1-1 IE 3265 Production & Operations Management R. R. Lindeke, Ph.D. Spring 2006 Lecture Set 1.
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Transcript of 1-1 IE 3265 Production & Operations Management R. R. Lindeke, Ph.D. Spring 2006 Lecture Set 1.
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IE 3265 Production & Operations Management
R. R. Lindeke, Ph.D.Spring 2006Lecture Set 1
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Pre-Quiz – Terms Simplex JIT CMS Kanban EUAC NPW MRP ATCF/BTCF
MARR SMED Poka-Yoka Exponential
Smoothing Winter’s Method APR Bullwhip Effect Functional Silo
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Pre-Quiz Terms, cont IRR ROI EOQ Push Control Pull Control 6-sigma Johnson’s Rule Bottleneck
Queing Markov Chain Transportation
Model Duality Complementary
Slackness Breakeven
Analysis
1-4
Career Goals?
Manufacturing? Services Industry? Management of Operations And Then Where?
1-5Topic Areas in Operations Management
Forecasting Aggregate Planning Inventory Control: Deterministic Environments Inventory Control: Stochastic Environments Supply Chain Management Production Control Systems: MRP and JIT Operations Scheduling Project Scheduling Facilities Planning Quality and Assurance Maintenance and Reliability
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Operations
Finance
Marketing
Functional Areas of the Firm
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Strategic Time Horizons
1. Long Term Decisions Locating and Sizing New Facilities Finding New Markets for Products Mission Statement: meeting quality
objectives
2. Intermediate Term Decisions Forecasting Product Demand Determining Manpower Needs Setting Channels of Distribution Equipment Purchases and Maintenance
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Strategic Time Horizons – Short Term
3. Short Term Decisions Purchasing Shift Scheduling Inventory Control
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The Elements of StrategyTime Horizon Short Term Intermediate Long Term
Evaluation Cost Quality Profitability Customer satisfaction
Focus Process Technology Market Issues Volume Quality Tasks
Consistency Professionalism Proliferation Changes in the task Explicit goals
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History of POM Major Thrust of the Industrial Revolution
1850-1890. Factories tended to be small. Boss had total
control. Little regard for workers safety or workers rights.
Production Manager Position. 1890-1920. Frederick Taylor champions the idea of
“scientific management”. As complexity grows specializations take
hold Inventory Control Manager Purchasing Manager Scheduling Supervisor Quality Control Manager etc.
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Global Competition
Global competition is heating up to an unprecedented degree. It appears that several factors favor the success of some industries in some countries, For example:
Germany: printing presses, luxury cars, chemicals Switzerland: pharmaceuticals, chocolate Sweden: heavy trucks, mining equipment United States: personal computers, software,
entertainment Japan: automobiles, consumer electronics
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Porter’s Thesis Management guru Michael Porter, has
developed a theory to explain the determinants of national competitive advantage, including:
Factor Conditions (Land, Labor,Capital, etc.) Demand Conditions (local marketplace may be more
sophisticated/demanding than world marketplace) Related and Supporting Industries Firm Strategy, structure, rivalry
(e.g.: Germans are strong technically, Italian family structure, Japanese management methods)
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Time-Based Competition Time-based competitors focus on the
entire value-delivery system. They attempt to transform an entire
organization into one focused control of the total time required to deliver a product or service.
Their goal is not to devise the best way to perform a task, but to either eliminate the task altogether or perform it in parallel with other tasks so that over-all system response time is reduced.
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Time-Based Competition Focus on the bigger picture,
continued “Becoming a time-based competitor
requires making revolutionary changes in the ways that processes are organized” (Blackburn 1991).
Being not only the first to market but the first to volume production as well gives a firm a decided advantage. See Table on p. 22 of text looking into DRAM products.
1-15How Do Firms Differentiate Themselves from Competitors?
Low Cost Leaders: WalMart and Costco in Retailing Korean automakers (Hyundai, Kia, etc.) e-machines in personal computers
High Quality (and price) Leaders. Ex: Mercedes Benz automobiles Rolex Watches
Some firms do both: (Chevrolet and Cadillac at GM)
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Business Process Re-engineering*
The process of taking a cold hard look at the way that things are done
Classic Example: IBM Credit Corporation. The process had been broken down to a series of multiple steps, each having substantial delays
Approval required from 6 days to 2 weeks.
*Hammer and Champy, 1993
1-17Business Process Re-engineering
The process was re-engineered so that a single specialist would handle a request from beginning to end.
The result was that turnaround time was slashed to an average of 4 hours!
1-18Along What Other Dimensions Do Firms Compete?
Delivery Speed, Delivery Reliability Federal Express, United Parcel Service
Flexibility Toyota: provides many models to various
market groups Service
Nordstrom bases its reputation on providing a high quality of service to customers
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Just-In-Time or LEAN Manufacturing
LEAN Mfg. is a production control system that grew out of Toyota’s kanban system.
It is a philosophy of production control that attempts to reduce inventories to an absolute minimum and eliminate waste in any of its forms.
It has become pretty much a standard way of thinking in many industries (especially automotive.)
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I Hate to say it BUT! We still are driven by profitability The ideas of Competitiveness and LEAN
Mfg. need to be balanced against Quality results in Production
We find (in a Capitalist economy) that these competing(?) demands often can increase profitability if we let the factory move toward them not first to volume production – the first to
rational volume production is key!
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An example from Engineering Economy – Machine Replacement analysis – After Tax Basis
Current Equipment “The Defender” (purchased a few years ago before Company started rational Quality Management system and JIT system) Design Capacity: 310 molds/hr (620
parts/hr) Part Tolerance: 0.030” across parting line Average Quality: 2.9% defectives Average Maintenance: $12000/yr
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Machine Replacement analysis – After Tax Basis When purchased, average “Lot Size” was
7500 molds and pattern change took 45 minutes
Currently, production lot size has fallen to 375 molds (and without significant investment) pattern change is still 45 minutes Indicates 375/310 = 1.25 hr/pattern ‘run’ or 375
molds every 2 hours (with pattern change time) Real Production rate is: 188 molds/hr (375
parts/hr)! (the horrors of JIT!)
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Machine Replacement analysis – After Tax Basis
Quality/Maintenance “Downtime” consume 1 hour/shift The plant operates two 10 hour shifts (20
planned hours) but with downtime actual productive time is 18
productive hours/day on this machine Good Castings/day = 375*.971*18 = 6555
(1,645,300/251day-year) Scrap Castings/day = 375*.029*18 = 195
(48945/251day-year)
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Quality Costs Are Like Icebergs! Sometimes Only 10% Are Visible The Rest Sink The Ship!
Visible Costs: Scrap Rework Warranty Claims
Hidden Costs: Eng/Mgt Time Downtime Increased Inventory Decreased Capacity Customer
Dissatisfaction Lose of Market Share
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Quality Cost Issues: Eng/Mgt time: = 20400
8 hr/wk*51wks/yr@$50/hr Inspect time: = 63750
50hr/wk *51wk/yr@$25/hr Warranty Claims 85@$200 = 17000 “Goodwill Costs” = 8000
Total These Costs $109150
Machine Replacement analysis – After Tax Basis
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Machine Replacement analysis – After Tax Basis
“Product Issues” Prod Costs (labor/mat’l/etc.) = 7.00 Avg. Sale Price = 8.00 NOTE: in most JIT (LEAN) systems cost must drop 5
to 10% annually to customer!!!! Annual Income Defender (Rev – Costs)
Costs: Pr. Cost (All Castings) + Qual. Costs + Maint. Costs
7*(1645300 + 48945) + 109150 + 12000 = $11,980,865 Revenue:
Price * # Good Parts = 8*1645300 = $13,162,400 Income: 13,162,400 - $ 11,980,865 = $1,181,535
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Machine Replacement analysis – After Tax Basis
Challenger Equipment Design Capacity: 235 molds/hr (470 parts/hr) Part Tolerance: +0.010” across parting line Average Quality: 0.5% defectives Average Maintenance: $8500/yr
This machine has ‘built-in’ quick change pattern technology so change is about 5 minutes (0.083 hours) 750 parts takes (1.6 hrs + 0.083hr) = 1.68 hrs on
this unit This machine has an effect production rate of:
445 parts/hour
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Machine Replacement analysis – After Tax Basis Company does Preventative Maintenance so
this machine works 20 hr/day # Good Castings: 445*20*.995 = 8855*251=
2,222,730/yr # Scrap Castings: 445*20*.005 = 44*251 =
11170/yr Quality Costs:
Eng/Mgt time: NONE! Insp. Time (spot Check) 5hr/wk*51 = $6375 Warranty Costs 5/yr@$125 = $625 Goodwill Costs NONE!
Total Q. Costs: =$7000
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Machine Replacement analysis – After Tax Basis
Product Issues: Production Costs: $7.10 Avg Selling Price: $8.15
(higher due to improved tolerances but will have to achieve continuing 5 – 10% reduction annually)
Annual Income Challenger (Rev – Costs) Costs:
Pr. Cost (All Castings) + Qual. Costs + Maint. Costs7.1*(2222730 + 11170) + 7000 + 8000 = $15,875,690
Revenue: Price * #Good Parts = 8.15*2222730 = $18,115,250
Income = $18,115,250 - $15,875,690 = $2,239,560
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Machine Replacement analysis –Depreciation Issues
Defender (7yr MACRS asset now 3 yrs old) Initial Cost: $1.5 Million Present Mkt. Value: $650,000 Pr. Book Value (1.25M – (.143 + .245
+.175)*1.25M) : $546,250 Salvage Value (5 yrs): $220,000
Challenger (7yr MACRS asset) Initial Cost: $1 Million Salvage Value (5 yrs): $425,000
1-31Machine Replacement analysis – After Tax Basis – Depreciation Schedule
YR % Red. Chal. Depr.
1 .143 143000
2 .245 245000
3 .175 Def. Depr. 175000
4 .125 156250 125000
5 .089 111250 89000
6 .089 111250 Bk Value after 5 years:
7 .089 111250 223000 (Chal)
8 .045 56250 0 (def.)
1-32Machine Replacement analysis – After Tax Basis: 38% C. Tax rate, 12% MARR
Potential Cap. Gain not taken by keeping Defender
Saving in Income Tax Burden for not getting Cap. Gain of Selling Defender at > Bk Value
Long Term Cap. Gain -- Taken
1-33Machine Replacement analysis – After Tax Basis: 38% C. Tax rate, 12% MARR
Long Term Cap. Gain Taken {since salvage value ($425K) exceeds Bk. Value ($223K)}
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Defender “Followup” You’re the Engineer – think about
what to do? Q 1 (homework): How much can
this company spend to add ‘Quick-Change’ technology to existing machine?
Q2 (homework): Just by ‘Fixing’ Quality Issues, could the defender be kept? Show why or why not.