprehend. I ask them to imagine the machine that ejects a long ribbon of spaghetti. Batch processes in manufacturing are the least familiar for many students, though they will be familiar with a batch of cookies. Frequently, I have students that have either done some car repair or have had family members that have. When doing a brake job, if the discs (or for older cars, drums) are scored, they need to be turned. As there are four, the machine must be set up to turn the disc, and then a batch of four is processed.

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War Stories Flaw in Product Design Causes Fine (This story was told to me by a source who chooses to remain anonymous.) I worked at a consumer products company when pumps for dispensing toothpaste were used for a hair- styling product. The pumps were designed so that a molded piece fit into the bottom of the tube. This piece would then be pulled up as the product was used. The pump was designed so that the molded piece would not go down. Since the toothpaste companies used very large volumes of the pumps, the pumps were redesigned to better meet their needs. Specifically, small grooves were inserted into the outer edge of the molded piece. This allowed the toothpaste manufacturers to speed up their production process because the piece could be forced on more easily since air would escape through the grooves. We were not concerned about the design change because we did not realize the impact it would have on our inventory. When the piece moves up, there is an empty space in the bottom of the pump. We failed to realize that the water within the product would go through the grooves and evaporate since cosmetics can sit on the shelves for a long time. The California Bureau of Weights and Measures regularly samples products in inventory to ensure that the weight of the item is at least the weight listed on the package. After they sampled our pump cosmetics, they fined us for low weights. The low weights occurred because we didn’t take the evaporation factor into account when we filled the pumps. Product Life Cycles (This story was told to me by William Wagner.) When I worked at an electronics company, I addressed product design issues. Another manager in the company oversaw product design of 1K memory for computers that was 75% done. I told this manager that this project should be stopped since other companies were making 4K memory, thus making 1K obsolete. He was not convinced by my argument, so I suggested that he ask our customers who they thought would buy this product once we completed it. When he asked them, he was told that no one would buy it. So the project was abandoned. My experience with projects has shown me that new products are being more quickly developed in the market. This is causing the product life cycles to shorten. It is also putting pressure on companies to design better products more quickly.

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Using Appropriate Measurements for Product Design (This story was told to me by William Wagner.) At an electronics company I worked for, there were problems with product design and manufacturing. The performance of the engineers was measured by the ability to transfer designs to production in a timely manner. Since this was a quarterly measure, the engineers would rush to finish new product designs at the end of each quarter. Doing so caused many designs to be problematic to produce. Therefore, the engineers spent most of their time putting out fires in production caused by poor product design. The design problems caused the manufacture of defective products. So, manufacturing and engineering pointed fingers at each other with regard to who was to blame. I realized that we needed a realistic objective to strive for. The appropriate measure should focus on quality, not just the timely transfer of designs to production. We also wanted to know how many units we would sell. Manufacturing should be measured on their performance in meeting production volume projections and cost objectives. The first step I took was to define the objective and the problem. The typical product design lead time ranged from six months to two years. The manufacturing lead time was about 12 months. The lack of teamwork between engineering and manufacturing, and the wrong performance measurements increased the difficulty of manufacturing. It was sometimes difficult to determine if a problem was caused by manufacturing or engineering. The change in measurements and helping these two departments work as a team improved performance in many ways, such as enhanced yields, improved quality, and reduced lead times. Lunch Rush at the campus grill (process choice) When I was a university student, I worked as a short order cook at the student union grill. Cooking burgers can be an example of fitting production process to volume. I generally started working mid-morning to prepare for the lunch rush. During this time, the occasional order would come in. I would then stop preparing lunch and cook the sandwich to order. This could be seen as a one-off operation or even a project process if the customer’s demands were quite specific. As orders became more frequent, one of the short order cooks would stop preparation and start cooking burgers in small batches (batch process). Once the lunch rush was in full swing, we would have three short order cooks. We then increased the batch size and divided the operations involved. One would cook the larger batch, one would prepare the buns with the requested toppings, and one would assemble the burgers, wrap, and place the burgers under the heat lamps for the line servers. This highest volume operation is an example of a line process.

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Answers to Discussion Questions 1. Define product design and explain its relationship to business strategy. Product design is the process of determining all the features and characteristics of a product or service. The design of the product or service must match the business strategy in order for the company to be successful. For example, if we create a product with numerous features, it would probably be more expensive to produce. This would not help us if our goal is to provide a low cost product. 2. What are the differences between product and service design? Recall that the key differences between manufacturing and service is the fact that manufacturing creates a tangible product, while services typically do not, and that services involve the customer. Service design is more complicated because we must not only define the service itself, but also the aesthetic and psychological benefits it provides. 3. Explain the meanings of benchmarking and reverse engineering. Benchmarking involves the usage of information gathered from world class companies in order to improve your company’s performance. Reverse engineering is the study of an actual product by disassembling it to determine how it was created. 4. Explain the meaning of design for manufacture (DFM) and give some examples. DFM is a set of guidelines for ensuring that a product is easy to produce profitably. DFM involves reducing the number of parts in a product, and the use of common and interchangeable parts. Refer to Figure 3-3 for example. 5. Describe the stages of the product life cycle. What are the demand characteristics at each stage? The four stages of the product life cycle are introduction, growth, maturity, and decline. (See figure 3-4.) Introduction is the stage where the product is introduced to the market and starts to sell. The demand is slowly growing in this stage. Growth is the stage where demand takes off. Maturity is the stage when the demand has peaked and started to level off. The last stage of decline occurs when another product replaces the current product. During this stage, demand declines.

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6. Explain the term concurrent engineering. Why is it important? Concurrent engineering is a team-based approach to product design. The team of people from different areas works simultaneously on the design. It is important because this ensures that we don’t have problems taking the product from engineering to production. Production can help ensure an easy transition if they are involved in the design. Thus the product becomes easier to manufacture. The old approach of separate departments working with the design at different times was costly and inefficient. Concurrent engineering has resulted in a shorter development time with better quality. 7. Identify the two general types of operations. What are their characteristics? The two general types of processes are intermittent operations and repetitive operations. Intermittent operations produce a variety of products in smaller quantities. Since a variety of products are produced, a standard flow does not exist. Intermittent operations tend to be labor intensive. Repetitive operations produce few products in larger quantities. Resources are organized in a line flow in repetitive operations. Since we are producing few products in large quantities, we can invest a lot of money in equipment. 8. What is meant by the term vertical integration? What types of companies are more likely to become vertically integrated? Vertical integration refers to the number of supply chain decisions that are made within a company. For example, a company that manufactures wood furniture could also own the land that supplies the trees that are then cut down and processed by the plant. This is an example of backward integration. For forward integration, the same company would then sell directly to the final customer who uses the furniture instead of selling to a retailer. Companies that are more likely to become vertically integrated are ones who have the capital available to do so. Vertical integration is more effective for continuous operations in which the number of input materials is small. Fine (1998) points out that successful companies move back and forth between being vertically integrated and not in order to remain competitive over longer periods of time. 9. What is a process flowchart and what is it used for? A process flowchart is a diagram that shows all of the process steps for producing a product or service. It is useful in analyzing the process flows in order to make improvements. For example, we can identify potential problem areas and decide how to prevent the problem from occurring.

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10. Give some examples of automation. How has automation changed the production process? Automation is the use of machines that can perform work without assistance from a human worker. Examples of automation are automated material handling, computer-aided design (CAD), flexible manufacturing systems (FMS), robotics, and computer-integrated manufacturing (CIM). Automation has enabled production to be more consistent in terms of quality and to efficiently produce larger volumes of product. 11. Discuss the benefits of computer-aided design (CAD). The benefits of CAD are increased speed and flexibility in the design process, improved ability to share designs since they are electronic files, and the ability to easily archive designs and compare designs. 12. What is meant by the term service package? Service package refers to the group of features that comprise the service. The three elements of the service package are the physical goods, benefits related to the senses, such as taste and smell, and psychological benefits. 13. Name three service companies and describe their service package. Let’s look at the three service companies of McDonald’s, Border’s bookstore, and Disney theme parks. At McDonald’s, the physical goods are the food, as well as the functional seating, along with the play area for children. The sensual benefits are the consistent taste of the food and the sound of happy children. The psychological benefits are quick food and a more relaxing time for parents since kids can occupy themselves with the Happy Meal and/or play area. At Border’s, the physical goods are the books, café items, and places to read and/or chat. The sensual benefits are the smell of the café items and the sight of interesting things to read. The psychological benefits are the comfort and status of the experience. At Disney, the physical goods are the rides, shows, restaurants, gift shops, etc. The sensual benefits are the sight of cartoon characters, sounds of the experience, and feel of the rides. The psychological benefits are fun and learning. 14. Give examples of services that have a good match between customer expectations and service delivery. Give examples of services that do not have a good match. Good matches:

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•

FedEx: Federal Express is very good at delivering undamaged packages on time, which is what the customers expect. They also provide a tracking procedure so that customers can determine where their package is in transit. • Amazon.com: I have ordered many books from amazon.com. The prices have been good. The correct items were delivered accurately and quickly. They also send e-mail notification when the order has been shipped. Poor matches: • Some office supply stores: As the number of home businesses has increased, some office supply stores are not effective at meeting the needs of businesses where someone is not always at the office during daytime work hours. When delivering items, they tell the customer that the items will arrive sometime that day between 8 a.m. and 5 p.m. This is a nuisance for some customers since they have to make sure someone is there to accept the shipment. • Some moving companies: I have had numerous bad experiences with various moving companies. Customers of movers expect the items to be delivered on time in a nondamaged condition. During each of my last three moves, some items were damaged. My last movers arrived two days late. In addition, customers expect that it should not be difficult for the movers to fix or reimburse the damaged items. In my last two moves, it was difficult to do so. I either kept getting a busy signal when trying to file a complaint by phone or left several messages concerning a complaint where my call was not returned.

See Solutions Manual for Answers and Solutions to Problems

Answers to Case – Biddy’s Bakery (A) 1. Explain the challenge Elizabeth faced in meeting her capacity needs. What should she have considered before moving into the larger facility? The challenge is that Elizabeth’s constraint is in the market. She needs to find ways to deal with this constraint. She should have gained an understanding of what caused the growth before considering the move to make sure that it was possible to continue growing in the same manner. 2. What is wrong with the proposal made by the team of business students? Why?

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The proposal made by the team of business students does not match the operations decisions to the corporate strategy and core competencies of the bakery. A mismatch will increase the possibility of failure. 3. What type of operation does Biddy’s Bakery currently have in place? What type of operation is needed to meet the proposal made by the team of business students? Explain the differences between these two operations. Biddy’s Bakery currently has an intermittent operation in place. To meet the students’ proposal, Biddy’s Bakery would have to start using a repetitive operation. Repetitive operations use a capital intensive process with a line flow, while intermittent operations use a labor intensive process with a variety of flows. 4. Elizabeth senses that the business would be different if she accepts the proposal but does not know how and why. Explain how it would be different. The business would be different for several reasons. To be effective, the bakery would have to use more equipment in order to efficiently and effectively produce in large volumes. The worker skills would not be important anymore. The degree of flexibility would be low. 5. What would you advise Elizabeth? I advise Elizabeth to not adopt the proposal suggested by the team of students for several reasons. First, the proposal does not match the corporate strategy of Biddy’s Bakery. Second, the proposed changes are in conflict with the competencies of the bakery. The issue that needs to be addressed is the excess capacity. Since there is excess capacity, the constraint is in the market. TOC supports the use of the Thinking Processes (TP) to determine how to better meet customer needs in order to increase demand. (Please see the TOC Tips from chapter 2 of this manual for more information on the TP.)

Answers to Case – Creative Care Animal Clinic (B) 1. Identify the operations management problems that Dr. Barr is having at the clinic. Dr, Barr is experiencing several operations problems due to a change in what the customers are requesting as compared to the services the clinic was designed to offer. The increase in specialized services and the addition of grooming requires a different layout. Not only have the space requirements changed but some non-contact services are being performed in

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contact areas. Customers are requesting a mix of services but the clinic has not thought about service “packages.” Finally, the staff is not trained for the new service mix. 2. How would you define the “service bundle” currently being offered? How is this different from the initial purpose of the clinic? Customers are now requesting a bundle of grooming, examining, and sometimes minor surgical services. The business was originally designed to offer examining and surgical services. Not only do the new demands require additional services but also customers see these as a “package.” The clinic needs to offer the demanded bundle more seamlessly. 3. Identify the high-contact and low-contact segments of the operation. How should each be managed? The high-contact segments include reception and customer waiting. The low-contact segments are examining, surgery, and grooming. However, grooming is currently being performed in a high contact area. High-contact segments must be performed while the customer is present and in contact. Low-contact segments can be performed while the customer is not there, and do not need customer contact. In fact, as the grooming operations demonstrate, customer contact with low-contact segments can decrease performance. 4. What should Dr. Barr have done differently to avoid the problems she is currently experiencing? What should Dr. Barr do now? Dr. Barr should have studied the impact of a change in the mix of services offered before she started accepting a significantly different mix. Now she needs to either reject businesses that are outside of her original plans (probably not what she wants to do) or redesign the clinic to better handle the current mix. The redesign should include a new facilities layout, employee training, and probably special attention to the service “packages” offered.

Complete Manuals for the Interactive Cases also are available on the companion site: www.wiley.com/college/reid.

In Class Exercises The problem used in this exercise uses data from a real company that is presented, along with the solution, that Patterson presented (1992). (Please note that I switched products D and E from Patterson’s data so that the answer would not result in producing A, B, C, and D, which is a

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mistake that students could make by producing them in order. I wanted to ensure that students were correctly answering the question. Also, my answer to this exercise differs from Patterson’s answer due to a rounding error in his calculations.) You may want to consider not including the last page (questions 4 and 5) as part of the exercise. These questions could become part of a class discussion. The following exercise takes about an hour (or more) for the students to answer in class in teams. I give it out at the end of class, while allowing enough time, so that students can leave as soon as they have completed the exercise. I give the students the option of working individually or in teams of up to five students. I hand out the background information as a separate copy. When I hand out copies of the exercise questions, I ask the students to take one copy per person and one copy per team. This way each student will have a copy of the assignment. I only require one copy per team be turned in to me for grading. Please note: It is helpful to tell students, right after they have read the information on the in-class exercise that the table for their answers is in a different format than the table in the information. A calculator would be useful for completing this exercise.

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Reid & Sanders Operations Management, Fifth Edition

PRODUCT MIX EXERCISE

HAND IN ONE CLEAN COPY

Please provide names and signatures only for team members who are present today: NAME (Print) SIGNATURE 1. 2. 3. 4. 5. The purpose of this exercise is to discuss the situation facing a manager and help the manager determine the product mix (quantities of each product) that maximizes profitability. A fundamental decision for a manufacturing company is the product mix decision, which consists of the quantity of each product to make in order to maximize profitability (or minimize losses) for the organization. XYZ Corp. manufactures five different products: A, B, C, D and E. Table 1 presents the product prices, material costs and the weekly demand. Table 2 presents the labor requirements and labor availability for each of the four work centers in the XYZ manufacturing plant. The labor requirements indicate how much labor time is required to manufacture one of each product. The available labor indicates that two full-time employees each are assigned to work centers 1 and 4. Work center 2 has one full-time employee, while work center 3 has three full-time employees. In order to simplify the problem, assume that setup times in the work centers and efficiencies are not relevant. Total operating expenses per week are $14,000 (not including cost of materials). TABLE 1: Price, Material Cost, and Demand Product Price A 90 B 91 C 101 D 224 E 146

Material Cost 30 28 35 84 80

TABLE 2: Labor requirements and Labor Availability Product Work Center 1 Work Center 2 A 15 mins. 0 mins. B 10 mins. 7 mins. C 15 mins. 7 mins. D 0 mins. 60 mins. E 0 mins. 23 mins. Time available 80 hours 40 hours

Work Center 3 20 mins. 10 mins. 13 mins. 3 mins. 15 mins. 120 hours

Weekly Demand 120 100 100 30 50

Work Center 4 6 mins. 15 mins. 10 mins. 4 mins. 6 mins. 80 hours

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Note: Data is from real company that was published in article (Patterson, “The Product-Mix Decision: A comparison of the Theory of Constraints and Labor-based Management Accounting,” Production and Inventory Management Journal, 3rd Qtr., 1992: 80-85) 1. Determine which work center is the constraint by calculating the total production time needed to manufacture the weekly demand of each product. Work center 1

Labor minutes required per week per product A B C D E

Total mins. needed

Total hrs. needed

2 3 4 The constraint is work center ______________. 2. What is the throughput and throughput per constraint minute for each product?

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4. How would you explain the logic of your decision to management? Consider what the usual procedure for product mix decisions are in your response.

5. Now that you have convinced management that we should use the Theory of Constraints to make product mix decisions, you have been asked to help them understand the impact of elevating the constraint. If we could add more labor to the constraint work center, how much would our throughput change based on time added? What is the maximum hourly rate that we would be willing to pay?

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ANSWER KEY 1. Determine which work center is the constraint by calculating the total production time needed to manufacture the weekly demand of each product. Work center 1

Labor minutes required per week per product A B C D E 1800 1000 1500 0 0

Total mins. needed 4300

Total hrs. needed 71.7

700

1800

1150

4350

72.5

2400

1000

1300

900

750

6350

105.8

720

1500

1000

120

300

3640

60.7

The constraint is work center 2 (because it only has 40 hours available, but needs 72.5 hours. 2. What is the throughput and throughput per constraint minute for each product? Product A B C D E

Throughput 30 63 66 140 66

Constraint time/unit 0 7 7 60 23

T/C.U. Infinity 9 9.42 2.33 2.87

3. How much of each product should we manufacture to maximize profitability? What will our weekly profit be for this product mix? (You must show the order of the production choices you made to receive full credit.) Constraint has 2400 minutes available (40 hours times 60 minutes/hour) First, make 120 units of A (no time on constraint is used) Next, make 100 units of C, which uses 700 minutes (100 x 7) of the constraint Time remaining on constraint is 1700 minutes (2400 – 700) Next, make 100 units of B, which uses 700 minutes (100 x 7) of the constraint Time remaining on the constraint is 1000 minutes (1700 – 700) Finally, we can only make 43 units of E since we will run out of capacity on the constraint (1000/23 = 43.5 – round down since we can not make partial units) Even though we have 11 minutes left on the constraint, we can not make any other products because we do not have enough time to do so.

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Revenues (less material costs): A 120 units x (90 – 30) = $7,200 C 100 units x (101 – 35) = $6,600 B 100 units x (91 – 28) = $6,300 E 43 units x (146 – 80) = $2,938 Total revenues: Less Operating Expenses: Profit

$22,938 14,000 $ 8,938

4. How would you explain the logic of your decision to management? procedure for product mix decisions are in your response.

Consider what the usual

I would point out that industry practice has made product mix decisions based on the profit margins for each product. This margin has been calculated in a number of ways. It could be just the price minus the cost of materials. The margin could also be calculated by further reducing the margin (price minus cost of materials) by allocating labor and/or overhead to each product based on its production time. This can lead to a sub-optimal answer if there is a physical constraint (one resource’s capacity is not enough). The best solution considers both the margins and the constraint. Indeed, we can compare the results of using accounting-based methods for this problem, thus proving that they are not the best approach. I could even give management the PQ problem and ask them to solve it. Then I would present the correct solution. This would lead to a discussion. (Patterson (1992) points out that Goldratt (the inventor of TOC) believes that product margins are impossible to measure using traditional cost accounting methods. He further points out that TOC makes the following assumptions: (1) material is the only truly variable cost, (2) direct labor should be considered a fixed cost in the short term in many factories, and (3) manufacturing overhead can not be accurately allocated to the “cost” of making a product.) 5. Now that you have convinced management that we should use the Theory of Constraints to make product mix decisions, you have been asked to help them understand the impact of elevating the constraint. If we could add more labor to the constraint work center, how much would our throughput change based on time added? What is the maximum hourly rate that we would be willing to pay? For the first additional 150 minutes, we would be willing to pay up to $2.87 per minute of the constraint in order to produce the rest of product E. For those 150 minutes, throughput for each minute would increase by $2.87 minus the amount paid for the each constraint minute. Then, we would be willing to pay up to $2.33 per constraint minute for the next 1800 minutes to make all the units of product D. For those 1800 minutes, throughput for each minute would increase by $2.33 minus the amount paid for the each constraint minute.

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References Fine, Clockspeed, Perseus Books, Reading, MA, 1998. Goldratt, E. M., The Haystack Syndrome, North River Press, Inc., Croton-on-Hudson, NY, 1990. Griffin, B., “Using Origami to Teach Production Management,” Production and Inventory Management Journal, Second Qtr., 1997, 1 – 5. Patterson, M. C., “The Product-Mix Decision: A Comparison of the Theory of Constraints and Labor-Based Management Accounting, Production and Inventory Management Journal, Third Qtr., 1992, 80 – 85.

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Chapter 4: Supply Chain Management Overview This chapter describes the elements of the supply chain and its management. The bullwhip effect is discussed. The various decisions in supply chain management are discussed and evaluated. These include outsourcing, purchasing, use of technology, warehousing, and vertical integration. Finally, the performance measures and trends in supply chain management are described. Teaching Tips and Strategies I begin by describing supply chains. Then, I lead a discussion concerning the various types of supply chain management decisions. I address how the global environment affects supply chain management decisions. Fine (1998) provides interesting results concerning a study of supply chain strategy. I prefer to spend more of the class time actually learning about supply chain management using the Beer Game (and/or other games), as discussed in a later section. This may lead to a discussion about the Theory of Constraints approach to supply chain management. If you wish to pursue this approach please see the TOC Tips section in Chapter 3. That section includes a discussion about the make-or-buy decision that is discussed in this chapter of the textbook. Information flow and ERP Figure 1-11 in Chapter 1 shows the flow of information among functions within a firm. I show this figure again and ask students to comment on what information would benefit both the company and customers, or suppliers. To continue this discussion, I point out that Wal-Mart shares its sales information with Proctor and Gamble. This means, in principle, that either Wal-Mart or Proctor and Gamble could determine how many cases of Pampers to send to each store. I show them Figure 4-2 and then ask them what would be gained if this decision were made by P&G. I point out that P&G is closer to the middle of the chain. Either Wal-Mart or P&G can make the shipping decisions in such a way as Wal-Mart’s inventory goals are met. However, P&G could also coordinate shipments with production and supply shipments, therefore lowering costs throughout the entire supply chain. Crossdocking Often, my students have told me that some explanations work better on a whiteboard than

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PowerPoint. One of those may be crossdocking. I start by drawing a few producers on the left, a warehouse in the middle, and a few retailers (supermarkets) on the right. Next, I discuss how a semi-trailer would be loaded from the warehouse of a store by loading goods from different areas within the warehouse. I point out that there is insufficient demand from any one store to allow a truck to be dispatched directly from the producer. We then discuss what would happen if the stores could tell the producers exactly what they needed by pallet (24 pallets make a trailer load). These could then be assembled at the producer, sent to the warehouse, and crossed over to the trailers waiting to go to individual stores. Once the pallets for each store have arrived from the other producer, the trailer is sent to the store. This demonstrates the two key points to the students. First, material handling is greatly reduced because the stock is never shelved in the warehouse. Second, this would never work unless there is a high degree of information flow among all the players in the supply chain. Ethics The Instructors’ Manual entry for Chapter 1 mentions that ethics was one of the big issues in AACSB accreditation. You may have had a discussion about ethics in outsourcing. Ethics in outsourcing can be perused more deeply in this chapter. The text presents guidelines for relationships with suppliers. The virtual case asks students to discuss the ethics of purchasing. Green Issues We can also introduce students to environmental concerns in this chapter. As students do have experience with beverages, I have them discuss the impact of “bottle bills” as they vary from state to state. Some states do not require any deposits on beverage containers, while others are considering extending this requirement to bottled water.

War Stories Global Supply Chain Management (This story was recently told to me by a source who chooses to remain anonymous.) I worked for a cosmetics company when the international trade barriers started disappearing. The company had set up their operations with the trade barriers in mind so that they could minimize the costs of duties, delays, and paperwork of customs. Specifically, domestic plants served domestic markets, while international plants served international markets. When the global environments started changing, we decided to combine the two divisions into one, where the plants would be focused on technology since customs, duties, and shipping costs would become a small portion of the total costs.

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In addition, we reconsidered our warehouse and shipping decisions. Specifically, the cost per square foot of warehousing space in Japan was about 20 times the cost in the United States. We had been transporting our products by ship from the U.S. to Japan, which took about six weeks. Therefore, we had to hold a couple of month's worth of inventory in a warehouse in Japan. We decided to send the shipments by air from Europe to make it closer to the source of production and save on warehousing costs. The additional costs of transportation were much lower than the money saved by reducing the size of the warehouse. The Insulin Bullwhip As an example of the bullwhip, or Forrester, effect, I describe the demand for insulin as it moves up the supply chain. First, the class agrees that the number of diabetics and their demand for insulin must be fairly flat. Then we note that even though their daily demand is flat, their purchases of insulin are probably not randomly distributed throughout the week and month. They may fill prescriptions on certain days of the week or times of the month. Next we discuss that the retail drug stores may aggregate the insulin demand with the demand for other products, and order stock periodically. With similar batching at intermediate levels, the pharmaceutical company may not see a smooth demand. Finally, we discuss how the producer would see smooth demand if they were in direct contact with the consumer.

Answers to Discussion Questions in Textbook 1. Discuss the different types of e-commerce. E-commerce, or using the Internet and Web to transact business, can be characterized by noting what entities are involved. Business-to-business (B2B) concerns businesses working together to allow one to receive inputs from another. Business to consumer (B2C) is a retail activity. Here companies use electronic means to deliver goods and services to consumers. 2. Explain the different revenue models used in e-commerce. Operators of e-commerce web sites can support their activities using one or more of several revenue models. A site that attracts users and then displays advertisements from other businesses is using the advertising revenue model. A site that charges a fixed periodic fee for access to its content is using a subscription revenue model. Some sites charge a fee for a completed transaction, such as a stock trade. This is the transaction fee model. Companies that earn directly from what customers buy use the sales revenue model. Finally, a site may earn its revenue by referring visitors to other sites. This is the affiliate revenue model.

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3. Give two examples from the Internet for each of the different revenue models used in ecommerce. Revenue Model Advertising Subscription Transaction fee Sales Affiliate

Examples Yahoo.com, Mail.com The Wall Street Journal on-line, Investors Business Daily online Ameritrade, Datek Amazon.com, Lands’ End Best20sites.com, Expatriate online

4. Describe the evolution of business-to-business (B2B) e-commerce. B2B can be said to have started in the 1970’s with automated order entry systems that used telephone connections. In the late 1970s, electronic data interchange (EDI) provided standards for the computer-to-computer exchange of information such as invoices and purchase orders. 5. For the next item you buy, determine its supply chain. I recently bought soft drinks in cans. The cans are produced by obtaining the raw materials from mines, followed by processing in a plant. The cans are filled with the liquid at the bottling companies. They are then placed in a warehouse. From there, they are shipped to the retailers who sell them to customers. 6. How do supply chains for service organizations differ from supply chains for manufacturing organizations? Service supply chains typically do not include external suppliers. In addition, the tier one supplier is a company that produces the final packaged product. Manufacturing supply chains typically include a greater variety of links in the chain in terms of the types of companies. Manufacturers have external suppliers in different tiers, as well as processing operations. 7. How can companies satisfy increasing customer expectations? Increased customer expectations can be satisfied by providing customers with excellent value. For example, a company can emphasize short delivery times, excellent customer service, quality guarantees, or low prices.

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8. Describe the additional factors that affect global supply chains. Global supply chains face several additional challenges. The members of the supply chain can be dispersed around the world. This can increase shipping time and pipeline inventory. Longer delivery times can make forecasting less accurate. All the partners in the supply chain will not use the same currency. Currency fluctuations can change prices between contract and delivery. Different countries will have varying levels of infrastructure development. This can impact transportation, the availability of trained workers, communications, and manufacturing operations. Firms may need to provide many market specific variants and versions of their products to meet local tastes, conditions, and regulations. This is referred to as product proliferation. 9. Think of your last major purchase. What criteria did you use to select the supplier? My last major purchase was a new computer, which I purchased from Dell. The criteria I used were speed of delivery, ability to customize, price, and features. Dell offers special discounts to professors and students. 10. Explain the concept of partnering, including advantages and disadvantages. Partnering is the development of a close relationship with a supplier based on trust, shared information, and vision. The advantages are the ability to reduce costs, and improvement in quality and planning. The disadvantages are the violation of trust that can cause problems and the inability to quickly change suppliers if problems arise. Recall the Ford/Firestone quality fiasco that is currently being litigated. The presumption of trust may have caused the delay in detecting quality problems. 11. Explain the benefits of using a single supplier as opposed to multiple suppliers. The use of a single supplier allows us to receive quantity discounts, easily schedule deliveries, and form a good relationship. The benefit of using multiple suppliers is a lower risk of supply interruption, the possibility of better service and price, and greater flexibility. 12. Describe the kinds of information that are necessary in a supply chain. We need to track sales, the movement of products, the location of items within the warehouse, and the status of the items in the production process.

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13. Describe the role of warehouses in a supply chain. Warehouses allow us to consolidate the transport of products, mix products, and provide service by sending products to the customers. 14. Describe radio frequency identification (RFID) and how it could be used by an organization. RFID uses unpowered microchips to transmit encoded information through antennae. RFID tags may be attached to cases, pallets, or containers. They can eliminate the need to unpack, count, or scan contents in order to keep track of material movements and inventory levels. 15. Describe the current trends in e-commerce and how they affect supply chain management. Electronic marketplaces allow easier communication between suppliers and customers. Edistributors can represent many different suppliers. E-purchasing companies connect companies with MRO suppliers. They may also automate the process using value chain management (VCM). On-line exchanges are third parties that create an on-line marketplace for a large number of buyers and sellers in a particular industry. Sometimes, a market owned by an industry enables buyers to purchase direct inputs from a limited set of invited suppliers. This is called industry consortia.

See Solutions Manual for Answers and Solutions to Problems

Answers to Textbook Case – Electronic Pocket Calendars Supply Chain Management Game Supply chain management games usually take more time than a single class period can provide. With a fair amount of preparation, the Electronic Pocket Calendar game can fit into a single (1.5 to 2 hour) class session. Preparation Before the day of the game, several steps should be taken: 1) Assign a student or team to run the game. This team will remind the participants as to how the game is run, distribute the actual orders to the retailers each period, and preside over the game through the weeks. 2) Assign the remaining students to roles (Factory, Distributor, Wholesaler, and Retailer). The [1, 3, 6, 12] structure implies a class size (minus lead team) of 22 students. To adjust

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the game to class size it may be necessary to prune or add a branch. For example, cutting branch C would eliminate 1 distributor, 2 wholesalers, and 4 retailers, for a total reduction of 7 players. The average weekly demand at the factory would then be adjusted to reflect the loss of demand from Distributor C. The players should review what their specific procedures are before arriving for class the day of the game. 3) Distribute desk placards (e.g. Retailer C11) so that the rest of the players can easily find their needed suppliers and customers once the game begins. 4) Distribute blank inventory position cards so that the players will be able to follow through the 5 steps listed for each period. 5) Discuss the operating rules. For example, how are backorders handled? Will we stick to FIFO? 6) Prepare cards for the actual weekly demand to the retailers for the number of weeks you wish to run the game and give these to the lead team. The enclosed Excel chart contains an example of actual demands created from the distribution data given in the textbook. Game day It is difficult to have the game run in one class period. With preparation, you should be able to start quickly. Have the players sit in supply chain order: Retailers toward the front, factory to the rear. The retailers receive their weekly orders from the leaders. Also, each chain (A, B, C) may be laid out in a front-to-back column. Once everyone is in place, the lead team can start the game. After they review the set-up, they will distribute the order cards to the retailers. The retailers then follow their procedures, communicating with wholesalers when necessary. The wholesalers, distributors, and factory then react to what they have received from their supply chain partners. The game can get quite hectic. The lead team must keep all the players working on the same week. Only once all players have completed their weekly tasks should the retailers receive the next set of orders. The lead team will also need to clarify procedures and try to resolve unclear instructions. All players will record their weekly positions and actions on their game cards. Follow-up Playing the game in one class session can be quite hectic. The end-of-game discussion can be assigned as homework, or left for a future class period.

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Notes While this game appears in the Supply Chain chapter, some of the concepts, such as inventory and order records, are better understood after these concepts are presented in later chapters. Running the game early clarifies supply chain concepts and the need for coordination. Running it later allows students to visualize recourse planning issues. Chart showing actual weekly demands for all retailers given average weekly demand

Factory Distributor A Distributor B Distributor C Wholesaler A1 Wholesaler A2 Wholesaler B1 Wholesaler B2 Wholesaler C1 Wholesaler C2 Retailer A11 Retailer A12 Retailer A21 Retailer A22 Retailer B11 Retailer B12 Retailer B21 Retailer B22 Retailer C11 Retailer C12 Retailer C21 Retailer C22

Average Weekly Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8 Week 9 Week 10 Actual Demand Average (cases) 175 60 90 25 45 15 52.5 37.5 15 10 30 31 40 54 36 39 20 12 14 51 8 30.4 15 25 11 17 29 22 21 18 16 16 24 20.2 11.25 16 10 9 17 19 1 8 11 1 11 10.2 3.37 7 4 6 5 1 1 6 5 1 4 3.9 37.5 17 70 13 22 53 56 67 32 11 1 34.1 15 23 13 10 9 15 27 5 14 17 10 14.2 20 1 25 39 21 29 13 37 26 19 7 21.7 17.5 28 11 17 2 9 18 26 1 2 5 12.0 10 14 7 12 15 12 12 13 13 13 7 11.9 5 9 6 0 4 10 5 4 6 7 4 5.5 5.5 5 7 1 3 3 6 11 4 8 1 4.9 4.5 6 6 7 7 9 1 2 2 1 0 4.2

Input data from Textbook individual location information replenishment order quantity (cases) Factory 350 Distributor A 120 Distributor B 180 Distributor C 100 Wholesaler A1 90 Wholesaler A2 60 Wholesaler B1 105 Wholesaler B2 75 Wholesaler C1 60 Wholesaler C2 40 Retailer A11 60 Retailer A12 30 Retailer A21 45 Retailer A22 15 Retailer B11 75 Retailer B12 60 Retailer B21 40 Retailer B22 35 Retailer C11 40 Retailer C12 20 Retailer C21 20 Retailer C22 20

Beginning Average Weekly Reorder point Inventory Demand (cases) (cases) (cases) 190 277 175 125 185 60 190 280 90 52 77 25 95 140 45 31 46 15 110 163 52.5 80 118 37.5 31 46 15 21 31 10 62 92 30 31 46 15 24 35 11.25 8 13 3.75 78 116 37.5 31 46 15 42 62 20 37 55 17.5 21 31 10 11 16 5 12 18 5.5 10 15 4.5

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Individual player progress sheet Individual location information

Player:

Role:

replenishment order quantity (cases)

Reorder point (cases)

Beginning Inventory (cases)

Average Weekly Demand (cases)

Week 1

Week 2

Week 3

Week 4

Weekly Information Week 5

Week 6

Week 7

Week 8

Week 9

Beginning Inventory Shipments received Orders received Ending Inventory Inventory Position Place Order? Weekly calculations Inventory Backorders Cost of Holding Cost of Backorders Total cost this week Cumulative Holding Cost Cumulative Backorder Cost Cumulative Total Cost

Answers to Textbook Case – Electronic Pocket Calendar Supply Chain Management Game 1. How well does the distribution system seem to work? Talk about it in terms of customer service, costs, effective use of inventory, and information flows. This distribution system is not working well. Customer service is poor since we had back orders. Costs were high since the level of inventory of the system was high overall. Inventory was not used well since it was not in the right locations. Information flows did not help this system’s performance. 2. Given the amount of inventory in the system, why did back orders occur? Back orders occurred because the inventory was not in the right place at the right time. 3. In this distribution chain, what happened to customer demand data? The customer demand data was only known to the retailers. The only information that flowed through the system was ordering data, which gives the various companies an idea about what is happening with demand. 4. How should customer demand data be communicated through the system? Customer demand data should be communicated through the entire system instantaneously. Each company in the supply chain should know the demand of the retailers that they supply Copyright © 2013 John Wiley & Sons, Inc.

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either directly or through an intermediary. 5. What would you recommend be done differently? I recommend using the distribution solution from the Theory of Constraints (TOC). The majority of the inventory should be held at the factory’s warehouse. The ordering process follows a pull system. The retailer orders the amount sold to the customers from the wholesaler. The wholesaler orders the amount sold to its two retailers from the distributor and so on. Each location sets its initial inventory level as the maximum amount expected to be sold during the lead time to replenish from its supplier. Each location manages its buffer of inventory following the principles of buffer management.

Answers to Textbook Case – Supply Chain Management at Durham International Manufacturing Company (DIMCO) 1. Briefly describe DIMCO’s supply chain. DIMCO currently has 375 different suppliers from around the world. They supply 1350 different components or raw materials. DIMCO sends all of its finished goods to a central warehouse that supplies ten regional distributions centers (RDCs). Each of the RDCs supplies an average of 12 local distributors that each supplies an average of 35 retailers. 2. What are the advantages that DIMCO can gain by implementing supply chain management? DIMCO can obtain benefits by implementing supply chain management principles both upstream and downstream. Through better coordination with their suppliers, DIMCO could reduce costs, inventories, and lead times. By involving suppliers earlier in a new product design, they could reduce the time to market and improve the quality of new products. Through better coordination with distributors and retailers, DIMCO could better forecast demand for its products, and reduce inventory, costs, and product obsolescence. These improvements can lead to improved customer loyalty and profitability. 3. What would you recommend DIMCO attempt next? Should it work on integrating the suppliers or the distributors first? Or should it work on both simultaneously? As both integrating suppliers and integrating distributors require improvements in their communication and information technologies, they should address both at the same time. The supplier network is broader, the distribution network is deeper, but both need better coordination.

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4. What are your recommendations with regard to the external suppliers? With 375 current suppliers and 1350 components, DIMCO should not aim for single suppliers. However, they may be able to reduce this number substantially. Once they have a smaller group of suppliers they should work toward greater integration. This should include electronic ordering and collaborative forecasting. Tighter order coordination could then allow them to work toward JIT deliveries and reduced supply chain inventories. 5. What are your recommendations with regard to the external distributors? It seems DIMCO’s distribution network was established to meet the information needs of an earlier era. Shipping to one warehouse that ships to 10 RDCs, that ship to an average of 12 local distributors supplying an average of 35 retailers seems unnecessarily deep. With better information exchange and communication, some of these levels can be eliminated. For example, could DIMCO not ship directly to the 10 RDCs? DIMCO should also be receiving sales information directly from the retailers. This would reduce the bullwhip effect, improve their ability to forecast, and allow them to produce and ship more efficiently.

Complete Manuals for the Interactive Cases also are available on the companion site: www.wiley.com/college/reid.

Interactive Learning The student version of the web site for this textbook includes PowerPoint chapter review, selected solutions, several interesting company tours, and web links. The business simulation package includes demonstrations of tanker operations and truck loading. The web sites listed include a small cheese store and firms in the automobile business. The links to organizations can again be used to find the current issues and job categories in the field. Global shopping can be a challenge for North American college students. While the majority now has some experience shopping on-line, few have experience ordering from a foreign country. International students can help their classmates here. Many students order items from home. By going through the steps in making an international order, these students can highlight what is different and what remains familiar in international orders.

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In Class Exercises I suggest using three different games to teach supply chain management: The Beer Game, the Supply Chain Management Game, and the Ice Cream Game. I have successfully used the Beer Game a number of times. Sterman (1989) provides a helpful description of how to run the game. I can usually run the game for about 35 weeks in about 1.25 hours. It is more difficult to run the game in a large class if the professor is the only one to facilitate the game. Each team or supply chain can consist of four to ten members. There are four companies in the supply chain. So we need at least one person to represent each company type. I have found it helpful to have each team/supply chain sit at a 6 or 8 foot long table. If two people are the distributors, they sit opposite each other on either side of the table. I prefer to not use more than 8 people per team, but will decide depending on class size in order to reduce the number of teams, making it easier to facilitate the game. If this is the case, I first put the extra people at the factory positions, then at the retailer positions to have a maximum of three at each position, and be able to have them sit at the end of the table. I used poster boards (four for each supply chain) to create the game board. Beer Game boards can be obtained from the System Dynamics Society for about $100 each by calling (617) 259-8259. The article in Management Science explains the results of using the game (Sterman, 1989). I have used a very helpful short video (about 10 minutes) that summarizes the game results and relates it to other industries. I show this video at the end of the game, either at the end of the class during which the game was played or the following class. This video can be purchased for about $25 from the System Dynamics Group at MIT by calling (617) 253-1574. The Beer Game can also be played using a computer. I have heard that the computerized version of the game is useful. Coakley et al. (1998) provide a helpful explanation concerning the advantages and disadvantages of using the computerized version. In recent years, I have modified my usage of the Beer Game. I would like to thank Dr. James Cox III for sharing these innovative modifications with me. First, I have the students play the game the normal way. Then, I tell them that we will be playing it again. This time, they can change anything but the time to move shipments between the companies. I point out that the average demand at the retailer is 10 cases per week and it follows the uniform distribution with a high value of 20 and a low value of 0. (I created a set of demand cards for this distribution that are the same for each team so that we can compare the results.) I give them time to discuss the changes each team plans to make. First, I give them a short break, asking them to come back and discuss the changes. This time, the game can be run more quickly for less time periods – about 20 weeks. We can then discuss our results. The students explain their changes and corresponding results. I then explain how we would have played the game using the ideas from TOC. The second part of the game takes about 45 minutes to play. Blackstone and Cox (1998) explain ideas

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for modifying the game, including having natural disasters hit various positions. They also provide an analysis using the TP of the Beer Game, which includes several CRT figures. (The TP are described in the TOC Tips section of Chapter 2 of this manual.) I would like to thank Dr. James R. Holt for including two great supply chain games, the Supply Chain Management Game and the Ice Cream Game, in this manual. I look forward to using them in my classes. The Supply Chain Management Game is described in the PowerPoint file entitled SupplyChainGame.ppt. The file includes the handouts needed to give to the students. The last page of the file explains how TOC can be used to successfully manage the supply chain. The instructor will need to provide tokens and dice for the students to play the game. I estimate that it would take well over an hour to play the game. The Ice Cream Game is described in the Excel file titled Icecream4-3-1. This file provides the support needed to play the game. The intro sheet describes how to play the game. The input sheet must be used during the game to enter the decisions made by each company in the supply chain. These results are then displayed in the graph sheet and the various period sheets. The instructor will need to give the students a hard copy of the sheet for their company. During the game, the instructor lets each team know their performance by reading the data from the results sheet for that period. The first run of this game will most likely consist of four to five periods of play. This is usually enough for them to realize that their performance needs improvement. Then, the second run utilizes the principles of TOC. During this run, the teams can see that throughput increases when the teams work together. I estimate that it would take about three hours to play the game.

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References Blackstone, J. H. and Cox, J. F., “Designing and Implementing an Effective Supply Chain Using TOC – A Paradigm Shift,” APICS International Conference Proceedings, 1998, 235 – 238. Coakley, J. R., Drexler Jr., J. A., Larson, E. W. and Kircher, A. E., “Using a Computer-Based Version of the Beer Game: Lessons Learned,” Journal of Management Education, 22(3), 1998, 416 – 424. Fine, Clockspeed, Perseus Books, Reading, MA, 1998. Goldratt, E. M., Schragenheim, E., and Ptak, C. A., Necessary But Not Sufficient, The North River Press, Great Barrington, MA, 2000. Kendall, G. I., Securing the Future: Strategies for Exponential Growth Using the Theory of Constraints, St. Lucie Press, 1998. Simchi-Levi, D., Kaminsky, P., and Simchi-Levi, E., Designing and Managing the Supply Chain, Irwin McGraw Hill, 2000. Sterman, J. D., “Teaching Takes Off: Flight Simulators for Management Education,” OR/MS Today, October, 1992, 40 – 44. Sterman, J. D., “Instructions for Running the Beer Distribution Game,” 1984, D-3679, System Dynamics Group, MIT, E40-294, Cambridge MA 02139. Sterman, J. D., “Modeling Managerial Behavior: Misperceptions of Feedback in a Dynamic Decision Making Experiment,” Management Science, 1989, 35(3), 321-339.

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Chapter 5: Total Quality Management

Overview This chapter focuses on introducing the key concepts and tools of quality. The evolution and philosophy of total quality management (TQM) are discussed. Quality is described through various definitions and dimensions. The costs of quality are presented. The seven most commonly used tools of quality control are presented and discussed. The Baldrige Award and several certification programs are discussed. The contributions of several quality “gurus,” such as Deming, Juran, Crosby, Shewhart, Feigenbaum, Ishikawa, and Taguchi are presented. Finally, the reasons for TQM failures are presented.

Teaching Tips and Strategies This section includes more references and information that are not present in the textbook, in case the professor would like to spend more time on the topic of quality. I spend a significant amount of time on quality since I believe it is an important topic for all business students. Students enjoy the stories I share in class. I have included those stories in this manual. First, I provide information on the evolution of the quality movement. Then, I present the various definitions and dimensions of quality. I present and give examples of Garvin’s eight dimensions of product quality, which are listed and explained in his 1994 article: 1. Performance 2. Features 3. Reliability 4. Conformance 5. Durability 6. Serviceability 7. Aesthetics 8. Perceived quality I would like to thank Professor William A. Ruch for the helpful examples of quality characteristics of a toaster for classifying the characteristics as Garvin’s dimensions. I give examples and then ask the class to determine which dimension is appropriate. I list the appropriate dimensions here after each example. • My toaster has a light-dark adjustment – feature • My toaster takes 2 minutes to make toast, while yours takes 10 seconds –performance • My toaster can make bagels – feature Copyright © 2013 John Wiley & Sons, Inc.

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Your toaster lasts for a year; mine stops working in three months – durability Your toaster had a scratch on it when you purchased it – aesthetics My toaster occasionally ejects toast so forcefully it hits the ceiling – reliability Your toaster falls from the counter to the floor and stops working – durability

Next, I discuss the differences between service quality, and product or manufacturing quality. I note that it is more difficult to measure service quality. I also point out that one key difference in services is that the customer is part of the “production” process. Therefore, if a defect or problem occurs, the customer will be aware of it. One question we must consider is whether it can be fixed or not (i.e. bangs cut too short can’t be fixed, while the wrong paint color can be fixed). Either way, we can consider some form of restitution. I then share the war story listed below, entitled “Service Recovery.” I point out that we will spend more time later on a model and questionnaire developed for measuring and improving service quality. Next, I share some important data concerning the topic of quality, which can lead to a discussion about what companies should do. Banks (1992) points out that surveys show that most dissatisfied customers do not communicate their dissatisfaction to the company they are having problems with. He points out that some studies indicate that the percentage of dissatisfied customers that does not complain can be as high as 96%. They may choose to stop buying from that company. Past studies have indicated that dissatisfied customers typically complain to about nine to 11 people (Banks, 1992). On the other hand, I have heard that, on an average, satisfied customers tell only one person of their satisfaction. Research shows that by letting them voice the complaint without fixing it causes their likelihood of repurchase to increase dramatically. Fixing the problem after the complaint causes them to become more loyal customers (Banks, 1992). In addition, research also indicates that not only does it cost more to obtain a new customer than to retain one, but also that customers tend to increase their spending the longer they buy from a company. Given a company's need for feedback, I have sometimes required my students to write two letters to companies that they have purchased from recently. One letter must be a letter of complaint that provides constructive criticism. The other must be a letter of praise for a job well done. I give this assignment near the beginning of the semester asking them to share any feedback received from the companies so that I or they can share it with the class. We can then discuss how the complaint or praise was handled. Given the research results, we realize that the need for feedback from customers is important. This then leads to a discussion of service guarantees. I point out the elements of a good service guarantee. The benefit of having a guarantee is that the customers are more likely to give the valuable feedback organizations need since the customers have an incentive to do so. I share the war story listed below, entitled “Service Guarantees.” Tax and Brown (1998) point out that

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Hampton Inn hotels increased revenues by $11 million as a result of implementing a service guarantee, while becoming the hotel chain with the highest customer retention rate. However, we have to realize that some customers may take advantage of the guarantee or demand in relation to their profitability as a customer. Therefore, many companies spend time determining which customers they desire to keep serving (Tax and Brown, 1998). Tax and Brown explain how to develop an effective service recovery system based on their survey results. In addition, it is helpful to give the employees an incentive for providing suggestions for improving quality. In services, since front-line employees are the ones who deal directly with customers, they typically hear the complaints and have a better understanding of the problems that need to be addressed. The article, entitled “Cashing in on Suggestions,” discusses the system implemented by the Air Force for providing rewards to employees for improvement suggestions. The article points out that the system cost $3.4 million to set up, while they saved $213 million as a result of the suggestions generated and implemented. The article also points out that the typical reward to the employee is 10% of the money saved during the 12 months following implementation, up to $10,000, while a flat fee is offered for suggestions with benefits that can not be quantified. Next, we discuss the costs of quality. I ask them to give me examples of each type of cost after I have defined them. I find it helpful to ask them to answer the discussion questions six and seven from the chapter. The seven tools of quality are then covered in class. I give examples of each. I create a Pareto chart and fishbone diagram on the board with their help for a section of the university they frequently complain about, which is usually the bookstore. I ask them to volunteer their complaints, which I list on the board. Then I read each one aloud, asking them to raise a hand if they would share that specific complaint. Quality Progress published a seven-part series of issues in 1990 explaining how to create and use each of the seven most commonly used tools of quality. Since these seven tools of quality control were briefly presented in the textbook, these articles would be helpful in providing information if more coverage of the tools is desired. The citations for these articles are listed at the end of the references section of this chapter in this manual. I present the information on the Baldrige Award and certification methods. It would be a useful exercise to ask students to conduct research to plan for a debate in class. A number of articles have been published providing criticism and support of the award. In class, one side could criticize the award, while the other would offer support for the award. I also spend time comparing the Baldrige Award and the certification programs. Reimann and Hertz (1996) provide a useful comparison of the Baldrige Award and ISO 9000. Then, I spend time discussing the major contributions of the quality gurus. March (1994) presents a helpful description of the

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important contributions of Deming, Juran, and Crosby. I spend time presenting more information on service quality than what is covered in the textbook. I present and explain the conceptual model of service quality and questionnaire developed by Zeithaml et al. The book and article cited below are useful references. Zeithaml et al. (1990) present a conceptual model of service quality, which is useful for improving service quality by reducing one or more of the five gaps, along with the SERVQUAL questionnaire, which was developed as a tool for measuring service quality. Jaiswal’s (2008) use of SERVQUAL applied to call centers in India is a timely application. The questionnaire is included in the Appendix of the book, along with an explanation of how to analyze the results. The book by Zeithaml et al. explains the development of their innovative and widely cited work in service quality. The article by Zeithaml et al. (1988) summarizes and explains the conceptual (gaps) model of service quality. After presenting the service quality research, I find it helpful to provide some entertainment, which also becomes an application of the research. I show a 7-minute video clip from the 1993 movie “Falling Down.” (I learned the idea of using video clips at a presentation of the 1996 Annual Meeting of the Decision Sciences Institute by Brown et al.) Michael Douglas plays a defense worker who encounters a number of difficulties following his layoff from work. The clip I show, which begins 44 minutes into the movie, is about his experience at a fast food restaurant. I give the students background information, along with an apology in case the scene might offend anyone, before I show it. I also ask them to identify problems in the scene that we can relate to the gaps model when we discuss the scene. One problem is the fact that he can not order breakfast after 11:30 a.m., which is gap 1, the difference between customer expectations and management's perception of those expectations. The other problem is that the burger delivered does not look anything like the one pictured on the menu board, which is gap 4, the difference between the delivery of the service and the external communications. Students find this clip to be funny, which enlivens them by providing an interesting diversion. I then present information on benchmarking and reengineering that I gleaned from two useful books (Hammer and Champy, 1993; Camp, 1995). I point out that they are two useful techniques for improving processes if implemented successfully. I also warn them that reengineering has been criticized because many layoffs had resulted from the improvements. I point out that several companies later admitted that they had attributed their layoffs to reengineering, when in fact, the layoffs were actually attributed to downsizing. Once the concepts and steps of benchmarking and reengineering have been completed, it is useful to start a discussion in a large group or smaller groups to ask the students to compare and contrast benchmarking and reengineering.

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Finally, I spend time comparing quality and satisfaction. I point out that they are different and that it is important to measure both. I present some of the key details concerning satisfaction surveys based on the book and article cited below. The book by Rust et al. (1994) presents information on how to develop a satisfaction survey, which is focused on the business processes, along with steps for analyzing the results of the survey. Their article presents some of the key ideas from their book. I then show them a satisfaction survey that I had created for measuring the satisfaction level of students in a class. I have attached a condensed version of that survey at the end of this chapter.

War Stories Service Recovery (After discussing the differences between manufacturing and service quality, I then prepare to tell the following true story from a Harvard Business Review article by Hart and Sasser, Jr. (1990), which my students think is entertaining and informative.) As we have discussed, one important difference between manufacturing and service quality is the fact that in services the customer is typically involved in the actual “production” process or process steps. Since it is difficult to reach a 100% quality level, it is likely that a customer will experience a quality problem. So what can we do? We can recover from them. I will now tell you a true story published in an article in Harvard Business Review about a large group of vacationers taking a plane to Club Med Cancun. “The vacationers had nothing but trouble getting from New York to their Mexican destination. The flight took off 6 hours late, made 2 unexpected stops, and circled for 30 minutes before it could land. Because of all the delays and mishaps, the plan was en route for 10 hours more than planned and ran out of food and drinks. It finally arrived at 2 o’clock in the morning with a landing so rough that oxygen masks and luggage dropped from overhead. By the time the plane pulled up to the gate, the soured passengers were faint with hunger and convinced that their vacation was ruined before it had even started.” (p. 148) (I pause here to let it sink in and then ask a rhetorical question.) How would you feel if you were on that plane? “One lawyer on board was already collecting names and addresses for a class action lawsuit.” (p. 148) (Pause for laughter.)

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“Silvio de Bortoli, the general manager of the Cancun resort and a legend throughout the organization for his ability to satisfy customers got word of the horrendous flight and immediately created an antidote. He took half the staff to the airport, where they laid out a table for snacks and drinks and set up a stereo system to play lively music. As the guests filed through the gate, they received personal greetings, help with their bags, a sympathetic ear, and a chauffeured ride to the resort. Waiting for them at Club Med was a lavish banquet, complete with mariachi band and champagne. Moreover, the staff had rallied other guests to wait up and greet the newcomers, and the partying continued until sunrise. Many guests said it was the best time they’d had since college.” (p. 148-149) “In the end, the vacationers had a better experience than if their flight from New York had gone like clockwork. Although the company probably couldn’t measure it, Club Med won market share that night. After all, the battle for market share is won not be analyzing demographic trends, ratings points, and other global measures but rather by pleasing customers one at a time.” (p. 149) Not accounting for differing customer segment needs About two years ago, I purchased a new chair for my home office from a national chain of office supply stores. I arranged for home delivery since I could not manage to carry it up the stairs to my office by myself. The first frustration I felt was that I had to arrange to be home for an entire day for the delivery. I understand, as a professor of operations management, the desire to route the deliveries in a cost-effective manner. However, we cannot ignore the importance of customer satisfaction and the differences in customer needs. I think that office supply stores serve two different customer segments, which are business offices and home-based businesses. It is easy for most business office deliveries to be made since someone is normally present all day. Homebased deliveries may be an inconvenience for some people since they may have difficulty arranging someone to be present at home for an entire day. So I arranged to be home for an entire day for my delivery. Luckily, my chair was delivered in the morning. However, I found out after the driver left that the assembly parts for the chair were missing. The only items in the box, which by the way was new and unopened, were the chair and the base. The leg and rollers were missing. I then called them to correct the situation. I was told that I could have another chair delivered the next day. I was given the impression during the phone call that I could have an early morning delivery since I had appointments already scheduled that day. I called at about 9:15 that morning to determine the time of delivery since I had not yet received it. I was then told that I could not be given a delivery time, regardless of my situation (which I explained again on the phone). I understand that the office supply store is not completely at fault in this scenario. However, it is partially at fault since it purchases items from a supplier with questionable quality control. I find it hard to believe that the office supply store

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can not even reduce the delivery time range (or window) to one or two hours on the morning of delivery. It would seem to me that once the routing is done that a reasonable delivery time window could be given to the customer so that he/she does not have to stay home all day. I also wondered how frequently the delivery drivers make multiple stops at the same delivery location due to the customer not being there at the time of delivery. As a matter of fact, my delivery driver checked to make sure I was home on the first delivery day before he brought the chair to the door. During the second delivery, I asked the driver about the frequency of having to come back when a customer is not at home. I was told that it happens frequently. The office supply store did not have a policy about charging for an extra delivery stop. I can begin to imagine how much money (due to the high cost of gasoline) and time is wasted due to their policy of not giving a small delivery window. In addition, how many customers are lost due to this policy? Service guarantees (After some discussion of service quality, I ask them to give me examples of a service guarantee. For example, Blockbuster Videos has a guarantee for a number of newly released movies that they will be in stock or you will get a rain check that can be used to rent that movie within the next 30 days for free. You could also discuss the benefits of a guarantee. It provides valuable feedback from customers, which rarely happens when there is no guarantee. This feedback can then be used to improve quality. I then tell them that I am going to list the details of a guarantee for a pest extermination company. I ask them to decide if they think this company is still in business.) Here is the guarantee for hotel and restaurants offered by the pest exterminator BBBK: • “You don’t owe one penny until all the pests on your premises have been eradicated.” • If you are ever dissatisfied with BBBK’s service, you will receive a refund for up to 12 months of the company’s services – plus fees for another exterminator of your choice for the next year. • If a guest spots a pest on your premises, BBBK will pay for the guest’s meal or room, send a letter of apology, and pay for a future meal or stay. • If your facility is closed down due to the presence of roaches or rodents, BBBK will pay any amount of fines, as well as all lost profits, plus $5,000.” (Hart, 1988, p. 54) So, do you think this company is still in business? (Most think it is not!) Well, it was successful and was still in business as of a few years ago (and to my knowledge, still is), when it was over 35 years old. I know that BBBK is still in existence because a student told me that her company used BBBK in their restaurant when she worked there a few years ago. The company, which is called “Bugs” Burger Bug Killers (BBBK), was formed in 1960 in Miami by creating the

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guarantee and then designing the company procedures to support the guarantee. In 1986, only $120,000 was paid out on the guarantee on sales of $33 million (Hart, 1988). Of course, BBBK charged up to 10 times the normal rate of its competitors. BBBK was sold to Johnson Wax in 1986, with an agreement to keep the guarantee. At that time it had accounts in over 43 states in the U.S. This is now a good time to share one or more of my pest stories (fly in salad, rat in restaurant, and mouse running on produce in grocery store) or one of yours if you have one to share! This story can lead to a good discussion about the characteristics of a good service guarantee. According to Hart, it is “(1) unconditional, (2) easy to understand and communicate, (3) meaningful, (4) easy (and painless) to invoke, and (5) easy and quick to collect on.” (Hart, 1988, p. 55) Another good discussion would cover the need to design the procedures to reduce the chances of paying out on the guarantee. I ask the students if they recall the guarantee that Domino’s Pizza used to offer (delivered in 30 minutes or less or else it is free). I then ask what they would have done to ensure on-time delivery. The Move from QC to QA (This story was recently told to me by an anonymous source.) During my years as a manager, I have noticed that the trend in quality has been to move from quality control (QC) to quality assurance (QA). This means that organizations have moved from an emphasis on detecting poor quality after production to preventing poor quality from occurring in the first place. The onus has been put on the operator to make a quality item, as opposed to having the inspector find the defect. This eliminates the waste of spending money on inspection, which includes the salary of the inspectors, the cost of testing the items (which may be destroyed in the test, such as an automobile crash test), and the cost of rework. In the past, operators were typically rewarded based on meeting production quotas or efficiencies. This is problematic since the operators may choose to speed up their work to produce more items causing quality to decrease. They also may not be worried about the probability of that defect being discovered since inspectors do not normally check every item produced. Consider an analogy. How many times do you overspeed when driving your car? You probably do so because you believe the chance of being caught by the police officer is small. In considering the problem, I realized that the solution was to structure the rewards and penalties appropriately. When I was a manager at a glass decorating company, I made that change in the screen printing process. This process entailed three passes of printing and baking in the oven. In the past, the average production per shift was 6,000 items. We decided to set the standard at 10,000 items per shift, with a bonus being paid to all workers in that process for exceeding the standard. We set up inspection at the end of the process only (final inspection). Every lot and batch was measured for quality. If a defective item was found, every worker’s bonus in the

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process was decreased accordingly. We quickly averaged 12,000 items per shift without making any other changes to the process, such as increasing the number of workers. This production rate gave each worker a 20% increase in pay. This change resulted in the operators themselves identifying the quality problems. They knew that if they spend time working on a defective item, their bonus would be affected. In addition, there was a reinforcement of quality by the team up and down the production process since no one wanted their bonus to be affected by someone else’s poor quality. The final results were that the workers received a 20% increase in pay, while the production quantity doubled. In addition, the quality levels increased significantly. It is difficult to know how much the quality level had changed. This is due to the fact that before the change, workers who found a defected product would spread it through all the good products to decrease the chances of detection. This process changed from the use of the 125 workers producing an average of 6,000 per shift to the use of 75 workers producing an average of 12,000 per shift. Therefore, the level of productivity more than tripled. The reduction in the number of operators was achieved by removing the temporary workers, along with some layoffs. Manufacturing Story (This story was told to me by an anonymous source recently.) When I was working as an engineer at a manufacturer of controls used in washing machines and dryers, we had a system in place where our line employees could make bonuses based on their output. One of the controls we manufactured was used for the temperature setting in the clothing dryers. We built the controls and sent them to the dryer manufacturer who simply installed them in each dryer unit. The last step in our production process was to attach a fastener on a threaded post, which was done by hand with a wrench. Unfortunately, one of the line employees decided to bring an electric drill with a socket attached so that he could put on the fasteners much faster. The problem was that when he used the electric drill, the fastener was made very tight, which resulted in a part of the internal component breaking off. This damage was not visible so the bad parts were shipped along with the good ones. When our customer started having numerous problems with only the temperature control that we supplied, we could not imagine why the component would break internally. We were very close to losing this major client because of this problem. We also had to pay large penalties for the quality problems and the downtime caused by our defective parts. Fortunately, we did locate our problem. We told all the line employees that no one was allowed to bring personal tools to work since there was a reason why an electric drill with a socket attachment could not be used on this control. Obviously, wherever electric tools could be used, we supplied them and would continue to do so for our employees.

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How to deal with damaged items (This story was told by an anonymous source as well.) When I was working as a design engineer in a corrugated box plant, I was often sent to other locations to solve quality problems. Sometimes a carton design change was necessary. However, there was one case I will never forget at a canning plant I was sent to. We manufactured corrugated containers for cans of several vegetables, such as green beans, asparagus, tomatoes, carrots, peas, pork, and beans. The carton used for each vegetable was the same size and style; only the outside printing was different since it identified the type of vegetable in the cans. Over 80 percent of our complaints were for the pork and beans boxes, with fewer complaints for the peas, tomatoes, and green beans boxes. And we never had any problems with asparagus boxes. It just did not make sense to me since the boxes were identical, except for the outside printing. While I spent two days watching the packaging line where the canned goods were automatically packaged in our containers, I could not find any problems. So I finally asked the manager what they did when a box fell off the line or got damaged. He said that the cans of vegetables went into a store room where their employees could buy the dented cans for five cents each. It was rather easy to see what the real problem was – they never needed any more asparagus in the five-cent store room, but they were always in short supply of pork and beans. Whenever more pork and beans were needed in the store room, someone just pushed a few boxes off the line so that they would be damaged from the fall. The plant manager agreed that this answer made a lot of sense. So his company discontinued the practice of selling dented cans to employees. Instead, they gave such items to a free food pantry for the needy nearby. To no one’s surprise, our problem with the pork and beans boxes disappeared completely. KFC article Apte and Reynolds (1995) explain the process followed by the Kentucky Fried Chicken (KFC) to deal with service delays at the drive-through window (DTW). The article includes the QSC evaluation form used by KFC to measure quality. In 1989, KFC’s South Central Division’s profit margin and performance on key customer attributes on the QSC evaluation form, operational facility review form, and market tracker surveys were significantly decreasing. One of the key areas of concern was the DTW service times. KFC selected four restaurants for further study and testing. This included data collection of DTW times, along with the use of quality tools, such as

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the Pareto chart, cause-and-effect (fishbone) diagram, and control charts. They set a goal of reducing the service time at the DTW from more than two minutes on average from the arrival of the customer at the DTW (not the speaker) to the completion of service in 60 seconds, a goal which was believed by many to be unrealistic. The teams of workers were asked to write ideas in a notebook, along with explanations for each instance of longer service times. The article presents KFC’s fishbone diagram on page 14 of the article. Some of the changes that were implemented as a result of the study were an improvement on the process flow and layout, change of the product mix, standard box sizes, and the use of headsets for employees. The product mix offered at the DTW was changed to ensure that the items that were time-consuming to make and not ordered often, were not included on the menu. The results were a reduction of the service time, which was about 30 seconds when the article was written, along with increased sales and productivity. Hudson Foods (Costs of Poor Quality) (This story was told by Dr. Scott M. Russell.) Hudson Foods was one of the top ten poultry producing companies in the U.S. In 1996, a food-borne illness outbreak involving ground beef occurred that resulted in an investigation by the U.S.D.A. - Food Safety and Inspection Service (F.S.I.S.). The Hudson beef processing facility was forced to discontinue operation and workers were laid off. In the two weeks following the incident, twenty-five million pounds of ground beef were condemned by the U.S.D.A. and destroyed. Moreover, even though the portion of the company that produced beef products was relatively small compared to the poultry portion of the business, the company went out of business within 14 days. Hudson Foods, a $600 million company, was forced out of business in 14 days because its brand name was badly tarnished by this incident. DNA Traceback (Source of Poor Quality) (This story was told by Dr. Scott M. Russell.) Recently, scientific instruments have been developed that have allowed scientists to evaluate the DNA fingerprint of bacteria. This allows the scientist to perform bacterial isolation with far greater discrimination than simply identifying the genus and species of the organism. Using these techniques, it is possible to determine the source of a food-borne illness outbreak. For example, a number of people became ill after eating a particular type of frozen pizza. Because the pizza was a “supreme” and contained various types of food ingredients, it was difficult to determine the source of the bacteria. Upon investigation, it was found that the sausage was contaminated. By evaluating the genetic material of the bacteria found in the sausage and in the stool of the individuals involved, scientists were able to determine that the genetic pattern of the bacterium involved was associated with mice. The same genus and species of bacteria might have originated from humans or cows, but these bacteria have different genetic patterns than those found on mice. The genetic material, if examined

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carefully, can be used to disclose the type of animal that the bacterium lived on. Thus, when evaluating the processor that distributed the sausage, mice were found which had bacteria with the precise genetic material bands as those in question. The case was solved by concluding that the mice had been ground into the sausage during processing and had contaminated the food. Using this technique on E. coli O157:H7 contaminated ground beef, researchers were able to trace it back to a ground beef grinding facility, to a particular beef producer, and then to a particular cattle farm. It is my understanding that when the owner of this farm found out that his cattle were responsible for this outbreak, he took his life, rather than face the extreme consequences. E. coli O157:H7 on ground beef is considered an adulterant by the U.S.D.A. Arsenic or cyanide is also considered adulterants in foods. Thus, a naturally occurring organism is now being placed into the same legal category as a deadly toxin. An approach for diagnosing problems as a consultant (This story was told by Dr. Scott M. Russell.) The first and foremost thing to remember when working with a company in the capacity of a consultant is that, in every case, individuals within the company know either bits and pieces needed to solve the problem, or they know the entire solution, but are unable to implement it. For example, I have often gone into processing facilities and thoroughly reviewed the entire operation and made suggestions only to hear the plant manager say “I told you that was the problem” to his/her manager. In a particular instance, I went into a poultry plant that was having a high incidence of hemorrhaged thighs. Upon investigating the freshly picked carcasses, I noticed that when I handled the carcass by the leg, the femoral artery hemorrhaged while holding the carcass. This indicated extremely fragile arteries, which indicated aflatoxin ingestion by the birds during growout. Aflatoxin is a toxin formed by the mold Aspergillus flavus when growing on corn that is used in poultry feed. When chickens eat this toxin, it makes their arteries fragile and it is easy to notice bruising and hemorrhaging. Thus, I went to the Live Production Manager and asked if he had been monitoring aflatoxin in the feed. He said that they monitored the feed and there was no problem. What I did not know was that the plant had been blaming him for this problem for some time and he had been denying it. Once again, he tried to shift the blame to the plant. Upon interviewing other people that were responsible for the live birds, they indicated that the birds had exhibited other signs of aflatoxicosis. Therefore, I pressed the Live Production Manager on this issue again and said that I had some strong evidence that the birds were being exposed to toxins. Finally, he agreed that they had found a great deal of aflatoxin in the feed. If I had not made this discovery, the Live Production Manager might still be deceiving the plant personnel into believing that it was their fault. Often, the consultant must act as a moderator to get past the finger-pointing to the root of the problem, and find out the facts before a solution can be developed. In another instance, a plant was about to be shut down due to fecal contamination of the carcasses. The most important aspect of reducing fecal contamination is to first diagnose where

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the problem originates. It must be determined whether the problem is related to deficiencies in the field or in the plant. First, I tried to evaluate the intestinal strength and content of the birds to see if the problem originated while the bird was growing. If the intestines show diseases, such as coccidiosis, and evidence indicates the birds may have had intestinal problems, then the growout operation needs to be improved to avoid contamination in the plant. Next, I evaluated each piece of processing equipment within the plant to determine if they were responsible for causing contamination. I tried to identify if differences were occurring from line to line and found that one particular line was worse than the others. This told me that the equipment on one line was the culprit. After backtracking and investigating each piece of equipment, I found that the venting machine (the machine that removes the cloaca of the chicken) was responsible. I told the plant personnel to repair or replace the venter. The company immediately replaced the venter and the problem disappeared. In this case, the Live Production Manager was being blamed by the plant for something that he had no control over. In fact, the Complex Manager was about to fire the Live Production Manager until we proved that the problem was originating in the processing facility. Again, we were serving as consultants and moderators. Quality in Design To highlight the several different aspects of design quality, I like to discuss with the class the design of items they may be familiar with. I start by mentioning how Conformance to Specifications can lead to the Flashing 12 problem on DVD players. The players do what they were designed to do but not necessarily what the typical user wants. We then discuss either bicycles or automobiles. With an automobile, I have them assume they are a typical suburban family with children. The children play sports, the family visits grandparents, and so forth. I then ask them to describe the characteristics of an automobile that would fit their needs. They mention reliability, price, operating costs, room, etc. I then point out that what they have described is a minivan. We then note that even though the minivan better fits the needs, an SUV is the more popular choice. This points out the difference between fitness for use and psychological factors.

Answers to Discussion Questions in Textbook 1. Define quality for the following products: a university, an exercise facility, spaghetti sauce, and toothpaste. Compare your definitions with those of others in your class. The quality of a university can be defined as: • quality of professors – have Ph.D., helpful, knowledgeable, able to clearly explain material, fair • ability to place students in a good position at a high salary in a timely manner • facilities are up-to-date in terms of technology (i.e. wireless classrooms)

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value for the price of the education ability to prepare students for success in the business world variety of course offerings efficiency and accuracy of processing paperwork, such as registration for classes appearance of the campus perceived prestige of the university

The quality of an exercise facility can be defined as: • variety of gym equipment • variety and availability of fitness classes • value for the price of membership • ability to help members get into shape • accurate billing • atmosphere meets member’s needs • waiting times for machines are two minutes or less The quality of spaghetti sauce can be defined as: • good taste • the jar is filled to 28 ounces plus or minus one ounce • value for price paid • perceived quality of the product • ability to quickly answer questions at the address listed on the jar of sauce • the sauce has chunks of tomatoes • ease of opening jar • ease of preparing the sauce to eat • able to keep leftover sauce in container in refrigerator easily to last longer • length of time the sauce can still be eaten The quality of toothpaste can be defined as: • ability to clean teeth • good taste • perceived quality of the product • ability to keep breath fresh • ability to prevent plaque • ability to whiten teeth • ability to prevent cavities • tube of toothpaste is filled • ability to fight gingivitis • ability to fight tartar

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able to quickly and accurately answer questions in a friendly manner at the toll-free number listed on toothpaste tube tube is filled with 4.2 ounces plus or minus 0.5 ounce. toothpaste is certified by the American Dental Association (ADA)

2. Describe the TQM philosophy and identify its major characteristics. TQM focuses on identifying the causes of quality problems and correcting these problems. TQM emphasizes the need to include every employee of the organization in the quality improvement efforts. TQM emphasizes the need to define quality based on the customer’s needs. Its major characteristics are customer focus, continuous improvement, quality at the source, employee empowerment, understanding quality tools, team approach, benchmarking, and managing supplier quality. 3. Explain how TQM is different from the traditional notions of quality. Also, explain the differences between traditional organizations and those that have implemented TQM. Traditional notions of quality focused on inspection of products. Instead of relying on inspection as the primary tool for quality, TQM focuses on identifying the causes of quality problems and correcting these problems. TQM takes a broader view of the organization than the traditional views of quality. Organizations that implemented TQM successfully were able to produce a higher quality product at a lower price, thereby increasing market share. Traditional organizations have either failed or will fail in the future if quality is poor. 4. Find three local companies that you believe exhibit high quality. Next, find three national or international companies that are recognized for their quality achievements. The selection of the local companies will depend on the location of the university utilizing this textbook. The Ritz-Carlton Hotel Company, a winner of the Malcolm Baldrige National Quality Award, is known for outstanding customer service. Its employees are trained well and are empowered to deal with quality problems on the spot. Florida Power & Light (FPL) was the first American company to win Japan’s Deming Prize, which is a prestigious quality award. FPL has created and used a process for identifying and dealing with quality problems that has been benchmarked by a number of companies. For example, FPL applied this process to service interruption problems to determine the major causes. They made changes based on the analysis, such as moving power poles away from dangerous curves in the road to deal with one important cause (Florida Power Light Quality Improvement (Q1) Story Exercise (A), Harvard Business School Case 9-689-041). Disney is well-respected for its customer focus. Disney has theme parks in the U.S., Japan, and Europe. Disney is known for its excellent training program and attention to details.

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5. Describe the four dimensions of quality. Which do you think is most important? The four dimensions of quality are the quality of product or service design, quality of conformance to design, ease of use, and post-sales service. The quality of product or service design is determined by the features that are included in the final design of the product or service. The quality of conformance to design is the result of how well the product or service meets its specifications. Ease of use is determined by the ease of using the product or service, its reliability and its maintainability. Post-sales service is the level of service provided after the product or service has been purchased. The four dimensions of quality are all important in determining quality. However, quality of design is most important since it determines the ability to meet customer needs, which is the objective. If the quality of design does not meet customer needs, then it will not matter if the product or service meets it design specifications, is easy to use, or is supported by good postsale service. 6. Describe each of the four costs of quality: prevention, appraisal, internal failure, and external failure. Next, describe how each type of cost would change (increase, decrease, or remain the same) if we designed a higher-quality product that was easier to manufacture. Prevention costs are the costs associated with preventing poor quality, such as training, designing a quality product that is easy to manufacture, and planning costs. Appraisal costs are the costs of determining the level of quality and finding defects. These costs include inspections, product testing, and quality audits. Internal failure costs are the costs associated with finding and dealing with quality problems discovered before the product or service reaches the customer. Some examples of internal failure costs are rework, scrap, and machine downtime due to quality problems. External failure costs are the costs of poor quality discovered by the customer. Some examples of external failure costs are product returns, lawsuits, and repairs. If we designed a higher quality product that was easier to manufacture, then both internal and external failure costs would decrease since we would produce less defective products. Appraisal costs would probably decrease since we may be able to reduce inspections and quality audits. Prevention costs would increase since we have expended effort to design a better quality product. 7. Think again about the four costs of quality. Describe how each would change if we hired more inspectors without changing any other aspects of quality.

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If we hired more inspectors without changing other aspects of quality, then we would still produce the same number of defects. However, we would find more, but not necessarily all, of these defects before they reach the customer. Therefore, internal failure costs will increase, while external failure costs will decrease. Appraisal costs would increase since we are now paying for more inspectors. Prevention costs would remain the same since we did not change other aspects of quality. 8. Explain the meaning of the plan-do-study-act cycle. Why is it described as a cycle? The plan-do-study-act cycle is a procedure for continuous improvement. First, a plan is developed after we have documented procedures, collected data, and identified problems. Next, the plan is implemented. We then study the results of our implementation. Finally, we act based on the results. It is described as a cycle since it is an ongoing process or series of steps that is repeated. 9. Describe the use of quality function deployment (QFD). Can you find examples in which the voice of the customer was not translated properly into technical requirements? QFD is a tool for matching customer requirements to technical requirements. This tool incorporates the customer requirements, the relative importance of the customer requirements, the technical requirements (how we can meet customer requirements), the strength and type of relationships between the customer and technical requirements, the relationships or trade-offs between the different technical requirements, and the ratings of the ability of competitors and our company to meet customer requirements into one diagram in order to evaluate all this information in an integrated manner. In the airline industry, low prices and direct, non-stop flights are two important customer requirements. Most airlines have focused on developing a hub-and-spoke system in order to improve efficiencies. A hub-and-spoke system is one in which many flights stop at a hub city, such as Atlanta, before continuing to the final destinations, or the spokes. This limits the ability of the customers to find a direct, non-stop flight to their destination, thus increasing travel time. 10. Describe the seven tools of quality control. Are some more important than others? Would you use these tools separately or together? Give some examples of tools that could be used together. The seven tools of quality control are the cause-and-effect diagram, flowchart, checklist, control chart, scatter diagram, Pareto chart, and histogram. The cause-and-effect diagram, or fishbone diagram, shows all possible causes of one quality problem or defect type (effect),

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where the causes are separated into categories (or bones) on the diagram. It is used as a brainstorming tool to determine which causes to investigate. The flowchart documents the flow of the materials or customer through the steps of the process. The checklist lists the type of defects, along with a tally of the frequency of each type. Control charts show plots of samples of a product or service characteristic taken from the process over time. The control chart helps us determine whether the process is in control, which means that only random variation exists. Scatter diagrams are plots on an x-y axis used to determine the relationship between two variables. Pareto charts show the frequency and cumulative percentages of defect types arranged from most frequent to least frequent defect types. This chart demonstrates which defect types cause the majority of the quality problems or complaints. A histogram shows the frequency of each quality problem. The Pareto chart and cause-and-effect diagram can be effectively used in combination. First, the Pareto chart is used to identify the problem(s) that cause the highest number of actual defects or complaints. Next, a common problem becomes the effect on the cause-and-effect diagram. This diagram then helps us identify causes to investigate in order to solve the problem. 11. What is the Malcolm Baldrige National Quality Award? Why is this award important, and what companies have received it in the past? The Malcolm Baldrige National Quality Award (MBNQA) is an award that was created by the U.S. Congress in 1987 to promote quality and improve the trade deficit. The award is important because it provides an effective framework for improving quality. Many companies have used the MBNQA framework to improve quality, without any intention of applying for the award. Some of the companies that have received it are Motorola, AT&T, Xerox, Federal Express, and Ritz-Carlton. 12. What are ISO 9000 standards? Who were they set by and why? Can you describe other certifications based on the ISO 9000 certification? ISO 9000 is a set of standards and a certification program for companies based on a documentation of the quality processes. The standards were set by the International Organization for Standardization to set a standard for companies doing business. ISO 14000 is a set of standards that focuses on environmental concerns. 13. Who are the seven “gurus” of quality? Name at least one contribution made by each of them.

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The seven gurus are Walter A. Shewhart, W. Edwards Deming, Joseph M. Juran, Armand V. Feigenbaum, Philip B. Crosby, Kaoru Ishikawa, and Genichi Taguchi. Shewhart’s work created the foundation for today’s statistical process control, and he is often referred to as the “grandfather of quality control.” Deming helped management understand that most quality problems are caused by the processes and systems, not the workers. Deming motivated the usage of statistical quality control tools for differentiating between common and special causes of variation. Juran contributed to the quality movement by creating a focus on the definition and costs of quality. Feigenbaum introduced the concept of total quality control. Crosby’s contribution is a result of his argument that quality is free, which is based on that idea that many costs of quality are hard to quantify. Ishikawa identified the concept of the “internal customer.” Taguchi is known for applying a concept called design of experiment to product design

See Solutions Manual for Answers and Solutions to Problems

Answers to Textbook Case – Gold Coast Advertising (GCA) 1. What is wrong with how Gold Coast Advertising measures its quality? Explain why Gold Coast should ask its customers about how they define quality. It is not frequently measuring quality based on the ability to meet customer expectations. Success is determined by meeting or exceeding customer expectations. It is important to frequently ask customers how they define quality since their definition can change over time. 2. Offer suggestions to George Stein on ways of identifying quality dimensions GCA’s customers consider important. George should interview regular customers that stopped using GCA for their advertising needs, which is known as defection analysis (which was discussed in a Harvard Business Review article). This is a great source of information. In addition, George should survey customers to determine which criteria are important. 3. Develop a short questionnaire to be filled out by GCA’s customers that evaluates how customers define quality. Have the customers and potential customers rate the following criteria, either on a scale of 1 to 5, where 5 is the highest level of importance to the customer, or to divide 100 points among the list of criteria.

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creativity of advertising speed of developing advertising price of advertising development professionalism of advertising agency staff empathy of advertising agency staff work is completed on time

In addition, the survey should have open-ended questions: What are the criteria that you would use to select an advertising agency? What improvements would you suggest for advertising agencies?

Answers to Textbook Case – Delta Plastics Inc. (A) 1. Identify the different costs of quality described in the case. Explain the trade-offs between the costs of quality that Delta made in its decision. Was George Chadwick correct that conducting more tests was unnecessary? The case highlights the difference between end product quality, also referred to as safety in this case, and quality in manufacture. Chadwick and Fine were concerned that their significant investment in product development and safety tests would be lost if another producer were to beat them to the market. De Costa was concerned that they had inadequately tested the product’s quality in manufacturing. They could end up with a product that would be expensive to produce. 2. Use one of the quality tools described in the chapter to analyze the defects in the case. How do the quality dimensions differ between the two materials? Are there more defects associated with the super plastic versus the standard material? A Pareto chart of the total defects found over the 4 weeks for each plastic and each defect shows that the Super Plastic yields greater quality problems. While cracks and air bubbles are the two most frequent problems for both types of plastics, these problems are more frequent with the new plastic. Cracks are especially a problem, with the new plastic yielding cracks more than twice as often. Thickness, scratches, and uneven edges are less of a problem and show smaller differences between the two products. 3. Given your findings, what should Jose do? Now that the Pareto chart indicates that the new material may be susceptible to cracking, Jose

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needs to find the cause of the cracking and a solution for it. Jose can develop a fishbone chart with the help of his staff to help identify the source of the cracking problem. He will then need to work with manufacturing engineers and R&D to find a solution.

Complete Manuals for the Interactive Cases also are available on the companion site: www.wiley.com/college/reid.

Interactive Learning The student version of the web site contains PowerPoint chapter reviews, selected solutions, several informative company tours, and web links.

In Class Exercise I would like to thank Professor William A. Ruch for the use of this interesting exercise on service quality. This exercise could be used in a way that requires all the students in the class to answer the questions for one type of service. I prefer to use it the way it was designed. This way the students can give more thought to an area of interest or that they work in. Students like having the ability to make a service industry selection. In addition, when the graded assignments are returned, the professor could ask someone from each type of service used to share their answers with the whole class. This could become a discussion. The following exercise takes approximately 40 minutes for the students to answer in class by forming teams. I give it out at the end of class, while allowing enough time, so that the students can leave as soon as they have completed the exercise. I give the students the option of working individually or in teams of up to five students. When I hand out copies of the exercise, I ask the students to take one copy per person and one copy per team. This way each student will have a copy of the assignment. I only require one copy per team be turned in to me for grading.

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SERVICE QUALITY EXERCISE

HAND IN ONE CLEAN COPY

Please provide names and signatures (only for team members who are present today): NAME (Print) SIGNATURE 1. 2. 3. 4. 5.

The purpose of this assignment is to discuss quality in a specific service situation. Discuss each of the questions on the back and arrive at a consensus answer. BASIC DEFINITION OF QUALITY IN SERVICES: Excellent quality Good quality Poor quality Very poor quality

= = = =

you would highly recommend this service you would recommend this service you would not recommend using this service you would recommend against using this service

SERVICE SITUATIONS: Auto brake job Executive search firm Financial planning Used car sales Landscaping Federal Express Temporary office help agency Public utility (elec. or gas) Trash pickup-city or private U.S. Army combat unit Pet grooming Hospital emergency room Purchasing dept. in mfg firm Information systems department

American Express Card Catered wedding Computer repair Theme park U.S. Postal Service State auto license bureau Movie theater Nursing care Dome stadium Pre-school Gambling casino Barber/beauty shop Security service Photo developing

One-day training seminar City police department Rock concert Travel agent Interior decorating Car wash Airline Defense attorney Dry cleaner Accounting firm Bank checking account Mexican restaurant Newspaper Student copy service

......or choose any other service not on the list (but check with the instructor for confirmation).

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SPECIFIC SERVICE CHOSEN EXPLAIN ALL OF YOUR ANSWERS -- "YES" OR "NO" IS NOT ACCEPTABLE.

1. Is there a physical product involved? Which is dominant, the product or the service?

2. How unique or how standardized is the product and/or service from the same company from one time to the next?

3. Give three specific examples of characteristics of the product and/or service that would determine how well the quality of the service is rated.

4. Is the customer involved in the production and delivery of the service? How?

5. What is an example of (a) a critical defect, (b) a major defect, and (c) a minor defect?

6. Give two or more examples of the cost(s) of a defect for the company?

7. After the service is delivered, is corrective action possible? Is restitution possible?

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8. Is service quality most affected by the contact employee, by technology, or by management? Explain your choice.

9. Is service quality the same as customer satisfaction?

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ANSWER KEY 1. Is there a physical product involved? Which is dominant, the product or the service? Physical products involved in airlines and restaurants are food and seating. 2. How unique or how standardized is the product and/or service from the same company from one time to the next? A car wash is standardized, while an emergency room visit is customized. 3. Give three specific examples of characteristics of the product and/or service that would determine how well the quality of the service is rated. Speed, courtesy, and taste 4. Is the customer involved in the production and delivery of the service? How? The customer is typically involved in the service industry. They come to place the order – make their selections – and then wait for the service. For example, they are part of production and delivery when they are getting a haircut – deciding what to do and having it done. 5. What is an example of (a) a critical defect, (b) a major defect, and (c) a minor defect? Critical defect is the worst possible problem (i.e. plane crash, food poisoning). Major defect is a bad problem, but not as bad as a critical defect (i.e. hair turns orange, plane is stuck on the runway for hours and runs out of food and drinks). Minor defect is just a small problem (i.e. plane is a few minutes late, wrong change is given). 6. Give two or more examples of the cost(s) of a defect for the company? A defect may mean payments for a lawsuit settlement, lost customers, and the cost of repairing the item. 7. After the service is delivered, is corrective action possible? Is restitution possible? Many times both are possible. The wrong hair color can be fixed. We can give a refund of the cost of the hair coloring. 8. Is service quality most affected by the contact employee, by technology, or by management? Explain your choice. It depends on the service chosen. 9. Is service quality the same as customer satisfaction? They are not the same. Service quality factors can affect satisfaction.

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References Anonymous, “Cashing in on Suggestions,” Newsday, Feb. 2, 1998. Apte, U. M. and Reynolds, C. C., “Quality Management at Kentucky Fried Chicken,” Interfaces, 25(3), May – June, 1995, 6 – 21. Banks, B., “The Rites of Service,” CA Magazine, July, 1992, 20 – 28. Camp, R. C., Business Process Benchmarking: Finding and Implementing Best Practices, ASQC Quality Press, Milwaukee, WI, 1995. Dettmer, W. H., Goldratt’s Theory of Constraints: A Systems Approach to Continuous Improvement, ASQ Quality Press, Milwaukee, WI, 1997. Garvin, D. A., “Competing on the eight dimensions of quality,” Harvard Business Review, Nov.Dec., 1987, 101 – 109. Hammer, M. and Champy, J., Reengineering the Corporation, HarperBusiness, 1993. Hart, C. W. L., “The Power of Unconditional Service Guarantees,” Harvard Business Review, July-Aug.., 1988, 54 - 62. Hart, C. W. L., Heskett, J. L. and Sasser, Jr., W. E., “The Profitable Art of Service Recovery,” Harvard Business Review, July-August, 1990, 148 - 156. Jaiswal, A. K. (2008) Customer satisfaction and service quality measurement in Indian call centres, Managing Service Quality. Bedford: Vol. 18, Iss. 4; p. 405 Kordupleski, R. E., Rust, R. T. and Zahorik, A. J., “Why Improving Quality Doesn’t Improve Quality (Or Whatever Happened to Marketing?),” California Management Review, Spring, 1993, 82 – 95. March, A., “A Note on Quality: The Views of Deming, Juran and Crosby,” in Readings in Total Quality Management by Harry Costin, The Dryden Press, 1994, 137 – 154. Reimann, C. W. and Hertz, H. S., “The Baldrige Award and ISO 9000 Registration Compared,” Journal for Quality and Participation, Jan./Feb., 1996, 12 –17. Rust, R. T., Zahorik, A. J. and Keiningham, T. J., Return on Quality, Irwin Professional Publishing, 1994.

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Tax, S. S. and Brown, S. W., “Recovering and Learning from Service Failure,” Sloan Management Review, 40 (1), 1998, 75 - 88. Zeithaml, V. A., Berry, L. L. and Parasuraman, A., “Communication and Control Processes in the Delivery of Service Quality,” Journal of Marketing, 52, April 1988, 35 – 48. Zeithaml, V. A., Parasuraman, A. and Berry, L. L., Delivering Quality Service, The Free Press, 1990.

Quality Progress Series on the seven tools of quality: Burr, J. T., “The Tools of Quality; Part I: Going with the Flow (chart),” Quality Progress, June 1990, 64 – 67. Sarazon, S. J., “The Tools of Quality; Part II: Cause-and-Effect Diagrams,” Quality Progress, July 1990, 59 – 62. Shainin, P. D., “The Tools of Quality; Part III: Control Charts,” Quality Progress, Aug., 1990, 79 – 82. Anonymous, “The Tools of Quality, Part IV: Histograms,” Quality Progress, Sept., 1990, 75 – 78. Anonymous, “The Tools of Quality; Part V: Check Sheets,” Quality Progress, Oct., 1990, 51 – 56. Burr, J. T., “The Tools of Quality; Part VI: Pareto Charts,” Quality Progress, Nov., 1990, 59 – 61. Burr, J. T., “The Tools of Quality; Part VII: Scatter Diagrams,” Quality Progress, Dec., 1990, 87 – 89.

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SATISFACTION SURVEY

Please rate the following: Professor Character Traits Your professor overall Instructor’s knowledge of subject matter Instructor’s attentiveness Instructor’s communication skills Instructor’s level of enthusiasm Instructor’s level of respect for students Managing Class Overall management of the class The variety of teaching methods used Encouragement of questions Whether class is interesting Level of discussion in class Instructor’s rapport with the class Instructor’s control of the class Assignments Assignments overall Number of assignments Length of assignments Ability of assignments to facilitate learning Speed of returning assignments Course design Overall course design Number of topics covered Clarity of course requirements Pace of course Testing Testing overall Whether tests cover material from class Fairness of tests Length of tests Clarity of test questions (not tricky) Speed of return of tests Grading Grading overall Clarity of grading Fairness of grading Accuracy of grading Feedback Feedback from instructor overall Quality of feedback Nature of feedback

Much better than expected

About as expected

Worse than expected

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Frequency of feedback Course materials The course materials overall Clarity of course materials Relevance of course materials How understandable course materials are Much better than expected

About as expected

Worse than expected

Summary Questions This instructor This course This course with this instructor How likely are you to take a course with this instructor again if you have the opportunity? ___ 100% ____ 80% _____60% _____ 40% ______ 20% ______ 0% How likely are you to refer this instructor to others? ___ 100% ____ 80% _____60% _____ 40% ______ 20% ______ 0%

What could I do to make this course even better? What should I do to become a better professor?

What do you like most about the course? What am I doing well in the course?

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Chapter 6: Statistical Quality Control Overview This chapter focuses on the three major topics of traditional statistical tools: descriptive statistics, statistical process control (SPC), and acceptance sampling. Sources of variation in a process are discussed. The SPC section includes discussions about the usage and types of control charts for attributes and variables, along with process capability. Finally, the concepts of Six Sigma and acceptance sampling are discussed.

Teaching Tips and Strategies I usually spend several hours covering this material. The time does include one or two in-class exercises. I always use the exercise included in this manual. I sometimes supplement it with an exercise that includes the need to create the control charts using the data provided. I also frequently use a physical exercise derived from SPC training in the aerospace industry. In this exercise, teams either catapult erasers across the room using a rubber band launcher, or toss coins up a yardstick using a ruler as a launcher (discussed below). In each case, they plot the means and ranges for the sets of trials. They then change positions, and compute and plot additional sets. I find that students enjoy the exercise and later perform better on this section of SQC exams. I begin by presenting the concepts of variation, followed by some examples the students can relate to, such as noticing the level of liquid in a 2-liter bottle of soda. (Please see the answer to discussion question number three for this chapter for more information on this example.) I also point out how to deal with each type of variation. I point out that the purpose of SPC is to find abnormal variation. Next, I explain the difference between attributes and variables and give examples of each. I would like to give credit to Professor James C. Hershauer for the great idea of using Hershey’s Kisses to facilitate explaining the SPC material that students enjoy. I take out an unopened bag of Hershey’s Kisses candies. Then I ask the students for suggestions on how we can measure the quality of an unopened bag. After each suggestion, I ask the entire class whether the quality characteristic is an attribute or a variable. Then I continue in the same manner with respect to an opened bag. While doing so, I pass the bag around the room suggesting that each student feel free to take a couple of candies. The students come up with many ideas for measuring quality. When the subject of taste is brought up, I point out that I know of a perfume manufacturer that has an employee with the job title of “professional nose.” The job entails taking a sample of each batch of perfume and smelling it to see if it is acceptable. I was told that the “nose” does not

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have to possess exceptional smelling abilities. A “nose” can be trained. So I guess the same applies for “professional tasters.” Would they like to have that job? I explain how to interpret charts based on the normal distribution assumption, along with the terminology for interpretation. When discussing the relationship between the normal distribution and control charts, it is often useful to turn a normal distribution on its side and then show where the control limits fall. I then show them numerous examples of control charts and ask the class to tell me if they are in control or not, and why. I explain all the types of out-of-control conditions, not just the ones where the plot is outside the control limits. (The article, “Constructing and Using Process Control Charts,” provides an explanation of the creation and usage of the charts, numerous graphical examples to demonstrate different “out of control” scenarios, along with a helpful explanation of how to create control charts in Excel). I proceed to explain the x-bar and R-charts, and demonstrate the calculations for each using a small data set. I also point out the reasons why both charts are important by using an example that they can relate to. (Please see the answer to discussion question number five for the information on that example.) I do the same for the pchart. For c-charts, examples of their usage are given without a demonstration of calculations. In my school, students have taken their first course in statistics before they take operations management. Before we discuss range, we discuss spread in general. I ask them that if they had never taken statistics, how would they have measured spread. If they are honest, they will admit that standard deviation would not have occurred to them, but range, sum of deviations, and sum of absolute deviations would (even if they would not call them that). Some ask why would they use range when standard deviation is more robust. I have them imagine being on a shop floor several years ago without a computer or a calculator. Range is easier and “good enough.” Then, I list some of the quality characteristics that the class came up with for Hershey’s and ask which chart should be used for each example. I also ask if there is a way to use a p-chart for a variable, such as weight. We discuss how it could be done, but also how it provides different and less information than using the x-bar and R-charts. Out-of-control Students find judging whether a process is out of control by observing points outside of the limits to be easy. Observing patterns is harder. I then ask them whether something could cause the pattern. I point out that a cause is “assignable” and therefore the process is out of control. I then present the difference between control limits and specification (or tolerance) limits. Noaker (1996) provides a clear explanation of the usage of SPC and capability analysis. I point

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out that Starbucks had determined that the specification limits for the cooking time of espresso are 18 and 23 seconds, with 20 seconds being the optimum (Carter, 2001). This leads to a discussion and demonstration of process capability calculations and interpretations. Fine (1997) provides a description of the method used to attain process capability, along with an example. To discuss capability versus acceptability, I draw a nut and bolt on the board. We then discuss what would make this system not function. Both the nut bore and the bolt diameter varies. If the bolt diameter is too big for the nut bore, it will not fit. If it is too small there will be a wobble. The trick is to get the process capability to be tighter than the acceptable range. If the process can produce bolts within a hundredth of an inch and the nut-bolt system can accept a variability within a tenth of an inch, we should have no problems. Reverse these ranges, and the system would rarely perform. When discussing the acceptance sampling material, I ask them what information we should consider when determining the sample size for inspection. We also spend time discussing the placement and type of inspection. Students enjoy an example I share with them about a company that was able to easily and cheaply perform 100% inspection. The company makes balls for children that are supposed to bounce high. So they have a conveyer system that causes the balls to drop from a height onto a slanted board. After the balls hit the board, they bounce into the air and land in one of two containers. The smaller container which is close to the board is the defective balls since they did not bounce high, while the other container which is farther away contains only good balls. Finally, we discuss how to create OC curves. SQC is another situation where in-class exercises can help students understand the practice. The end of this manual describes the Gum Drop exercise. Another example is the coin catapult. Here students are grouped into teams of four each. The supplies for each team, besides paper and pencil, include a wooden ruler, a wooden yard (or metre) stick, an eraser, and a large coin such as a quarter. The ruler is placed on a table with the eraser under the middle (note the exact location). The coin is then launched by one student while another judges how high it flies against the yard stick held by another student. The fourth student records the results. After a sequence of samples of several observations each, the students change roles. We then often change a test condition, such as repositioning the eraser. Once the data is collected, we can use the charts to determine whether the processes are in control.

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War Stories What is the Assignable Cause? (This story was told to me recently by an anonymous source.) Vendor A was one of the two suppliers of corrugated boxes at a major pharmaceutical company. The boxes were used on one of their automated packing lines. The boxes supplied by the two vendors were identical in every way, except for the manufacturer’s stamp on the bottom of the box, which indicated the name of the vendor and the strength of the material used to manufacture the box. For some unknown reason, the pharmaceutical company continued to have problems with Vendor A, but never had any problems with the boxes from the other supplier, Vendor B. Engineers from Vendor A could not determine what was causing the problem. Whenever the engineers watched the automated line, nothing ever happened. Yet, whenever the engineers were not present, usually on the late shift, the line was stopped by defective boxes, but only when using the boxes from Vendor A. After a period of time, it was suggested that one of the employees of the pharmaceutical company was purposefully causing the problem as he or she, for some reason, did not want them to purchase from Vendor A. So, a private meeting was arranged with both vendors and the pharmaceutical company. The pharmaceutical company asked if Vendor B, whose boxes never caused a problem, would manufacture 10,000 boxes for the company with Vendor A’s stamp on the bottom so that they could determine if sabotage was the problem. Both of the vendors agreed to the special run since they both wanted to help the pharmaceutical company solve its problem. Sure enough, this special run of boxes also clogged up the line even though they were actually manufactured by Vendor B and not Vendor A as the name stamp on the bottom of the box indicated. Now, since they knew the problem was an internal employee sabotaging the line to cause problems for Vendor A, they could easily handle the situation. They moved personnel from another line to the problem line and never had any more problems. They were reasonably sure as to which employee was causing the problem. However, since they could not prove it, they simply put a note in his file indicating that he was a strong suspect and kept a close eye on his progress. Although they did not use SPC to deal with the problem, it would have been helpful in determining the cause of the defects. It would probably have found the assignable cause more quickly than the method used.

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The Implementation of Control Charts (This story was told to me by an anonymous source.) While I worked as a manager at a consumer products company, I realized that the biggest problem with the usage of control charts initially is the ability to get the workers to respond to the charts appropriately. We did train the workers to understand the charts. The problem is that many workers do not “see the big picture.” In other words, unless they are experienced, they do not understand the impact of the other parts of the production process on their process step. For example, let’s examine the process that puts the cap on a bottle. The control chart is used to measure the torque (strength) needed to open the cap. If the chart shows an “out of control” condition, it may not be due to a malfunction of the cap tightening process. It may be that the cap mold is of the wrong size or the mold is worn down. The production workers could easily understand the chart, but not know how to determine the assignable cause. Finding this cause is critical in addressing the correct problem. In addition, it is important to use control charts appropriately to ensure that the important quality characteristics are measured. For example, a bottle of a product has two critical measures. First, we need to ensure that the fill level is appropriate. This could be measured by height or weight, which would require the use of x-bar and R-charts. Second, we need to measure how easy it is to open the cap. If it is too easy, it may open during shipment, thus spilling its contents throughout the boxes. On the other hand, if it is too difficult to open, the customer will become frustrated. We use a tool that measures torque, which is the strength needed to unscrew the cap. This tool is placed on the cap. When the tool opens the cap, it measures the torque required to do so. U.S.D.A. Hazard Analysis and Critical Control Point (HACCP)/Pathogen Reduction Final Rule (Acceptance Sampling) (This story was told by Dr. Scott M. Russell.) According to the new United States Department of Agriculture Food Safety and Inspection Services (USDA-FSIS) regulations implemented in 1998, poultry slaughter facilities must be evaluated for Salmonella on a random, intermittent basis. A USDA Inspector in Charge (IIC) will receive notification that he or she should begin testing and the following will occur: 1. One carcass per day will be selected, rinsed, and the rinse will be tested by the USDA-FSIS for the presence of Salmonella. 2. Carcasses will be selected and tested for approximately 51 processing days or until 51 carcasses have been evaluated. In some cases, samples must be discarded and more samples are taken. For example, if samples are temperature abused or lost during shipment, they would not be tested. 3. Thirteen or more positives out of 51 samples (> 25.5 %) results in a failure.

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4. Once the first failure occurs, the plant is given 30 days to make corrections, and the testing series (51 samples) begins again. 5. After a second failure, the company must write an action plan detailing corrective actions that will be taken to prevent the problem from recurring. 6. Testing resumes 30 days after the second testing series has been completed. 7. Once the third failure has occurred, inspection will be withdrawn for approximately 2-3 months, which effectively closes the processing plant. This action by the USDA results in layoffs, loss of reputation, and lost business. In addition, approximately 5,000,000 chickens in various stages of growth must be sold to another processor. A poultry company’s efforts to minimize bone contamination (Inspection) (This story was told by Dr. Scott M. Russell.) I was recently asked to serve in a court trial involving an individual who became extremely ill as a result of ingestion of a chicken bone that became lodged in his throat. The bone penetrated his esophagus and an infection developed within the peritoneal area of his heart and throughout his pleural cavity. He required surgeries on his esophagus and lungs, totaling over $600,000 in medical expenses. Upon investigating the source of the bone, I was able to conduct a thorough review of the facility in which the suspect chicken breast fillet was produced. Upon evaluating this facility, I found that an incredible amount of effort was expended to ensure that no bones were able to pass through the process and make it to the final product. During the process of deboning, inspection, and packaging, no less than 16 people picked up each piece of chicken breast and manually and visually inspected it prior to allowing it to continue to the package. It is inconceivable that any product could make it through such a rigorous process and still contain bones. In fact, when reviewing the company’s records regarding returned product due to bone contamination, only one or two complaints had been filed in many years. On further inspection, it was determined that the product did not originate from this company because the company did not sell chicken breast fillets to the retail outlet involved at the time of the incident. How can failure rates get down to a few per million? Students often have difficulty grasping how any process can get so reliable as to yield only a few defects per million. We then discuss two concepts: system reliability versus part or component reliability, and process capability versus acceptable range. I use airplanes to introduce system reliability. First, we define failure as the system (the airplane) not performing and not as any individual component not performing. For critical systems on an airplane there will often be parallel, backup systems. For example, there may be three redundant systems linking the pilot to the control surfaces. While any one of these systems could fail, the pilot can still control the airplane unless all fail at the same time. With two parallel systems

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having a failure rate of 1 per thousand landings, the probability of a system failure would be one per million.

Answers to Discussion Questions in Textbook 1. Explain the three categories of statistical quality control (SQC). How are they different, what different information do they provide, and how can they be used together? The three categories of SQC are traditional statistical tools, acceptance sampling, and statistical process control (SPC). Traditional statistical tools are descriptive statistics, such as the mean and range, used to describe quality characteristics. Acceptance sampling is a process of taking a random sample or portion of a batch and deciding whether to accept or reject the whole batch or lot. SPC is a process that uses samples to determine whether a process is functioning normally or not. Traditional statistical tools describe the quality characteristics, but do not tell us whether quality is good or bad. Acceptance sampling tells us whether an entire batch or lot produced should be accepted or rejected after the goods have been produced, while SPC tracks the process over time to ensure it is functioning properly. These tools can be used together effectively. We use the traditional statistical tools as inputs into SPC, which is updated frequently enough to ensure that quality problems are discovered in a timely manner. Finally, after a batch has been produced, we use acceptance sampling to determine whether or not the batch can be sold to the customer. 2. Describe three recent situations in which you were directly affected by poor product or service quality. I purchased a bag of flour that I did not open right away. I placed in it the kitchen cabinet. Weeks later, I found bugs in many food items in the cabinet. When I examined the bag of flour, I found dead bugs in the glued seal and inside the bag. Because of the infestation, I had to throw out a number of food items from the cabinet. I also had to treat the kitchen with a compound that would get rid of the remaining bugs. I did not notice that the bag of sliced beef had expired when I purchased it from a grocery store. A few days later, I opened it and ate some beef. Within an hour, I became very sick. I then looked at the package only to realize that it had expired 3 weeks earlier. I was very upset. I do accept some responsibility in the fact that I do not always check expiration dates on items I purchase. However, that package should not have been available for sale. I now check expiration dates every time. In addition, when I went to another facility of the same grocery store, I found that every package of sliced beef for sale had expired by at least a

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week. So I took all the packages of beef up to the help desk to give them to a manager and issue a complaint. He apologized saying that he would deal with the problem. My mother came to visit to help me unpack from my trip. Her luggage did not arrive with her flight that arrived late on the evening of August 1. She was assigned a file reference number by the airline baggage service after standing in line for at least 15 minutes. I called the baggage call center the next evening since we had not heard from the airline nor received the luggage. Our frustration was further compounded by the fact that every time I called the 1800 number, it was busy. I tried the number many times. The following day (August 3rd), I decided to try the flight reservation number in hopes of speaking with someone. I ended up talking to someone many times. They would try calling the contracted baggage delivery service after they found out that the luggage had been turned over to this service by the airline. They were not able to get an answer from them. They gave me their phone number as well. When I was able to speak to someone there, I would get different answers, such as the need to find more information or that the luggage had already been delivered. I kept calling both phone numbers the next day as well in hopes of getting more information. Finally, on August 5th, the luggage was delivered after midnight. My mother did not have her luggage for four full days of a six-day trip. To make matters worse, we had to deal with the frustration of not knowing what was going on and of continuing to spend time trying to gather information. 3. Discuss the key differences between common and assignable causes of variation. Give examples. Common causes of variation are random, which means that there is not a specific reason for the variation, such as a malfunctioning machine. If you look at 2-liter bottles of a soft drink on a shelf at a retailer, you will notice that they are not filled to the exact same level. That is to be expected, since a machine cannot fill each one to exactly 2 liters every time. Assignable causes of variation are not random. Some examples of assignable causes are a machine in need of repair and defective raw materials from our supplier. 4. Describe a quality control chart and how it can be used. What are upper and lower control limits? What does it mean if an observation falls outside the control limits? Samples of product or services are plotted on the control chart over time. We then interpret the chart to determine whether the variation in the process is normal or abnormal. We need to use the chart because most products and services exhibit some variation. If the variation is normal, the process is assumed to be “in control.” Therefore, we do not need to fix the process. If the variation is abnormal, this process is assumed to be “out of control.” Therefore, we need to determine what is causing this variation, such as a malfunctioning

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machine or untrained worker. Control charts do not tell us how many defects are being produced by the process. The charts tell us whether it is likely that the process has changed. If the process has changed or is out of control, then it is likely that we are producing defects. A control chart is a diagram with a center line, an upper control limit, and a lower control limit. The upper control limit is normally equal to the mean of the sample data plus three standard deviations. The lower control limit is normally equal to the mean minus three standard deviations. If an observation falls above the upper control limit or below the lower control limit, the process is assumed to be out of control. This is because the chart is based on the normal distribution, which states that 99.7% of the plots will fall within three standard deviations of the mean. Since it is highly unlikely that a plot will fall outside three standards deviations of the mean, the process is likely to be out of control. 5. Explain the differences between x-bar and R-charts. How can they be used together and why would it be important to use them together? The x-bar chart is used to detect variations in the mean of the process, while the R-chart is used to detect changes in the variability of the process. The x-bar and R-charts are used when the data is a variable, which means that we can collect data using decimal points, such as 16.5 ounces. Examples of variables are weight, height, and temperature. The x-bar and R-charts should be used together. Think about preparing a Thanksgiving turkey in the oven. What can go wrong with the temperature of the oven if it is set at 350 degrees? The average temperature during cooking could be 250 degrees instead. On the other hand, the temperature could average 350 degrees, but actually fluctuate between 200 and 500 degrees during cooking. Either way, the turkey will not be properly cooked in the oven. The inaccurate average temperature would have been detected by the x-bar chart. The changes in the temperature would have been detected by the R-chart. We use these charts together by plotting the average of the sample on the x-bar chart and the range (high temperature in the sample minus the low temperature in the sample) on the R-chart. We first interpret the Rchart. If it is out of control, then the process variation is out of control. The next step would be to investigate the cause of this problem. There is no need to interpret the x-bar chart if the R-chart is out of control. If the variation is out of control, it is not possible to make conclusions about the average because the variation would probably change the average. If the R-chart is in control, then we can interpret the x-bar chart. If it is out of control, then the process average is out of control. 6. Explain the use of p-charts and c-charts. When would you use one rather than the other? Give examples of measurements for both p-charts and c-charts.

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The p-charts and c-charts are both used when the data is an attribute. Data is an attribute when we ask a yes or no question, or count the number of defects. For example, is the bottle of Coca-Cola full or not? How many of the Hershey’s kisses in the bag are not covered in foil? The p-chart is used to determine whether the proportion of defective units in a sample is in control or not. The c-chart is used to determine whether the number of defects on each item is in control or not. The key difference is that the sample size for the c-chart is always one. In other words, each plot represents the number of defects on one item, such as the number of spelling errors in a report. 7. Explain what is meant by process capability. Why is it important? What does it tell us? How can it be measured? Management or regulations set acceptable levels of variation in order to determine if a product is defective or not. For example, a product is not defective if it is filled to 16 ounces plus or minus one ounce. For this product, the upper specification limit would be 17 ounces, while the lower specification limit would be 15 ounces. Process capability tells us whether or not the process itself is capable of manufacturing a product that has a high probability of falling within the specification limits (not defective). It is important for a company to produce quality products. Process capability is measured by comparing the specifications to the actual variation in the process. The process capability index is the width of the specifications divided by the width of the process variation. If the process capability index is less than one, then the process is not capable of producing within specifications. The index can be used to determine how many defects are produced on average. 8. Describe the process of acceptance sampling. What types of sampling plans are there? What is acceptance sampling used for? In acceptance sampling, we determine if a set number of items, such as fifteen out of a batch of 100, are defective or not. Then we compare the number of defects to a preset maximum number of acceptable defects to decide whether to accept or reject the whole batch. If the number of actual defects is less than or equal to the preset number, then the entire batch is accepted. Otherwise, it is rejected. Acceptance sampling is used to determine whether the level of quality is acceptable or not. The three types of sampling plans are single sampling, double sampling, and multiple sampling. 9. Describe the concept of Six Sigma quality. Why is such a high quality level important? It is referred to as Six Sigma because the specification limits are six sigma away from the mean. We know that the normal process variation is three sigma away from the mean. So, if we divide the width of the specification limits, which is six sigma plus six sigma, divided by

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the width of the process variation, which is three sigma plus three sigma, then the process capability index is calculated as 2. Therefore, a process with a six-sigma quality level has a process capability index of 2. This means that the process will make about 3 defective items for every million produced if the process is centered on the mean. A process is centered on the mean when the process mean and the desired mean are equal. If they are not equal, then the process has shifted to the left or right, thus causing more defects in the tail of the distribution. An example will clarify this issue. Assume that the following data was collected from the process of filling jars of spaghetti sauce that has a six-sigma quality level when the process is centered: • Process mean = 16.5 ounces • Desired mean = 16 ounces (what is printed on the jar) • Process standard deviation = 0.5 ounces • Upper specification limit = 17 ounces • Lower specification limit = 15 ounces This process would produce jars that are filled above 17 ounces since the process mean is greater than the desired mean. (It might be helpful to show this information on a graph.) This level of quality is important because customers demand a high level of quality. In the past, parts per thousand defective was the measure used by companies. Now the measure is parts per million (ppm) defective.

See Solutions Manual for Answers and Solutions to Problems

Answers to Textbook Case – Scharadin Hotels 1. Set up 3-sigma control limits with the given data. The center line of the chart is CL = p =

p =

number of defectives 85 = = 0.057 number of observations (30)(50)

p (1 − p ) (0.057)(0.943) = = 0.033 n 50

LCLp = p -z p = 0.057 − 3(0.033) = −0.042

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UCLp = p + z p = 0.057 + 3(0.033) = 0.156 The LCL is rounded to zero since we cannot have a negative control limit.

p chart 0.20 0.15 0.10 0.05 0.00 0

samples

2. Is the process in control? Why? The process is out of control because the last 11 samples were all above the CL. The control chart is based on the normal distribution, which has 50 percent of the data above the mean and the data points are independent. Therefore, this chart shows an abnormal pattern. An analogy about a coin toss might be helpful. We would expect the coin to result in 50 percent tails. So, if you tossed a coin 11 times and ended up with tails each time, you would conclude that it is highly unlikely that this coin is normal. 3. Based on your analysis do you think the problem is the new computer system or something else? The problem is not the new computer system since it was brought on line at the beginning of the month. The problems started occurring during the third week of the month. 4. What advice would you give to Larraine based on the information you have? To find the solution to the problem, we need to further analyze any changes that began in the third week of the month. We should begin the analysis by looking at the bills that were incorrect in the third and fourth week to find any common factors. For example, was the same employee generating the charges on those incorrect bills? If so, we need to further train that employee.

See Solutions Manual for Answers and Solutions to Problems

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Answers to Textbook Case – Delta Plastics, Inc. (B) 1. Prepare a 3-sigma control chart for both production process, using the new and standard material (use the quality report in Delta Plastics, Inc. Case, Chapter 5). Are both processes in control? What can you conclude? The quality report for the Delta Plastic case in Chapter 5 lists the number of defects found over the last 4 weeks for both types of plastic and for 5 types of defects. As these are defect counts, the appropriate chart type is a c-chart. Of the 5 defect types, cracks and air bubbles seem to be the most serious. Below are c-charts for these two defects for each plastic type. For c-charts, the center line is the average number of defects per period (in this case, days) and the limits are: UCLc = c + 3 c LCLc = c − 3 c therefore UCL Cstd = 6.3 LCL Cstd = -2.2 UCL Bstd = 7.7 LCL Bstd = -2.22 UCL Csup = 11.1 LCL Csup = -1.8 UCL Bsup = 9.2 LCL Bsup = -2.1 As the counts cannot be less than zero, use zero for all negative lower control limits.

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Cracks Standard 3.5 3 2.5 2 1.5 1 0.5 0 1

9 10 11 12 13 14 15 16 17 18 19 20 21

Bubbles Super 7 6 5 4 3 2 1 0 1

Cracks Super 8 7 6 5 4 3 2 1 0 1

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Bubbles Standard 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1

9 10 11 12 13 14 15 16 17 18 19 20 21

The first three charts are in control. All observations are positive and below the upper control limits. Further, none of them shows a trend. The chart for bubbles with the super plastic should be considered out of control. Even though all observations are within limits, the chart shows a clear increasing trend in defect counts. Being in control does not tell the whole story. While the crack counts for the super plastic may be stable (in control), they are also much higher than the standard material. 2. Are both materials equally subject to the defects? As observed above, the super plastic has more defects than the standard plastic, primarily in terms of cracks and scratches. 3. Given your findings, what advice would you give Jose? Clearly, manufacturing has problems with the new super plastic. The number of crack and bubble defects is higher with the super plastic as compared to the standard material. In addition, the bubble problem is getting more severe. Jose need to determine what is causing this material to yield more defects. Jose should advice against Delta going into production with the new material until the problems can be identified and production methods are changed to produce higher quality.

Complete Manuals for the Interactive Cases also are available on the companion site: www.wiley.com/college/reid.

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Interactive Learning The companion website for the textbook contains templates and solved Excel problems for the cchart, p-chart, and process capability. It also contains PowerPoint chapter reviews, selected solutions, several interesting company tours, and web links. The two companies listed are quite different. What measures of quality could the nut company have? They should measure delivery times, package weights, product mix, and so forth. Welded Tubes is a more traditional operation. Their web site even gives the tolerances for several products. Students should be asked what quality control charts this company would maintain.

Internet Challenge This exercise asks students to track the on-time performance of 3 airlines operating out of a local airport. The assignment instructs students to collect data during the same time periods to avoid weather and time effects. It is important to ask students what other effects there could be. Air transportation analysts have pointed out that on-time performance is heavily impacted by the airports an airline uses, and often their aircraft type and size. An airline that flies between the local airport and one of the nation’s most inefficient airports may look worse than it is. Once the data is collected, students will still need to decide what to plot. Is percentage of delays the appropriate measure? Which is worse, a series of 10 minute delays on long-haul flights, or an occasional 45 minute delay. The first is unlikely to cause a missed connection, the latter probably will.

In class exercise I would like to thank Professor William A. Ruch for the interesting exercise included here that students enjoy. The following exercise takes approximately 40 minutes for the students to answer in class by forming teams. I give it out at the end of class, while allowing enough time, so that students can leave as soon as they have completed the exercise. I give the students the option of working individually or in teams of up to five students. I hand out the background information as a separate copy. When I hand out copies of the exercise questions, I ask the students to take one copy per person and one copy per team. This way each student will have a copy of the assignment. I only require one copy per team be turned in to me for grading. I stress that the same set of questions is asked about the fair measure and “too many green ones” problems, and that the first set is about the fair measure problem only. I also stress the need to

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give a more detailed answer to the second question of the “too many green ones” problem. They need to be specific on what a sample is and how the proportion defective is determined. (This way I can be sure that they understand how to use this chart for this case.) I also spend more time explaining the answer to that question in class since it is sometimes answered incorrectly. To do the exercise, the students need to understand the usage of the different control charts and their corresponding formulas. It would be very helpful if the students have already seen demonstrations of the calculations for each control chart.

PROCESS QUALITY EXERCISE

BACKGROUND INFORMATION

The purpose of this exercise is discuss the situation facing a manager and helps him determine which quality control techniques to use and what information is needed to solve the problem. Tom Dooley just graduated from Arizona State and accepted a job with Meyerson Candy Company. One of their major products is gum drops that are packaged in an assortment of colors, each color being a different flavor. Most of the process is automated with machines producing the gum drops, mixing the different flavors, and packaging them in plastic bags. Each bag should contain 16 ounces of candy; each gum drop is about 1/2 ounce. The mix in each bag should be approximately 20% red (cherry), 20% orange, 20% white, 20% yellow (lemon), 10% black (licorice), and 10% green (lime). Recently, the company has received customer complaints along two lines: 1. Many are complaining that the bags do not appear full and believe that they are not getting a fair measure for the money they are paying, but no one has verified this. 2. Several customers have complained about “too many green ones” in the package. Some have even reported counting the total number of gum drops and the number of green ones in a package. No one has ever complained about “too few green ones.” Tom has been given copies of the complaint letters and the assignment to “fix the problem.” He decided his first step is to determine if there really is a problem with the process. To do that he will need to use the tools and ideas he learned in his Operations Management course. Tom has been trying to figure out what information he needs, how to analyze it, and how to create a system to monitor the quality of the product to assure that these customer complaints do not arise in the future. At first, he was not sure whether to count the gum drops, weigh them, or

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use some other measure. After giving it more thought, Tom has decided to take random samples of 10 bags throughout the day and use their weights to monitor “fair measure.” The problem of “too many green ones” is a bit more difficult for Tom to formulate. He thought about calling the green ones “defects,” but then he would have to say that each bag should contain about 10% “defects.” This wouldn't sound right in a report to the management. A better approach, he thought, would be to say that since the bag should contain about 32 gum drops and 10% of those should be green, any bag containing 2, 3, or 4 green ones would be a “good” bag. Therefore, if a bag contained less than 2 or more than 4 green ones, the bag would be considered “bad” or “defective” with respect to the product specifications. Now, Tom has to determine if he needs a p-chart, an x-bar chart, an R-chart, or a c-chart. He needs your help. Please read the questions ON BOTH SIDES of the question sheet. Discuss the questions, arrive at a common conclusion, and write the answers clearly, completely, and concisely in the space provided. Copyright 1995, William A. Ruch

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PROCESS QUALITY EXERCISE

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HAND IN ONE CLEAN COPY

Please provide names and signatures only for team members who are present today: NAME (Print) SIGNATURE 1. 2. 3. 4. 5.

THE "FAIR MEASURE" PROBLEM 1. What kind of chart (or charts) does Tom need to analyze this problem? Explain why you chose the chart or charts he should use.

2. Specifically, what information will Tom need to construct the chart(s) and how will he gather it?

3. Explain the calculations Tom will need to make – including formulas and tables he will need – to construct the chart(s).

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4. After he has completed the chart(s), what should Tom do over the next week or so?

THE "TOO MANY GREEN ONES" PROBLEM 1. Should Tom use the same or different type of chart(s) to analyze this problem? Explain why.

2. Specifically, what information will Tom need to construct the chart(s) for this problem and how will he gather it?

3. Explain the calculations Tom will need to make – including formulas and tables he will need – to construct the chart(s).

4. After he has completed the chart(s), what should Tom do over the next week or so?

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PROCESS QUALITY EXERCISE ANSWER KEY

Instructor’s Manual

HAND IN ONE CLEAN COPY

Please provide names and signatures (only for team members who are present today): NAME (Print) SIGNATURE 1. 2. 3. 4. 5.

THE "FAIR MEASURE" PROBLEM 1. What kind of chart (or charts) does Tom need to analyze this problem? Explain why you chose the chart or charts he should use? Tom should use both the x-bar and R-charts since weight is a variable measure of quality. These charts must be used together. 2. Specifically, what information will Tom need to construct the chart(s) and how will he gather it? Tom will need to take random samples of 10 bags each from the process. For each bag, he will measure the weight and record it. Then he will calculate the average weight of those 10 bags by averaging the 10 recorded weights. Finally, he will calculate the range of the weights by subtracting the smallest of the 10 weights from the largest of the 10 weights. 3. Explain the calculations Tom will need to make – including formulas and tables he will need – to construct the chart(s). Answer should show the formulas for the x-bar and R-charts. In addition, the answer should explain that Tom will need to look up information from a table to estimate 3 standard deviations from the mean for the control limits. 4. After he has completed the chart(s), what should Tom do over the next week or so? Tom should continue taking samples at regular intervals to determine whether the process is still in control or not. If it is out of control, Tom will need to take action to fix the assignable cause of the variation.

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THE "TOO MANY GREEN ONES" PROBLEM 1. Should Tom use the same or different type of chart(s) to analyze this problem? Explain why. Tom should use the p-chart. He must use a different chart since the quality characteristic being measured is an attribute. The background information suggests that he should not use a c-chart since he does not think it is reasonable to count each green gum drop as a defect. 2. Specifically, what information will Tom need to construct the chart(s) for this problem and how will he gather it? Tom will need to gather random samples of 10 bags. For each bag, he will count the number of green gum drops. If the number is less than 2 or more than 4, then the bag is considered defective. Each plot on the p-chart will then show the proportion of the 10 bags that were defective. For example, if 2 out of the 10 bags have the wrong number of green ones, then the proportion defective is 0.20 (20%). 3. Explain the calculations Tom will need to make – including formulas and tables he will need – to construct the chart(s). The answer should show the formulas for the center line and control limits for the pchart. 4. After he has completed the chart(s), what should Tom do over the next week or so? Tom should continue taking samples at regular intervals to determine whether the process is still in control or not. If it is out of control, Tom will need to take action to fix the assignable cause of the variation.

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References “Constructing and Using Process Control Charts,” Harvard Business School article, Item number 9-686-118. Carter, S., “A Starbucks Star is Born: The Pour Girl Makes Good,” Newsday, Mar. 21, 2001, B11, B16. Fine, E. S., “What is this Process Capability Stuff, Anyway,” Quality, Mar. 1997, 24, 26. Noaker, P. M. (ed.), “Seek and Destroy Process Variation,” Manufacturing Engineering, Apr. 1996, 57 – 60.

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Chapter 7: Just-in-Time and Lean Systems Overview This chapter examines the core beliefs of just-in-time systems (JIT). The goal of reducing waste is important in JIT. JIT uses a pull system, which is different from the push system. The key elements of JIT are described. The critical role of TQM in JIT is explained. The role of the employees in JIT is explained. Finally, we gain an understanding of the impact of JIT on all functional areas within the service and manufacturing organizations. Teaching Tips and Strategies I explain the elements of JIT and the importance of TQM. I supplement the material from the textbook by including information from interesting and informative books about JIT or Lean Thinking. Womack et al. (1990) present the results of a five-year study of the automobile industry. It compares the results of JIT and mass production. Womack and Jones (1996) provide details on the five key elements of lean thinking. Bradley (1995) points out that JIT implementations have resulted in more inventory turns, inventory reductions, improved quality, and improved delivery performance. However, Bradley points out that business still have much more improvements to complete since cycle times, lead times, and inventory are still too high. JIT is not old news. Amasaka and Sakai (2009) discuss Toyota’s “new JIT” that incorporates several recent concepts into Toyota’s global production strategy. I have found it helpful to show an HP video (from 1983), entitled “Stockless Production,” of a skit where they demonstrated the impact pull versus push production on cycle time, space needed for production, rework quantities, cycle time, and WIP. The video, which lasts 30 minutes, is entertaining and informative. They compare the performance of a push batch of six items to pull batches of one and three items. Another great video to show is a four-minute clip from the TV show “I Love Lucy” of the episode entitled “Job Switching.” (The idea for using this video clip came from Brown et al. 1996). This episode is available at CBS/FOX Video on a tape that includes another episode as well. The scene begins about 20 minutes into the episode where Lucy and Ethel are working on the assembly line at the candy factory. It is a funny scene that addresses issues concerning the pace of the line. This video clip is appropriate for both JIT and layout discussions. I end this discussion by explaining how JIT can be implemented in services. I point out how the dice game could actually be a service simulation since we have processing by resources and setup times in both services and manufacturing. I also talk about how

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McDonald’s has implemented JIT. Please refer to discussion question number 10 for more information on this topic.

War Stories The Realities of JIT Companies that use JIT have experienced a variety of problems. For example, Bergstrom (1996) points out that the production systems need to be not only reliable, but also flexible to switching “on the fly” to meet an unexpected production change. Congdon and Rapone (1995) discuss the typical problems of equipment downtime, the timing of subassembly production, the release of excess materials to compensate for yield, and setup losses. The equipment downtime causes stoppages on the production line which negatively affected manufacturing flow. Porter (1997) points out that survey results indicate the problems with JIT, which include lack of supply reliability and the use of forecasts in production. Koepfer (1997) points out that one of the factories of Aisin, a brake-part supplier of Toyota that accounted for 80% of Toyota’s purchased brake-parts, was destroyed by fire. This fire was a major problem since the supplier had only a three day supply of parts in the warehouse. At the time, both Toyota and Aisin were using all of their plants at full capacity. It was estimated that Toyota might miss selling 50,000 cars as a result of the fire. Koepfer asked if JIT was under review at Toyota. He was told that the system works but was not perfect yet (p. 10). The Realities of Kanban I developed an animation while working in the aerospace industry to demonstrate to the management that JIT and kanban do require the balance and attention to flow that have been pointed out in this chapter. The main points of this animation can be easily demonstrated on the board in the classroom. Rather than a pure flow shop, I draw an assembly system with a split (one upstream facility serving two or more downstream work centers). I then ask the students whether a kanban card gives all the information needed for centers upstream of the split to determine which lots to run next. Students usually suggest that the first card in should be the first card served. I then mark that card as a lot destined for one of the machines after the split and the next

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card for a lot destined for the other machine after the split. We then cause a breakdown on the machine corresponding to the first card. We then see if the first card in is serviced. The machine will be busy with this lot, and has a strong possibility that it cannot be further worked upon when ready. This demonstrates the need for flow and reliability, and introduces the topic of local and global knowledge dispatching rules that will be discussed when sequencing is addressed. Geraghty and Heavey (2005) discuss the need to modify a kanban control system in a non-repetitive manufacturing environment. Realities of Worker Involvement Table 7-3 is found in the section Lifetime Employment, which is not a common practice in many western companies. Worker involvement is poor when workers fear for their jobs. It would be rare that a worker would suggest a cost-saving change if he feared that the implementation of the change would risk his job. This sounds obvious. However, many companies have called for greater worker involvement and suggestions for costs savings while implementing large lay-offs under the guise of business process reengineering. The calls go unheeded. As most of my students have had some work experience, we discuss whether they have ever seen anything that could have been done better at their workplace. We then discuss whether they would have felt comfortable reporting their opinion to the management. Often, the answer is no.

Answers to Discussion Questions in Textbook 1. Describe the core beliefs of the JIT philosophy. The core beliefs of JIT are the elimination of waste, the ability of the employees to see the “bigger picture,” simple solutions, continuous improvement, visibility, and flexibility. JIT strives to produce the right products at the right time in the right quantities. Continuous improvement and flexibility are important beliefs that help us achieve this goal. 2. Identify the three major elements of JIT. The three major elements of JIT are just-in-time manufacturing, total quality management (TQM), and respect for people. 3. Explain how JIT manufacturing works and its key elements.

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JIT manufacturing focuses on value-added processes in order to produce high volumes of high quality, and low-cost products that meet the customer needs. Its key elements are the pull system, kanban production, small lot sizes, short setup times, uniform plant loading, flexible resources, and a streamlined layout. 4. Find an example of successful JIT manufacturing. Toyota is a company that has successfully used JIT. It is the company that developed JIT. JIT has resulted in short lead times, high quality, low costs, and flexible production. 5. Explain the importance of total quality management in JIT. TQM is critical in JIT since poor quality would result in not delivering the right products at the right time in the right quantities. It would also cause us to either spend time fixing the product or scrap it if it can not be fixed. 6. Find an example of successful TQM implementation. Motorola, a winner of the Malcolm Baldrige National Quality Award, has successfully implemented TQM. Motorola is also known for focusing on achieving Six Sigma quality, which translates into about 3 defective parts per million. 7. Explain the importance of respect for people in JIT. Respect for people is important in JIT because everyone must be involved in managing and improving production. The employees must work together effectively in order to successfully implement JIT. 8. Find an example of a company that has high respect for people. Southwest Airlines is known for its high respect for people. They make a great team, where everyone lends a hand to help when needed. 9. Describe the JIT implementation process. Why should some things be changed before others? The JIT implementation process consists of the following steps, which are listed in order: • Make quality improvements

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Reorganize the workplace Reduce setup times Reduce lot sizes and lead times Implement layout changes Switch to pull production Develop relationships with suppliers

Some steps must be done before others to allow us to be successful. For example, we cannot effectively and efficiently reduce lot sizes until we first reduce the setup times. 10. Find examples of JIT in services. Which aspects of JIT are easiest to apply in services? McDonald’s has implemented JIT in their program “Made for You.” This program, which was implemented a few years ago in the restaurants, consists of making food to order. It consists of computerized kitchens with the use of robotic technology (Edwards, 1998). For example, Edwards points out that machines dump fries into a basket, lower the basket into the oil, and then remove the fries when done. Doucette (1998) states that the company has revamped its point of service software, toasters, prep tables, and holding bins. According to Doucette, the prep tables were redesigned for smooth, and more efficient, work flows. The easiest aspects of JIT to apply in services are the use of multifunction workers, cycle time reductions, setup time reductions, parallel processing, and workplace reorganization. 11. Explain how you could use JIT to make your life more efficient. I can focus on eliminating waste. The wastes that JIT focuses on are time, energy, space, or human activity that does not contribute value. I live in a townhouse where my office is upstairs, while the kitchen is downstairs. So, I try to reduce the number of trips up and down the stairs. I leave the items that need to go up on the stairs until I really need to go upstairs.

See Solutions Manual for Answers and Solutions to Problems

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Answers to Textbook Case – Katz Carpeting 1. What suggestions do you have for implementing JIT at Katz? Should specials and standards be produced on the same line? (Hint: Do they require the same type of operation?) Specials and standards should not be produced on the same line since they do not require the same type of operation. JIT uses cells for manufacturing. We could easily divide these two areas into lines or cells of their own, and even have more than one cell per area. 2. If production of standards and specials is separated, how different will JIT implementation be for production of the different products? Explain what would be needed in JIT implementation for both products. JIT implementation will not differ much for these two types of products. The main difference is the critical need of reducing setup times for the production of specials. To implement JIT for both products, we will need to perform the following steps: 1. Make quality improvements: In order to produce the right number of products at the right time, without waste, we need to improve quality. 2. Reorganize the workplace: The layout, cleanliness, and organization of the environment must be improved. 3. Reduce setup times: Setup times must be reduced in order to allow us to be flexible in production, and reduce waste since setup time does not generate income. Setup time takes away the production time available to produce the product. In addition, we need short setup times in order to justify the production in small batches to be flexible. It is much more important to reduce the setup times for special products since these times are quite high. 4. Reduce lot sizes and lead times: Once setup times are reduced, we can reduce the lot or batch size. Reducing the setup times and batch sizes cause the lead times to significantly decrease. 5. Implement layout changes: The layout needs to change in order to improve the process. We should form line flows and create cells of these lines. 6. Switch to pull production: The customer orders pull the products through the production process. 7. Develop relationships with suppliers: We need to develop relationships with suppliers in order to improve quality and receive frequent deliveries of raw materials.

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3. What suggestions do you have for improving the way the production schedule is currently made? JIT uses strict, fixed schedules for manufacturing for some period of time before allowing changes. This is what needs to be done in order to improve production scheduling. Making frequent changes to the schedule is disruptive. 4. How would you characterize Josh’s view of JIT? What challenges do think a consultant will face in implementing JIT at Katz? If you were a consultant, how would you approach these problems? Josh does not have a positive view of JIT. A consultant would need to overcome the resistance that Josh would show concerning a JIT implementation. I would approach these problems using the TOC approach for buy-in (which is discussed in the TOC Tips section of chapter 2 of this manual). It is important to help Josh figure out what his current problems are and to gain a better understanding of how JIT is beneficial. We will need to help him understand that idle time is not bad. The goal of the company is not to keep everyone busy. It is, in many cases, to make money now and in the future. We can demonstrate that keeping everyone busy can actually hurt our financial performance.

Answers to Textbook Case – Dixon Audio Systems 1. Identify the pros and cons of a JIT relationship from a supplier’s point of view. A supplier such as D&S can obtain several benefits from establishing a JIT relationship with a buyer such as Dixon. Usually, such relationships are long term, more cooperative, and include a small set of vendors. D&S will then have a more certain and steady demand for their product. They should also have more accurate forecasts further into the future. Besides these demand benefits, D&S could improve its production and distribution efficiency. Better knowledge of the size and timing of orders would allow them to plan operations more efficiently. As they are responsible for much of the ordering, they can better coordinate their operations with the order cycles. However, D&S does have some reasons to be concerned also. The relationship shifts the supply responsibility to D&S. The guaranteed business would be at risk if D&S were to forecast or perform poorly. Further, the responsibility for placing orders is now in the hands of a D&S paid employee.

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2. Identify the pros and cons of a JIT relationship from a buyer’s point of view. A buyer, such as Dixon, can obtain many benefits from a JIT relationship with a supplier. Order timing becomes the responsibility of the vendor. Quality should improve and deliveries should become more reliable. Through better coordination, the supplier’s costs should improve, which may eventually be reflected in their price. Buyers often have several concerns for such an arrangement. For one, seldom does a supplier have only one customer in a market. Buyers worry that sensitive information, such as upcoming product promotions, may become known to their competitors through the information they share with the supplier. Buyers are also often reluctant to give up the ability to play one vendor against another in search for the lowest price. 3. What factors should Dixon and D&S consider before making a decision on this relationship? Dixon should be concerned with whether D&S has the capacity to deliver all that they need. They also need assurance that D&S can meet their quality and timing requirements consistently. Dixon should also make certain that sensitive company information will not fall into the wrong hands. Finally, they should make sure they are not committing to a price that may evolve to be higher than the market price if conditions change. D&S need to protect themselves also. What are their liabilities if they are responsible for poor quality or missed orders at Dixon? What assurance do they have that the agreed price will remain competitive? Also, Dixon is not their entire customer base. Does this commitment limit their freedom to accept other, possibly more profitable, orders?

Complete Manuals for the Interactive Cases also are available on the companion site: www.wiley.com/college/reid.

Interactive Learning The student version of the web site for this textbook includes PowerPoint chapter review, selected solutions, web links and a company tour of Toyota Motor Corporation, the company where Taiichi Ohno implemented JIT. While the Toyota site is primarily geared to the consumer, it does show how an automobile can be built to order.

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Two organizational sites are also of use to the student. We have visit Manufacturing Excellence in earlier chapters. The APICS site includes the links to its current magazine and resources for practitioners. It also discusses the process to become a certified practitioner.

Internet Challenge The text suggest student look at the Ryder site. Following the Transportation Services link first brings students to a general description of Ryder’s ability to take over this activity. The Snapple case then describes the benefits of having Ryder perform this service for a company familiar to many students. Other companies are also worth a look. Roadway time-based services (http://www.roadway.com/services/timebased.html) describe the advantages of allowing their company to handle time critical shipments, and also describe JIT.

In Class Exercises Please see the Dice Game and Job Shop Game from the In Class Exercise section of chapter 16. These games include modifications for running them using JIT. We can use the games to compare the performance of different scheduling techniques.

References Amasaka, K., & Sakai, H. (2009). TPS-QAS, new production quality management model: key to New JIT - Toyota's global production strategy. International Journal of Manufacturing Technology and Management, 18(4), 409. Bergstrom, R. Y., “Seamless JIT Doesn’t Just Happen,” Automotive Production, Sept., 1996, 48 – 49. Bradley, P., “Just in time works, but…,” Purchasing, Sept. 7, 1995, 34 – 37. Brown, K. A., Hyer, N. L., Smith-Daniels, D. and Sprague, L., “Cinematic Ticklers: Using Movie Clips to Stimulate Classroom Discussion About Operations Management Issues,” Proceedings of the 1996 Annual Meeting of the Decision Sciences Institute, 1189.

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Congdon, W. S. and Rapone, R. M., “JIT and Lean Production,” Production, Aug., 1995, 22 – 26. Doucette, L., “Re-equipped McDonald’s Rolls Out Made For You Program,” Foodservice Equipment & Supplies, 51(7), 31 -32. Edwards, C., “Robomac McDonald’s to Install High-Tech Kitchens in Bid to Win Back Business,” Boston Globe, Mar. 27, 1998, C2. Geraghty, John & Cathal Heavey. (2005). A review and comparison of hybrid and pulltype production control strategies. OR Spectrum, 27(2-3), 435-457. Koepfer, G. C. (ed.), “A ‘Just-In-Case’ Case?,” Modern Machine Shop, Apr., 1997, 10. Miltenburg, J., “Comparing JIT, MRP and TOC, and embedding TOC into MRP”, International Journal of Production Research, 35(4), 1997, 1147 – 1169. Moore, R., and Lisa Scheinkopf, “Lean Thinking and the Theory of Constraints: Friend or Foe?,” http://www.chesapeak.com, 1998. Porter, A. M., “The Problem with JIT,” Purchasing, 123(4), 18 – 19. Womack, J. P., Jones, D.T. and D. Roos, The Machine that Changed the World. Harper Perennial, 1990. Womack, J. P. and D.T. Jones, Lean Thinking, Simon & Schuster, 1996.

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Chapter 8: Forecasting Overview The principles and steps in forecasting are described. The various types of forecasting methods are presented and discussed. Qualitative and quantitative methods are compared. Choosing the appropriate method based on the demand pattern is discussed. Methods for determining the accuracy of the forecasts are presented.

Teaching Tips and Strategies My end-of-term surveys over the last several years have found more students reporting this chapter as the most useful and favorite than any other chapter in the term. I focus more on qualitative forecasting methods during class time for two reasons. One reason is that they have been used more often in industries in the past (Sanders and Mandrodt, 1994). The other reason is that these types of forecasts are probably more accurate given the current global environment that is rapidly changing. In this situation, the past is not a good prediction of the future. Yet, most quantitative models rely heavily on past demand data. Georgoff and Murdick (1986) provide a helpful comparison of popular forecasting methods. Zotteri, et al. (2207) provide a recent study of methods used in machinery and textile industries. Jain (2007) provides a recent study of typical forecast horizons. Fisher et al. (1994) explain how Sport Obermeyer, a skiwear manufacturer, was able to eliminate almost all production costs associated with making skiwear that customers do not want by using accurate response. The demand for fashion skiwear is dependent on a number of factors that are difficult to predict, such as the weather, economy, and fashion trends. This article points out that they changed their forecasting approach by moving from a consensus forecast to asking each member of the buying committee to make an independent forecast. They found some interesting results. For some products, the various forecasts were close to average and showed small variation, while other products showed high variation. They determined that low variation in the forecast predictions was a very accurate predictor of forecast accuracy. They used this information in production scheduling. During the non-busy season, they manufactured the products with low forecast variation. When the busy season hit, they used the available capacity to react to changes in the demand of products that showed high variation in the forecasts.

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The material on Collaborative Planning, Forecasting and Replenishment (CPFR) ties in nicely with the discussion of supplier-buyer cooperation introduced in the previous chapter. I ask students to try to identify what information must be shared to perform CPFR successfully. We then discuss why suppliers or buyers may be reluctant to share this information. The quantitative methods are worth including for several reasons. First, I prefer each section of the course to have both theory and problem solving. I want students to feel more comfortable with an analytic approach by the time they finish the course. In this chapter, I focus on the time-series forecasting methods. Second, it allows us to discuss whether the measures used are intuitive and reasonable. When discussing forecast accuracy, I ask students how they would determine whether a forecast was accurate. Under what conditions does cumulative error make sense? What measure would they come up with? When a student volunteers mean squared error, I ask whether this really would be the first thing to come to mind. Why would they square the errors? Would they not just take the absolute error? I then point out that squared error may not make sense but it does make the math work in regression. Last, and maybe most important, students consistently report forecasting to be their favorite technique and that which they expect to be most useful. Groups vs. individual forecasts Whether using qualitative or quantitative methods, forecasting aggregated values is easier than individual items. We discuss shoes for this example. I ask whether it would be easier to forecast total demand for shoe leather or to forecast shoes by size, color, and style. Value selection Students are often uncomfortable with selecting parameter values without clear guidelines. I try to give them both a rule-of-thumb and other reasons for their choice. For example, when selecting starting values for exponential smoothing, I often start with the most recent actual observations, or most recent increase. I tell them it is common to use low values for α and β, in the range of 0.1 to 0.4. I then bring up a spreadsheet with a graph and let them see the difference in tracking of a forecast for different values of α and β. At my school, students learn linear regression in their statistics class. Therefore, I cover the time series methods but not the regression methods of this chapter.

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War Stories Forecasting and Sales Incentive Plans (This story was told to me by William Wagner.) (This story is also included in Chapter 11 of this manual.) When I worked at an electronics company, I came up with a sales incentive plan to deal with the ups and downs of the market. During the peaks of the market demand, we did not have enough capacity. During the valleys in demand, we had excess capacity. I realized that there were conflicts between sales and production. One problem was the late shipments that occurred during peaks in demand. I decided to measure and reward actual billing, and net order performance against the sales quota by creating a book-to-bill ratio that got rid of the extremes. In other words, this ratio would have a positive influence on orders in a down market and a negative influence on orders in an up market. Each quarter, we negotiated sales quotas by working to minimize the backlog in each region. The head of sales wanted a global quota figure. The goal of each salesperson was to achieve his or her book-to-bill ratio. The rewards for sales were capped with a high maximum reward that was attainable. The quota was capped quarterly to pay commission up to a maximum of 125% of the quota. The goal was to reward accuracy in forecasting sales. The book-to bill ratio was the sum of net sales and net orders divided by two. Let’s look at an example of how this ratio is used. Suppose that a salesperson has a quota of $2M, but books $4M in orders, while only $1.5M was shipped due to production capacity issues. This technically means that the quota was missed, though it was not the salesperson’s fault. The ratio would be the sum of $4M and $1.5M divided by 2, which is $2.75M. This is what we would pay the commission on. This shows that the salesperson exceeded the quota by 37%. This system is more equitable. It would not be fair to pay commission based on the $1.5M produced since it is not the salesperson’s fault that the orders were turned in near the end of the quarter, or because there was not enough capacity to produce them. On the other hand, it is not fair to pay commission on the $4M orders since all of these orders may not be fulfilled because the customer can back out before shipment. This system keeps everyone motivated to work hard. In addition, we did not have the problem of a salesperson leaving after receiving a large bonus based on orders that may not be shipped for various reasons. The company was protected from the extremes in the marketplace since salespeople were given the appropriate incentives depending on the

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demand level as compared to our capacity. Fast Food Restaurant Forecasting (This story was told to me by William Wagner.) When I owned and managed my Miami Subs restaurants, I had to forecast demand. To do so, I would look at historical demand, but err on the upside. It is better to have too much food, than to run out of food. I would look at the demand during the same time period as the year before. I would also account for changes in the day of the week. For example, a year ago today was a Sunday, while today is a Monday. The fact that it is the weekend affects the level of demand depending on the location. For example, an industrialized area will have high demand during the week when work occurs and low demand on weekends. In other locations, the peak demand may be Thursdays and Fridays, or the entire weekend. In addition, since my restaurants were located in Florida, I had to account for the change in demand due to the arrival and departure of “snowbirds.” Snowbirds were people who lived in another state (usually cold), and would move to Florida from November to March or April. The predicted level of sales demand would determine how many people to staff in each area of the restaurant. It was easier to predict demand when I could use the historical data for my store as the basis for the predicted demand. I used the predicted sales revenue to estimate the labor costs as 17% of the sales revenues. I then allocated staff to different areas of the store and to various shifts in order to reach the desired labor costs. I also used the predicted demand to determine the best decisions regarding trash pickup. Trash pickup costs are based on the number of pickups and the volume of trash in each pickup. The formula for calculating the costs is not simple. It also varies based on the location of the store. My experience in the restaurant industry indicates that most fast food restaurants are overserviced in terms of trash pickups. The ideal situation is to have the dumpster full each time a pickup occurs. I set the trash pickup days based on the demand pattern. Supplier – Buyer Cooperation A few years back I taught a short course on supply chain information technology to people working in the food industry. Among the participants were employees of both the largest food producer and food retailer in a medium-sized European company. When asked what the most valuable information the retailer could supply the producer is, the producers responded that information on planned promotions (sales) would be the most

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valuable. This would allow them to set aside extra capacity and adjust to higher than normal demand. The retailers were then asked whether they shared this information or not. While several reasons were given, the primary fear was that information on future promotions may fall into their competitors’ hands.

Answers to Discussion Questions in Textbook 1. Give three examples showing why a business needs to forecast. Forecasts are needed as inputs to other operations decisions such as inventory planning, production scheduling, and staff scheduling and hiring. 2. Give three examples from your life in which you may forecast the future. I predict that the lack of fiscal restraint would cause the European currency, the Euro, to lose value against the dollar. I prepare a teaching plan for the semester based on estimates of how long it will take to cover each topic. I also make decisions on which cases to include based on the estimated class size. 3. Describe the steps involved in forecasting. The first step is to decide what to forecast in terms of the data to forecast and the level of detail required. The second step is to evaluate and analyze the appropriate data. In this step, we identify the data needed and its availability. The third step is to select and test the forecasting model. We must consider different factors when selecting the model such as ease of use, cost, and accuracy. In the fourth step, the forecasts are generated using the model. During the last step, we monitor the accuracy of the forecasts since we may need to change the model if the environment has changed. 4. Identify the key differences between qualitative and quantitative forecasting methods. Which is better in your opinion and why? Qualitative methods are subjective since they rely on the educated guesses of the forecaster. Quantitative forecasting methods are based on using calculations to make forecasts. These calculations require past data. They are more objective. I think that qualitative methods are better because we are in a rapidly changing environment where the past is not a good predictor of the future. 5. What are the main types of data patterns? Give examples of each type.

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The main types of data patterns are level or horizontal, trend, seasonality, and cycles. Level patterns show a stable demand that fluctuates around the mean. The demand for some food items is relatively stable. A trend is where the data is either increasing or decreasing rather steadily over time. For example, the current trend in computer sales has been decreasing in the U.S. because less people need to upgrade their computers. Seasonality occurs when the season affects the level of demand. For example, computer sales increase during the Christmas season dramatically. Cycles are movements in the data over longer periods of time. The demand for housing tends to follow a cyclical pattern based on the interest rates and other economic factors. 6. Describe the different assumptions of time series and causal models. Time series models assume that the demand is only related to its own past demand patterns. Causal models assume that the some other factors affect the variable we are trying to predict. Causal models measure the relationship between the other factor(s) and the data we are trying to forecast. 7. What are the differences among models that forecast the level, trend, and seasonality? The same set of models can be used in most cases. The key difference is that an additional feature or calculation(s) is added to the model to adjust for the effect of the trend or seasonality. 8. Explain why it is important to monitor forecast errors. It is important to monitor forecast errors because using the same forecasting model may not continue to be the best way to accurately forecast demand if changes in the environment occur. Errors in forecasts will affect our costs and customer service levels since many operations decisions are based on forecasts. 9. Explain some of the factors to be considered in selecting a forecasting model. We should consider the amount and type of available data. For example, if we do not have any data for a new product we plan to introduce to the market, we will need to rely on quantitative methods. We should also consider the degree of accuracy, the length of forecast horizons, and whether data patterns exist. We should evaluate the trade-offs between data accuracy and the cost to forecast. The forecast horizon and data patterns help determine which method is more appropriate.

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See Solutions Manual for Answers and Solutions to Problems

Answers to Textbook Case – Bram-Wear 1. Is seasonal exponential smoothing the best model for forecasting Urban Run athletic wear? Why? No, seasonal exponential smoothing is not the best model for forecasting Urban Run athletic wear because the demand pattern is no longer seasonal. 2. Explain what has happened to the data for Urban Run. What are the consequences of continuing to use seasonal exponential smoothing? What model would you use? Generate a forecast for the 4 quarters of the 4th year using your model. Determine your forecast error and the inventory consequences. The data for Urban Run changed from a seasonal pattern to an upward trend. The consequences of continuing to use a seasonal method are cycles through the year of either having too much or not enough inventory. I would use an exponential model with trend. I decided to set alpha at the 0.9 level and beta at the 0.3 level. I calculated the S and T values for the third quarter of the third year by averaging the past year’s data in terms of demand and trend, respectively. My forecasts for the first four quarters of the fourth year are 31.7, 31.5, 32.2, and 34.3, respectively. During the first two quarters, there will be too much inventory since the trend was much less pronounced, while the excess inventory for the last two quarters will be small. The MAD for my method is 6.3125, while the MSE is 7.83. I decided to rely more on MAD since I knew that the estimate would be higher in the first two quarters. 3. Is exponential smoothing with trend the best model for forecasting 5-pocket cargo jeans? Why? The exponential smoothing method with trend is not the best model for forecasting cargo jeans demand any more. In year 1, there was an upward trend. However, the trend no longer exists.

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4. What method would you use to forecast monthly cargo jean demand for the second year given the previous year’s monthly demand? Explain why you selected your approach. Generate the forecasts for each month of the second year with your method. Determine your forecast error and the inventory consequences. We should either use a moving average or an exponential smoothing method.

Answers to Textbook Case – The Emergency Room (ER) at Northwest General (A) 1. What is your opinion of the level at which the data are being collected? What are some of the advantages of collecting data at this level? The data are collected by arrivals per hour of the day and day of the week. As nurses are scheduled by whole hours and days, this level of detail is sufficient. An advantage of this level of detail is that nurses can be scheduled to correspond to peak demand. For example, it appears that the highest demand occurs in the mid-afternoon to early evening. Jenn can either have nursing staff work a shift such as 10 to 6 or hire additional part-time nurses for the afternoon. Day of week data provides similar advantages. At first glance, it appears that the weekends are busier. Jenn should schedule more nurses for those days. One level of detail that is missing is information on type of visit. It could be that the amount of time a nurse needs to spend with a patient varies with medical problems. For example, a wound may require more care than a fever. If this is true, and the percent of accident related injuries varies by hour or day, then Jenn would need to take this into account. Finally, we are told that Jenn believes October to be a typical month. We are not told if she is correct in this belief. 2. Aggregate the original data for October as you see appropriate (e.g. sum up by day of week, time of day, week of the month, etc.). This will give you a new data set to work with. Analyze your data for patterns. Can you find any? The following summarizes the original data of the day of week and two-hour time slots (shifts probably will not start every hour).

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Day

Percent

Date Hour

Da W T y Dat 1 2 e

0.01

0.02

0.04

0.02

0.03

0.04

0.05

0.07

0.05

0.04

0.03

0.04

0.06

0.05

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 24 26 27 28 29 30 31

75 77

55 69 73 74 43 44 59 56 73 74 77 41 43 59 44 73 74 75 40 44 59 45 73

Su 56 53 72 m M

41.8 43. 58. 3 2 0.70 0.7 0.9 3 8

50. 72 74 75.8 6 0.8 1.21 1.2 1.28 5 5

Grand ave 59

3. Use at least two different forecasting models on the new data set you have developed

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in question 2, by aggregating the original data. Compare their forecast performance and provide an evaluation. To demonstrate the techniques, the forecasts below use moving average and exponential smoothing. First, I created a series of day totals with the day effect removed (the actual day result divided by the day percent: Actual

No day effect

45 87 93 98

With the second series, I then created a 3-day moving average and an exponential smoothing series with alpha as 0.3, and F4 as the 3-day MA. Day no day effect 3 day MA Expo Smooth, alpha

1 77

2 3 4 54 84 62 72 0.3 72

5 62 67 69

6 61 69 67

7 58 62 65

8 59 60 63

9 65 59 62

I then returned the day effect for the last day Forecast method Forecast

With day effect Actual

3 day MA Expo

70 69

58 57

73 73

Finally, we can use the hour percentage to predict a given hour. For example, the 3day moving average prediction for arrivals from 13:00 to 14:00 on the last Friday of October would be 70 time hour effect or 70* .07 = 4.9, which rounded to 5 is the actual arrivals for that time slot.

Complete Manuals for the Interactive Cases also are available on the companion site: www.wiley.com/college/reid.

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Interactive Learning The student web site for this chapter includes PowerPoint chapter review, selected solutions, company tours, web links, and Excel spreadsheet templates and solved problems. The first company listed, Artesyn Communications Products LLC, is now part of Emerson Network Power. They can be found at http://www.artesyncp.com/index.html Students should look at the products offered by these firms and try to determine which forecasting methods would be most appropriate. The Forecasting Principles page can take students beyond what is introduced in this chapter. They discuss the basics, and practice. They also explore some emerging methods such as neural networks, and have links to futuristic sites such as The Institute for Alternative Futures.

In Class Exercises The following exercise takes approximately 40 minutes for the students to answer in class in teams. I give it out at the end of class, while allowing enough time, so that students can leave as soon as they have completed the exercise. I give the students the option of working individually or in teams of up to five students. When I hand out copies of the exercise, I ask the students to take one copy per person and one copy per team. This way each student will have a copy of the assignment. I only require one copy per team be turned in to me for grading. I stress the need to work individually before working in a group on this exercise.

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FORECASTING EXERCISE Please provide names and signatures (only for team members who are present today): NAME (Print) SIGNATURE 1. 2. 3. 4. 5.

The purpose of this exercise is to gain some insight into making forecasting decisions. Suppose that I plan to buy chocolate chip cookies from a bakery and bring them to the next class to sell. Each cookie costs 75 cents to purchase. I plan to sell them for a dollar each. 1. Individually estimate how many I should purchase in order to maximize profit. Briefly explain your logic.

2. Working in groups, discuss your forecasts. What does your group suggest the purchased quantity should be? How did you arrive at a consensus?

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3. What factors would cause you to change your forecast? (For example, does the day of the week, time of the class, or season of the year affect the forecast?)

4. Would your forecast differ if the selling price changed? How?

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References Fisher, M. L., Hammond, J. H., Obermeyer, W. R. and Raman, A., “Making Supply Meet Demand in an Uncertain World,” Harvard Business Review, May - June, 1994, 83 – 93. Georgoff, D. M. and Murdick, R. G., “Manager’s Guide to Forecasting,” Harvard Business Review, January - February, 1986, 3 – 9. Jain, C. (2007). BENCHMARKING FORECASTING PROCESSES. The Journal of Business Forecasting, 26(4), 9-10, 12-14, 23. Sanders, N. R. and Mandrodt, K. B., “Forecasting Practices in U.S. Corporations: Survey Results,” Interfaces, 24(2), March – April, 1994, 92 – 100. Zotteri, Giulio, & Matteo Kalchschmidt. (2007). Forecasting practices: Empirical evidence and a framework for research. International Journal of Production Economics, 108(1/2), 84.

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Chapter 9: Capacity Planning and Facility Location Overview This chapter defines capacity planning and location analysis, and explains the steps and factors that are considered when making these types of decisions. The relationship between capacity planning and location analysis is described. The use of decision support tools for capacity planning and location analysis is described.

Teaching Tips and Strategies At my college, the combination of student background and the length of term do not allow us to cover all the textbook chapters in one term. As I teach in a business school, I often choose to drop the chapters that are most closely related to Industrial Engineering (even though I am an industrial engineer). These include this chapter, Chapter 10 – Facility Layout, and Chapter 11 – Work System Design. I make sure the students understand the different types of capacity and the factors we consider when making location decisions. With respect to capacity, students learn that the bottleneck or constraint (if physical) determines the firm’s capacity by reading the required novel, The Goal. We discuss how the factors depend on whether we are locating a service or manufacturing facility. At times, I have demonstrated factor rating. I have used the example included in the in-class exercise to demonstrate its use in other types of decisions. If I demonstrate it in class, I ask the students to decide what the weights should be, which I then use in the calculations, since students enjoy being involved in the class. The example discussed in class need not be facility location. Students are often familiar with magazine articles that rank, for example, the best place to live in America. Students can discuss what the factors used to determine the best places are and whether these are appropriate measures. They can then weight these factors. Consequences of analytic methods I point out that our choice of analytical methods can have unintended impacts on our decisions. This chapter includes at least two methods worth discussing. First, let us discuss the factor rating method. Many applications do indeed use a 5-point scale (1 being poor, 5 being excellent). However, once we use these ratings in computing the score, whatever the value of the factor, a rating of excellent is 5 times the value of a rating of poor. Rarely, if ever, would such a relationship between the 5 ratings actually be this way. I prefer to use a ratio scale, where the best in the category is assigned 100% and

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the others receive what is agreed to be their percentage. So, rather than assigning a rating of 1 to poor and 5 to excellent, the best gets 100% and the poor performer may be judged to be, say, only half as good resulting in a score of 50%. Break-even analysis can also lead to problems, such as ignoring cash flows. A solution may provide a lower or earlier break-even point because of a low fixed cost. However, another alternative might take longer to recoup the fixed cost but once it is covered, it is more profitable from then on. Net present value analysis can be more appropriate in this case.

War Stories Fast Food Restaurant Location Decisions (This story was told to me by William Wagner.) I used to own five Miami Subs restaurants (fast food). I considered a number of factors when deciding where to locate each of these restaurants. Access was the number one factor to consider. It needs to be easy to get in and out of the store’s parking lot. A store located in a mall does not have easy access if you have to enter the mall first before heading to the store. Access is also poor if a customer can only turn one direction when leaving the store’s parking lot (i.e. a right-turn only exit). I studied each area’s demographics and traffic patterns. The demographic I focused on was the level of income. I chose sites where the level of income was medium to high since Miami Subs is an upscale fast food restaurant. Miami Subs offers a large variety of items (135) at somewhat higher prices, while also selling beer and wine. I studied not only the traffic patterns, but also the traffic count. For example, the count is high on a highway, but probability of each car coming to the restaurant is lower than in other locations. I also considered the available space and whether the site was located next to a service, such as an arena or zoo. The service would draw potential customers to the store. It was also important to consider how these factors might change over the next five years. My experience in this industry made me realize that you can’t go wrong if you put your store next to a McDonald’s. This is because McDonald’s typically owns all the land (and leases to franchisees), and due to the fact that they conduct a comprehensive study before making a decision.

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The Typical Misuse of Capacity Many companies have a physical constraint in production. This is a resource that does not have enough capacity to produce the demand placed on it. The problem is that many of these companies do not deal with the constraint appropriately. They use efficiencies or standards as a measure of performance. This causes the other resources to produce in order to meet or improve their performance on these measures. In addition, given their focus on costs, they set batch sizes high in order to maximize efficiencies by reducing the total setup time. The combined effects of the large batches and increased production on non-constraint resources cause inventory to build up in the plant, which results in an increased production lead time. In addition, these plants have difficulty meeting production schedules, expedite frequently, and possibly have late deliveries. But what ends up happening to capacity? Because of the performance measures used, the capacity is actually wasted. According to the Theory of Constraints (TOC), the production schedule should be based on the constraint in production. Our goal is to improve our performance on the global measures of net profit, return on investment, and cash flow. Focusing our efforts on the local measures of efficiencies and/or standards typically cause the global performance measures to be negatively affected. Our goal is not to keep everyone busy producing the product. This does not mean that we are not interested in measuring individual performance. It does suggest that we should use the right measure of performance in order to motivate the right behavior. The typical measures used in industry actually cause inventory to increase, throughput to decrease, and operating expense to increase. All these measures have changed in the wrong direction, thus negatively affecting our global performance measures. What we should do is follow the decision-making rules of TOC with respect to priorities, production scheduling, and inventory. We work to ensure that the constraint is fully utilized, while the other resources can be idle just so long as they ensure the constraint is kept busy. In addition, we are not concerned with having large batch sizes on nonconstraint resources, since they have excess capacity. We can use this capacity for extra setups to improve production. As Dr. Eli Goldratt pointed out in the Goldratt Satellite Program, the average increase in capacity by over 1000 manufacturers that implemented drum-buffer-rope production (which is based on TOC) was 40%. I would estimate that much of this increase was due to changes in policies, measurements, and behaviors, and not due to increase in labor or machines. Mabin and Balderstone (2000) summarize the results of TOC implementations. Though the sample size is much smaller than that of Dr. Goldratt, we do have

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information on the impact of TOC on other measures. The average increase in revenue/throughput was 63% (outlier exclusive). Inventory levels decreased to an average of 49%. The average increase in due-date performance was 44%. Finally, lead times decreased to an average of 70%. Capacity and location decisions, assumptions, and management philosophy The models presented in this chapter, and in much of operations management, assume certain priorities. We often make location decisions to decrease transport costs and to improve response times. Early in my career, I worked for a consumer goods manufacturer that shipped its product all over the US and Canada. They started with just one plant in the Northeast. Eventually, their management philosophy dictated that they needed another plant. They then needed to pick a location. I ask my students, without describing the management philosophy, where they should put the second plant. Students most often mention the West. However, the management philosophy was similar to some of the concepts Malcolm Gladwell describes in The Tipping Point. Gladwell notes that organizations tend to lose cohesiveness when their populations start to exceed about 150. He then describes an electronics firm that opened a new plant on the other side of a parking lot once the numbers exceeded this limit. The close proximity allowed closer management. My previous employer decided it was time to start a new factory when the plant manager no longer knew all the employees by first name. They then needed to pick a location for the plant. A western location may decrease shipping and warehouse costs. However, a second management philosophy took precedence. Upper management felt that the plants and the company would run better if they visited all the facilities frequently. They feared they would do this less often if a visit involved travelling by plane or an overnight stay. The next plant was located in the Northeast, a few hours’ drive from the first plant and company headquarters (as were plants 3 through 5).

Answers to Discussion Questions in Textbook 1. Explain why capacity planning is important to a business. Having the wrong level of capacity causes negative effects. Too much capacity means that the costs are higher than they should be since we are paying for more land, equipment, and a larger building. Low capacity negatively affects the level of service

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provided to our customers. 2. Explain the differences between design capacity and effective capacity. Design capacity is the maximum output that can be achieved using temporary measures, such as overtime and subcontracting. Effective capacity is the maximum output that can be achieved under normal conditions, including realistic work schedules and regular staff levels. Effective capacity is usually less than design capacity. Effective capacity is what we can achieve over long periods of time, while design capacity can be reached on a short-term basis. 3. How is capacity utilization computed, and what does it tell us? Capacity utilization is the actual output divided by the capacity times 100%. It tells us what percentage of our capacity is being used. 4. What are the steps in capacity planning? The steps in capacity planning are to identify the capacity requirements for the present and future, develop capacity alternatives, and evaluate capacity alternatives. The capacity alternatives are do nothing, expand large now, and expand small now with the option to increase capacity later. We evaluate the capacity alternatives by determining the predicted impacts on costs, profit, and customer service. 5. What are decision trees, and how do they help us make better decisions? A decision tree is a tool for determining the predicted effect of decisions given the uncertainties of the outcomes related to each decision. They help us make better decisions since they provide a structured, logical process for evaluating the expected outcome given the probabilities of different outcomes. 6. Find and discuss business examples of overcapacity and undercapacity. Overcapacity typically occurs when a university builds a new business school building. This is because we would not want to construct the building to provide just enough offices for the current level of faculty. We would build extra offices to prepare for an increase in faculty in the future. Undercapacity occurs at universities when they have to keep increasing the class sizes since they do not have either enough faculty or classrooms to support the current

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number of students. 7. Explain the consequences of poor location decisions for a business. A poor location decision in the service industry affects the level of demand since customers usually go to the facility to be served. A facility that is not close to or part of a heavily populated area may not have a high level of demand. There are limits to how far customers will travel to obtain various types of services. A poor location decision with respect to proximity to the source of labor could cause us to have difficulty staffing the facility. The location decision also affects our cost structure. 8. Find examples of good and bad location decisions. It is good for restaurants to locate close to popular shopping areas, given the traffic volume and time spent by customers which could cause them to decide to eat there as well. A wood furniture manufacturer has made a bad location decision if the plant was located far from the lumber suppliers since it is expensive to transport the lumber. 9. Describe three advantages and three disadvantages of globalization. The advantages of globalization are the ability to take advantage of foreign markets, the availability of cheap labor, and the reduction of trade barriers. The ability to take advantage of foreign markets is the increased potential for obtaining new customers since there are now more countries to sell in. The availability of cheap labor can help us reduce our costs. The reduction of trade barriers makes it easier and cheaper to import products into other countries for sale, without opening a plant there. The disadvantages of globalization are the risk of losing proprietary technology, poor infrastructure, and different worker attitudes. The risk of losing proprietary technology occurs because some countries do not regulate the use of this technology. Poor infrastructure can cause problems regarding reliable transport of goods. Different worker attitudes can result in tardiness, absenteeism, and low productivity. 10. Describe the steps used to make location decisions. The steps for making location decisions are identify the location criteria, develop location alternatives, and evaluate location alternatives. The location criteria are the factors we want to consider when making the decision. We develop location alternatives by selecting potential locations that meet our criteria. Then we evaluate

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the location alternatives by evaluating the ability of the locations to satisfy our criteria overall. 11. Describe five factors that should be considered in the location decision. The five factors that should be considered in the location decision are transportation, community attitude, and proximity to customers, labor, and sources of supply. Transportation is the cost of moving items to and/or from the location. Community attitude relates to the community’s support for the facility in terms of lowering expenses to encourage it to open there, and the level of desire to have the facility there. Proximity to customers affects demand for services and transportation costs for manufacturers. Proximity to source of labor affects the ability to find staff for the facility. Proximity to sources of supply affects the transportation costs. Service and manufacturing firms may place different levels of importance on each of these factors. 12. Explain the differences among factor rating, the load-distance model, and break-even analysis. What criteria does each method use to make the location decision? Factor rating determines the weighted summed score for each location based on the rating of the ability of each location to meet the factor criteria. The load-distance model measures the frequency of movements over distances to determine which alternative minimizes travel costs. Break-even analysis determines the level of demand needed to cover all the costs. Factor rating can consider a variety of factors, while the load-distance model only considers travel costs. Break-even analysis only considers costs and demand.

See Solutions Manual for Answers and Solutions to Problems

Answers to Textbook Case – Data Tech, Inc. Note: I assumed that larger factor scores meant that the location better met the criteria. 1. Help Jeff decide whether he should put greater priority on a smaller facility with possibility for expansion or moving into a larger facility immediately. Decide on which is the best alternative and choose weights for the two capacity factors based on your findings.

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We determine the decision regarding the size of the facility based the use of a decision tree. In the case of the smaller facility, we would choose to expand if the demand was high. These are the calculations for the expected profit of each alternative: Large facility expected profit = (0.70) ($1,000,000) + (0.30) ($600,000) = $880,000 Small facility expected profit = (0.70) ($800,000) + (0.30) ($500,000) = $710,000 Therefore, we would clearly decide to move into a larger facility. 2. Once you have selected the factors for the two capacity alternatives, use factor rating to select a new location for Data Tech. The summed weighted score for location 1 is equal to 380. Therefore, location 1 meets our criteria.

3. How would your factor analysis be different if you had selected a different capacity alternative? If I had determined that a smaller facility resulted in a higher expected profit, then I would have allocated a weight of 30 to the factor of the facility with potential for expansion. Therefore, the factor of the facility with excess capacity would have a factor weight of 0. We then multiply each factor weight by the factor score for each location and sum these weighted scores. This results in summed weighted scores for locations 1, 2 and 3 of 260, 250 and 460, respectively. Therefore, we would choose location 3 since it best meets our criteria overall.

Answers to Textbook Case – The Emergency Room (ER) at Northwest General (B) 1. Discuss the pros and cons of using average demand to assess capacity requirements. Is this a reasonable approach for the ER? Using average demand to assess capacity can lead to a level where excess capacity in slow periods can be used to satisfy excess demand in peak periods. However, to use excess capacity for demand occurring at some other time requires either back-orders or carrying inventory. The ER is a service organization. Patients arriving during a peak month, such as December, cannot be seen earlier nor backlogged until a later month. Planning for average demand would not be appropriate for the ER.

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2. Make a recommendation for Jenn as to what she should do and the information that she should provide in her request. Jenn needs to base her request on peak demand periods. To do so, she needs to document the peak demand and the impact of having capacity below this level. Currently (see Case ER (B) in the previous chapter) demand data is from October, one of the low demand months. Jenn needs to collect arrival data for the peak vacation months. She must also document the level of overcrowding during these months, such as the number of patients in hallways and closets. If the board agrees that this is inadequate service, her data proving how frequent these conditions occur should influence the board.

Complete Manuals for the Interactive Cases also are available on the companion site: www.wiley.com/college/reid.

In Class Exercises This exercise was adapted from an example that Professor William A. Ruch used during lecture to demonstrate factor loading. The following exercise takes approximately 40 minutes for the students to answer in class by forming teams. I give it out at the end of class, while allowing enough time, so that students can leave as soon as they have completed the exercise. I give the students the option of working individually or in teams of up to five students. When I hand out copies of the exercise questions, I ask the students to take one copy per person and one copy per team. This way each student will have a copy of the assignment. I only require one copy per team be turned in to me for grading. To do the exercise, the students need to understand the factor rating procedure. It would be very helpful if the students have already seen a demonstration of it. I did not provide an answer key to this exercise since the answers can vary. When grading it, the professor should make sure that the weights are consistent with the stated importance of each factor.

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FACTOR RATING EXERCISE Please provide names and signatures (only for team members who are present today): NAME (Print) SIGNATURE 1. 2. 3. 4. 5.

The purpose of this exercise is to understand how to use factor rating to make decisions that involve multiple criteria. In order to fulfill your graduation requirements for a bachelor’s degree, you must take one more course in communication. You have a choice of three courses to meet this requirement: Writing Public Speaking Organization Communications It occurred to you that you could use factor rating for making this decision. First, you decided to consider the following criteria for this decision: Workload (amount of reading) Number of written assignments Probability of an “A” Usefulness in career You decided that your goal was to minimize workload and assignments, while increasing the probability of an “A” and the usefulness in the career. So, you collected information on these four criteria or factors to determine their ratings for each course. You rated the factors on a scale of 1 to 10, with 10 meaning that the course best meets the criterion. This information is provided in the table in the back of this exercise. The data in this table indicates that the organization communications class is the one with the lowest workload, since it received the highest rating. The public speaking class is the class with the highest probability of receiving an “A.”

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1. For the four criteria listed, please explain the relative importance of all of the criteria to you. For example, which is most important? (At least three of the criteria must be considered as important to some degree for this question.)

2. Allocate weights to the four criteria based on the information listed in the previous question.

Criteria:

Weight

Workload

_______

Written Assignments

_______

Probability of an “A”

_______

Usefulness in career

_______

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3. Decide which class to take after filling in the table below. Criteria Work Assn. A? Useful

Weight

Writing

Public Speaking

Organization Communications

8 10 5 10

6 4 10 10

10 6 6 8

TOTAL

4. What other types of decisions could you make using factor rating?

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References Gladwell, Malcolm, The Tipping Point, Back Bay Books; Reprint edition (January 7, 2002 ISBN: 0316346624 2002. Mabin, V. J. and Balderstone, S. J., The World of the Theory of Constraints: A Review of the International Literature, Boca Raton, FL: The St. Lucie Press/APICS Series on Constraints Management, 2000.

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Chapter 10: Facility Layout Overview This chapter defines layout planning and its importance. Process and product layouts are identified, described, and compared. The steps for designing product and process layouts are described and demonstrated. Two additional layouts, the hybrid layout and group technology (cell) layout, are explained. At my college, the combination of student background and the length of term does not allow us to cover all the textbook chapters in one term. As I teach in a business school, I often choose to drop the chapters that are most closely related to Industrial Engineering (even though I am an industrial engineer). These include Chapter 9 – Capacity Planning and Facility Location, this chapter, and Chapter 11 – Work System Design.

Teaching Tips and Strategies I stress the importance of making logical layout decisions. I ask them to evaluate the layout of our classroom and other classrooms they have been in. I point out that JIT uses a balanced line. I think that one benefit of presenting or demonstrating the design of a product layout is to understand its impact on cycle times and output rates to some degree. I would like to thank Professor William A. Ruch for his idea of explaining process layout decisions. First, I used an example of a building with four departments in a line next to each other. I then demonstrate the calculations. I take the same example and ask the class to suggest a better layout. We then perform the calculations for their proposed layout. Finally, I demonstrate the calculations, with their help, for a square building with each of the four departments in each corner of the building. This requires the use of rectilinear distance calculations. We can then see which of the three layouts is best since we used the same loads for each layout. I have used a helpful example, which was created by Professor William A. Ruch, for demonstrating product layout design decisions and performance measure calculations. Here is that example: Task A B C D E F G H

Immediate Predecessor None None A C C D E B, F, G

Task Time 50 sec. 30 sec. 20 sec. 45 sec. 20 sec. 25 sec. 10 sec. 35 sec.

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I begin by drawing the network for this production process on the board. Given a demand of 400 units per 8 hour day, our hourly rate is 50 units. This translates into a cycle time of 72 seconds. The production time is 235 seconds. Therefore, the theoretical minimum number of stations is 4. So we could create the following workstations: A and C B, E, and G D and F H This layout was created by putting boxes around the tasks on the network on the board. This layout can have a cycle time of 70 seconds or more. So we set the cycle time at 72 seconds to achieve our desired output rate. For this layout, the idle time is 166 seconds and the efficiency is 81.6%. Given the information listed so far, how would we set up the line? Which workstation is first in the line flow? It has to be the workstation with A and C. The last workstation has to be H. The other two workstations can be placed in any order in between the first and the last workstation. Next, we discuss how the tasks are sequenced within each workstation. For example, at the first workstation, we must do A, and then C. At the workstation with tasks B, E, and G, the only requirement is that E must be done before G. Finally, I ask how we could improve upon the current layout. Here are some possible improvements: • • • •

Improve the production method for any task, thus reducing the task time. This may or may not allow us to improve the layout. Adjust the production schedule up or down (different cycle time). For our layout, we could reduce the cycle time to 70 seconds, which is the highest workstation production time. This would increase our production rate. We could find something else for H to do. We could improve our layout by moving F to the last workstation (with H), and by moving C into the workstation where D is. This layout would allow us to reduce our cycle time to 65 seconds, thus increasing the production rate. In class, we could also practice determining the order of the new workstations and the order of work within the workstations for this new layout.

War Stories Warehouse Layout (This story was told to me by a source, who chooses to remain anonymous.) It is difficult to use the best possible or optimal layout when companies rent available space. They then have to try to find the best layout for that space. In my time working as a manager in distribution, I realized what the optimal layout for a warehouse is. The warehouse would

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have docks on opposite sides of the building, and the flow of product would be in one direction only. One dock would be for unloading, while the other would be for loading. The goods moved in a line flow from the unloading docks to receiving, to the warehouse, to the pick and pack area, to shipping, and finally to the loading docks. It is a logistical nightmare to have trucks loading and unloading at the same docks. One reason for this is due to the time required to load and unload the truck. At the warehouse I worked at, it took about 15 minutes to unload a truck, while it took 20 minutes to three hours to load a truck. So the optimal design would include many more dock doors for shipping as opposed to receiving. Since the space available may not be amenable to this design, a good alternative is to have a U-shaped flow through the facility from receiving to shipping. Relating to Cross-Docking The above example points out that a well-designed warehouse will have the receiving docks on one side and the shipping docks on the other. Chapter 4 presented the concept of cross-docking, where goods went directly from a trailer in receiving to a waiting trailer in shipping. The goods were never stocked in the warehouse. The receiving side – shipping side model would also be beneficial to cross docking. However, if both traditional warehouse operations and cross docking are to be run from one location, some additional care may be warranted. Ask students how they would design the traffic flow through the warehouse to avoid conflicts between goods “just passing through” and those destined for warehouse storage first. Office layouts This chapter describes office layouts as a special case of a process layout. Chapter 3 defined processes. Most offices have layouts that reflect business functions, as represented by departments. The accounts receivable people are close together, as are human resources, sales, and so forth. Is this always the case, and would there sometimes be benefits to switching to a product layout? Many companies involved in what is sometimes called back-office operations have found that a product layout can speed throughput. Back office operations often process large amounts of similar paperwork, such as insurance claims and loan applications. They place the people performing several steps of, for example, a loan application close together, and sometimes even in order of the steps they perform. This way, the applications flow through the office, and get back to the customer quicker without stacking up in inboxes.

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Answers to Discussion Questions in Textbook 1. Explain the importance of layout planning for a business. What are the consequences of a poor layout? Layout planning is important because it can significantly affect the productivity and service quality. Some consequences of poor layout are increased costs, confused and frustrated customers, and poor communication and information flows. 2. Explain the importance of layout planning for everyday life. How has poor layout planning affected your life? It has caused me to expend time and energy for extra movements within my home and at the university. For example, I have taught in a classroom where the computer is in a structure in the corner of the room. The table extended part of the way across the front of the room. I often lectured using PowerPoint. So I needed to keep walking back and forth from being close to the students to the mouse in order to change the slide. I have now compensated for this problem by using a remote mouse. In addition, the screen covered the entire whiteboard, thus making it impossible to write on the board, and have a slide or overhead projected on the screen at the same time. 3. Identify the four types of layouts and their characteristics. The four types are process, product, hybrid, and fixed-position layouts. A process layout groups similar processes or functions. Process layouts use general purpose resources, are less capital and more labor intensive, are flexible, have slower processing rates, have higher material handling costs, are more difficult to schedule, and need more space. A product layout arranges resources in a line flow. Product layouts use specialized resources, are capital intensive, have higher processing rates, lower material handling costs, need less space, and are relatively inflexible. A hybrid layout combines aspects of both product and process layouts. A fixed-position layout is used when the product can not be moved. The workers and equipment move around the products as needed. 4. Identify the steps in designing a process layout. To design a process layout, we have to gather information, develop a diagram of the space to be used, and develop a detailed layout of the space. We need information regarding the amount of space needed for each resource, and the closeness measures between resources, such as number of trips or closeness ratings concerning the desirability of locating each department pair close together. The diagram of the space is used to make sure that the space is large enough for all resources.

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5. Find examples of a process layout in local businesses. Draw a picture of the locations of departments. In a grocery store, all the fruit and vegetables are located together, while all the freezer items are located together. 6. Identify the steps in designing a product layout. The steps in designing a product layout are: • • • • • •

Identify tasks and their immediate predecessors. Determine output rate. Determine cycle time. Compute the theoretical minimum number of stations. Assign tasks to workstations. Compute efficiency, idle time, and balance delay.

7. Find examples of a product layout in local businesses. Draw a picture to show the workstations and the tasks performed. In some cafeterias, there is a one line flow starting with the pickup of a tray and silverware. The food and drink areas are typically in this order: • • • • • • •

Salads Dressing Bread Entrees Vegetables Dessert Drinks

Sometimes desserts are placed before the entrees. The cash register is at the end of the line. 8. Explain the concept of cycle time and how it affects output. Give an example. Cycle time is the maximum production time at any workstation on the line. A product is moved from one station to the next in one cycle time. One unit will be finished on the line in one cycle time. The cycle time has an inverse relationship with the production rate. For example, when the cycle time increases, the production rate decreases.

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9. Define group technology. Why is it important? Group technology is the use of combined resources in cells to form families of products. It is important because it brings the efficiencies of a product layout to a process layout environment. 10. Give an example of a poor layout. Find a better solution for that layout problem. I have taught in classrooms with a poor layout. Not having tiered seating makes it difficult for students to see the board/screen. Having the entrance to the classroom in the front (where the board is) is disruptive since everyone sees the arrival and departure of students during class (i.e. late arrivals). I dislike having a screen that covers the entire board. If I want to move back and forth between using the screen and board, I have to raise and lower the screen each time.

See Solutions Manual for Answers and Solutions to Problems

Answers to Textbook Case – Sawhill Athletic Club (A) 1. Develop an ld score for the current layout. What problems can you identify with the current layout? Please see the table following question 2 for ld score calculations for the current layout. The ld score for the current layout is 1202. The department combinations with relatively high trips also were located far from each other. For example, there are a large number of trips between the lobby and the child care facility, and between the lobby and the showers, yet these combinations have large distances between them. 2. Use trial and error to come up with a better layout that lowers the ld score. Explain the departments you thought needed to be in close proximity to one another. I focused on first locating departments close together that had the highest number of trips between them. To do so, I sorted the department combinations based on the number of trips. The first few on the list all had G as one of the departments, so I decided to locate G in the center of the facility. For those departments that had the most trips to and from G, I either located them directly above or below G, or to the right or left of G since these are the locations that have the shortest distance from G. Since the ld score changed from 1202 to 813, we significantly improved the layout.

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Depts. A and B A and C A and D A and E A and F A and G B and C B and D B and E B and G C and D C and F C and G D and E D and F D and G E and F E and G F and G

Current Layout Number of Trips Distance ld 15 1 15 34 2 68 32 3 96 14 1 14 54 5 270 76 3 228 2 1 2 2 1 2 34 2 68 72 2 144 26 1 26 47 2 94 3 1 3 9 2 18 1 1 1 4 2 8 7 2 14 74 1 74 57 1 57 1202

Proposed layout Distance 2 1 1 2 2 1 1 3 2 1 2 3 2 1 3 2 1 1 1

ld 30 34 32 28 108 76 2 6 68 72 52 141 6 9 3 8 7 74 57 813

Proposed Layout Pro Shop D Exercise and Weight Room E

Lobby A Showers/Lockers G Child Care Facility F

Food Court C Raquetball Courts B

3. Imagine an athletic facility such as Sawhill. What strategies would you suggest for creating an open environment? We should remove as many walls as possible. Wherever it is not possible to do so or does not make sense, we could convert them into dividers that are about waist high, and use columns for support structures. We could also use glass walls wherever possible to make it seem more open. Answers to Textbook Case – Sawhill Athletic Club (B) 1. What is the reason Sawhill is regularly running out of towels? Sawhill is regularly running out of towels because the washing process has a bottleneck operation with an hourly output rate below the hourly demand rate. Sawhill faces an hourly demand for towels of 60. Both the washing machine and

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dryer use a batch size of 20. The washer requires 20 minutes to wash a batch of 20 towels. It can do 3 batches per hour; therefore its hourly output matches the demand of 60 towels per hour. The dryer also uses a batch size of 20. However, it requires 60 minutes to dry a load. Therefore, its output rate is 20 towels per hour. The folding rate is also 60 towels per hour. Even though two of the operations can meet the demand, the bottleneck operation limits throughput to 20 towels per hour. 2. What is the cycle time of the current washing-drying-folding process? What should the cycle time be in order to meet towel demand? The cycle time is determined by the longest time required to complete a batch. The washer and dryer use batches of 20. The dryer requires an hour to complete this batch. Therefore the cycle time is one hour per batch of 20. In order to meet demand, the cycle time or batch size of the bottleneck operation needs to be improved. With a batch size of 20, the dryer would need to have a cycle time of 20 minutes. 3. Will purchasing an additional washer and dryer solve the problem? How will the cycle time change with an additional washer and dryer? Suggest a solution to the problem. No, purchasing an additional washer and dryer will not solve the problem. Two dryers operating in parallel raise the batch size to 40 towels. They will still have a cycle time of one hour for a batch of 40 towels. This rate of output is still below the needed 60 per hour. To solve the problem, Sawhill should buy two more dryers and no new washers. This raises the batch size of drying to 60 per hour with a cycle time of one hour. Assuming the staff can load the washers and dryers and still fold 60 towels an hour, this solves the problem. Complete Manuals for the Interactive Cases also are available on the companion site: www.wiley.com/college/reid.

Interactive Learning The student web site for this chapter includes PowerPoint chapter review, selected solutions, a company tour, and web links. The extend simulation software includes simulations of queuing and process layout decisions in a hospital. Students will need to install the software on the computer. In addition, they will need to make a change in Excel before opening the simulation program. Specifically, they will need to go into the macro section of the tools menu to change the security to medium in order to allow the simulation to run macros. The web site also includes an Excel template and solved layout problems.

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In Class Exercises This exercise was adapted from an exercise created by Dr. William A. Ruch. I estimate that the following exercise would take about an hour for the students to answer in class by forming teams. I give it out at the end of class, while allowing enough time, so that students can leave as soon as they have completed the exercise. I give the students the option of working individually or in teams of up to five students. When I hand out copies of the exercise questions, I ask the students to take one copy per person and one copy per team. This way each student will have a copy of the assignment. I only require one copy per team be turned in to me for grading. To do the exercise, the students need to understand how to make process and product layout decisions. They need to know how to perform the corresponding calculations.

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LAYOUT EXERCISE Please provide names and signatures (only for team members who are present today): NAME (Print) SIGNATURE 1. 2. 3. 4. 5.

The purpose of this exercise is to evaluate process and product layout decisions. 1. From the following "from-to" matrix and the layout, calculate the load distance score. Next, using logic, propose a better layout and calculate the load distance score of your proposed layout. TO FROM A B C D E F A 0 0 20 0 25 B 30 0 10 0 A C E C 0 35 20 B D F D 12 0 E 10 F

The current load distance score is The proposed load distance score is

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2. I have done the hard part; I have already balanced the production line and come up with the following five workstations. It is a moving assembly line (like auto assembly). WORKSTATION 1 2 3 4 5

PRODUCTIVE TIME 4 min 4 min 3 min 5 min 6 min

IDLE TIME 2 min 2 min 3 min 1 min 0 min

A. How long does it take a unit to go from the beginning to the end of the line?

B. In a four hour period, how many units would be produced on this line? (Assume the line begins and ends with the period full of units)

C. What is the efficiency of the line?

D. If the layout for this line consisted of three workstations, how would you expect the cycle time, efficiency, and production rate to be affected? (increase, decrease, remain the same, or it depends)

E. What impact would the breakdown of a workstation have on production?

F. What suggestions do you have for minimizing the effects of machine breakdowns in the future?

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LAYOUT EXERCISE ANSWER KEY Please provide names and signatures (only for team members who are present today): NAME (Print) SIGNATURE 1. 2. 3. 4. 5.

Load 20 25 30 10 35 20 12 10

Distance 2 3 2 3 1 2 2 1

ld 40 75 60 30 35 40 24 10 314

One Proposed Layout (see above) Distance ld 1 20 1 25 1 30 2 20 1 35 2 40 3 36 1 10 216

The current load distance score is

314

The proposed load distance score is

216 (an improvement)

2. I have done the hard part; I have already balanced the production line and come up with the following five workstations. It is a moving assembly line (like auto assembly). WORKSTATION 1 2

PRODUCTIVE TIME 4 min 4 min

IDLE TIME 2 min 2 min

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3 4 5

3 min 5 min 6 min

3 min 1 min 0 min

A. How long does it take a unit to go from the beginning to the end of the line? 30 minutes (which is a cycle time of 6 minutes through 5 workstations) B. In a four hour period, how many units would be produced on this line? (Assume the line begins and ends with the period full of units) Output =available time/cycle time = (4)(60 minutes per hour)/6 minutes = 40 C. What is the efficiency of the line? Efficiency = 22/(5)(6) times (100) = 73.3% D. If the layout for this line consisted of three workstations, how would you expect the cycle time, efficiency, and production rate to be affected? (increase, decrease, remain the same, or it depends) The cycle time would increase to at least 8 minutes. The efficiency would probably improve, but it depends on what the cycle time is (which would be determined by the allocation of work to the workstations). The production rate would decrease since it has an inverse relationship with the cycle time. E. What impact would the breakdown of a workstation have on production? The entire production process would shut down. F. What suggestions do you have for minimizing the effects of machine breakdowns in the future? We could place inventory between each workstation and/or perform preventative maintenance on the equipment.

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Chapter 11: Work System Design Overview This chapter describes the elements and objectives of work system design. Job design issues and methods analysis are described. The importance of work measurement is discussed. This chapter explains how to do a time study, work sampling, develop standard times, and use work standards. Finally, compensation plans and learning curves are described.

Teaching Tips and Strategies At my college, the combination of student background and the length of term does not allow us to cover all the textbook chapters in one term. As I teach in a business school, I often choose to drop the chapters that are most closely related to Industrial Engineering (even though I am an industrial engineer). These include Chapter 9 – Capacity Planning and Location, Chapter 10 – Facility Layout, and this chapter. I show a video clip from the Charlie Chaplin movie (from CBS/FOX Company), “Modern Times,” to lead into a discussion about the impact of job design on productivity and worker satisfaction. (The idea of using this video clip was brought forward by Brown et al. 1996). The students enjoy seeing and discussing this four-minute clip. The scene begins 6.5 minutes into the movie. It shows Charlie Chaplin working on the same task repeatedly. It also addresses breaks and pacing issues. This leads to a good discussion about job design. The concepts from the book “Fish!” (or the video related to the book) effectively supplement this discussion. The bestselling book is a parable about the famous Pike Place Fish Market in Seattle where the employees are very satisfied. The parable explains how to translate the ideas for boosting morale and energy to an office environment. Next, we discuss the various methods of work measurement. I point out that the use of standards can have a negative impact on the global performance of the firm. For a good example, please see the war story entitled “The Problem with using Standards” following this section. The in-class exercise is useful for having the students critically evaluate the use of performance measures. This chapter also discusses compensation plans. Please refer to the first war story (which is also included in chapter 8) for some information on creating these plans.

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Students enjoy a maze demonstration I have used for learning curves in class. I ask for a volunteer to come up to the overhead projector. Using an overhead with a maze on it, I ask the volunteer to complete the maze three times. Each time, I record the time taken. Then I ask the volunteer to complete the maze while looking at the screen instead of the projector. The maze is more difficult to complete because the hand must go in the opposite direction (since the projection reverses the image). I then record the times for filling out this maze three times. We then perform the calculations to determine the learning rate for each of these cases. The rates are usually quite different. Alternative Workplaces Alternative workplaces can lead to a lively discussion. I ask students what they would prefer. Often, those with little office experience see telecommuting as quite positive, while many with office experience mention that they would miss the casual interaction with colleagues. We then discuss whether they would be more or less productive working from home. This can be supplemented by listing the distractions and time savings available at the work place and at home. Output-Based and Time-Based Pay Systems The above discussion can lead to a discussion of the difference between time-based and output-based pay systems. We discuss the move from pay for output to pay for time that occurred during the industrial revolution. We then discuss whether pay for time would work well with telecommuting. Finally, we close this discussion by discussing the free agent trend, and whether bidding for work online requires a pay for output system and who benefits from this: worker, employer, and/or society.

War Stories Forecasting and Sales Incentive Plans (This story was told to me by William Wagner. This story is also included in Chapter 8 of this manual.) When I worked at an electronics company, I came up with a sales incentive plan to deal with the ups and downs of the market. During the peaks of the market demand, we did not have enough capacity. During the valleys in demand, we had excess capacity. I realized that there were conflicts between sales and production. One problem was the late shipments that occurred during peaks in demand. I decided to measure and reward actual billing and net order performance against the sales quota by creating a book-to-bill ratio that got rid of the extremes. In other words,

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this ratio would have a positive influence on orders in a down market and a negative influence on orders in an up market. Each quarter, we negotiated sales quotas by working to minimize the backlog in each region. The head of sales wanted a global quota figure. The goal of each salesperson was to achieve his or her book-to-bill ratio. The rewards for sales were capped with a high maximum reward that was attainable. The quota was capped quarterly to pay commission up to a maximum of 125% of the quota. The goal was to reward accuracy in forecasting sales. The book-to bill ratio was the sum of net sales and net orders divided by two. Let’s look at an example of how this ratio is used. Suppose that a salesperson has a quota of $2M, but books $4M in orders, while only $1.5M were shipped due to production capacity issues. This technically means that the quota was missed, though it was not the salesperson’s fault. The ratio would be the sum of $4M and $1.5M divided by 2, which is $2.75M. This is what we would pay the commission on. This then shows that the salesperson exceeded the quota by 37%. This system is more equitable. It would not be fair to pay commission based on the $1.5M produced since it is not the salesperson’s fault that the orders were turned in near the end of the quarter or because there was not enough capacity to produce them. On the other hand, it is not fair to pay commission on the $4M orders since all of these orders may not be fulfilled because the customer can back out before shipment. This system keeps everyone motivated to work hard. In addition, we did not have the problem of a salesperson leaving after receiving a large bonus based on orders that may not be shipped for various reasons. The company was protected from the extremes in the marketplace since salespeople were given the appropriate incentives depending on the demand level as compared to our capacity. The Problem with using Standards (This story was told to me by William Wagner.) When I worked as a manager at an electronics company, I realized that we needed to address the inventory problems. I discovered that we were manufacturing products that had a positive manufacturing variance, not based on demand. A positive manufacturing variance meant that it could be produced more quickly than the standard time. This happened because manufacturing was measured based on a comparison to standard costs. As a result of this measure, we had millions of units of products in inventory that couldn’t be sold because manufacturers kept building more products with positive variances. For some products, we had as much as ten times the annual demand in inventory. So I told them not to produce any more of

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the parts we did not need. But they still did. My only recourse was to pull the manufacturing standard so that they couldn’t make it anymore, and it was within my power to do so. It worked. When I started work at this company, there was a huge mismatch between demand and production quantities. The company was using all of its capacity to produce products, yet was losing money. There were huge conflicts between the manufacturing and marketing people. I am sure you can understand why. Marketing wanted to make products that were in demand. Meanwhile, manufacturing would not make the products marketing wanted stating that there was not enough capacity to do so. These two departments had performance measures that caused conflicting behaviors. Next, I began holding a monthly planning meeting with the marketing, engineering, and manufacturing people. Each month, we discussed the demand forecasts and the current inventory levels, using the actual data. These meetings ensured that we became a team, and that no one could blame each other for problems that occurred since we made decisions as a group. Blaming others was typical in the past for our company (and many other companies as well). As a result of the changes, the company was turned around in six months. It became profitable for the first time in ten years. Exceeding standard times in a shoe factory I once went for a job interview at an old shoe factory in Boston. I was told the following story about employees exceeding standards when being paid for piece work. One of their senior operators was able to beat the standard for sewing soles on shoes consistently. This step involved taking an upper from one bin, a sole from another, sewing the pieces together, and then turning and hooking the completed piece to a moving conveyor behind the operator. The operator's performance raised interest but each time the industrial engineer watched him, he performed the job in the normal fashion and did not exceed the standard. The industrial engineer then decided to observe without being noticed. He saw the operator take an upper and sole, sew them together and then simply flip the completed piece over his shoulder catching the moving conveyer. By not needing to turn, look, and hook, the operator saved considerable time per piece. It turns out that it took quite a bit of practice until he could hit the belt in most tries. I was told that the engineer was so impressed that the company continued to pay the operator far above standard. Employee involvement in work measurements Employee involvement in work measurement efforts does lead to some controversy. Early in my career as an Industrial Engineer (the field of engineering that is the source of

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much of Operations Management), I was involved in two work sampling studies. In the first study, the employees were informed. Not even the area supervisors were informed of the study in the second case. Each of these cases led to an interesting outcome. As a student engineer at an electronics firm, I was to perform a Work Sampling study of most of the manufacturing areas within the plant. This went well through the first few areas—soldering, printed circuit board assembly, and so on. However, the fabrication shop did not have easy access. While the workers were good natured, they did give me a hard time. Often, as I approached the shop, I could hear them call out, “Look alive, here comes Kevin.” Later, I was a senior industrial engineer in a consumer products factory. Here, we did not inform any of the workers or supervisors while the study was underway. Once we presented the results to the area manager, he commented, “We knew something was up but we didn’t know what.” I felt this damaged a relatively close relationship I had with this manager.

Answers to Discussion Questions in Textbook 1. Describe the major components of work system design. The major components of work system design are job design, process (methods) analysis, and work measurement. Job design determines the specific work activities of each employee or type of employee. Process analysis focuses on the detailed steps of doing a particular job. Work measurement determines how long it should take to do a job. 2. Visit a local business and describe the jobs to be done, the workers needed for the jobs, and how the workers help achieve the objectives of the business. At a university, we need faculty to teach the classes, janitors to clean the buildings, maintenance staff to repair facilities and equipment, administration staff to manage the university operations, and administrative assistants to handle clerical work. The performance of faculty would be based on student satisfaction, which in turn affects demand. Janitors are measured on the cleanliness of the buildings. Clerical staff provides support to the administration and faculty in achieving their objectives. 3. Describe the objectives of job design.

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The objectives of job design are support of organizational objectives, technical feasibility, economic feasibility, and behavioral feasibility. The job must be designed to encourage and reward those meeting the organizational objectives. 4. Explain why it is hard to design jobs in a business setting. It is hard to design jobs in a business setting because of the complexity of the environment and variety of factors that must be considered. We need to ensure that job design supports the organizational goals. The organization is a complex system of relationships. 5. Explain what we mean by technical feasibility, economic feasibility, and behavioral feasibility. Technical feasibility means that the job can be performed both physically and mentally. Economic feasibility means that the value added by the job exceeds its costs. Behavioral feasibility means that the job provides intrinsic satisfaction to the employee. 6. Describe cases in which people are preferable to machines. People are preferable to machines when interacting with people, creative thinking is important, judgments concerning multiple criteria are needed, and complex operations is performed that may not follow linear logic. People can express compassion or empathy when interacting with customers. 7. Describe cases in which machines are preferable to people. Machines are preferable to people when precision is needed, a job is dangerous, simple operations that follow linear logic is performed, and tasks are simple and repetitive. 8. Describe the advantages and disadvantages of using a high level of job specialization. The advantages of using a high level of specialization for the company are high productivity, readily available labor, lower wages, and minimal training. The advantages for employees are minimal credentials needed, less responsibility, less mental effort, and reasonable wages. The disadvantages for the employee are boredom, less opportunity for growth, little control, and little intrinsic satisfaction.

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The disadvantages for companies are high absenteeism, turnover rates, scrap levels, and grievances filed. 9. Describe factors affecting the work environment that must be considered in work systems design. The temperature, humidity, ventilation, lighting, and noise level are factors that affect the work environment. The temperature needs to be lower when work is strenuous. Poor lighting can lead to mistakes. 10. Describe the alternative workplace approach. The alternative workplace approach moves the work to the worker instead of the worker to the work. This can be accomplished in a number of ways. These are telecommuting, using different shifts or schedules, and the sharing of desks and office space. 11. Create a process flowchart for an activity that you do daily – for example, getting ready for school each day. To get ready to teach class, I need to prepare the lecture notes in PowerPoint. Then I have to print them. After I print them, I check the quality of the printouts before making copies of them to give to students. 12. Analyze a daily activity to see whether you can improve the process. Cooking is a good process to evaluate for improvement. It is important to minimize movements and steps. For example, it is better to remove several items from the cabinet at one time if they are all needed. It is important to consider the order of the work. For example, items that take longer to cook should be started first. 13. Compare and contrast the four work measurement techniques. The four work measurement techniques are time study, elemental time data, predetermined time data, and work sampling. Time study collects times for one worker over time to develop the standard. Elemental time data uses time study data from the database to estimate the standard by dividing the work into its elements and adding the time study data for each element. This technique is useful for companies with their own database. Predetermined time data uses a larger database of work unit times from many companies that have similar work elements to determine the

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standard. Work sampling estimates the proportion of time spent on different work activities to decide what proportions are acceptable. This method does not provide a standard time. 14. Explain the difference between time-based and output-based compensation plans. Time-based compensation plans pay employees based on the time worked. Outputbased compensation plans pay employees based on the amount of work completed. 15. Explain why it makes sense to use time-based compensation systems. It makes sense to use time-based compensation systems when it is not reasonable to measure output per employee. This would be used for managers, support staff, and some direct labor. 16. Explain why it makes sense to use an output-based compensation system. It makes sense to use an output-based compensation system when we want to reward workers for the level of their output in order to motivate them to be productive.

See Solutions Manual for Answers and Solutions to Problems

Answers to Textbook Case – The Navigator III 1. Based on Susan's observations determine how long it actually takes Sam to produce a Navigator III. Using an allowance factor of 15% percent, we can compute the following table

cycle 1 cycle 2 cycle 3 cycle 4 cycle 5 cycle 6 average PRF frequency

element 1 element 2 element 3 element 4 element 5 element 6 Sum 1.10 3.00 0.92 1.23 1.46 1.80 1.08 0.88 1.30 1.64 1.78 1.15 3.20 0.85 1.26 1.55 1.76 1.16 0.88 1.33 1.52 1.80 1.07 3.10 0.90 1.28 1.62 1.82 1.10 1.10 1.10 1.10 1.10 1.10 1.11 2.60 0.92 1.25 1.48 1.68 0.95 0.90 1.05 1.00 0.85 1.10 1.00 0.50 1.00 1.00 1.00 1.00

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normal time 1.05 1.17 same time 1.05 1.17 Standard with allowance at 15% Sam's standard

0.97 0.97

1.25 1.25

1.26 1.26

1.84 1.50

7.54 7.20 8.68 8.47

This shows Sam producing at a normal rate of 7.2 minutes, or a standard of 8.28 minutes. 2. If direct labor is assessed at $18.00 per hour, what would the labor savings per Navigator III be if all the employees used the same method that Sam uses? The difference in the two standards is 0.40 minutes. $18.00 per hour is $0.30 per minute. A time savings of 0.40 minutes yields cost savings of 12.0 cents per Navigator III. 3. If Frank's Fabricators produces 20,000 Navigator IIIs each month, what are the potential savings by using Sam's method for element 6? Frank's saves 12.3 cents per Navigator III. With 20000 Navigators, this yields a monthly savings of $2,460. 4. Why do you think Sam is reluctant to share his method improvement for element 6 with the company? Sam fears that if he shares his improvement, it will become the new method. The standard will then be updated. Sam is paid per hour. His improvement allows him to work less hard. If Sam were paid piece work, his method would allow him to make more money. 5. Do standard times inhibit process improvement? As Sam's case demonstrates, standard times do not inhibit operators from searching for better ways to perform their jobs. They can offer an incentive for operators to share their improvements. 6. How can you assure that operators will share time-saving improvements? Operators must be given an incentive to share. An incentive can be a monetary or non-monetary reward, or recognition. 7. From an employee's perspective, why wouldn’t you share a process improvement with

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the company? If an employee's improvement becomes the standard method, then the operator will have to work hard in order to obtain the standard. If operators are rewarded for exceeding the standard, this would cost them money.

Answers to Textbook Case – Northeast State University 1. Describe how Dr. Bay can use the data. Dr. Bay can use this information to determine which areas can be addressed in order to use the assistants more effectively. For example, if the computer entry time is too high in his opinion, he could take action to reduce computer entry. 2. Suggest ways in which the administrative assistants’ jobs can be changed to make better use of their time and be more supportive to the faculty. We could combine tasks. For example, we could have an assistant take copies over to the copy center once a day, instead of making several trips throughout the day, which causes time to be wasted. 3. Suggest ways the faculty can change work habits to reduce the burden on the administrative assistants. The faculty can use their computers to create assignments and exams, instead of passing this work off to the assistants. In many cases, it is relatively easy to input information into a computer as opposed to writing it out by hand. In addition, the faculty should be aware that a lead time is required for copying requests so that the assistants can make just one trip a day to the copy center. 4. Consider other alternatives to reduce the strain on the administrative assistants. Multitasking results in time wasting (as described in the TOC Tips section of chapter 17 of this manual). The assistants should try to complete each task without interruption. If more than one assistant is working in the office at a given time, we could have only one assistant to handle all interruptions, such as dealing with questions from faculty and students.

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Complete Manuals for the Interactive Cases also are available on the companion site: www.wiley.com/college/reid.

In Class Exercises The following exercise takes approximately 40 minutes for the students to answer in class by forming teams. I give it out at the end of class, while allowing enough time, so that students can leave as soon as they have completed the exercise. I give the students the option of working individually or in teams of up to five students. When I hand out copies of the exercise, I ask the students to take one copy per person and one copy per team. This way each student will have a copy of the assignment. I only require one copy per team be turned in to me for grading. I did not provide answers to this exercise since the answers are dependent on the job selected.

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WORK DESIGN EXERCISE

HAND IN ONE CLEAN COPY

Please provide names and signatures (only for team members who are present today): NAME (Print) SIGNATURE 1. 2. 3. 4. 5.

The purpose of this assignment is to apply work design concepts to one type of job. Select a job that you have experience with such as cashier, or restaurant server. Answer the following questions for that job. 1. What job did you select?

2. Define and/or map the key processes for that job (list tasks in sequence).

3. Identify the specific skills needed in order to perform the job.

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4. What measures should we use to determine job fit and/or acceptable or good performance?

5. Identify the constraint in the organization you worked for. How should we ensure that the measures are consistent with the global performance measures and the constraint?

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References Brown, K. A., Hyer, N. L., Smith-Daniels, D. and Sprague, L., “Cinematic Ticklers: Using Movie Clips to Stimulate Classroom Discussion About Operations Management Issues,” Proceedings of the 1996 Annual Meeting of the Decision Sciences Institute, 1189. Smith, D., “Update on TOC Measures & Incentives,” Presentation at the Jonah Upgrade Workshop, San Antonio, TX, 1997 (videotape JSA-05 from www.goldratt.com)

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Chapter 12: Inventory Management Overview This chapter describes the types, uses, and objectives of inventory. Inventory performance measures and the relevant costs associated with inventory are presented. The chapter demonstrates how to calculate the various types of order or production quantities. The benefits of small order sizes are discussed. This chapter also explains methods used to deal with inventory, such as single-period inventory policies, periodic review system, continuous review system, ABC analysis, and cycle counting.

Teaching Tips and Strategies I present the types and costs of inventory, along with performance measures. I also explain the periodic review and continuous review systems, along with ABC analysis. The issue of lot sizes is also addressed, particularly using some material from the novel, The Goal, about the Theory of Constraints (TOC), which is required for reading in my class. (This novel is discussed in the TOC Tips section of chapter 2.) Near the end of the novel, Jonah suggests that Alex cut the batch sizes in half on the resources that are not constraints. This leads to a discussion concerning the effects of batch sizes. Students enjoy critically evaluating various inventory methods using the concepts of TOC in a discussion format. (Please see the TOC Supplement section for this chapter in the manual for more information.) Once I present the basic EOQ model, I ask students what assumptions are in the model, and whether these are reasonable. The holding costs are modeled as proportional to the amount of inventory held, and the ordering costs are modeled as proportional to the number of orders placed. I then ask the students to look at what goes into holding costs, and whether they believe that doubling the inventory level will double, say, the insurance costs. We close this discussion by noting that, while the model is not perfect, it is useful. (See the Raw Material Inventory and EOQ Assumptions war story for more on this). The continuing growth of the Internet for student purchases allows for a discussion of ABC inventory. Many students have ordered a book online from vendors such as Amazon, who once billed itself as “Earth’s Biggest Bookstore.” I ask them where they think those books are. Amazon only holds the few hundred most popular books in its immediate inventory (this would be the A inventory). The next category would be books that can be obtained relatively quickly, often from an intermediary or the publisher (this is the B inventory). Books that are rarely ordered may require special order (the C inventory). Copyright © 2013 John Wiley & Sons, Inc.

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War Stories Problems at Retailer X I have encountered so many difficulties with retailer X (another story about X is in supplement A of this manual) that I only shop there if I have no other choice. All of the difficulties were encountered at one of its facilities. Retailer X sells clothing, some foods and drinks, household items, beauty products, towels, automotive supplies, etc. I lost track of how many times I went to X to buy a couple of items, only to find that at least one of these items was completely out of stock.. Several times, I went back to the same store to buy the missing item(s), only to find that they were still out-of-stock. I went to the store sometime in the first week of July, only to discover that I could not turn my film in for processing since they had run out of the special printed envelopes. One time, as I was paying for my items at the cash register, I realized that they had run out of carry bags. So, they dealt with this problem by using trash bags as carry bags. Can you imagine how much this inventory fiasco, as well as the others, must have cost them? The Impact of Production Measures on Inventory (same story is in chapter 15) (This story was told to me by a source that chooses to remain anonymous.) I worked at a consumer products company where the managers took mini-plant tours in each department daily. The board in each department listed the quality level, performance to plan, efficiencies, cost reduction savings, and out-of-stock products. During these tours, managers would harp on out-of-stock conditions. On Fridays, a larger group of managers, including higher-level executives, took longer tours that focused on the performance measures of efficiencies and engineering cost reductions. In order to increase efficiencies, we must increase the batch size so that the number of setups is reduced. On the other hand, in order to ensure that the product is in stock, we must produce in small batches. This is because we need to react quickly to changes in demand since demand is uncertain. The end result is that the workforce switches back and forth every week between small and large batch sizes, which can cause problems. Normally, they produce using small batches. However, every Wednesday they switch to large batches in order to improve the efficiencies. The Impact of Performance Measures (This story was told to me by a source that chooses to remain anonymous.) I worked at a consumer products company that made shampoos. The shampoo bottles were blown and decorated in our facility. We purchased the caps, raw materials of chemicals, and the boxes to pack the shampoos. There was a time when the demand for shampoos

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significantly decreased. The accountants wanted to improve the performance measures. To do so, we needed to make more products (increase inventories) so that we can allocate the overhead costs across more products, and also keep the employees busy. So, we made stockpiles of shampoo. We ended up slowing down work since demand did not increase enough to use up the stockpiles of shampoo. (Lisa's comments) What was the impact of this decision? When they decided to produce more shampoo, their expenses, such as purchasing expenses and inventory carrying costs, increased. It was a short-term fix that did not solve the real problem of managing by the accounting system instead of good business sense, as in TOC. Reducing the Holding Costs of Inventory (This story was told to me by William Wagner, the owner of a company called Pack-aDrum. Its web site is http://www.pack-a-drum.com.) I currently own a company that sells trash deflators to fast food restaurants. These deflators condense trash like a compactor does, except that the trash is not condensed enough to cause the waste removal companies to charge more for their service. We also designed a system for trash removal with the objectives of not showing the trash to the customers, and to reduce employee theft. The first objective was achieved by using a 44-gallon blue Rubbermaid container to take the trash from the dining area to the deflator in the back area of the store. The second objective was achieved by the use of see-through bags with the deflator and a specially designed cart. The cart is used to remove trash from the compactor area to the dumpster behind the store. The employee places all the empty boxes that have been broken down on the cart, followed by the bags of trash that have been deflated. My experience in the fast food industry indicates that the majority of inventory theft occurs when the trash is removed. (I used to own five Miami Subs restaurants.) Some companies refer to this as slippage or shrinkage, which are unexplained differences between the expected inventory levels and the actual inventory levels. The bulk of this shrinkage is actually theft. The point-of-sale (POS) system tells them what they should have in inventory based on the sales and inventory data. They typically have some idea of the level of theft based on determining their food costs as a percentage of sales. They can then compare this percentage to other stores in the same industry. In the fast food industry, the cost of food is typically 27 - 28% of sales. When a popular fast food restaurant chain tested our system in a corporate-owned store in Florida for 16 months, they saved a total of $6,600 of waste hauling costs and $10,000 in shrinkage. Our system cost them $3,500 for the deflator unit and $50 a month in bags. The resulting savings were significant especially given the thin margins in this industry.

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My experience indicates that these savings are typical in this industry, particularly when the store is located in a region of the country where waste hauling costs are higher than average. The Impact of Inventory on Customer Service (This story was told to me by William Wagner.) I had two bad experiences with Brand Y tires. A few years ago, I owned an expensive SUV. When I was out of town in Atlanta, both front tires suddenly became scalloped. It caused the car to severely vibrate when in motion. Surprisingly, no one in this large city carried Brand Y tires in the size needed for my SUV. Worse, no other tire manufacturer made tires in this size. So, I ended up having to drive on these bad tires, with severe vibrations, for several hundred miles in order to get home. More recently, I purchased a new car that came equipped with Brand Y tires. Although I did not want these tires, I decided to take them after being given assurances by the dealer that these were the standard tires on this car. I was also told that they would take care of any problems that might arise. Well, 500 miles later, one of the tires had a blowout. Once again, I was unable to find any store with the replacement tire in stock. So I took it back to the dealer and told them to replace all of the tires with another brand for no charge, which they did. Because of my experiences, I have decided that I will never own or drive a vehicle with Brand Y tires. Use of the Periodic Review System in Fast Food Industry (This story was told to me by William Wagner.) When I owned and managed my Miami Subs restaurants, I had to forecast demand. Since we had a large freezer and were receiving two deliveries of supplies per week, I had to plan orders accordingly. I set the par level for each item and changed it as needed based on the expected demand. I chose to err on safety (having too much inventory), since the freezer items could still be used in the future. For the produce items, I had to be more careful since ordering too much would result in throwing out some items. Twice a week, I would check the inventory levels and order to at least reach the par level by the time we received the items. In other words, I ordered more inventory than needed to reach the par level (at the same time I checked the inventory to account for the expected demand between placing the order and receiving the order). (Lisa’s comments) His system of placing orders is the periodic review system. However, he focused on setting a par level, and then adding the expected demand during the lead time to deliver to par. This calculation actually gives us T, the target inventory level from the periodic review system.

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Part Numbering of Inventory (This story was told to me by William Wagner.) When I worked for an electronics firm, I pointed out that the part numbering system needed to make sense. Motorola was the leader in the marketplace for some of the products we manufactured. These products had been introduced to the market by Motorola two years before ours were. I suggested that we change our product numbers to match theirs for this group of products. At first, sales did not understand my logic for doing so. I was able to convince them once they realized that customers would understand what the product was by the number, if it was the same as Motorola’s. In addition, we changed to using the General Electric system of numbering products. When you produced the same product with different voltages, the number should be the same, but followed by different letters. For example, C105-A and C105-B are the same product with different voltages. This also made it easier if the same product was later produced with a new voltage. We could then use a number that made sense by giving it the C105-C number, if it has not been used yet. Otherwise, we would have to choose whatever number is left in our system. Raw material inventory and EOQ assumptions. As an instructor, I stress that students should question assumptions. A good example of such questioning comes from early in my career as an industrial engineer. I started working for a consumer products company that made only a few products and had maintained over 50% market share for decades. The manager of IE explained their inventory policy on cotton, which was 85% of their material costs. He told me they had buyers traveling the world, looking for good prices on cotton. For example, when they found a good price in Egypt, they were authorized to buy large quantities – up to the limits of the company-owned warehouses. This was clearly not in compliance with the EOQ model I had learned at university. My boss explained: • At 85% of material cost, a good price on cotton should be grabbed. • The company (based in old textile mills) owned the warehouse and it could not be used for something else. • Cotton was a stable material, so there was little risk of obsolescence, shrinkage, etc. I learned several lessons from this: • The factors in the EOQ model are assumed to be linear, while in reality they may not be.

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• •

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The models we learn may not capture all the relevant information. Question assumptions – successful companies, such as this one, do.

Answers to Discussion Questions in Textbook 1. Visit a local business and identify the different types of inventory used. I have been to retailers like Office Depot and Kmart in different parts of the country. Let’s examine their different types of inventory. First, the products, such as office or school supplies that have been purchased from their suppliers are raw materials when they are received by the store packed in boxes. These items become WIP when they are in process of being stocked on the shelves. Finally, they become finished goods when they are purchased by the customer. MRO items include the cleaning supplies for the floors, bags to put the purchased items in when they are sold, the carts used to take the boxes of raw materials out to the shelves for stocking, and the WD-40 for ensuring that the wheels on the carts used by the customers move easily and quietly. 2. After visiting a local business, explain the different functions of its inventory. Let’s continue with the example from the question above. We need the raw materials to be able to prepare to restock shelves once items are sold. We use WIP to move the inventory through the process since we can not instantaneously restock shelves. Finished goods are the items sold to the customers. Finally MRO items provide support in the process and maintenance. They create anticipation inventory when they buy the items in cases using full truckloads in the fall, in order to prepare for the Christmas season. They use fluctuation inventory by keeping more items in the back storeroom to replenish the shelves when demand becomes higher than expected. The use of lot-size inventory occurs when they buy more from their suppliers than they immediately need. The MRO items facilitate the operations of the retail facility. 3. Explain the objectives of inventory management at the local business. We meet the objective of customer service when the items wanted by the customers are on the shelves, and the customers can be quickly serviced through the cash registers. We can determine the percentages shipped on schedule by determining the lateness associated with paying for the items.

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4. Describe how the objectives of inventory management can be measured. We can measure the percentage of line items that are completely out of stock on the shelves. We can determine the percentages shipped on schedule by determining the lateness associated with paying for the items. We could determine our objective in terms of the time to get through the cash register. For example, an airline study indicated that customers become frustrated if they have to wait more than eight minutes in line for check-in. 5. Explain the different methods for measuring customer service. We can measure the level of customer service by measuring the percentage of orders, line items, and dollar volume shipped on schedule, as well as idle time due to material or component shortages. The percentage of line items shipped on schedule measures the ability to deliver specific items. Idle time relates to internal customer service. 6. Compare the two techniques, inventory turnover and weeks of supply. Inventory turnover tells us how many times we sell our current inventory level on hand. For example, two inventory turns means our current inventory level will last about six months since there are two six-month periods in a year. The six month time period is 24 weeks of supply, or how long it would take to sell our entire current inventory without replenishing it. As you can see, these two techniques are related; they are just different ways of describing our inventory level. 7. Describe the relevant costs associated with inventory policies. Item costs are the costs associated with purchasing, such as price and transportation related costs, or making an item, such as direct labor and materials. Holding costs are the costs we incur as a result of holding inventory, such as capital, storage, and risk costs. Ordering costs are the costs of placing an order or the cost of setups in production. Shortage costs are incurred when demand exceeds supply. 8. Explain what is included in the annual holding cost. Holding costs include the capital costs associated with the money invested in inventory. They also include the storage costs of the warehousing space, workers, and equipment that deal with the inventory. Finally, they include the risk costs of obsolescence, damage, theft, insurance, and taxes.

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9. Describe what is included in ordering or setup costs. Ordering costs include the costs to prepare and handle orders, and the received goods. Setup costs are the costs associated with preparing the order, materials, and machines to make the item. 10. Describe what is included in shortage costs. Shortage costs are incurred when demand exceeds supply. They result in the loss of customer goodwill, which affects future sales, back-order costs, and lost sales. 11. Explain the assumptions of the EOQ model. EOQ assumes that the demand and lead times for receiving the order after placing it are known and constant. Ordering and setup costs are fixed and constant. These costs need to be fixed since they are used to calculate the EOQ. Backorders are not permitted. The quantity ordered arrives at once, just as the company runs out of inventory. The inventory replenishment process begins when the inventory reaches the reorder point. 12. Describe techniques for determining order quantities other than EOQ or EPQ. Lot-for-lot sets the order quantity equal to the amount needed for the time period. Fixed-order quantity orders the same amount each time an order is placed. For example, we may order a case full of items each time we need them. 13. Describe how changes in the demand, ordering cost, or holding cost affect the EOQ. Increase in the demand or ordering costs will increase the EOQ since they have a positive relationship, which also means that a decrease in them will decrease the EOQ. This is the case since both demand and ordering costs are in the numerator of the EOQ formula. Since holding costs is in the denominator, there is an inverse or negative relationship between these costs and EOQ. For example, as holding costs increase, the EOQ decreases and vice versa. 14. Explain how a company can justify smaller order quantities. A company can justify smaller order quantities if it can reduce the setup costs by reducing the setup time. It can also justify smaller order quantities if the holding costs increase.

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15. Explain what safety stock is for. Safety stock is the extra inventory for dealing with times when demand is higher than average. Therefore, safety stock determines the level of customer service. 16. Explain how safety stock affects the reorder point. Safety stock increases the reorder point. The reorder point must at least be set to equal the expected average demand during the lead time to replenish. Safety stock is the extra inventory held in case demand is higher than average. 17. Describe the type of products that require a single-period model. A single-period model is used for items with a very short selling life. Some examples are magazines, newspapers, and holiday-related items, such as pumpkins and lilies. 18. Explain the basic concept of ABC analysis. ABC classifies the inventory items according to their importance, in terms of volume and dollar value. We then use this information to allocate time to review and manage the inventories. The A items are most important; thus, they are most frequently managed. C items are the least important items. 19. Explain the concept of perpetual review. Perpetual review is the continuous updating of the inventory record. We can easily use point-of-sale data to track sales, and bar codes to track receipts of inventory. 20. Explain how two-bin systems work. The inventory is divided into two bins. The first bin holds a quantity equal to the expected demand during the replenishment time. The second bin holds the remaining inventory. This second bin should have enough items to cover normal demand during the replenishment lead time.

See Solutions Manual for Answers and Solutions to Problems

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Answers to Textbook Case – FabQual Ltd. 1. What is the total annual cost of the present ordering policy for part number 650810/ss/R9/o?

 D   Q   15, 600   1300  Total Cost =  S  +  H  =  (20)(2)  +  (55)(0.25)  = $9, 417.50    2  Q   2   1,300 2. What would be the lot size for part number 650810/ss/R9/o if FabQual were to use an economic order quantity (EOQ)?

EOQ =

2(15,600)(20)(2) 2 DS = = 301.3 H (55)(.25)

3. What would be the total annual cost of using an economic order quantity for part number 650810/ss/R9/o?

 D   Q   15, 600   301  Total Cost =  S  +  H  =  (20)(2)  +  (55)(0.25)  = $4,142.47   2   Q   2   301 I tested quantities of 301 and 302 in the cost equation before deciding that 301 should be the order quantity since it yielded the lowest total cost. We could have just simply rounded the quantity using the 0.5 rule; however, this does not guarantee the lowest total cost. 4. What would be the reorder point for part number 650810/ss/R9/o if FabQual wanted a delivery performance of 95%? What would it be if the company wanted a delivery performance of 99%? For a performance level of 95%, the z value from the normal distribution is 1.65.

R = dL + SS = (300)(3) + (1.65)(50) = 982.5 We would use a reorder quantity of 983 since we always round the quantity. In rounding, we do not use the 0.5 rule. We round up if the calculated reorder point has any number below the decimal point since we need to ensure that we have enough on hand. For a performance level of 99%, the z value from the normal distribution is 2.33.

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R = dL + SS = (300)(3) + (2.33)(50) = 1016.5 Our reorder quantity would be 1017. 5. Under the present scheme—ordering 1300 units each month in the first week of each month—there are typically 700 to 800 units on hand when the new batch of 1300 units arrives toward the end of each month. What would be the impact on the overall inventory level of part number 650810/ss/R9/o of a change from the present order policy to an EOQ-based policy? The impact would be a significant decrease in the average inventory level. The average inventory level, which is the order quantity divided by 2, would drop from 650 units to 150.5 units. 6. What are the other implications of a change from the present scheme to one based on the economic order quantity? If this part is representative of a great many spare parts, what would be the overall impact? The overall impact is a reduction in all inventory levels. This would allow us to decrease the area of the storage space. Therefore, our inventory holding costs would decrease. The total costs decrease from $9,417.50 to $4142.47, which is a savings of $5,275.03. Imagine that we have 100 spare parts that are similar to this one on an average. In this case, we would save over $500,000 annually.

Answers to Textbook Case – Kayaks! Incorporated 1. Kayaks! Incorporated has always measured customer service as the number of complete orders that ship on schedule. Using this measure, calculate the customer service level provided by Kayaks! Incorporated. Kayaks! Incorporated list 25 orders, 15 complete orders are shipped on schedule. From this, we can conclude that 60% shipped complete. 2. Does this method of calculating the customer service level make sense for Kayaks! Incorporated? No, this does not seem to make sense. It treats an order with one late item the same as an order with the majority of items late. It treats all orders as equal, whether they have many items or of high value.

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3. What other methods might be useful in measuring Kayaks! customer service level? Would these affect your analysis of customer service? We can propose measures that look at percentage of items that ships on schedule, percentage of dollar value that ships on schedule, or even percentage of dollar value in orders that contain late items. These are: Percentage of items shipped on schedule: Percentage of dollar value shipped on schedule: Percentage of dollar value in orders containing no late items:

94.22% 94.20% 35.37%

4. What is your report to Aeesha Grant with regard to the customer service being provided by Kayaks! Incorporated? Each of the four ways of measuring customer service has some value. The percentage of orders that have items shipped late would relate to costs incurred in extra handling and expedited shipping. The percentage of items shipped on schedule would relate to manufacturing’s ability to produce to schedule. However, the dollar value measures are probably more important. These relate to how much of the company’s business is at risk. The first of these measures shows that the company is shipping almost 95% of its dollar volume to schedule. This appears to be good. However, the last measure relates to customer satisfaction. It shows that orders corresponding to almost 65% of their entire dollar volume contain at least one item that is shipped late. These customers will not be pleased. If they look elsewhere for these products, Kayaks! Incorporated has serious problems.

Complete Manuals for the Interactive Cases also are available on the companion site: www.wiley.com/college/reid.

Interactive Learning The student version of the web site for this textbook includes PowerPoint chapter reviews, selected solutions, several interesting company tours, and web links. The site also includes an Excel file for EOQ and reorder point calculation.

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In Class Exercises The following exercise takes approximately 45 minutes for the students to answer in class by forming teams. I give it out at the end of class, while allowing enough time, so that students can leave as soon as they have completed the exercise. I give the students the option of working individually or in teams of up to five students. When I hand out copies of the exercise questions, I ask the students to take one copy per person and one copy per team. This way each student will have a copy of the assignment. I only require one copy per team be turned in to me for grading. After the students have had time to read the exercise and questions, I point out that for question 2 they should determine what H is for each product. To do the exercise, the students need to understand the usage of the EOQ and reorder point and their corresponding formulas. It would be very helpful if the students have already seen demonstrations of the calculations for each formula. This exercise could provide the foundation for a discussion about the assumptions of EOQ. The TOC Tips section of this chapter of the manual provides information that would be useful in this discussion.

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INVENTORY EXERCISE

Instructor’s Manual

HAND IN ONE CLEAN COPY

Please provide names and signatures (only for team members who are present today): NAME (Print) SIGNATURE 1. 2. 3. 4. 5.

The purpose of this exercise is to discuss the situation facing the manager and help her determine an inventory ordering policy from the information given. Richard Haslett owns three bars in Santa Cruz located on the boardwalk. In September, 1995, Richard hired Kelly Warton as the Business Manager to take care of accounting and inventory. Her salary is $40,000 which works out to about $20 per hour. After her first six months at work, Richard is dissatisfied with her performance. Kelly seems to be spending so much time taking care of the inventory that the books are always late. Although Kelly has been using standard ordering policies (set in 1990), she claims that very often she finds herself dealing with rush orders to avoid stockouts. In most cases, rush orders mean compromising on quality and settling for lesser known brands. This results in a number of dissatisfied customers, and it also meant that Richard still had to take care of many accounting tasks. He had felt that with Kelly taking care of running the bars, he would have more time for his family and fishing. Before making a decision on whether to retain Kelly, Richard thought he should get another opinion on the inventory problem. Cindy Haslett (Richard's niece) has just finished a course in Operations Management. Richard offered to sponsor Cindy's summer vacation in Santa Cruz if she would help to study the ordering policies for the bars. Realizing that the inventory policies should be based on demand, Cindy first studied the weekly demand for 1994-1995 and forecasted the annual demand for the major items based on 52 weeks per year. Three of these are listed on the next page. Discussions with Kelly revealed that orders were placed for each item when it reached its reorder point. She used the order and reorder points estimated by the previous stock manager. Kelly estimated that orders must be placed three weeks in advance in order to purchase and receive the correct brand. She spends about 30 minutes checking stock each

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time an order is placed. A study of the inventory records indicates that about 3% of the material are discarded due to spillage and broken bottles. Richard Haslett pays 9% interest on the debts for his business. Copyright 1995, Gertrude P. Pannirselvam; Adapted from Harvard Business School Case 9-673-033, Blanchard Importing and Distributing Co., Inc.

Product Vodka Scotch Rum

Annual Demand (Bottles) 1500 975 255

Unit Cost ($) 2.80 7.88 4.65

Current Order Quantity 200 100 50

Current Reorder Point 40 40 20

1. (2 points) What is the cost of placing an order?

2. (2 points) What is the holding cost for each type of liquor?

3. (4 points) What is the optimal ordering policy (i.e. order quantity and reorder point) for each product? Assume a safety stock of 6 bottles for each item.

4. (2 points) What information should Cindy provide Richard to convince him that the above policy is an improvement on the current policy used? Explain why the new reorder point is better, and show a comparison of the costs for the current and new order quantities for vodka.

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ANSWER KEY 1. (2 points) What is the cost of placing an order? The cost is (30 minutes)($20/hour) = $10 2. (2 points) What is the holding cost for each type of liquor? H (Vodka) = (0.12)(2.80) = 0.336 H (Scotch) = (0.12)(7.88) = 0.9456 H (Rum) = (0.12)(4.65) = 0.558 3. (4 points) What is the optimal ordering policy (i.e. order quantity and reorder point) for each product? Assume a safety stock of 6 bottles for each item.

2(1500)(10) Q (Vodka) = = 298.8 = 299 0.336 Q (Scotch) =

2(975)(10) = 143.6 = 144 0.9456

Q (Rum) =

2(255)(10) = 95.6 = 96 0.558

R (Vodka) =

1500 (3) + 6 = 92.5 = 93 52

R (Scotch) =

R (Rum) =

975 (3) + 6 = 62.25 = 63 52

255 (3) + 6 = 20.7 = 21 52

 1500   200   975   100   255   50  TC =   (10) +   (0.336) +   (10) +   (0.9456) +   (10) +   (0..558)  200   2   100   2   50   2 TC (current) = $318.33

 1500   299   975   144   255   96  TC =   (10) +   (0.336) +   (10) +   (0.9456) +   (10) +   (0.558)  299   2   144   2   96   2 TC (EOQ) = $289.53

Therefore, the new policy costs less.

The new reorder points are all higher than the current reorder points. Therefore, the chance of running out of liquor before a new order arrives is smaller (which means that the level of customer service is higher).

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References Goldratt, E. M., What is this thing called the Theory of Constraints and how should it be implemented?, The North River Press, Great Barrington, MA, 1990.

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Chapter 13: Aggregate Planning Overview This chapter explains business, sales, and operations planning. The different types of aggregate planning strategies are introduced and discussed. Next, the options for changing demand and capacity are presented. The various strategies are then evaluated in terms of costs and impacts on the various business functions. The differences between aggregate planning for services and manufacturing are discussed.

Teaching Tips and Strategies It is helpful to begin this material by discussing the various types of plans. Students can relate to demonstrations of the various aggregate plans using an example from an industry they have experience with. Finally, we end this material with an interesting discussion about the impact of layoffs and the performance of various aggregate plans using the measures from TOC. Please see the TOC Tips supplement of this chapter for more information.

War Stories Accuracy in Planning (This story was told to me by a source that chooses to remain anonymous.) When I worked as a master scheduler at a consumer products company, I gained insights into aggregate planning. I realized that planning for classes of products was easier and more accurate than for specific items. For example, we can have a good idea of how many cars will be sold this year in total, but not the sales of the specific cars. We also used aggregate planning to set up budgets. On an aggregate basis, I was 99.5% accurate in predicting the budget in terms of production hours. My accuracy was 70% at best on a specific SKU (stock-keeping unit) basis. The complicating factor for specific items is that the color demand depends on what the current trends and promotions are. For example, after the O.J. white Bronco chase, while the total demand for broncos may not change, the demand for white broncos would probably change. Also, we can anticipate growth in sales of all fragrances, but cannot predict how much the introduction of a new fragrance would cannibalize the sales of older fragrances.

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Levels of aggregation I recently visited a shoe factory in Portugal. All of their shoes had leather uppers. They ordered leather from outside vendors but the process had changed. Previously, they had dyed the leather themselves, now they were ordering leathered dyed from the vendor. So, in the past they only needed to forecast the aggregate amount of leather they would need. With the new process, they no longer had to dye leather themselves, but they needed to predict demand for each color individually. Total demand was easy to predict as compared to demand for each color. Balancing Demand Students can easily see that many firms cannot smooth out their aggregate plan by shifting demand or carrying backlogs. A tax preparation company cannot deal with the peak in demand in early April by telling customers that they had plenty of slack back in November, or by offering to complete the customer’s return in August. They must adjust their workforce. Sometimes a clever combination of services or products can smooth demand. In parts of the country where there is winter snow, students usually know people that mow lawns in the summer and plow driveways in the winter. They may even rake leaves in the fall, and trim branches in the spring. During a visit to the north of the Netherlands, I saw a shop that sold bicycles and lamps. I mentioned to the owner that this seemed like an odd combination. He replied, “Well, I sell a lot of bikes in the summer and a lot of lamps in the winter.” Balancing can address variations other than calendar seasons. In my area of the country, a fast food holding company places two or even three franchises in one building. The doughnut counter has its peak demand in the morning, the sandwich counter does most of its business around lunch, and they sell most of their ice cream in the early evening.

Answers to Discussion Questions in Textbook 1. Explain the importance of the strategic business plan. The strategic business plan is the long-term strategy in terms of revenue, cost, and profit objectives. It is important because it is the starting point for sales and operations planning.

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2. Describe sales and operations planning in terms of its purpose, components, and frequency. Sales planning involves decisions concerning the markets served, customer service levels, competitive priorities, profit margins, and market share in order to achieve the objectives of the business plan. Sales planning is conducted every 6 to 18 months depending on the firm’s choice of planning period. Operations planning involves decisions concerning the aggregate production rate, staffing levels, inventory levels, backorders, and use of overtime, undertime, subcontracting, hiring, and firing that is authorized to support the sales or marketing plan. Operations planning is conducted every 6 to 18 months depending on the firm’s choice of planning period, but may be updated more frequently. 3. Define the aggregate plan. The aggregate or production plan identifies the resources needed to support the marketing plan. The resource decisions are the aggregate production rate, staffing plans, and inventory policies. 4. Explain why we use an aggregate or a composite product when developing the aggregate plan. A composite product is used for developing the aggregate plan in order to minimize the level of detail in the plan. In addition, aggregate plans are usually more accurate than individual product plans since aggregate forecasts of demand are more accurate than forecasts of individual product demands. 5. Compare and contrast the level and the chase aggregate plans. These plans are similar since both plans ensure that demand is met. However, they meet demand in different ways. A level plan maintains the same workforce size and equipment, thus producing the same amount of product in each time period. This causes inventory to increase when demand is below average and decrease when demand is above average. A chase plan adjusts the size of the workforce and equipment capacities in order to meet the demand rate for each time period. Inventory is not used to support the plan. Instead, people are hired and fired as needed to deal with changes in demand.

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6. Describe the different demand-based options used in aggregate planning and their implications for a company. Reactive demand-based options use inventories and backorders to deal with changes in demand. This option causes our inventory costs to increase and our customer service levels to decrease because some orders may be shipped late. The proactive or capacity-based option attempts to shift the demand patterns in order to minimize changes in demand. This option can increase expenses, such as overtime and subcontracting. 7. Describe the different capacity-based options used in aggregate planning and their implications for a company. The different capacity-based options are overtime, undertime, subcontracting, hiring, and firing. Overtime causes labor expenses to increase since we typically pay a 50 percent wage premium for each overtime hour. Undertime increases the labor cost per unit since we have idle time. Subcontracting costs money since we have to send our product for outside manufacturing. This is usually more costly than making the product in house. Hiring causes us to incur expenses related to position advertising, interviewing steps, and training. Firing expenses may include increased unemployment compensation premiums and severance packages. 8. Explain what the hybrid aggregate plan is and why it is used. A hybrid aggregate plan uses options from both the level and chase aggregate plans. It is used because we may not prefer to use a level or aggregate plan. We can combine our preferred decisions from each plan. 9. Explain the procedure for developing an aggregate plan. First, we choose the type of aggregate plan to use. Next, we determine the aggregate production rate based on our choice of aggregate plan. The size of the workforce is calculated based on the type of aggregate plan used. Then we test the aggregate plan to determine its total cost. Finally, we evaluate the plan in terms of its impacts on cost, customer service, operations, and human resources. 10. Describe the factors to consider before developing an aggregate plan. We would want to consider the availability of workers based on the unemployment rate. We would also consider the time and expense involved in hiring and firing

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workers. The cost of holding inventory should be determined. We should also determine the impact of backorders on customer satisfaction, which can negatively affect future demand. 11. Explain how aggregate planning is different when the company does not provide a tangible product. In such services, we cannot use inventory buildup as a way of dealing with peaks in demand. 12. Visit a local manufacturer and determine how it uses aggregate planning. This answer will depend on the area in which the university is located. 13. Visit a local service provider and determine how it uses aggregate planning. This answer will depend on the area in which the university is located. 14. What two items must you calculate first when developing an aggregate plan? You must calculate the production rate and workforce size when developing the aggregate plan. 15. Visit a local business and learn how it calculates its resources. The answer to this question depends on the location of the university. 16. Describe the inputs needed to do master production scheduling. To create the MPS, we need the aggregate production plan, beginning inventory levels, and the capacity required for each of our products on each resource. 17. Describe the different sources of demand. The different sources of demand are customer orders, a forecast of demand, interplant requirements, service part requirements and distribution requirements.

See Solutions Manual for Answers and Solutions to Problems

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Answers to Textbook Case – Newmarket International Manufacturing Company (A) Note: I assumed that we only used full-time workers, and that some of their work time could be idle time. What is the total number of labor hours needed each week to produce the forecasted demand of all products? Week 14 15 16 17 18 19 20 21 22 23 24 25 26

A 3600 4000 4300 4400 4500 4500 4400 4300 4000 4000 3600 3200 3000

B 4000 4000 4000 3800 3800 3800 3600 3600 3600 3800 3800 3800 4000

C 2000 2500 2800 3100 3200 3200 3200 3000 3000 2800 2800 2600 2600

Hours 2964 3205 3364 3399 3452 3452 3352 3270 3198 3216 3120 2966 2994

Develop the staffing plan and total costs associated with using a level workforce without allowing any back orders in any period. Level Staffing Plan (need to have at least 3452 hours since there is no inventory) Hire 12 full-time workers Cost = (500)(12) + (87)(40)(14)(13) = $639,360

Develop the staffing plan and total costs associated with using the original full-time workforce (75 employees) supplemented by the use of overtime to avoid back orders. Week 14 15 16 17 18 19 20 21 22 23 24 25 26

Hours 2964 3205 3364 3399 3452 3452 3352 3270 3198 3216 3120 2966 2994

O/T Hours 205 364 399 452 452 352 270 198 216 120 Total: 3028

Total Costs = (75)(40)(14)(13) + (3028)(21) = $609,588

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Develop the staffing plan and total costs associated with adjusting the workforce each period to satisfy all demand by hiring and firing employees. Week 14 15 16 17 18 19 20 21 22 23 24 25 26

Hours 2964 3205 3364 3399 3452 3452 3352 3270 3198 3216 3120 2966 2994

Hire

Fire

6 4 2 3 2 2 1 3 3

Total staff 75 81 85 85 87 87 84 82 80 81 78 75 75

Pay 42000 45360 47600 47600 48720 48720 47040 45920 44800 45360 43680 42000 42000 590800

Total costs = 590800 + 13 * 500 + 13 *750 = $607,050

Make a recommendation regarding the suggested staffing plan that considers cost, customer service, and operations. My first choice is to use the same workforce, supplemented with overtime. This staffing plan is not much more expensive than the lowest cost plan of hiring and firing staff to meet demand. I would not fire staff because I concur with the TOC necessary condition or goal of satisfying employees now and in the future. (For more information, please see the TOC Tips section from chapter 2 and this chapter as well.) I believe that firing has an impact on the productivity and satisfaction of the employees that remain. They may be concerned with their job security as well. In addition, firing people shows the workers that the company’s performance is the most important objective. I would only use the staffing plan based on overtime if some workers were actually interested in working overtime at an hourly rate that is 1.5 times the normal rate. I would then give the overtime to those who want it in a fair manner. If the employees were not interested in overtime, then I would use the level workforce plan. I realize that this is the most expensive staffing plan of those considered. In this plan, there will be varying levels of idle time. I would either use the tools from TOC for finding ways to increase demand to use the idle time, or have the employees spend time focusing on improvements, such as quality initiatives, when they have idle time. All of the staffing plans ensure that demand is met. So this is not an issue in the staffing decision.

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Answers to Textbook Case – JPC, Inc.: Kitchen Countertops Manufacturer To answer the question as to which combination of regular and overtime production to use to produce the expected annual demand of 170000 units, please refer to the embedded spreadsheet. JPC Inc Countertops

Plant information

Plant 1

Plant 2

Plant 3

TOTAL

Annual Reg time prod rate Overtime capacity TOTAL

960000 192000 1152000

480000 96000 576000

720000 144000 864000

2160000 432000 2592000

Fixed cost (closed) Fixed cost (open)

312000 728000

260000 600000

390000 780000

Variable prod cost (unit) Var prod cst (overtime)

420 525

390 500

410 510

Expected demand

1700000

COST Calculations

Plant 1

Plant 2

Plant 3

Expected production (reg) Expected production (OT)

500000 0

480000 0

720000 0

1700000 0 1700000

Fixed Cost (open) Fixed Cost (closed)

728000 0

600000 0

780000 0

2108000 0

Variable cost (reg) Variable cost (OT)

206640000 0

190320000 0

295200000 0

692160000 0

Total cost

694268000

TOTAL

The above spreadsheet shows what was found to be the lowest cost alternative. It uses the maximum regular time production capacity at plants 2 and 3 and fulfills the remaining demand at plant 1.

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Regular Overtime Total cost

Plant 1 MAXIMUM 164000

Plant 2 MAXIMUM MAXIMUM

Plant 3 0 0 726,218.000

Regular Overtime Total cost

MAXIMUM 0

Regular Overtime Total cost

MAXIMUM 0

Regular Overtime Total cost

492000 0

0 0

MAXIMUM 20000 710,368,000

MAXIMUM 0

252000 0 698,948,000

MAXIMUM 0

MAXIMUM 0 694,268,000

Compare this solution (the last in the table) to several other combinations in the above table. The savings from closing a plant does not justify the cost of running overtime. Further, the solutions that involve closing a plant limit capacity. This could be a problem if the estimates turn out to be low and additional capacity is needed. Finally, there are many reasons other than cost to avoid using overtime as a long term solution. Our preferred solution uses only regular time production.

Complete Manuals for the Interactive Cases also are available on the companion site: www.wiley.com/college/reid.

Interactive Learning The student version of the web site for this textbook includes PowerPoint chapter reviews, selected solutions, and web links. The web site also includes a virtual case assignment related to aggregate planning. The companion site also contains an Excel spreadsheet with problem templates and solved aggregate planning problems.

In Class Exercises: Aggregate Planning The following exercise takes approximately 40 minutes for the students to answer in class by forming teams. Data and information from this exercise is used in the MPS exercise in chapter 14 as well. I give it out at the end of class, while allowing enough time, so that students can leave as soon as they have completed the exercise. I give the students the

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option of working individually or in teams of up to five students. When I hand out copies of the exercise questions, I ask the students to take one copy per person and one copy per team. This way each student will have a copy of the assignment. I only require one copy per team be turned in to me for grading.

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AGGREGATE PLANNING EXERCISE

HAND IN ONE CLEAN COPY

Please provide names and signatures (only for team members who are present today): NAME (Print) SIGNATURE 1. 2. 3. 4. 5.

The purpose of this exercise is to discuss the situation facing the manager and determine an aggregate plan based on the information given. Janice is in charge of scheduling the operating rooms (OR) at Community Hospital. Not all types of surgeries can be performed in the same operating room because of necessary equipment and environment. For example, cardiac surgeries must be performed in a sterile OR. She has collected information on the four types of surgeries performed in two ORs. Table 1 provides data regarding the time, revenues, and hospital staffing needs. Surgeons and anesthesiologists are needed in the OR as well; however, they are not on staff at the hospital. Surgeons only operate during the hours of 7 a.m. to 4 p.m. on weekdays. Table 2 provides data on the elective surgeries that need to be scheduled for the next three weeks. Janice needs to determine the aggregate plan. Full-time nurses work 40 hours a week for $25 an hour, and can work up to 20 hours overtime a week at a rate of $35 per hour. Subcontractor nurses are paid $45 an hour. It would cost $200 to hire another full-time nurse. Table 1 Type of surgery

Time required

Revenue per surgery

Staffing needs

Appendectomy

60 min.

$5,000

Gall bladder surgery Ear, Nose and Throat (ENT) surgery Vasectomy

30 – 45 min. 30 – 60 min. 30 min.

$5,000 $3,500 $2,000

Nurse and Surgical technician Nurse Nurse None

Table 2 Appendectomy Gall bladder surgery ENT surgery Vasectomy

Week 1

Week 2

Week 3

24 10 40 40

20 10 16 30

35 4 20 25

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For each question, determine the production hours needed in terms of nursing and the workforce size. Then test and cost the plan. Evaluate the plan. 1. Evaluate a plan of staffing the nurses for peak demand without using back orders.

2. Evaluate a plan of using the current full-time nurse, without overtime, and subcontracting as needed.

3. Evaluate a plan of staffing for the minimum demand, using overtime and subcontracting only as needed.

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AGGREGATE PLANNING EXERCISE ANSWER KEY For each question, determine the production hours needed in terms of nursing and the workforce size. Then test and cost the plan. Evaluate the plan. 1. Evaluate a plan of staffing the nurses for peak demand without using back orders. We need 71.5, 43.5, and 58 hours of nursing care for weeks 1, 2 and 3, respectively. Therefore, we need to hire another nurse. Undertime will be 8.5 hours, 36.5 hours, and 22 hours in weeks 1, 2 and 3, respectively. Regular time labor costs: ($25 per hour × 40 hours per week × 3 weeks × 2 nurses) $6,000 Hiring costs: $ 200 Total costs are $6,200. This plan has too much undertime. This is also the most expensive plan. 2. Evaluate a plan of using the current full-time nurse, without overtime, and subcontracting as needed. Regular time labor costs: ($25 per hour × 40 hours per week × 3 weeks × 1 nurse) Subcontracting costs: (53 hours × $45 per hour) Total costs are $5,385.

$3,000 $2,385

This plan does not have any undertime. This is an improvement over the last plan in terms of cost and the use of labor. 3. Evaluate a plan of staffing for the minimum demand, using overtime and subcontracting only as needed. We do not need to change the current staffing level to meet minimum demand. Regular time labor costs: ($25 per hour × 40 hours per week × 3 weeks × 1 nurse) $3,000.00 Overtime costs: (41.5 hours × $35 per hour) $1,452.50 Subcontracting costs (11.5 hours × $45 per hour) $ 517.50 Total costs are $4,970. This plan does not have any undertime. It is the most cost effective plan.

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Chapter 14: Resource Planning Overview This chapter introduces enterprise resource planning (ERP) and its antecedent, material requirements planning (MRP). First, it discusses the evolution of ERP, its goals, modules, and costs. The chapter then describes MRP. The difference between independent and dependent demand is presented. It presents an overview of its objectives, the necessary inputs to MRP, and its operating logic. Action notices are discussed. Various lot sizing rules are presented and compared. Capacity requirements planning is described and demonstrated.

Teaching Tips and Strategies I spend some time explaining ERP, and give examples of companies that sell ERP software that have high market share. Goldratt et al. (2000) discuss the management of the supply chain and the ERP industry in the novel, “Necessary But Not Sufficient.” I recommend this novel as it helps to understand this industry in a good way. I explain the basics of the MRP approach and the inputs needed. The article by Wermus and Pope (1995) uses the process of getting an education as an example to help students understand how MRP works. I think that this would be a helpful approach. The chapter explains that ERP software is often expensive to buy and more expensive to implement. However, business students may still be unaware of the importance. In classrooms with Internet connection, I like to show students how many jobs are out there that ask for some knowledge of ERP or familiarity of certain vendors. For example, in the fall of 2009, a visit to the Monster.com web site yielded instructive results. We searched for jobs using the keyword “SAP,” and limited the search to 100 miles from Albany, NY. I would recommend limiting the search to your local area unless your goal is to show that you will get thousands of hits on a national search for either “SAP” or “ERP”. Our national search returned over 2500 hits for ERP and over 4500 for SAP. Our local results found plenty of well-paying jobs in the area, often requiring a bachelor’s degree in business, such as accounting. These jobs required at least a familiarity with ERP systems. Managerial positions required experience with ERP systems.

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Total cost of ownership In discussing total cost of ownership, students can often relate this to their own software purchases and use. Many have recently bought their own computers, but also use computers on campus. Besides the cost of purchasing the software, they also consider other issues when picking a software package. Most of my students use a commercial package for word processing and spreadsheets even though open-source software is free. I ask them why they use a commercial package or what “costs” they are avoiding. They say that installing and learning the software involves a great deal of time. My students also take statistics courses. Statistics software packages, such as SPSS, usually require less work to obtain statistical results. But, they are required to learn the package. The majority of students will not put in the time to learn the statistics package. The Supply Chain Management game, Pocket Calendars, was described in Chapter 4. I delay playing the game in class until we have covered this chapter. Much of the action within the game involves inventory levels, order quantities, and items ordered but not yet delivered. By waiting until this section of the course, students are better able to perform the game, and will be reminded of the need to coordinate planning activities in a supply chain.

War Stories ERP success and project growth I once met a senior ERP consultant on a train. I asked him how often ERP projects were successful. His quick answer was “It depends.” First, it depends on how you define success. Would we define a project to be successful if it met its original targets within its time and budget? I answered that I supposed so. He said that he would also, but that this rarely occurred because projects rarely stayed within their original scope. He explained that the initial scope is often broadly and vaguely defined by senior management. The project moves down the organization as it passes through functional specification, technical specification, design, and implementation. Each step involves lesser senior staff. At each step those involved must add detail. Sometimes they also add their own desires. Adding detail rarely makes the project smaller. On the other hand, they do not want to upset the more senior people in either company so the time and monetary budgets remain fixed. By implementation, the actual work has grown significantly but the time and budget allocated have not. The consultant termed this “scope creep.” It is nearly impossible to complete a larger, more specific project with the time and money originally allocated for a smaller, if less specific, idea.

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The Use of MRP (This story was told to me by a source that chooses to remain anonymous.) When I worked at a consumer products company, I experienced a change in the system used to control production. Systems people were brought in by new management. They decided to start using an MRP system from HP. The “old regime” of managers went through a dehiring process. This process entailed taking away their secretaries and leaving their inboxes empty. Years later, another company overtook our company with the help of the “old regime.” The “old regime” did not know how to use the new system since their experience was with hand-written cards, which were used when the reorder points were based on forecasts. So they stopped using it. When using MRP, I learned that the key issue was the quality of the data used to run it. I also realized that MRP and MRP II assume unlimited capacity, which meant that we had to build capacity models. In addition, the reorder points and order quantities were just guesses.

Answers to Discussion Questions in Textbook 1. Describe enterprise resource planning and its role in an organization. Enterprise resource planning organizes and manages core and administrative business processes. As a software application, it shares information across functional areas. 2. Describe the basic modules of an ERP system. The basic modules of ERP include the core processes of production planning and control, inventory management, and purchasing and distribution. It also includes the administrative processes of accounting (cost control, accounts payable, and receivable, etc.) and human resources. The basic modules required to perform these functions are: finance and accounting, sales and marketing, production and materials management, and human resources. 3. Describe the evolution of ERP systems. ERP started by providing a single interface for routine manufacturing activities. It was then extended to include suppliers and customers. ERP was then expanded to not only manage activities but also to provide planning and decision-making support.

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4. Describe the role of SCM software and give examples of how it differs from firstgeneration ERP. SCM software is designed to improve decision making in the supply chain. It aims to coordinate the activities of suppliers, manufacturers, and customers. As it can work with information from upstream and downstream, it can answer questions dealing with coordinating production and distribution plans, determining distribution strategies, and minimizing transportation costs. First-generation ERP can only deal with internal production decisions. 5. Explain what independent demand is and give examples of products with independent demand. Independent demand is the demand for finished goods, where the demand for these items does not depend on the demand for other items. The goods are sold directly to a customer. The demand for desks is an example of products with independent demand. 6. Explain what dependent demand is and give examples of how you can use dependent demand in your personal life. Dependent demand is determined based on the demand for the finished goods. For example, when preparing Thanksgiving dinner, the finished goods are the cooked turkey, stuffing, and other food items. The cooked turkey creates a demand for other items, such as the uncooked turkey and the basting ingredients. 7. Explain the concept of backward scheduling and give examples of how you use backward scheduling in your personal life. Backward scheduling means that we begin by scheduling the finished goods and work backward in time down through the bill of materials. I use backward scheduling when I prepare a meal so that I can finish cooking on time. In other words, the chicken, French fries, and vegetables are all cooked in time for dinner. Since the chicken takes the longest to cook, I have to start cooking it first. 8. What are the objectives of MRP? The objectives of MRP are to determine the purchase quantities and timing of material requirements, and to keep priorities updated and valid to make sure that we respond to changes in the environment, such as order changes or late supply deliveries.

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9. Describe how MRP works. MRP takes the orders for the finished goods and works backwards in time down the bill of materials to plan the production and purchasing of all the components in order to complete the finished goods on time. 10. Describe the inputs needed for MRP. The inputs for MRP are the bill of materials, MPS, and the inventory records. The bill of materials shows the lot sizing rules, number of components needed for each parent item, and the lead times for each component. 11. For each input needed, describe problems that might arise when you run MRP. An incorrect bill of materials or incorrect inventory records could result in having the wrong components, which limits the chances of completing the finished goods. 12. Explain what happens when you use different lot size rules in MRP. When you use different lot sizing rules, the production quantities of the components may change as you move backwards in the scheduling process. 13. Explain why companies do capacity requirements planning. Companies do capacity requirements planning because the MRP may create a production schedule that exceeds their available capacity. 14. Describe the inputs needed for capacity requirements planning. The inputs for capacity requirements planning are the MRP schedule, the capacity needed to produce each component at each work center, and the capacity available in each work center. 15. Describe how MRPII differs from MRP. MRP II combines MRP with the financial system so that the impact of schedule changes on the bottom line can be evaluated. MRP II synchronizes internal functions with a common database.

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16. Describe enterprise resource planning. Enterprise resource planning (ERP) is a system that manages the entire supply chain. This system allows the sharing of data between different companies in the supply chain. ERP is an extension to MRP II, which an extension to MRP.

See Solutions Manual for Answers and Solutions to Problems

Answers to Textbook Case - Newmarket International Manufacturing Company (B) a. Generate the material requirements. You need a BOM for each of the three products, beginning inventory levels, and scheduled receipts. The BOMs are shown in Figure 14.8. All items use lot-for-lot as the lot size rule. No beginning inventories exist. Lead time is two weeks for all items except items D and F, which have lead time of three weeks. All other information is provided for you in the table that follows.

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A Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

14 7600

16 8700

18 9000

0 7600

0 8700

0 9000

0 8700

A Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

20 8700

22 8000

24 6800

26 3000

0 8000

0 6800

0 3000

D (L4L, LT = 3) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

14 26100

16 27000

0 26100

12 22800 22800 0

0 27000

0 26100

D (L4L, LT = 3) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

18 26100 00 0

20 24000

22 20400

24 9000

0 20400

0 9000

F (L4L, LT = 3) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

14 8700

16 9000

0 8700

12 7600 7600 0

0 9000

0 8700

F (L4L, LT = 3) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

18 8700

20 8000

22 6800

24 3000

0 8000

0 6800

0 3000

E (L4L, LT = 2) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

14 17400

16 18000

12 15200 15200 0 17400

0 18000

0 17400

E (L4L, LT = 2) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

18 17400

20 16000

22 13600

24 6000

0 16000

0 13600

0 6000

0 24000

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I (L4L, LT = 2) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

12 34800 34800 0 36000

14 36000

16 34800

0 34800

0 32000

I (L4L, LT = 2) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

18 32000

20 27200

22 12000

0 27200

0 12000

B Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

14 4000

15 4000

16 4000

17 3800

18 3800

19 3800

0 4000

0 3800

0 3600

B Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

20 3600

21 3600

22 3600

23 3800

24 3800

25 3800

26 4000

0 3600

0 3800

0 4000

G (L4L, LT = 2) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

13 8000

14 8000

15 7600

16 7600

0 8000

12 8000 8000 0 8000

0 7600

0 7200

G (L4L, LT = 2) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

17 7600

18 7200

19 7200

20 7200

21 7600

22 7600

23 7600

24 8000

0 7200

0 7600

0 8000

J (L4L, LT = 2) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

13 22800

14 22800

15 22800

16 21600

0 48000

0 22800

12 48000 48000 0 22800

0 22800

0 21600

J (L4L, LT = 2) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

17 21600

18 21600

19 22800

20 22800

21 22800

22 24000

0 22800

0 24000

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H (L4L, LT = 2) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

13 16000

14 16000

15 15200

16 15200

0 16000

12 16000 16000 0 16000

0 15200

0 14400

H (L4L, LT = 2) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

17 15200

18 14400

19 14400

20 14400

21 15200

22 15200

23 15200

24 16000

0 14400

0 15200

0 16000

C Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

15 5300

17 6300

19 6400

0 5300

0 6300

0 6400

0 6000

C Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

21 6000

23 5600

25 5200

0 5600

0 5200

R (L4L, LT = 2) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

13 10600

15 12600

0 10600

0 12600

0 12800

R (L4L, LT = 2) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

17 12800

19 12000

21 11200

23 10400

0 12000

0 11200

0 10400

X (L4L, LT = 2) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

13 5300

15 6300

0 5300

0 6300

0 6400

X (L4L, LT = 2) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

17 6400

19 6000

21 5600

23 5200

0 6000

0 5600

0 5200

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K (L4L, LT = 2) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

12 15900 15900 0

13 18900

15 19200

0 18900

0 19200

0 18000

K (L4L, LT = 2) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

17 18000

19 16800

21 15600

0 16800

0 15600

b. After completing the material requirements plan, develop a load profile for each work center for each week of the second quarter. Use the planned order releases and calculate the workload at each work center for weeks 14 through 26. The standard times are shown in the table. Use the load profiles to identify potential problems. The effective capacity at each work center is 960 hours each period. Workload for Work Center 1 Period 14 15 16 17 18 19 20

Item H D H H D H H D H H

Quantity 15200 26100 15200 14400 24000 14400 14400 20400 15200 15200

Standard hrs 0.0375 0.02 0.0375 0.0375 0.02 0.0375 0.0375 0.02 0.0375 0.0375

Total time 570 522 570 540 480 540 540 408 570 570

Weekly Load 570

Standard hrs 0.02 0.015 0.02 0.04 0.015 0.02 0.015 0.02 0.04 0.015 0.02 0.015

Total time 152 324 152 512 324 144 324 144 480 342 144 342

Weekly Load

1092 540 1020 540 978 570

Workload for Work Center 2 Period 14 15

16 17

Item G J G R J G J G R J G J

Quantity 7600 21600 7600 12800 21600 7200 21600 7200 12000 22800 7200 22800

476

988 468

966 486

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G R J G J

7600 11200 22800 7600 24000

0.02 0.04 0.015 0.02 0.015

152 448 342 152 360

Standard hrs 0.02 0.02 0.02 0.03 0.04 0.02 0.02 0.02 0.03 0.04 0.02 0.02 0.02 0.03 0.04 0.02 0.02

Total time 360 696 174 540 256 348 640 160 504 240 320 544 136 468 224 272 240

Weekly Load

Standard hrs 0.04 0.1 0.1 0.06 0.04 0.1 0.1 0.06 0.04 0.1 0.1 0.06 0.04 0.1

Total time 348 400 380 378 360 380 380 384 348 360 360 360 320 360

Weekly Load

942 512

Workload for Work Center 3 Period 14 15

16 17

18 19

Item E I F K X E I F K X E I F K X E I

Quantity 18000 34800 8700 18000 6400 17400 32000 8000 16800 6000 16000 27200 6800 15600 5600 13600 12000

1056

970 988

904 864

828 512

Workload for Work Center 4 Period 14 15 16 17 18 19 20

Item A B B C A B B C A B B C A B

Quantity 8700 4000 3800 6300 9000 3800 3800 6400 8700 3600 3600 6000 8000 3600

748 758 740 764 708 720 680

We will not have enough capacity in work center 1 during weeks 15, 17 and 19. Capacity will not be enough in work center 2 in weeks 15 and 17. Finally, we will not have enough capacity in work center 3 in weeks 14, 15 and 16.

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Answers to Textbook Case – Desserts by J.B. 1. Develop a list of the information you will need before you can help J.B. J.B. will need the same information that a manufacturer would: a. a list of his end products b. the ingredients (BOM) for each end item c. the manufacturing process for each item (the recipe) d. his capacity and his kitchen’s capacity to perform each operation above e. his source for all ingredients f. the lead times for ordering ingredients g. the process time for steps in the recipes h. estimates of demand for the end items to allocate capacity 2. Using at least 5 recipes for elaborate European-style desserts demonstrate how you would plan for materials. For example, see the following obtained from: http://homeworkersexpatscooking.subportal.com/recipes/C10/recipeC1047.html Amaretto cheesecake with raspberry sauce Yield: 1 Cake 1/4 c Butter 2 c Chopped almonds 2 tb Granulated sugar (Filling): 12 oz Cream cheese softened 1/2 c Granulated sugar 3 Eggs 1 c Sour cream 2 tb Amaretto 1/2 ts Vanilla 1/2 ts Almond extract (Sauce): 3 c Frozen unsweetened -raspberries thawed 2 ts Amaretto Sugar In 9-inch microwavable quiche dish shallow round baking dish or deep pie plate melt butter at high (100 per cent power) 1 to 1 1/2 minutes. Stir in almonds and sugar until evenly coated with butter. Press into bottom and sides of dish. Microwave at high 2 to 3 minutes or until firm. If necessary rotate dish during cooking. Beat cream cheese and sugar until light. Beat in eggs one at a time. Add sour cream 2 tablespoons Amaretto or almond liqueur vanilla and almond extract. Beat until smooth. Pour into baked crust. Microwave uncovered at medium (50 per cent power) 14 to 18 minutes or until cheesecake is almost set in centre. Rotate dish partway through cooking if necessary. Cool on countertop to room temperature then cover and refrigerate until serving time. Reserve some whole raspberries for garnish. Puree remaining raspberries. Push through sieve to remove seeds. Stir 2 tablespoons Amaretto or almond liqueur into puree. Add sugar to taste. To serve spoon some sauce on to dessert plates. Place slice of cheesecake on sauce. Garnish with reserved

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berries. If you prefer use 1 cup graham cracker crumbs with 1/2 cup finely chopped almonds for the crust. Use a food processor and pulse to chop nuts to an even consistency rather than a fine powder. Also you could substitute strawberries for the raspberries. To omit liqueur increase almond extract in the filling to 1 teaspoon and use just a drop in the raspberry puree. Edited to MM format by: Lois Flack CYBEREALM BBS Watertown NY - Home of Kook-Net (315)782-1120 -

The above recipe lists how much of each item is needed to produce the cheesecake end item. With an estimate (or actual orders) of this item and the other end items that use the same ingredients, the lead time needed by the vendor, the required order size (lot size), and the on-hand inventory, J.B. can determine when and how much of each item to order. As the shipping times are much greater than the process times, we would not need to consider when the ingredients are needed in the process. 3. Discuss the factors J.B. needs to consider when determining his capacity needs. J.B needs to consider capacity for: a. labor to perform the operations b. oven capacity to do the baking c. storage capacity for ingredients d. storage capacity for finished items e. working space to prepare the items To do this J.B. will need an estimate of the demand for each end item, the time taken to prepare and bake each item, the amount of ingredients needed, and the space they will occupy between completion and sales or delivery. 4. Explain to J.B. how he will be able to use an MRP approach in his bakery. Be sure to explain issues such as planned orders, projected available quantities, lot sizing rules, BOMs, and inventory records. The MRP approach can fit J.B’s operations whether he is producing for inventory (the store shelves) or for individual orders (make-to-order). First J.B will need to make a rough-cut capacity plan. This will allow him to plan for the needed labor and equipment capacity described in Question 3. He can then decide when to make the items. He can either make to stock, or accept orders to book against available capacity. The BOM will then allow him to take the planned end items, and determine when cooking steps need to be performed and what ingredients will be needed. Knowing when he needs ingredients, who his sources for ingredients are, how much time they need to deliver, what their delivery quantities are, and the quantity of each ingredient he currently has will allow him to plan orders for ingredients.

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Complete Manuals for the Interactive Cases also are available on the companion site: www.wiley.com/college/reid.

Interactive Learning The student web site for this chapter includes PowerPoint chapter reviews, selected solutions, a company tour, an Excel template for a planning problem, and web links.

In Class Exercises This exercise was adapted from quizzes created by Professor William A. Ruch. I estimate that the following exercise would take approximately an hour for the students to answer in class by forming teams. I give it out at the end of class, while allowing enough time, so that students can leave as soon as they have completed the exercise. I give the students the option of working individually or in teams of up to five students. When I hand out copies of the exercise questions, I ask the students to take one copy per person and one copy per team. This way each student will have a copy of the assignment. I only require one copy per team be turned in to me for grading. After the students have had time to read the exercise and questions, I point out that for questions 6 and 7, they should show all the numbers, not just the changes in the numbers. To do the exercise, the students need to understand MRP and the corresponding calculations. It would be very helpful if the students have already seen demonstrations of using the bill of materials and the creation of the MRP diagrams.

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MRP EXERCISE Please provide names and signatures (only for team members who are present today): NAME (Print) SIGNATURE 1. 2. 3. 4. 5.

The purpose of this exercise is to demonstrate your understanding of MRP. Below you see the bill of materials and on the back of this sheet are the MRP plans for items A, D, B, and C. Please answer the following questions: 1. Each unit of A requires how many units of B? 2. Each unit of A requires how many units of C? 3. What is the total lead time to produce item A? (including ordering all parts, making all subassemblies, and assembling A)

4. In period 4, the gross requirement for item C is 700 units. What action created that demand for 700 units of C?

5. What action(s), if any, should be taken right now? ("right now" is period 1)

B(1) 2 weeks C(2) 1 week

2 weeks

C(1) 1 week

D(2) 3 weeks B(1) 2 weeks C(2) 1 week

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A Planned order releases

4 100

6 250

8 150

D (L4L, LT = 3) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

4 200

6 500

8 300

0 200

0 500

0 300

B (FOQ = 300, LT = 2) Gross requirements Scheduled Receipts Projected Available 200 Planned order releases

1 200

3 500

4 100

5 300

6 250

8 150

0 600

100 300

0 300

50 300

200

C (FOQ = 1500, LT = 1) Gross requirements Scheduled Receipts Projected Available 1300 Planned order releases

1 1200

3 600

4 700

6 850

8 150

100

100 1500

1000

300

300 1500

950

800

6. If item C were ordered L4L instead of in lot sizes of 1500, what changes, if any, would you make in the planned order releases for C? Period 1 Planned order releases

7. The customer originally ordered 250 units of item A (lead time = 2 weeks) to be delivered in period 8. If the customer changes the order to 350 units of A, what changes, if any, should be made to the gross requirements for item C for the periods 1 through 8. Period Gross requirements

8. The customer also wants the order earlier. How early, if at all, can the order of 350 units be delivered?

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MRP EXERCISE ANSWER KEY Please provide names and signatures (only for team members who are present today): NAME (Print) SIGNATURE 1. 2. 3. 4. 5.

2. Each unit of A requires how many units of C?

3. What is the total lead time to produce item A? 8 weeks (including ordering all parts, making all subassemblies, and assembling A) 4. In period 4, the gross requirement for item C is 700 units. What action created that demand for 700 units of C? The planned order of 300 units of B in period 4 (times 2) & the planned order of 100 units of A in period 4 5. What action(s), if any, should be taken right now? ("right now" is period 1) We need to release orders for 600 units of B and 200 units of D. A

B(1) 2 weeks C(2) 1 week

2 weeks

C(1) 1 week

D(2) 3 weeks B(1) 2 weeks C(2) 1 week

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A Planned order releases

4 100

6 250

8 150

D (L4L, LT = 3) Gross requirements Scheduled Receipts Projected Available 0 Planned order releases

4 200

6 500

8 300

0 200

0 500

0 300

B (FOQ = 300, LT = 2) Gross requirements Scheduled Receipts Projected Available 200 Planned order releases

1 200

3 500

4 100

5 300

6 250

8 150

0 600

100 300

0 300

50 300

200

C (FOQ = 1500, LT = 1) Gross requirements Scheduled Receipts Projected Available 1300 Planned order releases

1 1200

3 600

4 700

6 850

8 150

100

100 1500

1000

300

300 1500

950

800

6. If item C were ordered L4L instead of in lot sizes of 1500, what changes, if any, would you make in the planned order releases for C? Period 1 Planned order releases

2 500

3 700

5 850

7 150

1 1800

3 600

4 700

6 950

8. The customer also wants the order earlier. How early, if at all, can the order of 350 units be delivered? The order cannot be delivered earlier. Delivering the revised order in week 8 is also unlikely.

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References Bolander, S. F. and Taylor, S. G., “Scheduling Techniques: A Comparison of Logic,” Production and Inventory Management Journal, First Qtr., 2000, 1 – 5. Goldratt, E. M., Schragenheim, E. and Ptak, C.A., Necessary But Not Sufficient, The North River Press, Great Barrington, MA, 2000. Wermus, M. and Pope, J. A., “Student Planning in an MRP Framework,” Production and Inventory Management Journal, Second Qtr., 1995, 51 – 55.

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Chapter 15: Scheduling Overview This chapter compares scheduling for low- and high-volume operations. The various methods of sequencing jobs are presented, demonstrated, and compared. The performance measures for schedules are presented and discussed. Developing a schedule using priority rules is explained. The scheduling of bottlenecks is explained. The theory of constraints (TOC) approach to scheduling the bottleneck is explained. This approach is known as drum-buffer-rope (DBR). The scheduling techniques for service applications are explained. Workforce scheduling issues are explained.

Teaching Tips and Strategies I first spend time explaining the various performance measures. Then, I explain and demonstrate various scheduling methods. This leads to an interesting discussion where we try to predict the effect of each method on the various performance measures. Next, we focus more of our time on DBR, since it is more complicated. The basic elements of DBR are explained in the novel, “The Goal,” which is required for reading in my class. Students really enjoy reading and discussing the novel. Some of them even have a hard time putting the book down. After they have read the novel, I present more details of the DBR solution. After I have presented MRP, JIT, and DBR, I focus on comparing and contrasting these methods of production. The TOC Tips section of this chapter presents the comparisons, along with details on how I explain DBR to the class. I show a video of a presentation given by the management of Valmont describing their DBR implementation. I facilitate at least one game that demonstrates the impact of DBR, such as the job shop game. The job shop game, dice game, and nickel game are included in the In-class Exercise section of this chapter in the manual. When asked to think of a reasonable dispatching rule, almost all students first think of the first-come-first-served rule. I ask them why this makes the most sense. The replay usually has something to do with fairness. We then discuss situations where they have had to wait. Banks, supermarkets, and airline check-ins do tend to run FIFO. Check-ins may also have priority lanes. I then ask them whether anyone has recently been to an emergency room. We then discuss whether an emergency room should serve patients on a FCFS basis. We quickly agree that serious cases should go first, because survival is probably more important than waiting time fairness. When we return to our discussion of dispatching rules, we then discuss what goals are being addressed with some of the other

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rules, such as EDD. The air traffic control case leads to an interesting discussion. Often, even after reading the case, students are reluctant to develop their own dispatching rule and concentrate on those presented in class. They often refocus once I tell them that the cost of crashing an airplane is much higher than any other cost. The new rule is now “don’t crash airplanes.” We also discuss the significance of different measures of the impact of rules. I point out that makespan can be seen as a strange concept because facilities keep operating. They do not shut down after producing a set of jobs. We also discuss the difference between lateness, tardiness, and earliness, which is the absolute value of lateness when it is negative. We discuss that earliness is often ignored because the cost, based on, say, time value of the money invested early, would be quite small compared to the cost of upsetting a customer with a late order. However, there are situations where earliness has a cost. Students would often prefer to wait a few more minutes for a pizza once they have arrived at the pizzeria rather than eat a cold pizza because it was ready before they had placed an order. The value of rules using shop-wide information instead of just local, work center information can be demonstrated quickly on the board. If a work center ships orders to two different downstream work centers, the local information can be insufficient. I ask them to consider a situation where a work center has received a kanban from two machines. Further, the machine that had sent its kanban first has broken down. Processing its order, as FIFO would have us do, would mean producing just enough, and to have work waiting at the next work station. Knowing the state of all downstream work stations would allow us to avoid this situation.

War Stories Considering Setups when Scheduling Production (This story was told to me by a source that chooses to remain anonymous.) My work experience in both the cosmetics and consumer products industries gave me a better understanding of production scheduling. When producing various colors of makeup on the same line, it was better to schedule production from light to dark colors in order to reduce setup times between batches. The same was true for foundations as well since the colors differed, while the formulas remained the same. At the consumer products company, we produce shampoos and conditioners on the same line. Shampoos are designed to strip the hair of dirt, while conditioners are designed to

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put clean “grease” in the hair. There is a minor difference between the different formulas or types of shampoo for normal, oily, and dry hair. When changing the line from one type of shampoo to another, all we have to do is push a couple of gallons through the line to flush it, which takes about 30 minutes. Conditioners are made of a mixture of ingredients. Changing the line from shampoo to conditioner requires a complete flush and sanitization of the line. This changeover could last about four hours. In the past, the production schedule was based on demand. It did not consider the effect of the schedule on setup times. So, I created a chart showing the setup times for all possible changeover combinations. I changed the sequence of the schedule to account for this information. The result was that we were able to produce significantly more products in the same amount of time. We lost an average of 30%, up to a maximum of 50%, of our capacity due to sequencing based on demand only. Because of the new rules, we were able to get rid of overtime. In addition, we were able to use 90% of our available capacity for production, while the other 10% of it was used for changeovers. At the same time, our service level did not decrease. The Impact of Unions on Scheduling (This story was told to me by a source that chooses to remain anonymous.) When I worked as a production manager in a consumer products company, I came to the realization that it is more difficult to run a union shop than to run a non-union shop. This is due to the fact that unions use collective bargaining. Unfortunately, I didn’t receive any training at the university about collective bargaining. I understand now that it is important to understand the motivations of the union and their rules as well. When a plant is unionized, changes made at the plant must be tailored based on the union’s interests. Therefore, the union can actually be an added hurdle or benefit when making changes. The union steward can decide where people work in the plant. So if a manager changes a process, the steward could decide to assign the worst- or best-performing person for the job. This decision will determine whether the manager will succeed or fail. The person assigned to the job is used to set the standards. How the actual work compares to the standard will determine success. Obviously, the worst person would set a standard that can be easily beaten, which then makes the manager look good. I did find that the union could be very helpful in some situations. When I realized that we needed overtime to meet demand, all I had to do was create a list of the number of each type of job classification that I needed. The next day, the union steward would provide me with the list of the workers assigned to work overtime. It made my job easy. This was due to the fact that the union workers wanted the overtime – their motivation.

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The Impact of Production Measures on Inventory (same story is in Chapter 12) (This story was told to me by a source that chooses to remain anonymous.) I worked at a consumer products company where the managers took mini-plant tours in each department daily. The board in each department listed the quality level, performance to plan, efficiencies, cost reduction savings, and out-of-stock products. During these tours, managers would harp on out-of-stock conditions. On Fridays, a larger group of managers, including higher-level executives, took longer tours that focused on the performance measures of efficiencies and engineering cost reductions. In order to increase efficiencies, we must increase the batch size so that the number of setups is reduced. On the other hand, in order to ensure that the product is in stock, we must produce in small batches. This is because we need to react quickly to changes in demand since demand is uncertain. The end result is that the workforce switches back and forth every week between small and large batch sizes, which can cause problems. Normally, they produce using small batches. However, every Wednesday they switch to large batches in order to improve the efficiencies. Applying POOGI in services (This story was told to me by a consultant who chooses to remain anonymous.) (POOGI, which is also known as the five focusing steps.) I was a consultant at a hospital where the management was reasonably certain that one product line (outpatient chemotherapy) was losing money. Management was deciding whether to trim the product line or turn it around. The COO was interested in applying the theory of constraints (TOC) since she felt that the ideas could be applied in services. A cross-functional team was formed to analyze outpatient chemotherapy. The team consisted of a registration clerk, a nurse from the ancillary department that renders care, someone from pharmacy, the head of labs (i.e. blood work), a coding person (for insurance and billing), two representatives from billing (one specialized in Medicare, while the other focused on third party reimbursements), someone from contracts (which is essentially sales), and the master scheduler (who was in charge of scheduling appointments). I was concerned that the apparent loss of money was actually not real. This could be due to the fact that overhead expenses were allocated. However, as long as the total variable costs of making the product are less than the product revenues, it is not losing money. No one knew where the constraint was. The PQ solution ideas could not be utilized since the constraint was not known. (Note: PQ is discussed in Chapter 3 and supplement B of this manual.) Finger pointing had become the standard procedure in the hospital. So I decided to have

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us pull back and create an overall process map of how the entities fit together. Once the map was created, I realized that this product had an A-plant flow. (Note: the A-plant is discussed in Chapter 3 of this manual.) In other words, many of the process steps could be performed simultaneously, with some information crossovers. The point of convergence was the coder, who then transferred the information to billing. The hospital had concerns about the quality in billing. They wanted to make sure that fraudulent practices did not occur. So they used a “scrubber” (quality control person) to check the bills before they were sent out in an effort to prevent inadvertent fraud. The scrubber dispatched a report to all the departments for each inaccurate bill. The problem was that the report did not indicate the specific errors. As a result, all the departments were performing some unnecessary rework. We decided to apply POOGI instead of DBR to this product line. We determined that coding was the constraint. Coding performance was based on the number of bills coded. This led to the negative effect of fast records being done first. The end result was that some bills were never reimbursed because insurance companies refused to pay bills that were not submitted within a specific time frame, following the date the service was performed. In order to exploit the constraint, we reexamined all the performance measures and processes to ensure that no erroneous information arrived at the coding department. For example, registration was responsible for entering the admitting code. If they did not know what the admitting code was, they sometimes guessed or entered the last admitting code used for that patient. So we decided to have another more appropriate department enter the admitting code. We also changed the performance measurement for coding in order to minimize the errors that were attributable to the coding department. In order to subordinate, we used appropriate performance measures and held the departments, other than coding, accountable for these measures. These measures were designed to ensure that the other departments provided the appropriate support to coding. Finally, to elevate the constraint, we decided that we either needed to hire another parttime coder or change a part-time coder to a full-time coder, since coding did not have enough capacity. Local verses global dispatching rules I visited a rolling mill as part of a computer integrated manufacturing consulting project. While learning its operations to build a simulation model, we needed to identify the scheduling rules at each workstation. The workers were allowed to determine what lots to run. They made this choice to avoid set-ups. Depending on the machine, they may wish to run wide-to-narrow, thick-to-thin, all the clad stock before the unclad stock, or by another rule. The problem with these locally-determined, attribute-dependent, dispatching rules was that they often produced an output stream that was quite detrimental to the

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operator of the next machine. They also did not reflect customer needs, such as whether a job was early or late. Operators were measured based on the amount of pounds they ran through their machines. The local rules were designed to “get their metal count up.” Unfortunately, this did not reflect that the mill was not paid for the sum of pounds running through the machines; it was paid for delivering good quality products to its customers on time. A set of locally-good rules rarely leads to a globally-best outcome.

Answers to Discussion Questions in Textbook 1. Compare and contrast high-volume and low-volume scheduling operations. Scheduling in a high-volume environment, which includes assembly lines and continuous flow processes, is determined by the line design and its balance. Scheduling in a low-volume environment, which includes batch and project processes, involves the use of priority rules, such as SPT and EDD. 2. Describe a high-volume service operation and how scheduling should be done. A high-volume service operation uses a line flow approach to production, such as an assembly line or continuous flow process. The schedule is decided when the line is designed so as to obtain the desired output. 3. Describe a low-volume service operation and describe how scheduling should be done. Low-volume service operations focus on scheduling each machine since they are arranged in departments, such as batch or project processes. Scheduling involves the use of priority rules, such as SPT and EDD. 4. Visit a local service operation and describe its scheduling procedures. Let’s look at the way Kinko’s Copy Center schedules the customer orders. They are using intermittent operations. So they should use priority rules for scheduling each copier and machine in the facility. It appears that they use FCFS as a rule for processing work for customers who wait for their order. They probably use the EDD rule for orders where the customer is not waiting. 5. Visit a local manufacturing operation and describe how it sequences jobs through the shop.

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This answer depends on the area in which the university is located. 6. Describe infinite loading. We can use infinite loading to schedule all the work proposed in the MPS to see if there is enough capacity to do the work. Infinite loading determines the capacity needed at each work center to meet the proposed schedule. 7. Explain how the output from infinite loading is used. The output from infinite loading is used to change the MPS to make it feasible in terms of capacity. 8. Explain how finite loading is done. Finite loading schedules work according to the available capacity. It plans production in each work center so that the capacity needed at that work center for the production schedule is sufficient. 9. Explain the benefits of finite loading. The benefit of finite loading is the creation of a feasible production schedules, in terms of capacity, more quickly than infinite loading. 10. Describe forward scheduling. With forward scheduling, processing starts immediately when a job is received. It helps us determine the earliest possible completion time for the job. 11. Describe backward scheduling. Backward scheduling starts by scheduling the last processing step of a job, and working backwards through the production process in order to ensure on-time completion. 12. Visit a local service or manufacturing operation and learn how it measures schedule effectiveness. Many service organizations measure schedule effectiveness based on tardiness. Let’s

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consider a restaurant that does not take reservations. They are probably more concerned that the actual waiting time does not exceed the estimated waiting time given to the customer. They could also measure lateness to have an idea of how accurate the estimates are in terms of not being too high or too low. 13. Describe the principles of OPT. OPT is a technique for scheduling production that focuses on effectively dealing with bottleneck systems. The bottleneck resources should be kept busy, while the nonbottlenecks resources should support them. Here are the principles of OPT: • • • •

• •

Balance the process with demand. Use non-bottlenecks only as needed to support the constraint. Understand that using the resource to produce does not necessarily mean that it is contributing to the bottom line. An hour lost at the bottleneck is an hour lost forever. Since the bottleneck determines the capacity of the entire plant, we need to use its capacity effectively. Bottlenecks determine throughput and system inventory. The transfer batch does not have to equal the process batch. If we are processing in batches of 10 units, we do not necessarily have to wait until all 10 units are done on a process before moving to the next process.

14. Describe the theory of constraints. The theory of constraints uses a five-step process for dealing with the constraint, which can be a policy or physical resource that limits us from improving our performance. Here are the steps: • • • • •

Identify the constraint(s). Exploit the constraints(s) by finding ways to deal with them directly in order to improve performance. Subordinate to the exploitation by making sure that all other areas or resources provide support. Elevate the constraint(s) by focusing on dealing with the constraint in order to gain more improvements. Repeat these steps if the constraint has moved.

15. Describe different methods that might be useful for scheduling service operations.

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We can schedule service operations by taking appointments, reservations, posting schedules, and delayed services or backlogs. Doctors schedule appointments, airlines take reservations, movie theaters post schedules, and restaurants use delayed services or backlogs when they use waiting lists.

See Solutions Manual for Answers and Solutions to Problems

Answers to Textbook Case – Air Traffic Controller School (ATCS) Note: The instructor may also want to ask the students to comment on the calculations for each question, not just perform the calculations. a. Develop a landing sequence that gives priority to those aircrafts with the highest cost of slack time (excess flying time multiplied by cost per minute of flying time). For example, flight 616’s 18.75 minutes of slack time (22 – 3.25) times $300 per minute means that if Flight 616 does not land until its time is all used up, it incurs an extra flying cost of $5,625. Make a Gantt chart showing the landing sequence and evaluate the sequence in terms of performance. Calculate mean flow time, mean lateness, and average number of planes in the system. Flight # 616 024 894 118 219 101 217 8076

flying Cost/min. time left 22 300 16 400 19 150 15 150 12 200 10 100 8 125 5 80

Cost 5625 5400 2587.5 1800 1700 800 656.25 280

Start time End time 0 3.25 5.75 7.50 10.50 14.00 16.00 18.75

3.25 5.75 7.50 10.50 14.00 16.00 18.75 20.25

Lateness -18.75 -10.25 -11.5 -4.5 2 6 10.75 15.25

4.74 12.00 -1.38 Ave # sys. Mean flow Mean late

Using the cost times the slack time as the sorting criteria does not ensure that the sequence will result in the lowest cost sequence. The only way to accurately do this requires us to sort the flights by cost per minute. Using the above sequence leads to a total cost of $18,848.75, while using a sequence based on minimizing cost per minute leads to a total cost of $13,101.25. [In this instance, with their positive lateness values, flights 219, 101, 217, and 8076 would have crashed.]

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b. Develop a sequence using SPT as a priority rule. Make a Gantt chart showing the landing sequence and evaluate the sequence in terms of performance. Calculate mean flow time, mean lateness, and average number of planes in the system. Flight # runway time Start time End time

Lateness

8076 894 101 024 217 118 616 219

-3.5 -15.75 -4.75 -8.25 2.5 -1.5 -5.25 8.25

1.50 1.75 2.00 2.50 2.75 3.00 3.25 3.50

0.00 1.50 3.25 5.25 7.75 10.50 13.50 16.75

1.50 3.25 5.25 7.75 10.50 13.50 16.75 20.25

3.89 9.84 -3.53 Ave # sys. Mean flow Mean late

This sequence gives us the minimum mean flow time and the minimum average number in the system of all sequences. This sequence also resulted in the lowest mean lateness of all sequences that I tested for this problem, though it does not always do so. [In this instance, with their positive lateness values, flights 217 and 219 would have crashed.] c. Develop a third sequence using EDD (earliest due date) as a priority rule. The plane with the least amount of flying time remaining has the highest priority. Make a Gantt chart showing the landing sequence and evaluate the sequence in terms of performance. Calculate mean flow time, mean lateness, and average number of planes in the system. Calculate the total cost associated with this sequence (flow time multiplied by cost per minute of flying time for each flight). Flight # 8076 217 101 219 118 024 894 616

flying Cost/min. Start time End time time left 5 80 0.00 1.50 8 125 1.50 4.25 10 100 4.25 6.25 12 200 6.25 9.75 15 150 9.75 12.75 16 400 12.75 15.25 19 150 15.25 17.00 22 300 17.00 20.25

Lateness actual cost -3.5 -3.75 -3.75 -2.25 -2.25 -0.75 -2 -1.75

120 531.25 625 1950 1912.5 6100 2550 6075

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The EDD sequence would yield the lowest mean tardiness. [All flights land.] d. Try to develop an alternative sequence that lands all of the aircraft safely and reduces the total cost. Flight # Cost/min. Start time End time Lateness actual cost 219 8076 217 101 118 024 894 616

200 80 125 100 150 400 150 300

0.00 3.50 5.00 7.75 9.75 12.75 15.25 17.00

3.50 5.00 7.75 9.75 12.75 15.25 17.00 20.25

-8.5 0 -0.25 -0.25 -2.25 -0.75 -2 -1.75

700 400 968.75 975 1912.5 6100 2550 6075

4.33 12.54 -1.04 18981.25 Ave # sys. Mean flow Mean late Total cost

I developed this sequence by first sorting them according to the slack time (flying time minus landing time). Then I moved the flights with expensive flying costs per minute up in the sequence wherever possible, while ensuring that all flights landed safely. The cost of this sequence is lower than the cost obtained by the EDD sequence, which did not land all the planes safely. The total cost of the sequence based on slack time is $19,743.75. Therefore, the sequence I found has obtained a lower cost. However, I am not sure that I have found the sequence with the optimal cost that safely lands all the planes since I did not use linear programming to solve this problem. However, using logic, I may have found this sequence. [Again, all flights land.]

Answers to Textbook Case – Scheduling at Red, White, and Blue Fireworks Company 1. Develop a staffing plan for RWBFC In accordance with the constraints stated above. The following staffing plan was developed extending the Tibrewala, Phillippe, and Brown technique to 3 days off.

Demand

Monday 20

Tuesday 20

Wednesday Thursday Friday 20 20 20

Saturday Sunday 20 20

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Employee 1 1 Remaining Dmd 19 Employee 2 0 Remaining Dmd 19 Employee 3 1 Remaining Dmd 18 Employee 4 1 Remaining Dmd 17 Employee 5 0 Remaining Dmd 17 Employee 6 1 Remaining Dmd 16 Employee 7 1 Remaining Dmd 15 Employee 8 0 Remaining Dmd 15 Employee 9 1 Remaining Dmd 14 Employee 10 1 Remaining Dmd 13 Employee 11 0 Remaining Dmd 13 Employee 12 1 Remaining Dmd 12 Employee 13 1 Remaining Dmd 11 Employee 14 0 Remaining Dmd 11 Employee 15 1 Remaining Dmd 10 Employee 16 0 Remaining Dmd 10 Employee 17 1 Remaining Dmd 9 Employee 18 1 Remaining Dmd 8 Employee 19 1 Remaining Dmd 7 Employee 20 0 Remaining Dmd 7 Employee 21 1 Remaining Dmd 6 Employee 22 1 Remaining Dmd 5 Employee 23 0 Remaining Dmd 5

1 19 0 19 1 18 1 17 0 17 1 16 1 15 0 15 0 15 1 14 0 14 1 13 1 12 0 12 1 11 0 11 1 10 0 10 1 9 0 9 0 9 1 8 0 8

1 19 0 19 0 19 1 18 0 18 0 18 1 17 0 17 0 17 1 16 0 16 1 15 1 14 0 14 1 13 0 13 1 12 0 12 1 11 0 11 0 11 1 10 0 10

1 19 1 18 0 18 1 17 1 16 0 16 1 15 1 14 0 14 1 13 1 12 0 12 1 11 1 10 0 10 1 9 1 8 0 8 1 7 1 6 0 6 1 5 1 4

0 20 1 19 0 19 0 19 1 18 0 18 0 18 1 17 1 16 0 16 1 15 0 15 0 15 1 14 0 14 1 13 0 13 1 12 0 12 1 11 1 10 0 10 1 9

0 20 1 19 1 18 0 18 1 17 1 16 0 16 1 15 1 14 0 14 1 13 0 13 0 13 1 12 0 12 1 11 0 11 1 10 0 10 1 9 1 8 0 8 1 7

0 20 1 19 1 18 0 18 1 17 1 16 0 16 1 15 1 14 0 14 1 13 1 12 0 12 1 11 1 10 1 9 0 9 1 8 0 8 1 7 1 6 0 6 1 5

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Employee 24 1 Remaining Dmd 4 Employee 25 1 Remaining Dmd 3 Employee 26 0 Remaining Dmd 3 Employee 27 1 Remaining Dmd 2 Employee 28 0 Remaining Dmd 2 Employee 29 1 Remaining Dmd 1 Employee 30 1 Remaining Dmd 0 Employee 31 0 Remaining Dmd 0 Employee 32 1 Remaining Dmd 0 Employee 33 0 Remaining Dmd 0 Employee 34 1 Remaining Dmd 0 Employee 35 1 Remaining Dmd 0 Employee 36 0 Remaining Dmd 0 Employee 37 0 Remaining Dmd 0 Employee 38 1 Remaining Dmd 0 Employee 39 0 Remaining Dmd 0 Employee 40 1 Remaining Dmd 0 Employee 41 0 Remaining Dmd 0 Employee 42 1 Remaining Dmd 0

1 7 1 6 0 6 1 5 0 5 1 4 0 4 0 4 1 3 0 3 1 2 1 1 0 1 0 1 1 0 0 0 1 0 0 0 1 0

1 9 1 8 0 8 1 7 0 7 1 6 0 6 0 6 1 5 0 5 1 4 1 3 0 3 0 3 1 2 0 2 1 1 0 1 1 0

0 4 1 3 1 2 0 2 1 1 1 0 0 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0

0 9 0 9 1 8 0 8 1 7 0 7 1 6 1 5 0 5 1 4 0 4 0 4 1 3 1 2 0 2 1 1 0 1 1 0 0 0

0 7 0 7 1 6 0 6 1 5 0 5 1 4 1 3 0 3 1 2 0 2 0 2 1 1 1 0 0 0 1 0 0 0 1 0 0 0

1 4 0 4 1 3 1 2 1 1 0 1 1 0 1 0 0 0 1 0 0 0 0 0 1 0 1 0 0 0 1 0 0 0 1 0 0 0

The schedule uses 42 employees. The schedule could have been more efficient if wrapping was allowed (for example: Saturday, Sunday, and Monday off). 2. Explain the method used in developing your plan. The schedule was developed by extending the Tibrewala, Phillippe, and Brown

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technique to 3 days off. 3. Explain how employees should be assigned to the different schedules. The schedule denotes the employees with different days off. As there are 42 employees, RWBFC could first ask for volunteers for the combinations that are less desirable. Often employees have a preference for unusual shifts for family reasons. If this does not work, more desirable shifts could be awarded by seniority, or employees could rotate through the off-days. 4. Discuss any concerns you have with the new staffing plan. Not allowing the rotation to span many weeks leads to a need for more workers. Keeping production level across 7 days may require employees to work when they would rather spend time with family. This could lead to an unhappy and unproductive workforce.

Interactive Learning The student version of the web site for this textbook includes PowerPoint chapter reviews, selected solutions, several interesting company tours, and web links. The web site also includes a virtual case assignment related to scheduling.

TOC Tips (this section also appears in the Theory of Constraints Supplement) The novel, “The Goal,” presents the key ideas and logic of DBR. It is a captivating story about a plant manager describing his actions and thoughts after being told that he has three months to turn his plant around or it will be shut down. Students enjoy seeing the movie version of “The Goal,” which is 45 minutes long. I recommend showing it in a class where the novel is not required for reading or using it as a review of the novel after the students have finished reading it. Students have commented that they enjoyed the book more than the movie, but that the movie was also a good review of the novel. The movie can be rented or purchased at www.goldratt.com or by calling (203) 624-9026. The novel and movie summarize the key concepts of the theory of constraints (TOC). The TOC approach to production is known as drum-buffer-rope (DBR). The drum is the scheduling of the work set to the pace (or beat) of the constraint. The buffer ensures that the constraint is protected from variability and other problems, so that it can be fully utilized. The rope is tied from the constraint to the release of raw materials. Materials are

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pulled through production by the constraint as needed. The sizing of buffers and buffer management are explained in the TOC Tips section of Chapter 12 of this manual. DBR and buffer management must be used together. I present DBR by using an example of a production process with a line flow. This example is part of the copyrighted presentation materials of the Avraham Y. Goldratt Institute. The parts are processed by resources A, B, C, D, and E in that order. The capability or capacity of parts per day for resources A, B, C, D, and E are 7, 9, 5, 8, and 6, respectively. The market demand is 11 parts per day. We first evaluate what happens if efficiencies are used to evaluate employee performance. The efficiency of Resource A would be high if the supplier deliveries are not problematic. Resource B would complain since it receives parts at a rate of 7 per day, but is expected to complete 9 per day. Resource C would be overworked since it receives more parts than it can process per day. Finally, Resources D and E have found ways to look busy. If efficiencies were not used, each resource in this process would produce an average of 5 parts per day. Let’s now assume that each resource is now capable of producing an average of 5 parts per day (a balanced assembly line such as the one used in JIT). However, an average of 5 parts means that sometimes we produce less than five, and sometimes more than five. Let’s assume that the probability of producing at least five parts per day is 50% for each resource (i.e. normal probability distribution). What is the probability of the entire line producing 5 parts per day if there is no work-in-process inventory? It is actually about 3% (0.5 raised to the fifth power since there are five resources). So, what do we do to ensure that we produce the five parts? We place an inventory between each resource. In practice, the inventory shifts position, thus resulting in the need to expedite. The costs go up as well. What is the conflict in production that we need to address? The answer is shown below (Copyright Avraham Y. Goldratt Institute 1999): Produce a lot

Increase work-inprocess

Keep costs in control

Decrease work-inprocess

Effective Production

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The cloud above is read as follows. In order to have effective production, we must produce a lot. In order to produce a lot, we must increase work-in-process. In order to have effective production, we must keep the costs in control. In order to keep the costs in control, we must decrease work-in-process. The assumption that we challenge is that we cannot increase and decrease work-in-process at the same time. The solution or injection that addresses this assumption is to place a large inventory where it is needed, and to keep it low everywhere else. Next, we apply the five focusing steps, which as also known as the process of ongoing improvement, to the production line example presented earlier. These steps are listed in the TOC Tips section in Chapter 2 of this manual. The constraint is identified as Resource C, thus becoming the drum since it had set the pace for the release of raw materials to the line. We exploit the constraint by inserting a buffer before the constraint. We release materials early through the process to ensure that the constraint is always busy since it determines the performance of the entire line. We subordinate the other resources by tying a rope from the constraint to the release of raw materials. This rope tells us when to release the materials. For example, when the constraint finishes processing a part, we release another raw material through the process. Next, we elevate the constraint by increasing its capacity. This is the first time we may actually spend money. For example, we could buy another unit (i.e. machine) of Resource C. If its capacity increases to 7 units per day, then the constraint becomes Resource E. A key benefit of having unbalanced capacities in the production line is that it becomes easier to increase capacity. We may only need to increase the capacity of the constraint. However, if we have balanced capacities, such as in JIT, we must increase the capacity of every resource. The production schedule is determined by first scheduling the constraint resource. Then, we ensure that the other resources support the constraint schedule. We size the buffers to ensure that the materials arrive at the constraint on time and become finished goods on time. The various buffers are sized by considering statistical fluctuations, setup times, run times, and batch sizes. Materials are then released according to the schedule. The details of the implementation will depend on the type of flow in the plant. (The TOC Tips section in Chapter 3 of this manual presents information on the flows, which are the V-, A-, T-, and I-plant structures.) The key elements of the production solution are: •

Use appropriate policies and measures to drive resource behaviors.

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Correctly size and locate buffers to improve system performance by protecting the constraint. Buffers are sized to deal with issues such as variability and “Murphy.” Use buffer management to drive management intervention. Stagger the release of work into the process based on the constraint.

The various types of buffers and buffer management are discussed in more detail in the TOC Tips section of Chapter 12 of this manual. I show an interesting video describing a successful DBR implementation after the details of DBR have been presented and discussed in class. The title of the presentation on the video is “It Just Can’t Be This Simple.” It was presented by the management of Valmont at the Jonah Upgrade Workshop in 1997. The video (number JSA12) is available in the Avraham Y. Goldratt Institute at a cost of $50 (www.goldratt.com or (203) 624-9026 by phone). It would be helpful for the students to have read “The Goal” or seen the movie about the book before seeing this video. The terminology students should know beforehand includes the following: constraint, EOQ, MRP, DBR, the steps of POOGI, CCR, buffer management, thinking processes (TP), measurements (T, I, and OE), and Jonah. The CCR is a capacity-constrained resource. The TP and measurements are presented and discussed in the TOC Tips section in Chapter 2 of this manual. A “Jonah” is someone who has been trained in the TP. (This has been true for years now; however, years ago, the Jonah training focused on production-related ideas.) Buffer management is discussed in the TOC Tips sections in Chapters 4 and 12 of this manual. Please note that in the video, Region one refers to the red zone, while Region two refers to the yellow zone. The video, which lasts about 40 minutes, begins with an explanation of the problems they had using MRP. Management describes the results of their successful DBR implementation, such as increased throughput and decreased WIP. Another interesting video describes a TOC implementation in services. It is a presentation by the management of D’Agostino Supermarkets (located in NY) at a 1996 Jonah Upgrade Workshop. The video (number JWW-6) is available in the Avraham Y. Goldratt Institute at a cost of $50 (www.goldratt.com or (203) 624-9026 by phone). The presentation lasts about 35 minutes. It would be helpful for students to understand the following terms before viewing the tape: Jonah, Jonah’s Jonah, MSW instructor, constraints, trees, the process of ongoing improvement (POOGI), and half-baked idea. A Jonah (for the many years now) is someone who is trained in the TP (discussed in the TOC Tips section of Chapter 2 of this manual). A Jonah’s Jonah is more advanced in the usage of the TP. MSW stands for the Management Skills Workshop, which is a course in applying the TP to resolving conflicts and reaching ambitious objectives. Trees are the TP diagrams. POOGI is the five steps. A half-baked idea is improved by creating negative branch reservations (from the TP). It is an idea that has not been fully thought

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out. One of the presenters uses a football analogy. The presentation provides a description of the application of POOGI in the supermarket. After implementing TOC, the sales and/or profits at D’Agostino Supermarkets increased by five percent after four years of remaining steady or declining. The presenters explain some of their new product innovations. The company also achieved a 4% profit before taxes in an industry where a 1% margin is the standard. Students enjoy the use of simulations to learn concepts in class. Two articles provide explanations on how to use simulation to teach DBR (Chakravorty and Verhoeven, 1996; Rodrigues and Mackness, 1998). Chakravorty and Verhoeven discuss the use of a production simulator in class. The students use a computer simulation of a production scenario to understand the complexities of managing production. First, the students run the simulation without knowledge of the DBR solution. Then, they run it again using DBR. Their article includes positive student comments about the use of the simulation in class. Rodrigues and Mackness provide a method for teaching production using visual interactive simulation models that represent the production approaches of JIT, DBR, and just-in-case (JIC). Several books provide more details concerning DBR. Goldratt and Fox (1986) provide helpful information using both text and figures, making it easier to understand and learn. McMullen, Jr. (1998) provides a good overview and explanation of the various areas of TOC, including DBR. Woeppel (2001) provides a detailed explanation of how to implement DBR. Several articles compare various production methods (Moore and Scheinkopf, 1998; Bolander and Taylor, 2000; Huff, 2001). Moore and Scheinkopf provide a detailed explanation and comparison of JIT and DBR. Bolander and Taylor compare the logic of JIT, DBR, MRP, and process flow scheduling (PFS) using an example to explain the differences and similarities. Huff compares JIT and DBR, and provides an example of an application of DBR in services. Several articles compare the performance of different production methods. Holt compares Traditional Batch, just-in-time (JIT), lean, TOC, and agile production methods using a simulation model. The simulation compares performance using the measures of work-inprocess (WIP) inventory level, flow time, efficiency, production completed, profit, and ROI. TOC outperformed all other methods on the measures of production completed, profit, and ROI. Batch production had the highest efficiency. JIT, with a batch size of one (the ideal), outperformed all other methods on the measures of WIP and flow time. However, TOC was the second best performer and outperformed JIT, with a batch size of three, on these measures. Cook (1994) compares the production control methods of

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traditional manufacturing, JIT, and TOC using simulation. Cook’s results are consistent with Holt’s results. The results indicate that traditional manufacturing does not outperform JIT or TOC. TOC outperformed JIT on the measures of production completed and flow time predictability. “While TOC sometimes has a higher flow time than JIT and more WIP inventory, this may be attributed to the fact that TOC requires fewer inventories than JIT (Cook, 1994, p. 77).” Cook argues for the implementation of TOC since it provides better performance, with less effort. In other words, Cook argues that TOC is easier to implement than JIT. The research of Holt, Cook (1994), and Miltenburg (1997) is in agreement that traditional manufacturing performs poorly, while JIT and DBR achieve better performance. In addition, neither DBR nor JIT is better on all performance measures. The following table presents a comparison of DBR, JIT and MRP. The work of several authors was instrumental in developing this table (Moore and Scheinkopf, 1998; Cook, 1995; Smith, 1994). This table presents a comparison of these production methods using various performance measures and philosophies. The end of the table focuses on the similarities and differences between DBR and JIT, since these two methods are the best depending on the performance measure utilized. The usage of balanced capacities and reduced process variation in JIT does not eliminate disruptions to production, since it is impossible to eliminate variation and “Murphy.”

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PRODUCTION METHOD COMPARISONS DBR JIT MRP Dealing with “Murphy” Inventory

Manages or plans for

WIP Times (i.e. processing and setup) Production Plant Capacities

Low Assumes nothing is “known”

Batches

Different-sized transfer and process batches Specialized High

Labor skills Short-term schedule flexibility Throughput Variation reduction

Differences Obsession Inventory Variability

Similarities Value Value Stream

Usually lowest overall; few selective locations (buffers)

Pull Unbalanced plant is acceptable and desirable

Very high Focus on bottleneck

Tries to eliminate (not possible) Low inventory; in several locations throughout plant (kanbans) Low Assumed to be known (deterministic) Pull Advocates balanced plant (demand = capacity for all resources) Equal transfer and process batches Multi-skilled Low

Largely ignores

High Focus on every resource

Low Not a concern

Waves of inventory; High throughout plant Very high Assumed to be known (deterministic) Push Not a concern (considered to be infinite) Equal transfer and process batches Specialized Low

DBR

JIT

Increase throughput Held only to protect throughput Reduce buffers after variability is reduced (or at the same time)

Reduce muda (waste) Considered waste Remove buffers and attack variability as it surfaces

Both recognize that customer perception of value is crucial Both recognize importance and that everyone works to turn inventory into throughput

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Both advocate Both advocate Both focus on continuous improvement

Sources: Moore, R., & Scheinkopf, L. (1998). Lean Thinking and the Theory of Constraints: Friend or Foe?. http://www.chesapeak.com; Cook, D. P. (1994). A Simulation Comparison of Traditional, JIT, and TOC Manufacturing Systems in a Flow Shop with Bottlenecks. Production and Inventory Management Journal, First Qtr, 73-78.

In Class Exercises I would like to thank Dr. James R. Holt for allowing me to include the Job Shop Game, Dice Game, and Nickel Game in this manual. Details on the Job Shop Game are included in the file entitled JSGINstinfo.htm (at http://www.vancouver.wsu.edu/fac/holt/em530/Docs/JSGInstinfo.htm). I have played the Job Shop Game with my students several times. It takes about an hour to play. It can be played in teams of six or seven students. Four students are the resources (A, B, C, and D), one student is the scheduler (releases orders), and one or two people record the results on two different tables. One table shows the flow times of the products based on the release time, while the other table shows the distribution of flow times. I ask the different teams to shuffle the product order cards. We can see that the results are basically the same regardless of the order of the release of products. Each team processes the same order of products twice so that the results are comparable. The first time, the orders are released once a day. The second time, we release orders based on the buffer in front of the constraint resource. This game demonstrates how DBR (drum-buffer-rope) significantly reduces the lead times and improves the predictability of the lead times. I would also like to thank Dr. Charlene Spoede Budd for including her modifications to the Job Shop Game in this manual. Several files provide information on running the game. The file Work Flow Class Presentation contains a presentation for explaining how to run the game twice, with and without DBR. The file Job Shop Simulation contains a presentation file that explains how to play the game. Another run of the game is included where the students try to improve performance before we explain how to use DBR. The file also includes an illustrative example for understanding which jobs are preferred by whom. The file Work Flow Case with Title explains how to play the game. The file also contains discussion questions for the students to answer, along with information and questions related to management accounting implications. The file WF Case-Instr.Guide provides the answers to the questions from the case, along with helpful information for running the game. Details on the Dice Game are included in the file entitled DiceGames.htm (at

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http://www.vancouver.wsu.edu/fac/holt/em530/Docs/DiceGames.htm). I enjoyed playing the Dice Game when I learned DBR. The Dice Game can be used to compare the performance of the push, JIT, and DBR production methods, and usually leads to an interesting discussion in class. Information on the Nickel Game is in the PowerPoint file entitled Nickel Game (www.vancouver.wsu.edu/fac/holt/em530/Docs/NickelGame.ppt). The Nickel Game is a quick game that demonstrates the effect of using batches in production. All three documents from James Holt were available as of October 2006.

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References Bolander, S. F. and Taylor, S. G., “Scheduling Techniques: A Comparison of Logic,” Production and Inventory Management Journal, First Qtr., 2000, 1 – 5. Chakravorty, S. S. and Verhoeven, P. R., “Learning the Theory of Constraints With a Simulation Game,” Simulation & Gaming, 27(2), 1996, 223 – 237. Cook, D. P., “A Simulation Comparison of Traditional, JIT, and TOC Manufacturing Systems in a Flow Shop with Bottlenecks,” Production and Inventory Management Journal, First Qtr, 1994, 73-78. Goldratt, E. M. and Cox, J., The Goal (2nd ed.), Great Barrington, MA: North River Press, 1992. Goldratt, E. M. and Fox, R. E., The Race, Great Barrington, MA: North River Press, 1986. Holt, J. R., “Comparing Performance of Different Production Management Approaches,” http://www.vancouver.wsu.edu/fac/holt/em530/Apicsholt.htm. Huff, P., “Using Drum-Buffer-Rope Scheduling Rather Than Just-In-Time Production,” Management Accounting Quarterly, Winter, 2001, http://www.mamag.com/winter01/w01huff.htm. McMullen Jr., T. B., Introduction to the Theory of Constraints (TOC) Management System, St. Lucie Press, 1998. Miltenburg, J., “Comparing JIT, MRP and TOC, and embedding TOC into MRP,” International Journal of Production Research, 35(4), 1997, 1147 – 1169. Moore, R. and Scheinkopf, L., “Lean Thinking and the Theory of Constraints: Friend or Foe?,” http://www.chesapeak.com, 1998. Reimer, G., “Material Requirements Planning and Theory of Constraints: Can they Coexist? A Case Study,” Production and Inventory Management Journal, 32(4), 1991, 48 – 52. Rodriques, L. H. and Mackness, J. R., “Teaching the Meaning of Manufacturing Synchronization Using Simple Simulation Models,” International Journal of Operations & Production Management, 18(3), 1998, 246 – 259. Smith, J. J., “TOC and MRPII, From Theory to Results,” http://www.rogo.com/cac/JJSmith.html, 1994. Woeppel, M. J., Manufacturer’s Guide to Implementing the Theory of Constraints, St. Lucie Press, 2001.

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Chapter 16: Project Management Overview This chapter describes project management applications and the project life cycle. The methods of PERT and CPM are explained and demonstrated with examples. Crashing the project to reduce its completion time is explained. The probability of completing a project by a specific time is explained. Finally, the authors present the critical chain approach to project management, which is a technique based on the theory of constraints.

Teaching Tips and Strategies I begin the project management material by defining a project and giving examples of projects that students can relate to. Then I focus on the “traditional” methods of project management, namely CPM and PERT. I explain the terminology, as well as the steps for creating a network. I explain the difference between AOA and AON networks. The circles used in AON networks make our tasks easier when working with PERT networks. However, in my work as a simulation specialist, I also found the AOA networks useful. In an AOA network, the arc length represents the relative duration of an activity, so the picture has that added degree of value. I then create an AON network on the board using an example students can relate to. I would like to thank Professor Yasemin Aksoy for coming up with the idea for this example. Students find this example to be memorable and easy to relate to. The example includes a number of chores and tasks which I intend to do before leaving home on Saturday. I list the tasks: • • • • •

Laundry – wash, dry, fold/put away Dust Vacuum Tea – make, drink Read newspaper

I point out that we could have divided laundry into fewer or more tasks. For example, I could have included loading and unloading as tasks. Choosing the appropriate level of detail is helpful. I then ask them for their estimates of the task times and write the times next to the activities. I ask if any of the activities must be done in a certain order. They realize that the three laundry tasks listed must be done in that order, dusting should

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precede vacuuming, and one must make tea before drinking it. I then add another precedence relationship of my not wanting to start making tea or reading newspaper until all the chores are complete. On the network, the two paths of chores are represented as feeding into the task of making tea. This way the network has an integration point which allows me to demonstrate how to decide the times when two activities precede another. We determine all the early and late times, thus finding the critical path. Then I point out that I am the only resource. We must then decide if it is possible for the project to be completed using critical path time. We can see that it can be done if dusting and vacuuming are scheduled to occur when the washer and dryer are running. After explaining the chores example, I pass a handout with project information and ask them to create the network, determine the early and late times, and find the critical path individually or in small groups. While they are working on the network, I check their progress and answer questions. I then draw the network on the board with their assistance. Students enjoy working on an example in class because they become more involved. Now that the students are more comfortable with the networks, I can discuss and demonstrate crashing. I give them a handout with a network already created and ask them to fill in the times. Then I write the answer on the board. Then, I take them through the crashing procedure, two to three times, based on the example. I make sure that the example will have two critical paths that will need to be crashed so that they understand what to do in that case. Next, I show the Taco Bell video, which shows the construction and opening of a restaurant in 48 hours. (Please see the War Story in this chapter, entitled “Successful Rebuilding after the L. A. Riots,” for more information on the video.) Next, I explain that not all activity times can be known with certainty. I point out that the way to deal with this is to estimate the optimistic, most likely, and pessimistic activity times. In almost every class I find a few students who have worked in construction. I explain that we have not done an exact activity before, but experienced contractors have done similar activities. I explain that p, o, and m can relate to asking an expert or experienced contractor: m – “How long do you think it will take?” o – “If all goes well, how quickly could it get done?” p – “If lots of things go wrong, how long could it take?” My students have completed at least one course in statistics. We then discuss that the distribution described above is most likely skewed toward the p side, and we can view o and p as corresponding to the upper and lower confidence limits. Students frequently ask

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why m is multiplied by 4. I point out that we are capturing a distribution with only three points, and that m represents more of the area under the curve. Finally, I spend time explaining the critical chain approach to project management, which is based on the theory of constraints. Please see the TOC Tips section of this chapter for more information on this approach, along with teaching tips. I suggest that you ask the students to compare and contrast the traditional and TOC approaches to project management in order to summarize the material. The comparison of the approaches is described next. Compare and contrast the traditional method of project management (PERT, CPM) with critical chain project management (CCPM) (which is based on the theory of constraints. These methods are similar in that they both find and focus on a critical sequence of activities. However, the traditional methods focus on the critical path, which is the longest sequence of task dependencies in terms of time, while CCPM focuses on the critical chain sequence. The critical chain is the longest path of task and resource dependencies in terms of time. We need to consider the availability of resources within the project network because the project plan could assume that two tasks can be done at the same time, when in actuality they cannot because only one resource (person) can do each task. One key difference between the methods is the treatment of safety time, which is used to deal with uncertainties in task times. In the traditional method, each activity usually has a large amount of safety time added given the uncertainty of finishing the task on time. This happens because resource performance is rated on finishing on time while the probability of completing an activity follows a skewed distribution. In other words, there is a chance that the activity could take much longer than expected. For example, the drive to the university would take much longer if there was a car accident that closed the highway. In CCPM, the safety time is removed from each task and a portion (normally half or less) is placed in the buffers. We do not need all the original safety times since it is preparing every activity for the worst-case scenario, and because we will now motivate resources to finish tasks early. Another key difference in the methods is that CCPM eliminates problematic resource behaviors, such as student syndrome and multitasking. CCPM reinforces “relay runner” behavior to ensure timely task completion, while ensuring a high level of quality.

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War Stories The Movie “Titanic” was a project failure When I say that the movie was a project failure, I am not referring to the amount of revenues generated by the movie. We know that it was a great success in terms of revenues. The movie was not only late in finishing, but was also over budget. Welkos and Puig (1997) point out that director James Cameron needed more time to finish the optical effects. They also point out that the movie took six months to make, which was two months longer than planned. It was still late, even though 90-hour workweeks were used (Welkos and Puig, 1997). In addition, the budget for completion was expected to be $200 million, which was $90 million greater than the planned budget. On May 29, 1997, the studios financing the movie decided to postpone the opening of the movie from July 2 to December 19 (Weinraub, 1997). They did so because the highest box office receipts are in the summer and near the end of the year. The movie could have opened later in the summer, but then there would be a decrease in the demand for movies. Because of the delay, the studios probably incurred as much as $10 million in interest charges on the cost of the movie since income was postponed for over five more months (Welkos and Puig, 1997). Project Raptor Harris Corporation asked its Mountaintop, PA team to build a new wafer fabrication plant since that division had achieved great success by applying the theory of constraints to improve the plant operations and sales. According to the reprint of a Midrange ERP article at www.goldratt.com/harriserp.htm, a typical project of this type, which would include the design and construction of the building, installation of equipment, employee hiring and training, and ramp-up of production, is about 54 months. The Project Raptor team finished this project in 13 months. The PERT project network included over 6000 tasks. However, since they used CCPM, they were able to simplify the management of the project by reducing the number of tasks to about 150 at first, then finally to four tasks. The project finished early, even with 40 days of poor weather and 15 days of vendorrelated delays. The project was 4% over budget, which was due to a change in the size of the building, not mismanagement of the budget. According to the article, the fact that the team hired and trained the staff by the end of the building construction, which was months before they were needed for production, was a controversial decision that increased costs. However, this decision allowed them to ramp up production in 21 days, instead of the normal 18 months. The extra cost of hiring did not hurt the budget, which was based on the typical methods utilized before the decision was made to manage the project using CCPM. (A video presentation (JSA-1) about this story is available at

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www.goldratt.com. In addition, the book, “Leading the Way to Competitive Excellence: The Harris Mountaintop Case Study,” provides more information.) Successful Rebuilding after the L.A. Riots In April, 1992, riots broke out in Los Angeles, thus resulting in the destruction of a number of buildings in the area, including a relatively new Taco Bell restaurant that burned to the ground in Compton. I show a 10-minute video in class that documents the rebuilding of that restaurant from the wood framing to the first taco served in 48 hours. I contacted Video Resources at Taco Bell (Phone number: (949) 261-7266) to obtain video number 2318, entitled “Compton Comeback.” I obtained it for a small fee after I explained that I planned to show it in my class at the university when discussing project management. The video shows news reports and a time-lapsed tape of the progress of the project over the 48 hours. Before I show the video, I tell them a little bit about it, and jokingly say that my intention of showing it is not to promote Taco Bell. I point out that it is interesting to see an actual project that was crashed. However, it does not explain the detailing of the crashing procedure. The video also includes some humor. I find that my students enjoy seeing it, especially after having gone through the “pain” of learning the crashing procedure. Life as a Professor I realized a few years ago that being a professor is about managing a number of projects. Professors have three important areas of work, which are teaching, research, and service. Teaching involves course design decisions, grading, and creating lectures, assignments and exams. Research can include literature searches, creating software programs, collecting data, statistical analysis, and writing up the literature review on the results of the survey or simulation. Service includes work on committees, which means meetings, and possibly creating surveys and analyzing the results. Service also includes discussing a paper at a conference, and reviewing papers for publication or presentation at a conference. The work of a professor is actually just a number of projects, such as those listed above. Well, I realized that I was not accomplishing as much as I should have. I know that it is not possible to excel in the areas of teaching, research, and service during the same time period. Each of these areas requires large commitments of time and energy. However, I still felt that I should be accomplishing more. When I learned more about critical chain project management (CCPM), I realized that I could easily apply some of its concepts to managing my time as a professor more

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productively. I learned that multitasking is problematic since it causes each project to last longer, as well as lowers productivity. Multitasking, as defined in CCPM, occurs when someone works on one task or project before he or she starts work on another task or project, without completing the previous one. The reason why productivity is hurt is because it normally takes some amount of time for setup and breakdown time to occur between work on each task or project. This amount of time can actually be significant. An example of setup time is the amount of time it takes to bring yourself up to speed from where you left off on the previous task. This setup time will be significant when I decide to continue work on a long simulation program that I wrote in FORTRAN. I still need to further test the program and add more coding to conduct my research. This may take a long time because I am not familiar with the program since I have not used it for years. So what did I decide to change? I decided to reduce the amount of multitasking that I do in-between the three key areas of teaching, research, and service. I have set aside large blocks of concentrated time for research. In addition, even though I have many research papers that I have started, I spend time focusing on one at a time, and finishing it by sending it to a publication before starting work on another research paper. I have found that my productivity has increased significantly since these changes were made. Better management of repairs In the session of Eli Goldratt’s Satellite Program on Project Management and Engineering, Dr. Goldratt discusses F-16 plane overhaul maintenance at a depot. (The Satellite Program, also known as the GSP tapes, is available on video and CD-ROM, which is referred to as the TOC Self-Learning Program, at www.eligoldratt.com.) The depot building had become too small. The department of engineers handling quality problems spent time addressing hundreds of problems that were not addressed in the manual. The lead time for overhaul had significantly increased. It took an average of more than 135 days to solve these problems. This led to more problems, which caused more multitasking, which resulted in the increase in lead time. To solve the problem, they decided to limit the number of problems assigned to each engineer to three. Before an engineer could start work on another problem, one of the three had to be resolved first. Within five months, this resulted in a decrease in the time to solve problems to less than 30 days on average. At the same time, no more engineers were hired, while overtime became almost nonexistent. In addition, there was no need to increase the size of the depot.

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Another Project Success Story (This story was told to me by William Wagner.) When I worked as a manager at an electronics company, I realized that 85% of our projects were abandoned before receiving any revenues. I oversaw a critical project that was more costly than any project our company had ever undertaken. The cost of this project was $6 million, compared to a typical cost of $250,000 to $1 million. Therefore, I felt that we needed a special focus to increase the probability of success. So I developed an incentive plan for engineers with success parameters, including time for completion, size of the product, speed of product performance, and process compatibility. Our company had never used incentives for engineers (only for the salespeople). I had to get approval from the chairman of the board to pay up to 10% of the $6 million cost as a bonus for success based on the four parameters listed earlier. The project was a resounding success. The product was smaller than anticipated, which caused the production costs to decrease. It was faster than originally specified. It also met the process compatibility criteria. It hit right in the four corners of the process parameters, which meant that we could actually produce it using our process. It was finished ahead of schedule. Shortly after introduction of this product to the market (within two months), it became the number one item in sales in the division. Its sales revenues in the first two months were $150 million. For all this, they only had to pay $600,000 in bonuses, which was the maximum bonus achievable. This product was also featured in the company’s annual report. Why do I think this project was a success? The engineers for this project were isolated as a team. They focused on this project only. I also believe we had the right people working on this project. We were able to motivate them with bonuses. (Top management had argued that engineers couldn’t be motivated.) Finally, the engineers on this project did not have to deal with the day-to-day firefighting, which was typical in our company. (Lisa’s thoughts) I can see that this project was successful because it addressed some of the key problems that the critical chain project management solution addresses. For example, he significantly reduced multitasking, which is a significant waste of time. He also reinforced appropriate resource (engineer) behaviors. The engineers were focused on the success criteria and motivated to reach the targets. A project manager’s goals: On time, within budget, and performing to specification Earlier in my career, one of my colleagues (my wife called him “Shiny Shirt”) sought to enter management. In many medium to large companies, the first step into management

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is to be a project manager. Soon, “Shiny Shirt” became a project manager and moved to a different location. About a year later I was assigned to a project that was also at “Shiny Shirt’s” location. While “Shiny Shirt” had been a competent engineer, I was less impressed with his management skills as I began to hear comments from those working on his project. “Shiny Shirt” used a project management program, similar to Microsoft Project that was recently introduced to the market. He was able to construct a precedence network, input expected durations, reported percent completions, budget amounts, and actual resources consumed. “Shiny Shirt” was well known for keeping tabs on how the project was progressing in terms of time and budget. However, the project team members were unhappy. As stated above, “Shiny Shirt,” with the aid of the software, was able to keep tabs on the progress of the project in terms of time and budget. Indeed, the project was on schedule and under budget. The team members had another complaint. They, just as “Shiny Shirt” had been, were competent engineers. They noticed that in his zeal to maintain time and budget, “Shiny Shirt” paid less attention to what the engineers felt was most important – performance. As a project manager, “Shiny Shirt” was often compromising system performance to make sure the time and budget goals were met. Many technical workers feel that a system that does not perform as specified is not desirable even if it is delivered on time and under budget.

Answers to Discussion Questions in Textbook 1. Identify some projects that are currently underway in your community. Is there a new hospital being built, a new retail store being opened, highway construction being done? For at least one project, try to identify the major activities. Kohl’s department store has moved to the Long Island area. In doing so, they purchased buildings that had been retail stores before the stores closed down. First, they had to either purchase or lease the building. They then needed to hook up all the utilities. They needed to buy stock and shelves for the store, and decide on a store layout. They also had to hire and train staff. 2. Visit a local organization to learn about the kinds of projects it is working on and how it manages these projects. This answer will depend on the area in which the university is located. Some general

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examples are listed in my answer. Churches manage the projects of preparing for Sunday masses and charity events, such as craft or amusement fairs. Software companies manage software development or revision projects. Consulting companies manage the projects of the work they do for various organizations. Construction projects include road resurfacing, and building apartments, businesses, and homes. Professors work on research projects, and develop and administer surveys. 3. Identify a personal project that you have recently completed or are in the process of completing—for example, writing a research paper or organizing a social event. Identify the major activities you had to complete. I moved about a year ago. I had to find a place to rent. I put a deposit on the new place. I hired movers to pack and move my belongings. I turned in a change of address form to the post office. I placed calls to shut off utilities at the old place and move them to the new place. I notified friends, family, and companies (credit cards, magazines, etc.) of the new address. I had to clean the old and new places. Finally, I had to unpack and organize my belongings at the new apartment. 4. Explain the advantage of using probabilistic time estimates. The advantage of using probabilistic time estimates is that the range of possible project completion times can be calculated. It is helpful to know the range if a project has activities with uncertain time estimates, which frequently occurs in reality. 5. Explain how we calculate the expected time value. First, we must obtain three estimates of the time it will take to complete an activity: the most likely time, an optimistic time, and a pessimistic time. Then, as the estimate is based on the beta distribution, we calculate the expected time by adding the optimistic time, the pessimistic time, and 4 times the most likely time, and then dividing by 6. 6. Explain the phases of a project’s life cycle. The phases of a project’s life cycle are conception, feasibility analysis or study, planning, execution, and termination. Conception is the phase where the need for a project is identified. Feasibility analysis or study is the evaluation of the expected costs, benefits, and risks of the project. Planning involves the determination of the project tasks and their time estimates. The execution phase is the actual completion of the project tasks. Finally, termination is the end of the project.

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7. Describe the life cycle of a project you have done. The conception phase was initiated when the need to move was identified. Feasibility analysis involved determining estimates of the costs of deposits and moving expenses. This analysis also includes the determination of the expected benefits of living in a larger home and being in a nicer area, where it is quiet and close to nature. In addition, I evaluated the risk that some items may be lost or broken in the moving process. In the planning phase, I created a list of all activities, along with their respective time estimates. In the execution phase, I completed all tasks, such as finding a realtor, signing a lease for a new home, and the actual moving process itself. Finally, the moving process was completed in the termination phase. 8. Provide an example of precedence relationships from your personal life. The job search is one type of project that I have completed. A resume cannot be sent to the prospective employer until it has been created. An interview cannot be scheduled until the employer has received a resume. The interview must precede the job offer. Negotiations concerning the salary and benefits cannot be completed until the job offer has been made. 9. Explain why determining the critical path is important in project management. Determining the critical path is important because it states the minimum amount of time the project will take unless the project is crashed. The expected project completion time is equal to the length of the critical path time since the critical path is the longest path of activities in the network in terms of time. The critical path is the set of activities that are most critical to successfully completing the project.

See Solutions Manual for Answers and Solutions to Problems

Answers to Textbook Case – The Research Office Moves a. Why are office allocations so difficult? What factors must be considered when planning an office layout? Office allocations are difficult because numerous factors must be considered. We must consider individual preferences and priority rules for allocating offices. For

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example, we could allocate offices within an individual department using length of tenure as the rule for determining the order in which the professors of different departments select offices. b. Offer Jeannette a method for monitoring the office move. Explain why this method or approach would be reasonable. I suggest that she create a project network to plan the move. The network will show the precedence relationships visually. In addition, the times on the network will allow her to make an action plan to ensure that all activities are started on or between the earliest start time and latest start time, so that the project is completed effectively. c. How long should it take from the day the decision is made to move until the move is completed? Employees only work Monday through Friday. All of Jeannette’s activity time estimates assume a five-day work week. First, we list the activities and their times. Then we draw the project network and calculate the ES and EF times by making a forward pass through the network starting at the beginning until the end. Then, we determine the LF and LS times by making a backward pass through the network starting at the end of the network. NOTE: I assumed that it would take one day to select and order the furniture since it was helpful to separate the task of selecting, ordering, and receiving furniture into the tasks of selecting/ordering furniture and receiving furniture. This makes it easier to draw the network. Activity A B C D E F G H I J K L M

Description Allocate offices to departments Allocate individual offices within departments Develop overall layout Receive individual requests for supplies and office setup Consolidate requests, order, and receive supplies Select and order furniture Receive furniture Sort and distribute supplies Individuals pack and tag furniture in offices Arrange for movers Arrange for phone installers Arrange for computer services Moving day (all tasks are completed)

Time Estimate (weeks) 3 2 4 3 2 0.2 6 1 2 3 2 4 0.2

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ES=0 EF=3 LS=0 LF=3

ES=3 EF=5 LS=3 LF=5

ES=5 EF=9 LS=5 LF=9

ES=9 EF=12 LS=9 LF=12

A(4)

B(2)

C(4)

D(3)

ES=12 EF=14 LS=13.2 LF=15.2 E(2)

H(1)

ES=12.2 EF=18.2 LS=12.2 LF=18.2 G(6) ES=12 EF=12.2 LS=12 LF=12.2

F(0.2)

ES=14 EF=15 LS=15.2 LF=16.2

ES=12.2 EF=16.2 LS=14.2 LF=18.2

L(4)

ES=12.2 EF=14.2 LS=16.2 LF=18.2

ES=15 EF=17 LS=16.2 LF=18.2

I(2)

K(2)

ES=18.2 EF=18.4 LS=18.2 LF=18.4 M(0.2)

ES=12.2 EF=15.2 LS=15.2 LF=18.2 J(3)

It will take 18 weeks (5-day work week) and 2 days to complete the move. d. What are the critical activities for the timely completion of this office move? The critical activities are on the critical path, which are A, B, C, D, F, G, and M. These activities are allocating offices to departments, allocating individuals to offices, developing an overall layout, receiving individual requests for supplies and office setup, selecting and ordering furniture, receiving furniture, and moving in. If any of these activities are delayed, the entire project will be delayed. e. What recommendations could you make to Jeannette to make this easier in the future? Jeannette should keep this network so that she can use it next time. If necessary, it can be revised if any activity times or precedence relationships have changed. It may also be helpful for Jeannette and the departments to keep a database of information regarding departmental and individual preferences so that the time for collecting information can be shortened.

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Answers to Textbook Case – Writing a Textbook 1. Add any additional activities that you think are necessary to the project. Ask the students for ideas. No additional tasks will be used in 2 through 4. However, defining single tasks for producing the chapters can make the network more difficult. 2. Draw the network diagram for this project. First, let us create a table of the information: Task # 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Description Write prospectus Discuss with publisher Conduct focus groups Select publisher Update prospectus Negotiate with publisher Write Chaps 1 – 8 Write Chaps 9 – 16 Review chapters Revise 1 - 8 Revise 9 – 16 Photo list Select other writers Define CD Write IM Write TB Write Soln Manual Write PowerPoint Design cover Design Mktg Produce galley proofs Proofread galley proofs Produce CD Print texts

Follows: 1 1 2 3,4 5 6 6 As chapters are avail As reviews avail As reviews avail As chapters avail 6 6 As soon as ½ revise As soon as ½ revise As soon as ½ revise As soon as ½ revise 6 6 10, 11 21 15, 17, 18 20, 21

Time (wks) 4 1 1 2 4 3 4 wks per chapter 4 wks per chapter 4 wks per chapter 2 wks per chapter 2 wks per chapter 24 weeks 4 2 12 12 12 12 8 6 6 4 4 16

See network at the end of this chapter.

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3. Determine how long it should take to complete the project. The network on the next page shows the order of operations. However, it should be noted that: Task 9 can start once the first and ninth chapters are produced in task 7 and 8. Task 11 and 12 can start once each chapter is ready from Task 9 Task 12 can start once each chapter is ready in Tasks 10 and 11. Task 15, 16, 17, and 18 can start once half of tasks 10 and 11 are complete. Task 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Follows 1 1 2 3,4 5 6 6 As chapters are avail As reviews avail As reviews avail As chapters avail 6 6 As soon as ½ revise As soon as ½ revise As soon as ½ revise As soon as ½ revise 6 6 10, 11 21 15, 17, 18 20, 21

Time 4 1 1 2 4 3 4 wks per chapter 4 wks per chapter 4 wks per chapter 2 wks per chapter 2 wks per chapter 24 weeks 4 2 12 12 12 12 8 6 6 4 4 16

Earliest start 0 4 4 5 7 11 14 14 18 22 22 24 14 14 34 34 34 34 14 14 56 62 46 62

Earliest finish 4 5 5 7 11 14 50 50 54 56 56 58 18 16 46 46 46 46 22 20 62 66 50 78

Noting that some tasks can start while their predecessors are still in progress, the above table indicates that the earliest the project can be complete is 78 weeks. 4. Consider what external issues might interfere with the timely completion of the project. Chris and Susan are multi-tasking for several tasks. They could still be writing

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chapters while earlier chapters are arriving to be revised. As they are professors, they probably have other work to be done during the 36 weeks they are writing chapters. If these other tasks cause them to stop writing and revising temporarily, the book project could fall behind the above schedule.

Complete Manuals for the Interactive Cases also are available on the companion site: www.wiley.com/college/reid.

Interactive Learning The student version of the web site for this textbook includes PowerPoint chapter reviews, and web links. In addition, Question 15 of the Kaizen Consulting, Inc. Virtual Company Case addresses project management issues in a hospital.

TOC Tips (this section also appears in the Theory of Constraints supplement) I compared and contrasted the traditional and TOC approaches to project management in the teaching tips section of this chapter of the manual. Goldratt (1997) provides an interesting novel that discusses the problems in the project management environment. This novel is set in a university, where the main character, Rick, is a professor that teaches project management in the Executive M.B.A. program. Goldratt presents an explanation of why we need to focus on the critical chain, instead of the critical path. Goldratt’s novel was designed to present the need for a new method of project management, along with some of its key ideas. However, this novel was not created to explain the details of the critical chain project management (CCPM) solution or implementation steps. Newbold (1998) and Leach (2000) provide more of the details of the critical chain project management solution. Newbold also includes information on how to play the project dice game. I have found the Bead Experiment, by Tony Rizzo, to be a very helpful learning experience. The Bead Experiment is a fun, effective method of demonstrating the significant negative impact of multitasking. The directions for playing the Bead Experiment, along with more information on a newer version of the game with presentation information, is provided in the in-class exercise section of this chapter of the manual. It takes about 30 minutes to play. The game involves moving beads using a spoon and hand. It is played twice, with and without multitasking. The game pieces can be obtained from the Avraham Y. Goldratt Institute at www.goldratt.com, or by calling (203) 624-9026.

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CCPM addresses the several realities in the planning of the project. Typically, each resource (employee working on a project task) and manager adds safety time to the estimated task time and project completion time because performance is rated on the ability to finish on time. The resources understand that task times follow a skewed probability distribution. In other words, there is a slim chance that the task time can take much longer than expected. The end result is a significant amount of padding of the tasks in the project network. The procedure for creating the project network may lead to missing resources and/or task dependencies. In addition, the additive rule is used to determine the estimated project completion time. Missing dependencies cause this estimate to be low. When the project is underway, more realities affect the project success. Lack of global project priorities and scheduling resources to ensure that they are not expected to do more than one task at a time leads to bad multitasking within and between projects. Bad multitasking entails working on one task, stopping before finishing, starting on another task, and then coming back to work on the first task. This causes significant delays in the project. In addition, the impact of integration points (where several tasks feed into another task in terms of dependency) in the network causes safety time to be wasted. First, the chance of at least one of the feeding tasks being delayed increases as the number of feeding tasks increases. This chance can be calculated by multiplying the probabilities of on-time completion of each feeding task for all feeding tasks. Second, the worst delays are always passed on at the integration point since we can not begin the next task until all of the final feeding tasks have been completed. Finally, following other resource behaviors affect the project success: • •

• •

3-minute egg rule = it must take the full scheduled time to be of high quality Unreported early finishes = resource finishes early, but does not report the early finish because of the possible loss of negotiating ability for future tasktime estimates; some percentage of resources do this Parkinson’s syndrome = work expands to fill the task time Student syndrome = other things more important than task leads them to delay work on it until its due date

The end result is that the significant safety time incorporated into the project network is wasted due to the realities of the project environment. In addition, unclear task requirements can waste time and/or negatively affect the quality of the project. Finally, the efforts to deal with time or quality problems may cause expenses to increase.

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CCPM consists of the following five elements for appropriately dealing with the realities that negatively affect project success: • • •

• •

Synchronize – stagger the release of work based on global project priorities and the synchronizer Plan – create a project network ensuring the inclusion of all dependencies and add time estimates that do not include safety time Schedule – create the critical chain schedule and insert buffers which consist of part of the safety time removed from the individual tasks; the critical chain is the longest sequence of task and resource dependencies Resource behaviors – ensure that problematic behaviors, such as student syndrome do not occur; ensure that “relay runner” behavior does occur Project control and visibility – use buffer management with real-time data on project status to take action only when necessary

The CCPM solution was created by applying the TP to project environments. A description and example of the TP is provided in the TOC Tips section in Chapter 2 of this manual. CCPM is also a result of the five focusing steps, also known as the process of ongoing improvement, which are listed in the TOC Tips section in Chapter 2 of this manual. The constraint in single project environments is the critical chain, the longest sequence of task and resource dependencies. The constraint in multi-project environments is the simultaneous integration points in or across projects, or the resource that is needed across projects at the same time. We exploit the constraint by removing resource contention (ensuring that a resource is not expected to perform two tasks at the same time). In multi-project environments, we exploit the constraint by staggering the project releases based on the synchronizer (which is the resource type used in all projects that is more heavily loaded) or integration points. We ensure subordination by having the non-critical tasks start late, and by using buffers and buffer management. In the multiproject environment, we also subordinate by using a capacity buffer for the drum resource. We elevate the constraint by identifying which resource area needs more capacity. Then, we offload tasks and/or hire more of that resource. When presenting the CCPM material, I begin by pointing out what the key problems in projects are. You could ask students to list them based on their experience. Then I ask if there might be a root cause or core conflict that leads to all these problems. I then point out that in a multi-project environment the root cause is the following conflict:

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Successfully manage all project work

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Ensure the organization addresses desirable business opportunities as soon as possible

Begin new projects as soon as possible

Ensure the organization meets the commitments of projects currently underway

Not begin new projects as soon as possible

Copyright Avraham Y. Goldratt Institute 1998 The evaporating cloud above is read as follows. In order to successfully manage all project work, we must ensure that the organization addresses the desirable business opportunities as soon as possible. In order to ensure the organization addresses desirable business opportunities as soon as possible, we must begin new projects as soon as possible. In order to successfully manage all project work, we must ensure the organization meets the commitments of projects currently underway. In order to ensure the organization meets the commitments of projects currently underway, we must not begin new projects as soon as possible. Beginning new projects as soon as possible and not beginning new projects as soon as possible is in direct conflict. Then, we discuss how this conflict leads to multitasking. The conflict related to the beginning of new projects leads to conflicting project priorities. These conflicting priorities lead to bad multitasking. Next, I discuss some of the key behavioral realities. I point out the major issues of the solution since there is not enough time to present all elements of the solution. The issues I define and give examples of are the additive rule, integration points, the skewed distribution of task times, and student syndrome. We then play the Bead Experiment to demonstrate the impact of multitasking. I clarify the need to use the critical chain and compare it to the critical path. I point out what the conflict is in a single project environment. It is shown in the following evaporating cloud:

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Do whatever it takes to fix an endangered original commitment

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Compensate for early (mis-)estimations or (mis-)considerations

Meet the project’s commitments (re: scope, budget, due date) Not jeopardize any other original commitment

Not compensate for early (mis-)estimations or (mis-)considerations

Copyright Avraham Y. Goldratt Institute 1998 Next, I briefly explain the five key elements of the solution. I demonstrate, using a simple example, how to find the critical chain, and insert the feeding buffer and the project buffer. I then briefly explain buffer management, and the performance measures to track and determine project status. Finally, I show a video to demonstrate a successful implementation of CCPM. I suggest showing a helpful video of a presentation given by executives at BAE Systems, a company that manufactures flight simulators, on successful CCPM implementation at a TOC World Conference in 2000. The video, which is labeled JSP9 and costs $100, can be obtained from the Avraham Y. Goldratt Institute at their web site (www.goldratt.com) or by calling (203) 624-9026. The video, which lasts one hour and 36 minutes, includes prerecorded video clips of managers explaining parts of the implementation. BAE uses the word “program” instead of the word “project.” It would be very helpful to show the video after the lecture since students will need to understand terminologies, such as buffer management, project buffer, feeding buffer, and synchronized critical chain schedule. The video briefly explains the phases of a CCPM implementation in a multiproject environment. As a result of the implementation, BAE saved $4 million, while reducing cycle time from two to four months.

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In class exercises This section includes the Bead Experiment that was discussed in the TOC Tips section and an in-class exercise for understanding how to use the traditional project scheduling method (CPM). I would like to thank Tony Rizzo for including this helpful experiment in this manual. Please note that the Bead Experiment includes beads for each project in the proportions of 40 oranges to 20 whites to 20 blacks. The Bead Experiment By Tony Rizzo To play the game, create teams of five people. The team performs two projects, called the red project and the blue project. The projects are identical, except for the fact that one has a red bowl and plates, and the other has a blue bowl and plates. (resource 1) sortsortsortsort-| | | (resource 2) |-processorangeprocessorange-| || | (resource 2) | |-processwhite---------------| || | (resource 3) | |-processblack---------------| | (resource 1) |-mixmixmixmixmix The first task requires that Resource 1 sort the contents of the bowl. The bowl contains glass beads of three colors: white, orange, and black. The beads (actually called gems) are flat on one side and round on the other side. The sorter uses a plastic spoon to move the beads from the bowl to each of three plates. Each plate ends up with beads of one color. Once all the beads are sorted and placed in their respective plates, the sorting task can be done, and the three successor tasks may be launched. Also, since most organizations today use a phase and gate model, I have the team complete the sorting task entirely, before any of the successor tasks can be launched. Think of the sorting as system engineering. The successor might be the detailed component design tasks.

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Once the sorting is done, Resource 2 gets the plates with the orange beads and the white beads. Only that resource can perform those two tasks. Skills are not interchangeable. In addition, this resource is a bottleneck, by design. Rizzo's policy is that the highest level manager in the group gets this assignment, always. Resource 3 gets the plate with the black beads. Upon receiving their plate of beads, Resources 2 and 3 begin the processing steps. The processing steps are: 1) spoon the beads onto the table (no pouring or flinging) 2) turn them all flat side down, using your fingers 3) turn them all again, flat side up 4) spoon them back into their respective plates, using only the spoon Only the spoon may be used. Flinging and pouring of the beads are not allowed. These are ISO-9000 violations. Once the beads are all in their respective plates again, Resource 1 gets the plates and mixes the beads, by spooning them back into the original bowl. Again, pouring and flinging are not allowed. When the beads are in the original bowl, the project is done. But, there's a catch. During the first experiment, the two projects are staggered only 20 seconds apart. After 20 seconds, the sorter must multitask and sort the beads of both the projects. The sorter is required to perform five operations on the red project and five operations on the blue project, until both sorting tasks are done. The resources that do the processing also must multitask, if they have any previous work. So, Resource 2 must perform five operations on the orange beads of the red project and five operations on the orange beads of the blue project, whenever he/she has beads from both the projects. When it's time to process the white beads, Resource 2 must again perform five operations on the white beads of the red project and five operations on the white beads of the blue project. The same holds true for every task and every resource. If a resource has work from only one project, then he/she need not multitask. If the resource has work from both projects, then he/she must multitask.

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They wouldn't want to multitask, because their common sense tells them not to do it. The purpose of the first bead experiment is to model the performance of a multitasking system. If they don't multitask during the first bead experiment, then you won't be able to make a comparison between the performance of a multitasking system and the performance of a non-multitasking system. Before letting them perform this experiment, ask them if multitasking is widespread in their organization. It's important that they think about the degree to which multitasking takes place, before they do the experiment. Most people will acknowledge that multitasking is a way of life for them and for their colleagues. When performing the experiment, first give the team as much time as needed, to learn all the steps. Then, make them perform the multitasking experiment. As they work, have a fourth person act as the project manager, whose function is to record the start time and the end time of each project. A fifth person acts as the resource manager. This person moves the work from resource to resource. He/she also announces the start and the end of each project. When the experiment is done, calculate the duration of each project, in seconds, not in minutes and seconds. Next, have the team perform the same projects, with the same beads, and with the same resource assignments as before, but without any multitasking. Give them instructions to work each task to completion, before moving to another task. This means that the projects are no longer staggered by a mere 20 seconds. Now, they are staggered more naturally, that is, the sorting of the blue project begins only when the sorting for the red project is completed. The same holds true for all other tasks. “No multitasking is the rule for the second experiment. When the non-multitasking experiment is done, calculate the duration of each project again, and compare these to the times obtained from the multitasking experiment. Then, let's have another discussion about multitasking. You can order beads, bowls, plates, and spoons from the following supplier, with which I have no financial ties: Entre Design (973) 581-1995. Ask for Joe Moran. Entre Design provides the kits that I use to teach the TOC MultiProject Management Method to Lucent managers. Yes, he'll want to be paid. His goal is to make money.

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Tony Rizzo, (908) 230-5348, tocguy@lucent.com (R) Replication notice; Tony Rizzo, 1999, (908) 230-5348. This article may be replicated freely, without written permission from the author, but only if the article is replicated in its entirety, including this notice. The article may be replicated in any intelligible form. Such forms include, but are not restricted to, hard copy publications that are either private, corporate, public, or governmental in nature. Such forms may also include electronic publications, such as Worldwide Web pages, electronic newsletters, and electronic mail. The article may also be translated into any language. Any such translations must include the complete article as well as this notice. Translations may include attributions for the translator(s). All translations must be made freely available for further unrestricted replication by others. I would like to thank Tony Rizzo for giving me permission to include the more recent version of the Bead Experiment in this manual. The following acrobat presentation includes directions for the experiment, which uses three projects instead of two. The following exercise takes approximately 60 minutes for the students to answer in class by forming teams (a shorter version took about 40 minutes). I give it out at the end of class, while allowing enough time, so that the students can leave as soon as they have completed the exercise. I give the students the option of working individually or in teams of up to five students. I hand out the background information as a separate copy. When I hand out copies of the exercise questions, I ask the students to take one copy per person and one copy per team. This way each student will have a copy of the assignment. I only require one copy per team be turned in for grading. While they are working on the exercise, I circulate through the room to provide help if needed. I do not give them the answers. To do the exercise, the students need to know how to draw an AON network, calculate all early and late times, find the critical path, and crash the network. It is helpful if the professor has demonstrated all of the steps, and has allowed time to practice each step in class when assistance can be provided before giving the exercise. To complete the exercise correctly, the student(s) must understand that it is beneficial to crash even if the only savings is the overhead costs, since the penalty cost will no longer be applicable. I also included a crossword puzzle for the project management concepts. The puzzle itself and the answers to the puzzle are Excel files. My students enjoy working the puzzle. I allowed them to use their books and notes to answer it. I also made it a fun competition by offering prizes for the first two people to finish it correctly. It takes at least 20 minutes to complete the puzzle. The first prize was a copy of the novel “Critical Chain” (which costs $20), while the second prize was a mouse pad with the university logo on it.

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PROJECT SCHEDULING EXERCISE

BACKGROUND INFORMATION

The purpose of this exercise is to discuss the situation facing a builder and help him determine how to schedule the rebuilding of a home. A builder specializes in moving homes from one site to another in the Midwest after the land that the home currently resides on was sold to an airport. The builder has asked for your help in determining how to schedule the project of rebuilding a home at the lowest total cost. This home is a one-story ranch home (about 2000 square feet) that is located in a small suburban town. The homeowner wants the home built in 60 days. The owner will charge you a penalty cost of $100 per day if it is not completed on time. The builder’s weekly overhead cost at a site is $350 per day. The following table relates information about the activities necessary for building the home. The crash cost and time differ from the normal cost and time due to the need to pay the subcontractor a bonus or overtime for finishing an activity quickly. This information can be used to determine which activity (if any) to crash and the amount of time to crash it. The crash time is the minimum time needed for that activity. However, an activity can be crashed to a time between the normal and crash times. For example, you could crash Activity F for one day only at a cost of $600, or two days for $1200. Activity A B C D E F G H I J K L M N O

Description Prepare land Obtain building permit Dig for footers and inspect Foundation Block inspection Framing, roofboards, and wallboards Roof shingling Windows and all doors Rough in plumbing, electric, heat and air conditioning Insulation Inspection of electric, etc. Sheet rock, texture ceilings Interior painting Install tub, sinks, and toilets Install cabinets, doors, and molding

Immediate Predecessor(s) None None A,B C D E

Normal Time 1 10 2 3 1 10

Cost 1800 200 1000 6000 0 37200

Crash Time 1 10 2 3 1 7

Cost 1800 200 1000 6000 0 39000

F G H

2 2 9

3500 7200 3700

1 1 6

4000 7625 4000

I I J, K L M M

3 1 9 2 2 7

3700 0 9600 2700 2800 12000

2 1 7 1 1 5

4000 0 10500 3200 3000 12750

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P Q R S T U

Counters, floor coverings Brick on outside of house Porch, patio, sidewalks, and garage floor Landscaping Blacktop driveway Final inspection

N, O H Q

3 7 3

6000 10000 4000

2 5 2

6500 11250 4375

R R P,R

3 0.5 1

3800 3000 0

2 0.5 1

4644 3000 0

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PROJECT SCHEDULING EXERCISE Please provide names and signatures (only for team members who are present today): NAME (Print) SIGNATURE 1. 2. 3. 4. 5.

1. Construct the activity-on-node (AON) network, using the normal activity times (horizontally on the back of this page) to represent this project. The chart must show all the early and late times for each activity.

2. What is the critical path? Can this project be completed on time using the normal activity times?

3. Which activities can currently be delayed without delaying the entire project? What are their corresponding slack times?

4. Decide how many weeks it will take to crash the project and explain how you would crash it. What is the net savings from crashing the project?

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PROJECT SCHEDULING EXERCISE: ANSWER KEY 1. Construct the activity-on-node (AON) network, using the normal activity times (horizontally on the back of this page) to represent this project. The chart must show all the early and late times for each activity. Please see the last page of this chapter of the manual for the network displaying the early and late times. 2. What is the critical path? Can this project be completed on time using the normal activity times? The critical path is B-C-D-E-F-G-H-I-J-L-M-O-P-U No, it can not be finished on time since this project will take 64 days using normal activity times. 3. Which activities can currently be delayed without delaying the entire project? What their corresponding slack times?

are

A – 9, Q – 21, R – 21, S – 21, T – 23.5, K – 2, N - 5 4. Decide how many weeks it would take to crash the project and explain how you would crash it. What is the net savings from crashing the project? 1) Crash activity I by 3 days: Costs $300 ($100 per day) Save: Penalties $100 × 3 days = $300 Overhead $350 × 3 days = $1050 2) Crash activity J by 1 day Costs $300 Save: Penalty $100 Overhead $350 Crash activity L by 2 days Costs $900 Save: Penalty $100 × 2 = $200 Overhead $350 × 2 = $700 Total savings overall after crash costs are paid: $1,200

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Project Management Crossword Puzzle ACROSS 2. We typically place __________ of the safety time removed in the buffer. 4. When we _________ a project, we shorten its duration time. 6. The probability of a __________ at an integration (assembly) point is calculated by subtracting from one the multiplication of the probabilities of on-time completion of the tasks feeding into it. 7. The longest sequence of tasks that are task and resource dependent. 9. Safety time placed at the end of the critical chain to protect it. 11. At integration (assembly) points in the network, the __________ delays are passed on. 12. The desired behavior of our resources when working on their tasks. 15. The behavior that causes the worst problems in projects in terms of lead time. 16. We determine the early times for the project activities by making a ____________ pass through the network.

DOWN 1. Safety time placed in locations where an activity or path feeds into the critical chain. 3. When an activity has several activities that it immediately precedes, we use the ______________ of their late start times to determine the late finish time of that activity. 5. The longest sequence of task dependent activities in terms of time. 8. The resource behavior that involves spending most of the time working on an activity right before it is due. 10. When several activities feed into another activity, we use the ______________ of their early finish times to determine the early start time of that activity. 13. We determine the late times for the project activities by making a ____________ pass through the network. 14. We _________ the release of project according to global project priorities in order to improve the lead times and promote appropriate resource behaviors.

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References Goldratt, E. M., Critical Chain, North River Press, 1997. Leach, L. P., Critical Chain Project Management, Artech House, Inc., Norwood, MA, 2000. Levinson, W. A. (ed.), Leading the Way to Competitive Excellence: The Harris Mountaintop Case Study, ASQ Quality Press, Milwaukee, WI, 1998. Newbold, R. C., “Project Management in the Fast Lane: Applying the Theory of Constraints,” St. Lucie Press, 2000. Weinraub, B., “As Problems Delay ‘Titanic,’ Hollywood Sighs in Relief,” New York Times, May 29, 1997. Welkos, R. W. and Puig, C., “Company Town; ‘Titanic’ Embarks on 6-Month Side Trip; Paramount and Fox push back release of costliest film ever--$200 million and counting—to December, an already crowded movie season,” The Los Angeles Times, May 28, 1997.

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Answer Key for Exercise ES=30 EF=37 LS=51 LF=58

ES=40 EF=43 LS=61 LF=64

ES=37 EF=40 LS=58 LF=61

ES=43 EF=43.5 LS=63.5 LF=64

S(3) Q(7)

R(3) T(0.5)

ES=0 EF=1 LS=9 LF=10

A(1)

ES=15 EF=16 LS=15 LF=16

ES=10 EF=12 LS=10 LF=12

ES=30 EF=39 LS=30 LF=39

ES=26 EF=28 LS=26 LF=28

G(2)

E(1)

ES=39 EF=42 LS=39 LF=42

J(3)

I(9)

ES=42 EF=51 LS=42 LF=51

ES=53 EF=55 LS=58 LF=60

L(9) N(2)

C(2) F(10)

H(2)

D(3)

M(2)

ES=12 EF=15 LS=12 LF=15

ES=16 EF=26 LS=16 LF=26

ES=28 EF=30 LS=28 LF=30

ES=39 EF=40 LS=41 LF=42

ES=51 EF=53 LS=51 LF=53

O(7)

ES=53 EF=60 LS=53 LF=60

16-30

ES=60 EF=63 LS=60 LF=63

P(3)

K(1)

B(10) ES=0 EF=10 LS=0 LF=10

ES=63 EF=64 LS=63 LF=64

U(1)

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Network diagram for RWBFC case

1 5

10 0

8 11 15 13 16 14

23 17

19 18 20 22

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Supplement D Master Scheduling and Rough-cut Capacity Planning Overview This chapter explains the role and organizational linkages of master production scheduling. The objectives of master production scheduling are presented. The procedure for developing a master production schedule (MPS) is explained. The MPS is then used to perform rough-cut capacity planning in order to find an authorized MPS. Finally, we learn about available-to-promise quantities and how to deal with changes in the MPS later in the process.

War Stories Is the MPS “Real”? (This story was told to me by a source that chooses to remain anonymous.) When I worked as a master production scheduler, I learned realities about the MPS that were not taught at the university. The reality is that an invalid MPS is one of the biggest problems in production. Sometimes the plan is overstated. For example, they actually produced 60% of the planned quantities, but did not have any stockouts. They knew the plan was overstated or not valid since safety was added everywhere in the process. They realized that they needed to prioritize work so they worked on the oldest orders first. They hoped to work on the right 60% of the MPS and move the right 40% forward in the schedule since it was not yet needed. This was important because their capacity was only enough to make 60% of the MPS! The due dates and ship dates differ, but the time between them can be compressed. The ship date is when the customer wants it. Since the due date is when they plan to finish it, the due date is influenced by hedging in terms of safety time. As a matter of fact, there is a consulting firm that helps the majority of its clients make their MPS valid so that they can evaluate the capacity against the real requirements. Corrected or "real" MPS plans still have some safety, but much less than before. For the invalid plans, they would typically plan for 100, but actually produce 60. For the corrected plans, they plan for 70 and actually produce 62. When the plan is "real," they can plan for a spike in demand by adding more equipment or by building inventory to prepare for the peak in demand. This was difficult to do before since they were not sure the spike was real. So what makes a "real" plan? We must rely on historical data concerning our capacity but push for the theoretical capacity available. The reality of the supply side is that the

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theoretical capacity may be 10,000, but the standard is 7,200 due to the time needed for setup and maintenance. The standard is what we strive for. However, the actual demonstrated capacity could be 6,500 due to machine breakdowns, quality problems and worker issues. The reality of the demand side is that everybody lies. Why? It is because they have been disappointed before. So, marketing, engineering, purchasing and production each include their hedges. Distribution does not have a hedge since they have no choice in the matter. They all know that production is like a funnel. It comes out of the small end slowly. They think that if they keep pouring more work into the funnel that it will actually come out more quickly. The exact opposite is true in reality. The more WIP (work-in-process inventory) there is in the system, the longer the queues. And queuing time can be a significant portion of the total lead time, if not the majority. We need to use a valid plan that does not include hedging. When I filled in for a production manager for six months, I was concerned about our ability to make the schedule. I knew we had five production lines with 10 jobs scheduled for that day that each took a day to process. The supervisor told me not to worry. As it turns out, five of the jobs dropped out of the schedule for various reasons, such as raw material quality problems, specification problems or design problems. So it did work out. But it was difficult to know which work was critical since we were not using a valid plan.

Answers to Discussion Questions 1. Visit a local business and learn how it calculates its resources. The answer to this question depends on the location of the university. 2. Describe the inputs needed to do master production scheduling. To create the MPS, we need the aggregate production plan, beginning inventory levels, and the capacity required for each of our products on each resource. 3. Describe the different sources of demand. The different sources of demand are customer orders, a forecast of demand, interplant requirements, service part requirements and distribution requirements. 4. Discuss the objectives of the master scheduler and how they influence master scheduling decisions.

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The objectives of the master scheduler are as follows: • • •

Achieve the desired level of customer service. Effectively utilize the resources of materials, labor and equipment. Ensure that inventory is at an appropriate level in terms of investment.

These objectives influence the master scheduling decisions in terms of how the demand is satisfied and how capacity is dealt with. 5. Explain the process of developing an authorized MPS. First, we develop a proposed MPS. Then, we use rough-cut capacity planning to determine if we have enough capacity to meet the MPS. If there is not enough capacity, we create an MPS that is feasible in terms of capacity. If there is enough capacity, then the MPS is evaluated in terms of its impact on customer service, its use of resources and inventory investment. If it meets our criteria, then it becomes an authorized MPS. 6. Explain the importance of rough-cut capacity planning in the MPS process. Rough-cut capacity planning is important because if we do not ensure there is enough capacity for the MPS, then we may have an infeasible MPS. If the MPS were infeasible, we would start experiencing problems on the plant floor. Specifically, items would be finished late, which could cause us to start expediting. 7. Describe the role of time fence policies. Time fence policies stabilize the MPS. The MPS is divided by the two time fences of demand and planning that cause the MPS to consist of frozen, slushy and liquid zones. The demand time fence separates the frozen and slushy times zones, while the planning fence separates the slushy and liquid time zones. These zones have varying rules regarding the frequency and authorization for making changes. 8. Explain the changes you can make in the frozen portion of the MPS and who must authorize such changes. In the frozen portion of the MPS, you can make infrequent changes that must be authorized by a manager who is responsible for the release of resources to operations. Changes made in this portion could jeopardize existing customer orders.

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9. Explain the changes you can make in the slushy portion of the MPS and who authorizes such changes. In the slushy portion of the MPS, we can make changes in the product mix, but not changes that need additional resources. The master scheduler authorizes such changes. 10. Discuss how the MPS might be used in a service organization. First we need to identify our resources in terms of people of various skill levels and equipment. Next, we decide how to use our resources. To do so, we analyze the demands of our various services and then allocate resources to them. Finally, we make sure that we have developed a schedule that uses our available resources to meet our objectives. For example, a hospital knows how many surgeries are scheduled (demand) and how many of each type of medical staff are available (resources). We also know how many operating rooms are available and how much of each type of surgical equipment is available. Then, we schedule the operating rooms and staff accordingly. We would also leave some time available in the schedule for emergency surgeries.

Answers to Case – Newmarket International Manufacturing (B) 1. Joe now needs a rough-cut capacity check to determine whether the capacity at each work center is adequate to support the expected demand. Using the forecasted demand as your proposed master schedule, calculate the load profile for each work center for each week of the second quarter. Highlight any weeks in which problems might occur. Week 14 15 16 17 18 19 20 21 22 23 24 25 26

Work Center 1 876 915 942 927 936 936 900 888 870 894 870 840 858

Work Center 2 680 720 744 742 750 750 724 708 708 718 718 702 728

Work Center 3 744 860 938 988 1014 1014 1000 962 920 896 840 760 732

Work Center 4 664 710 740 742 752 752 728 712 700 708 692 664 676

Total 2964 3205 3364 3399 3452 3452 3352 3270 3198 3216 3120 2966 2994 D-4

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Since the capacity of work center 1 is 920 hours, we will not have enough capacity in weeks 16, 17, 18 and 19. Since the capacity of work center 2 is 740 hours, we will not have enough capacity in weeks 16, 17, 18 and 19. For work center 3, we will not have enough capacity during the weeks of 16 to 21 because the effective capacity is 920 hours. Since the capacity of work center 4 is 725 hours, we will not have enough capacity in weeks 16 through 20. It is clear that our plan does not compensate for the peaks in demand in the first part of this quarter. 2. Joe knows from past experience that he has some flexibility in his workforce. Therefore as long as the total capacity needed does not exceed the total available, the master schedule should be feasible. He also knows that he can increase his capacity total an additional 2.5% through extra overtime and still be within his budget. Given this new information, what recommendations do you have for Joe? What weeks are likely to be problems, and how should he use the capacity in those weeks? How important to NIMCO is it to have a flexible workforce? The total hours available in all work centers is 3305. With the additional 2.5%, the available hours increase to 3387. This is enough capacity to produce all products except during weeks 17, 18 and 19. In the other weeks, this extra capacity, along with the flexibility of workers, would allow us to compensate for the capacity shortages in the work centers. During week 16, overtime will give us enough capacity in each work center, except for work center 3. During week 20, overtime will give us enough capacity in work center 4, but not enough in work center 3. Work center 3 will also not have enough capacity even with overtime in week 21. Therefore, we need the ability to shift workers from other work center(s) to work center 3 during its peak demand times. It is critical for NIMCO to have a flexible workforce.

In Class Exercises MPS The following exercise takes approximately 40 minutes for the students to answer in class in teams. This exercise is a continuation of the exercise from the last chapter. I give it out at the end of class, while allowing enough time, so that students can leave as soon as they have completed the exercise. I give the students the option of working individually or in teams of up to five students. When I hand out copies of the exercise questions, I ask the students to take one copy per person and one copy per team. This way each student will have a copy of the assignment. I only require one copy per team be turned in to me for

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grading. The last question in the exercise addresses TOC issues. It translates the concept of product mix decisions into a service environment. Please see the TOC Tips section and in-class exercise of chapter 3 of this manual for a discussion on product mix decisions.

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MPS EXERCISE

HAND IN ONE CLEAN COPY

Please provide names and signatures only for team members who are present today: NAME (Print) SIGNATURE 1. 2. 3. 4. 5. The purpose of this exercise is to discuss the situation facing the manager and determine the master production schedule based on the information given. Janice is in charge of scheduling the operating rooms (OR) at Community Hospital. Not all types of surgeries can be performed in the same operating room because of necessary equipment and environment. For example, cardiac surgeries must be performed in a sterile OR. She has collected information on the four types of surgeries performed in two OR’s. Table 1 provides data regarding the time, revenues and hospital staffing needs. Surgeons and anesthesiologists are needed in the OR as well; however, they are not on staff at the hospital. Surgeons only operate during the hours of 7 a.m. to 4 p.m. on weekdays. Table 2 provides data on the elective surgeries that need to be scheduled for the next three weeks. Janice understands that the only surgery that can be put on back order by the hospital is a vasectomy. In addition, if the patient develops an upper respiratory infection prior to surgery, then surgery must be canceled if that patient is scheduled for a gall bladder or ENT surgery. Nurses earn $25 an hour, while surgical technicians earn $50 an hour. Hospital policy requires booking as many elective surgeries in the OR as possible. If emergencies arise, the elective surgeries need to be rescheduled. Table 1 Type of surgery

Time required

Appendectomy

60 min.

Revenue per surgery $5,000

Gall bladder surgery Ear, Nose and Throat (ENT) surgery Vasectomy

30 – 45 min.

$5,000

Nurse and Surgical technician Nurse

30 – 60 min.

$3,500

Nurse

30 min.

$2,000

None

Staffing needs

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Table 2 Appendectomy Gall bladder surgery ENT surgery Vasectomy

Week 1 24 10 40 40

Week 2 20 10 16 30

Week 3 35 4 20 25

1. Develop a proposed MPS.

2. Determine if the hospital has enough capacity available to meet the MPS. If it is not feasible, prepare a feasible MPS.

3. Evaluate the MPS.

4. The constraint is OR time. Which surgeries do we prefer in terms of their impact on our throughput?

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MPS Exercise Answer Key 1. Develop a proposed MPS. The proposed MPS involves scheduling the surgeries based on demand. 2. Determine if the hospital has enough capacity available to meet the MPS. If it is not feasible, prepare a feasible MPS. The proposed MPS is not feasible since it requires 91.5 hours of OR time in the first week when the surgeons will only work 90 hours a week (45 hours each OR). Since we can use back orders for vasectomies, we should postpone three of them from the first week until the second week. This new MPS is now feasible. 3. Evaluate the MPS. The MPS does not meet the customer requirements since some surgeries were put on back order. This MPS may not have enough flexibility to deal with emergency surgeries, particularly during week 1. We may want to consider delaying more of the vasectomies until week 2 to prepare for potential emergencies. We have enough resources to meet the MPS. 4. The constraint is OR time. Which surgeries do we prefer in terms of their impact on our throughput? Throughput is revenue less variable costs. We calculate the throughput per constraint minute using the maximum surgery time since we need to schedule the OR for that time even if it is not used. Appendectomy Gall bladder surgery ENT surgery Vasectomy

($5,000 - $25 - $50)/60 = $82.08 ($5000 - $25)/45 = $110.56 ($3,500 - $25)/60 = $57.90 $2,000/30 = $66.67

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References Spencer, M. S. and Cox III, J. F., “Master Production Scheduling Development in a Theory of Constraints Environment,” Production and Inventory Management Journal, First Qtr., 1995, 8 – 14.

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