Production and Operations Mangement- Chapter 1-8

Reid & Sanders, Operations Management© Wiley 2002

Introduction to Operations Management 1

C H A P T E R


OM Defined

Operations management:

The business function responsible for planning, coordinating, and controlling the resources needed to produce a company’s products and services


Simplified Organizational Chart


Information Flows


Information FlowsTo & From Operations


The Role of OM in the Business


Value Added Defined

Inputs in $$Transformation

ProcessOutputs in $$$

Value Added by Process


Service - Manufacturing

Services:• Intangible product• No inventories• High customer

contact• Short response time• Labor intensive

Manufacturing:• Tangible product• Can be inventoried• Low customer

contact• Capital intensive• Long response time


Service-Manufacturing Continuum


OM Decisions

• Strategic decisions:– Decisions that set the direction for the

entire company.– Broad in scope & long-term in nature

• Tactical decisions:– Short-term & specific in nature– Bound by the strategic decisions


Example


Major Historical Developments

Industrial Revolution Late 1700sScientific Management Early 1900sHuman Relations Movement 1930s to 1960sManagement Science Mid-1900sComputer Age 1970sJust-In-Time Systems 1980sTotal Quality Management (TQM) 1980sReengineering 1980sFlexibility 1990sTime-based Competition 1990sSupply Chain Management 1990sGlobal Competition 1990sEnvironmental Issues 1990sElectronic Commerce Late 1990s – Early 21st Century


Industrial Revolution Late 1700s

• Replaced traditional craft methods

• Substituted machine power for labor

• Major contributions:– James Watt (1764): steam engine– Adam Smith (1776): division of labor– Eli Whitney (1790): interchangeable parts


Scientific ManagementEarly 1900s

• Separated ‘planning’ from ‘doing’

• Management’s job was to discover worker’s physical limits through measurement, analysis & observation

• Major contributors:– Fredrick Taylor: stopwatch time studies– Henry Ford: moving assembly line


Human Relations Movement1930s to 1960s

• Recognition that factors other than money contribute to worker productivity

• Major contributions:– Understanding of the Hawthorn effect:

Study of Western Electric plant in Hawthorn, Illinois intended to study impact of environmental factors (light & heat) on productivity, but found workers responded to management’s attention regardless of environmental changes

– Job enlargement– Job enrichment


Management ScienceMid-1900s

• Developed new quantitative techniques for common OM problems:– Major contributions include: inventory

modeling, linear programming, project management, forecasting, statistical sampling, & quality control techniques

– Played a large role in supporting American military operations during World War II


Computer Age1970s

• Provided the tool necessary to support the widespread use of Management Science’s quantitative techniques – the ability to process huge amounts of data quickly & relatively cheaply

• Major contributions include the development of Material Requirements Planning (MRP) systems for production control


Developments: 1980sJapanese Influence

• Just-In-Time (JIT):– Techniques designed to achieve high-volume

production using coordinated material flows, continuous improvement, & elimination of waste

• Total Quality Management (TQM):– Techniques designed to achieve high levels of

product quality through shared responsibility & by eliminating the root causes of product defects

• Business Process Reengineering:– ‘Clean sheet’ redesign of work processes to

increase efficiency, improve quality & reduce costs


Developments: 1990s

• Flexibility:– Offer a greater variety of product choices on a

mass scale (mass customization)

• Time-based competition:– Developing new product designs & delivering

customer orders more quickly than competitors

• Supply Chain Management– Cooperating with suppliers & customers to reduce

overall costs of the supply chain & increase responsiveness to customers


Developments: 1990s

• Global competition:– International trade agreements open new markets for

expansion & lower barriers to the entry of foreign competitors (e.g.: NAFTA & GATT)

– Creates the need for decision-making tools for facility location, compliance with with local regulations, tailoring product offerings to local tastes, managing distribution networks, …

• Environmental issues:– Pressure from consumers & regulators to reduce, reuse

& recycle solid wastes & discharges to air & water


Electronic Commerce

• Internet & related technologies enable new methods of business transactions:– E-tailing creates a new outlet for retail goods &

services with global access and 24-7 availability– Internet provides a cheap network for coordinating

supply chain management information

• Developing influence of broadband & wireless


Operations Strategy & Competitiveness 2

C H A P T E R


The Role of Business Strategy

• Business Strategy:– The firm’s long-range plan based on an

understanding of the marketplace– Defines how a company intends to

differentiate itself from competitors– Individual employees & functional units use

the strategy to align their efforts with each other to accomplish the overall game plan


Operations Strategy

• OM Strategy:– The long-range plan for the design & use of the

operations function to support the overall business strategy:

• The location, size, & type of facilities• The worker skills & talents required• The technology & processes to be used• How product & service quality will be controlled

– Operating efficiency an operating strategy


Developing aBusiness Strategy

• Mission:– A statement defining what business the firm is in, who its

customers are, & how its core beliefs shape its decision-making

• Environmental scanning:– Monitoring the external environment for market opportunities

& competitive threats

• Core competencies:– Internal strengths & weaknesses of the firm (e.g.: personnel

with special expertise, access to unique technology, & things the firm does better than competitors)


Putting it all Together

Business Strategy:Defined long-range plan

for the company

Environmental Scanning:Monitoring the

business environment for market trends,

threats, and opportunities

Mission:Statement that defines What our business is; Who our clients are; and How our values define our business

Core Competencies:Our unique strengths that help us win in the

marketplace


Developing an Operations Strategy

• Identify the competitive priorities required to support the business strategy:

• Common priorities include: – Cost: low production costs enables the company to price its

product below competitors– Quality: higher performance or a more consistent product

can support a price premium– Time: faster delivery or consistent on-time delivery can

support a price premium– Flexibility: highly customized products or volume flexibility

can support a price premium


Translate Priorities into Design

Business Strategy

Operations Strategy:Based on Competitive Priorities

Design of Operations:Structure & Infrastructure


Design of Operations

• Structure:– Facilities– Flow of work– Technology

• Infrastructure:– Planning & control systems– Work design & compensation


Competing on Low Cost

• Eliminate wasted labor, materials, and facilities

• Emphasize efficient processes & high productivity

• Often limit the product range & offer little customization

• May invest in automation to increase productivity


Competing on Quality

• High performance design:– Superior features, high durability, &

excellent customer service

• Product & service consistency:– Error free delivery– Close tolerances


Competing on Time

• Rapid delivery:– How quickly an order is received after the

order is placed

• On-time delivery:– Sometimes items can arrive too quickly

• JIT firms try to avoid clutter of excess inventory

– Ability to deliver exactly when expected• Not too early or too late


Competing on Flexibility

• Product flexibility:– Easily switch the production process from

one item to another (substitution)– Easily customize output to meet the

specific requirements of a customer

• Volume flexibility:– Rapidly increase or decrease the amount

of product being produced to match demand


Understand TradeoffsExample: Made-to-Order Pizza

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Distinguish Order Qualifiers from Order Winners

• Order Qualifiers:– Competitive priorities that a product must meet to

even be considered for purchase– Generally, represented by features shared by all

competitors in a given market niche

• Order Winners:– Competitive priorities that distinguish the firm’s

offerings from competitors & ultimately win the customer’s order


Productivity

Inputs

OutputsP


Productivity Measures

• Partial Measures:– A ratio of outputs to only one input (e.g.: labor

productivity, machine utilization, energy efficiency)

• Multifactor Measures:– A ratio of outputs to several, but not all, inputs

• Total Productivity Measures:– The ratio of outputs to all inputs


Labor Productivity

Example: – Assume two workers paint twenty-four tables in

eight hours:– Inputs: 16 hours of labor (2 workers x 8 hours)– Outputs: 24 painted tables

hourtableshours

tables

Inputs

Outputs/5.1

16

24


Multifactor Productivity

• Convert all inputs & outputs to $ value• Example:

– 200 units produced sell for $12.00 each– Materials cost $6.50 per unit– 40 hours of labor were required at $10 an hour

41.11700$

2400$

/10$40/50.6$200

/12$200

hourhoursunitunits

unitunits


Interpreting Productivity Measures

• Is the productivity measure of 1.41 in the previous example good or bad?

• Can’t tell without a reference point

• Compare to previous measures (e.g.: last week) or to another benchmark


Productivity Growth Rate

• Can be used to compare a process’ productivity at a given time (P2) to the same process’ productivity at an earlier time (P1)

1

12

P

PPRateGrowth


Productivity Growth Rate

Example:– Last week a company produced 150 units using 200 hours of labor

– This week, the same company produced 180 units using 250 hours of labor

rategrowthnegativeaor

P

PPRateGrowth

hourunitshours

unitsP

hourunitshours

unitsP

%4

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75.072.0

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1

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1


Product Design & Process Selection 3

C H A P T E R


Product & Service Design

• The process of deciding on the unique characteristics of a company’s product & service offerings

• Serves to define a company’s customer base, image, competition and future growth


Products versus Services

• Products:– Tangible offerings– Dimensions, materials, tolerances &

performance standards

• Services:– Intangible offerings– Physical elements + sensory, esthetic, &

psychological benefits


Strategic Importance

• Products & service offerings must support the company’s business strategy by satisfying the target customers’ needs & preferences

• If not, the company will lose its customer base and its market position will erode


Step–by-Step

• Idea Development:– A need is identified & a product idea to satisfy it

is put together

• Product Screening:– Initial ideas are evaluated for difficulty &

likelihood of success

• Preliminary Design & Testing– Market testing & prototype development

• Final Design– Product & service characteristics are set


Idea Development

• Existing & target customers– Customer surveys & focus groups

• Benchmarking– Studying “best in class” companies from your

industry or others and comparing their practices & performance to your own

• Reverse engineering– Disassembling a competitor’s product & analyzing

its design characteristics & how it was made

• Suppliers, employees and technical advances


Product Screening

• Operations: – Are production requirements consistent with

existing capacity?– Are the necessary labor skills & raw materials

available?

• Marketing:– How large is the market niche?– What is the long-term potential for the product?

• Finance:– What is the expected return on investment?


Preliminary Design & Testing

• General performance characteristics are translated into technical specifications

• Prototypes are built & tested (maybe offered for sale on a small scale)

• Bugs are worked out & designs are refined


Final Design

• Specifications are set & then used to:– Develop processing and service delivery

instructions– Guide equipment selection– Outline jobs to be performed– Negotiate contracts with suppliers and

distributors


Break-Even Analysis


Break-Even Analysis

• Total cost = fixed costs + variable costs (quantity):

• Revenue = selling price (quantity)

• Break-even point is where total costs = revenue:

QVCFTC

QSPR

VCSP

FQor

QSPQVCForRTC


Example

• A firm estimates that the fixed cost of producing a line of footwear is $52,000 with a $9 variable cost for each pair produced. They want to know:– If each pair sells for $25, how many pairs

must they sell to break-even?– If they sell 4000 pairs at $25 each, how

much money will they make?


Example Solved

• Break-even point:

• Profit = total revenue – total costs

pairsVCSP

FQ 3250

9$25$

000,52$

000,12$

40009$000,52$400025$

QVCFQSPP


Design for Manufacture (DFM)

• Guidelines:– Minimize the number of parts– Use common or standardized parts– Use modular design– Avoid the need for tools (e.g.: snap

together components)– Simplify operations


DFM Example


DFM Benefits

• Lower costs:– Lower inventories (fewer, standardized

components)– Less labor required (simpler flows, easier

tasks)

• Higher quality:– Simple, easy-to-make products means

fewer opportunities to make mistakes


Product Life Cycle


Concurrent Engineering

• A design approach that uses multifunctional teams to simultaneously design the product & process

• Replaces a traditional ‘over-the-wall’ approach where one group does their part & then hands off the design to the next group


Sequential Design


Concurrent Engineering


Concurrent Engineering Benefits

• Representatives from the different groups can better consider trade-offs in cost & design choices as each decision is being made

• Development time is reduced due to less rework (traditionally, groups would argue with earlier decisions & try to get them changed)

• Emphasis is on problem-solving (not placing blame on the ‘other group’ for mistakes)


Process Selection

• Intermittent operations:– Capable of producing a large variety of

product designs in relatively low volumes

• Continuous operations:– Capable of producing one (or a few)

standardized designs in very high volumes


Intermittent versus Continuous

Decision Intermittent Operation Continuous Operation

Product variety Great Small

Degree of standardization Low High

Organization of resources Grouped by Function Line flow

Path of products Varied, depends on product Line flow

Factor driving production Customer orders Forecast of demand

Critical resource Labor Capital

Type of equipment General purpose Specialized

Degree of automation Low High

Throughput time Longer Shorter

Work-in-process inventory More Less


Intermittent Operations

• Pros:– Very flexible

• Cons:– Material handling & variable costs are high – Work scheduling is difficult


Continuous Operations

• Pros – Highly efficient to produce large volumes

(low variable costs)

• Cons– Inflexible to design changes – Susceptible to component failure– High fixed costs for capital equipment


Continuum of Process Types

• Projects– Used for one-at-a-time products made exactly to customer

specifications

• Batch processes:– Used for small quantities (batches) with a high level of

customization

• Line processes:– Used for relatively high volumes with little customization

• Continuous processes:– Used for very high volume standardized products (often

commodities)


Continuum of Process Types


Vertical Integration

• How much of the supply chain is owned by a company? – A supply chain is the series of linked

activities from raw material extraction to the final customer (Chapter 4)

• Consider the direction of integration:– Forward (toward customers)– Backward (toward suppliers)


Make-or-Buy

• Outsourcing decisions should consider:– Long-term strategic impact– Existing capacity available– Expertise required & available– Quality issues– Ramp up speed & delivery issues– Total costs


Process Flowcharting

• Graphically defines the operation, step-by-step

• Used to help visualize the flow of work & information:– Can help identify potential problem areas– Format can be as simple or detailed as

needed


Example


Process Technology

• Automation• Automated Material Handling:

– Automated guided vehicles (AGV)– Automated storage & retrieval systems (AS/RS)

• Computer-Aided Design (CAD) software • Robotics & Numerically-Controlled (NC)

equipment• Flexible Manufacturing Systems (FMS)• Computer-Integrated Manufacturing (CIM)


Supply Chain Management 4C H A P T E R


What is a Supply Chain?

• A network of activities that deliver a finished product or service to the customer.– The connected links of external suppliers,

internal processes, and external distributors.


Components of a Typical Supply Chain

ExternalSuppliers

InternalFunctions

ExternalDistributors

INFORMATION


A Basic Supply Chain


Supply Chain Management

• Supply Chain Management entails:– Coordinating the movement of goods and

delivery of services. – Sharing information between members of

the supply chain. • For example: sales, forecasts, promotional

campaigns, and inventory levels.


Supply Chain for

Milk Products


External Suppliers

• External suppliers provide the necessary raw materials, services, and component parts.

• Purchased materials & services frequently represent 50% (or more) of the costs of goods sold.

• Suppliers are frequently members of several supply chains – often in different roles.


External Suppliers

• Tier one suppliers:– Directly supplies materials or services to the firm that

does business with the final customer

• Tier two suppliers:– Provides materials or services to tier one suppliers

• Tier three suppliers:– Providers materials or services to tier two suppliers


Internal Functions

• Vary by industry & firm, but might include:– Processing– Purchasing– Production Planning & Control– Quality Assurance– Shipping


Logistics & Distribution

• Logistics: getting the right material to the right place at the right time in the right quantity:– Traffic Management:

• The selection, scheduling & control of carriers (e.g.: trucks & rail) for both incoming & outgoing materials & products

– Distribution Management: • The packaging, storing & handling of products in transit

to the end-user.


Information Sharing

• Supply chain partners can benefit by sharing information on sales, demand forecasts, inventory levels & marketing campaigns

• Inaccurate or distorted information leads to the Bullwhip Effect


Typical Information Flow


The Bullwhip Effect

• If information isn’t shared, everyone has to guess what is going on downstream.

• Guessing wrong leads to too much or too little inventory:– If too much, firms hold off buying more until

inventories fall (leading suppliers to think demand has fallen).

– If too little, firms demand a rush order & order more than usual to avoid being caught short in the future (leading suppliers to think demand has risen).


The Bullwhip Effect

• Farther away from the customer, the quality of information gets worse & worse as supply chain members base their guesses on the bad guesses of their partners.

• The result is increasingly inefficient inventory management, manufacturing, & logistics


Short-Circuit the Bullwhip

• Make information transparent:– Use Electronic Data Interchange (EDI) to support

Just-In-Time supplier replenishment– Use bar codes & electronic scanning to capture &

share point-of-sale data

• Eliminate wholesale price promotions & quantity discounts

• Allocate scarce items in proportion to past sales to avoid attempts to ‘game’ the system


Electronic Data Interchange

• The most common method of using computer-to-computer links to exchange data between supply chain partners in a standardized format.

• Benefits include:– Quick transfer of information– Reduced paperwork & administration– Improved data accuracy & tracking capability


Vertical Integration

• A measure of how much of the supply chain is controlled by the manufacturer.– Backward integration:

• Acquiring control of raw material suppliers.

– Forward integration: • Acquiring control of distribution channels.


Outsourcing

• Entails paying third-party suppliers to provide raw materials and services, rather than making them in-house.

• Outsourcing is increasing as many firms try to focus their internal operations on what they do best.


Whether to Outsource?

• What volume is required?• Are items of similar quality available in the

marketplace?• Is long-term demand for the item stable?• Is the item critical to success of the firm?• Does the item represent a core competency

of the firm?


Breakeven Analysis

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QVCFCTC

QVCFCTC

MakeMakeBuyBuy

MakeMakeMake

BuyBuyBuy

:PointceIndifferen

:InsourcingofCostTotal

:gOutsourcinofCostTotal


Example: The Bagel Shop

• Bill & Nancy plan to open a small bagel shop.– The local baker has offered to sell them bagels at

40 cents each. However, they will need to invest $1,000 in bread racks to transport the bagels back & forth from the bakery to their store.

– Alternatively, they can bake the bagels at their store for 15 cents each if they invest $15,00 in kitchen equipment.

– They expect to sell 60,000 bagels each year.

• What should they do?


Example Solved

Interpretation: – They anticipate selling 60,000 bagels (greater

than the indifference point of 56,000).– Therefore, make the bagels in-house.

000,56:

15.0$000,15$40.0$000,1$

QQ

QQ

QVCFCQVCFC MakeMakeBuyBuy

forSolve

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Developing a Supply Base

• How to chose between suppliers?

• One supplier or many per item?

• Whether to partner with suppliers?


Criteria for Choosing Suppliers

• Cost:– Cost per unit & transaction costs

• Quality:– Conformance to specifications

• On-time delivery:– Speed & predictability


Arguments for One Supplier per Item

• May only be one practical source for the item – Patent issues, geography, or quality considerations)

• The supply chain is integrated to support JIT or EDI– Making multiple suppliers impractical

• Availability of quantity discounts• Supplier may be more responsive if it’s guaranteed

all your business for the item• Contract might bind you to using only one supplier• Deliveries may be scheduled more easily


Arguments for Multiple Suppliers per Item

• No single supplier may have sufficient capacity• Competition may result in better pricing or service• Multiple suppliers spreads the risk of supply chain

interruption• Eliminates purchaser’s dependence on a single

source of supply• Provides greater volume flexibility• Government regulation may require multiple suppliers

– Antitrust issues

• Allows testing new suppliers without risking a complete disruption of material flow


Partnering with Suppliers

• Involves developing a long-term, mutually-beneficial relationship:– Requires trust to share information, risk,

opportunities, & investing in compatible technology

– Work together to reduce waste and inefficiency & develop new products

– Agree to share the gains


The Role of Warehouses

• General Warehouses: – Used for long-term storage of goods

• Distribution Warehouses:– Transportation consolidation:

• Consolidate LTL into TL deliveries

– Product mixing & blending:• Group multiple items from various suppliers

– Improve service:• Reduced response time• Allow for last-minute customization


Future Challenges

• Household Replenishment:– Fulfilling consumer demand at the point of

use (the home).– Often called ‘the last mile’ problem.

• Freeze Point Delay (Postponement):– Last minute customization to provide

exactly what the consumer wants while maintaining very small inventories


Total Quality Management 5C H A P T E R


What is TQM?

• Total Quality Management – An integrated effort designed to improve

quality performance at every level of the organization.

• Customer-defined quality – The meaning of quality as defined by the

customer.


Defining Quality

• Conformance to Specifications – How well the product or service meets the targets

and tolerances determined by its designers

• Fitness for Use– Definition of quality that evaluates how well the

product performs for its intended use.

• Value for Price Paid– Quality defined in terms of product or service

usefulness for the price paid.


Defining Quality

• Support Services– Quality defined in terms of the support provided

after the product or service is purchased

• Psychological Criteria– A way of defining quality that focuses on

judgmental evaluations of what constitutes product or service excellence.


Manufacturing vs. Service

• Manufacturing produces a tangible product– Quality is often defined by tangible characteristics – Conformance, Performance, Reliability, Features

• Service produces an intangible product– Quality is often defined by perceptual factors– Courtesy, Friendliness, Promptness, Atmosphere,

Consistency


Changing Focus of Quality Management


Overview of TQM Philosophy

• Focus on identifying root causes of reoccurring problems & correcting them– A proactive, not reactive approach

• Allow customers to determine what’s important (customer-driven quality)

• Involve everyone in the organization


TQM Philosophy

• Maintain a Customer Focus:– Identify and meet current customer needs– Continually gather data (look for changing

preferences)

• Continuous Improvement:– Continually strive to improve– Good enough, isn’t good enough

• Quality at the Source:– Find the source of quality problems & correct them


TQM Philosophy

• Employee Empowerment:– Empower all employees to find quality problems

and correct them

• Focus on internal & external customer needs:– External customers:

• People who purchase the company’s goods and services

– Internal customers:• Other downstream employees who rely on preceding

employees to do their job


TQM Philosophy

• Understanding Quality Tools:– All employees should be trained to properly utilize

quality control tools

• Team Approach:– Quality is an organization-wide effort– Quality circles: work groups acting as problem-

solving teams

• Benchmarking– Studying the business practices of other

companies for purposes of comparison.


TQM Philosophy

• Manage Supplier Quality:– Ensuring that suppliers engage in the same high

quality practices– Strategic partnering with key suppliers

• Quality of Design:– Determining which features will be included in the

final design of a product to meet customers’ needs & preferences

• Ease of Use:– Ergonomics, easy to understand directions, etc.


TQM Philosophy

• Quality of Conformance to Design:– Degree to which the product conforms to it’s

design specifications (a measure of consistency & lack of variation)

• Post-Sale Service:– Assisting with issues that arise after the purchase– Warranty & repair issues, follow through on any

promises to build a continuing relationship with the customer


Costs of Quality


Ways to Improve Quality

• PDSA Cycle

• Quality Function Deployment

• Problem-solving tools


Plan-Do-Study-Act Cycle (PDSA)


Plan-Do-Study-Act Cycle (PDSA)

• Plan: Plan experiments to uncover the root cause of problems

• Do: Conduct the experiments• Study: Study the data generated

• Act: Implement improvements or start over

• Repeat: Continuously improve


Quality Function Deployment

• Compares customer requirements & product’s characteristics

• Understand how the product delivers quality to the customer


Comparing “Voices”

Voice of the

Customer

Voice of the Engineer

Customer-basedBenchmarks


QFD

• In addition, QFD:

• Provides for competitive evaluation (benchmarks)

• Considers design trade-offs & synergies

• Facilitates target setting & developing product specifications


Setting Specifications

Trade-offs

TargetsTechnical

Benchmarks


Problem Solving Tools

• Cause-and-Effect Diagrams

• Flow Charts

• Check Lists

• Control Charts

• Scatter Diagrams

• Pareto Charts

• Histograms


Cause-and-Effect Diagrams

• Also called Fishbone Diagrams

• Help identify potential causes of specific ‘effects’ (quality problems)


Flow Charts

• Diagrams of the steps involved in an operation or process


Checklists

• Simple forms used to record the appearance of common defects and the number of occurrences


Control Charts

• Track whether a process is operating as expected


Scatter Diagrams

• Illustrate how two variables are related to each other


Pareto Analysis

• Helps identify the degree of importance of different quality problems


Histograms

• Illustrate a frequency distribution


Quality Awards

• Malcolm Baldrige National Quality Award is given annually to companies demonstrating excellence– Manufacturing– Service – Small Business– Education– Healthcare


MBNQA Criteria


Quality Standards

• ISO 9000 Standards: – Set of internationally recognized quality standards – Companies are periodically audited & certified

• ISO 14000: – Focuses on a company’s environmental

responsibility

• QS 9000: – Auto industry’s version of ISO 9000


Quality Gurus

• W. Edwards Deming

• Joseph Juran

• Phillip Crosby


W. Edwards Deming

• Focus on optimizing the system - not individual components

• Management is responsible for the system (source of 85% of problems)

• Continuous improvement (focus on prevention, not after-the-fact inspection)

• Understand variation (special versus common causes)


Joseph Juran

• Quality = fitness for use• Developed the quality trilogy:

– Quality planning (future orientation/design quality)– Quality control (statistical control of variation)– Quality improvement (continuous improvement)

• Emphasized the costs of quality:– Understand the trade-offs between prevention &

appraisal costs with failure costs


Phillip Crosby

• Quality requires leadership:– Do it right the first time– The goal is zero defects

• Argued that ‘quality is free’:– The benefits far outweigh the cost of

achieving zero defects


Statistical Quality Control 6C H A P T E R


Quality Control Methods

• Descriptive statistics:– Used to describe distributions of data

• Statistical process control (SPC):– Used to determine whether a process is

performing as expected

• Acceptance sampling:– Used to accept or reject entire batches by

only inspecting a few items


Descriptive Statistics

• Mean (x-bar):– The average or central tendency of a data set

• Standard deviation (sigma):– Describes the amount of spread or observed

variation in the data set

• Range:– Another measure of spread – The range measures the difference between the

largest & smallest observed values in the data set


The Normal Distribution


Equations

• Mean:

• Standard deviation:

n

xx

n

ii

1

1

1

2

n

Xxn

ii


Impact of Standard Deviation


Skewed Distributions (One Form of Non-Normal Distribution)


SPC Methods

• Control charts– Use statistical limits to identify when a

sample of data falls within a normal range of variation


Setting Limits RequiresBalancing Risks

• Control limits are based on a willingness to think something’s wrong, when it’s actually not (Type I or alpha error), balanced against the sensitivity of the tool - the ability to quickly reveal a problem (failure is Type II or beta error)


Types of Data

• Variable level data:– Can be measured using a continuous scale– Examples: length, weight, time, &

temperature

• Attribute level data:– Can only be described by discrete

characteristics– Example: defective & not defective


Control Charts for Variable Data

• Mean (x-bar) charts– Tracks the central tendency (the average

value observed) over time

• Range (R) charts:– Tracks the spread of the distribution over

time (estimates the observed variation)


x-Bar Computations

xx

xx

x

n

zxLCL

zxUCL

nn

xxxx

...21


Example

• Assume the standard deviation of the process is given as 1.13 ounces• Management wants a 3-sigma chart (only 0.26% chance of alpha error)• Observed values shown in the table are in ounces

Time 1 Time 2 Time 3

Observation 1 15.8 16.1 16.0

Observation 2 16.0 16.0 15.9

Observation 3 15.8 15.8 15.9

Observation 4 15.9 15.9 15.8

Sample means 15.875 15.975 15.9


Computations

• Center line (x-double bar):

• Control limits:

92.153

9.15975.15875.15

x


2nd Method Using R-bar

RAxLCL

RAxUCL

n

RRRR

x

x

n

2

2

21 ...


Control Chart Factors

Factor for x-ChartA2 D3 D4

2 1.88 0.00 3.273 1.02 0.00 2.574 0.73 0.00 2.285 0.58 0.00 2.116 0.48 0.00 2.007 0.42 0.08 1.928 0.37 0.14 1.869 0.34 0.18 1.82

10 0.31 0.22 1.7811 0.29 0.26 1.7412 0.27 0.28 1.7213 0.25 0.31 1.6914 0.24 0.33 1.6715 0.22 0.35 1.65

Factors for R-ChartSample Size (n )


Example

Time 1 Time 2 Time 3

Observation 1 15.8 16.1 16.0

Observation 2 16.0 16.0 15.9

Observation 3 15.8 15.8 15.9

Observation 4 15.9 15.9 15.8

Sample means 15.875 15.975 15.9

Sample ranges 0.2 0.3 0.2


Computations

22.1433.273.092.15

62.1733.273.092.15

33.23

2.03.02.0

2

2

RAxLCL

RAxUCL

R

x

x


Example x-bar Chart

X-bar Chart

12

13

14

15

16

17

18

1 2 3 4 5 6 7 8 9 10

Time

Ou

nc

es

UCL

LCL

CL


R-chart Computations(Use D3 & D4 Factors: Table 6-1)

0033.2

71.628.233.2

33.23

2.03.02.0

3

4

DRLCL

DRUCL

R

R

R


Example R-chart

R Chart

0

1

2

3

4

5

6

7

8

1 2 3 4 5 6 7 8 9 10 11

Time

Ou

nc

es

UCL

LCL

CL


Using x-bar & R-charts

• Use together• Reveal different

problems


Control Charts for Attribute Data

• p-Charts:– Track the proportion defective in a sample

• c-Charts:– Track the average number of defects per

unit of output


Process Capability

• A measure of the ability of a process to meet preset design specifications:– Determines whether the process can do what we

are asking it to do

• Design specifications (a/k/a tolerance limits):– Preset by design engineers to define the

acceptable range of individual product characteristics (e.g.: physical dimensions, elapsed time, etc.)

– Based upon customer expectations & how the product works (not statistics!)


Measuring Process Capability

Compare the width of design specifications & observed process output


Capability Indexes

• Centered Process (Cp):

• Any Process (Cpk):

6 widthprocess

ion widthspecificat LSLUSLC p

3

;3

minLSLUSL

C pk


Example

• Design specifications call for a target value of 16.0 +/-0.2 microns (USL = 16.2 & LSL = 15.8)

• Observed process output has a mean of 15.9 and a standard deviation of 0.1 microns


Computations

• Cp:

• Cpk:

66.06.0

4.0

1.06

8.152.16

6

LSLUSL

C p

33.033.0or 1min3.0

1.0or

3.0

3.0min

1.03

8.159.15or

1.03

9.152.16min

3or

3min

LSLUSLC pk


Three Sigma Capability

• Until now, we assumed process output should be modeled as +/- 3 standard deviations

• By doing so, we ignore the 0.26% of output that falls outside +/- 3 sigma range

• The result: a 3-sigma capable process produces 2600 defects for every million units produced


Six Sigma Capability

• Six sigma capability assumes the process is capable of producing output where +/- 6 standard deviations fall within the design specifications (even when the mean output drifts up to 1.5 standard deviations off target)

• The result: only 3.4 defects for every million produced


3-Sigma versus 6-Sigma


Just-In-Time Systems 7C H A P T E R


Just-In-Time

• Getting the right quantity of goods to the right place – exactly when needed!

• Just-In-Time= not late & not early


Philosophy of JIT

• Elimination of waste

• Broad view of operations

• Simplicity

• Continuous improvement

• Visibility

• Flexibility


Eliminate Waste

• Waste is anything that doesn’t add value:– Unsynchronized production– Inefficient & unstreamlined layouts– Unnecessary material handling– Scrap & rework


Broad View of Operations

• Understanding that operations is part of a larger system

• Goal is to optimize the system – not each part:– Avoid narrow view: “That’s not in my job

description!”– Avoid sub-optimization


Simplicity

• It’s often easy to develop complex solutions to problems by adding extra steps

• Goal is to find a simpler way to do things right:– Less chance to forget extra step– Fewer opportunities to make mistakes– More efficient


Continuous Improvement

• Traditional viewpoint: “It’s good enough”

• JIT viewpoint: “If it’s not perfect, make it better”


Visibility

• Waste can only be eliminated after it’s discovered

• Clutter hides waste

• JIT requires good housekeeping


Visibility


Flexibility

• Easy to make volume changes:– Ramp up & down to meet demand

• Easy to switch from one product to another:– Build a mix of products without wasting

time with long changeovers


Three Elements of JIT


JIT Manufacturing

• Kanbans & pull production systems

• Quick setups & small lots

• Uniform plant loading

• Flexible resources

• Efficient facility layouts


Pull Production & Kanbans


Number of Kanbans Required

N = number of containersD = demand rate at the withdraw stationT = lead time from supply station C = container size

C

DTN


Quick Setups & Small Lots

• Setup times = time required to get ready– E.g.: clean & calibrate equipment,

changing tools, etc.

• Internal versus external setups– Stop production or setup will still running

• Internal setups = lost production time– Inefficient setups = waste


Uniform Plant Loading

Monday Tuesday Wednesday Thursday FridayAAAAA BBBBB BBBBB DDDDD EEEEEAAAAA BBBBB BBBBB CCCCC EEEEE

Monday Tuesday Wednesday Thursday FridayAABBBB AABBBB AABBBB AABBBB AABBBBCDEE CDEE CDEE CDEE CDEE

5 units5 units10 units

Weekly Production Required

Traditional Production Plan

JIT Plan with Level Scheduling

ABCDE

10 units20 units


Flexible Resources

• General purpose equipment:– E.g.: drills, lathes, printer-fax-copiers, etc.– Capable of being setup to do many

different things

• Multifunctional workers: – Cross-trained to perform several different

duties


Efficient Facility Layouts

• Workstations in close physical proximity to reduce transport & movement

• Streamlined flow of material• Often use:

– Cellular Manufacturing (instead of job shops)– U-shaped lines: (allows material handler to quickly

drop off materials & pick up finished work)


Job Shop Layout


Cellular Manufacturing


TQM & JIT

• Quality at the Source

• Jidoka (authority to stop line)

• Poka-yoke (foolproof the process)

• Preventive maintenance


Respect for People:The Role of Workers

• Cross-trained workers• Actively engaged in problem-solving• Workers are empowered• Everyone responsible for quality• Workers gather performance data• Team approaches used for problem-solving• Decision made bottom-up• Workers responsible for preventive

maintenance


Respect for People:The Role of Management

• Responsible for culture of mutual trust

• Serve as coaches & facilitators

• Support culture with appropriate incentive system

• Responsible for developing workers

• Provide multi-functional training

• Facilitate teamwork


Supplier Relations & JIT

• Use single-source suppliers

• Build long-term relationships

• Co-locate facilities to reduce transport

• Stable delivery schedules

• Share cost & other information


Benefits of JIT

• Smaller inventories• Improved quality• Reduced space requirements• Shorter lead times• Lower production costs• Increased productivity• Increased machine utilization• Greater flexibility


Implementing JIT Manufacturing

• Identify & fix problems• Reorganize workplace

– Remove clutter & designate storage

• Reduce setup times• Reduce lot sizes & lead times• Implement layout changes

– Cellular manufacturing & close proximity

• Switch to pull production• Extend methods to suppliers


JIT in Services

• Multifunctional workers

• Reduce cycle times

• Minimize setups

• Parallel processing

• Good housekeeping

• Simple, highly-visible flow of work


Forecasting 8C H A P T E R


Principles of Forecasting

• Forecasts are rarely perfect

• Grouped forecasts are more accurate than individual items

• Forecast accuracy is higher for shorter time horizons


Step-by-Step

• Decide what to forecast:– Level of detail, units of analysis & time horizon

required

• Evaluate & analyze appropriate data– Identify needed data & whether it’s available

• Select & test the forecasting model– Cost, ease of use & accuracy

• Generate the forecast• Monitor forecast accuracy over time


Types of Forecasting Methods

• Qualitative methods:– Forecasts generated subjectively by the

forecaster

• Quantitative methods:– Forecasts generated through mathematical

modeling


Qualitative Methods

• Strengths:– Incorporates inside information– Particularly useful when the future is

expected to be very different than the past

• Weaknesses:– Forecaster bias can reduce the accuracy of

the forecast


Types of Qualitative Models

Type Characteristics Strengths WeaknessesExecutive opinion

A group of managers meet & come up with a forecast

Good for strategic or new-product forecasting

One person's opinion can dominate the forecast

Market research

Uses surveys & interviews to identify customer preferences

Good determinant of customer preferences

It can be difficult to develop a good questionnaire

Delphi method

Seeks to develop a consensus among a group of experts

Excellent for forecasting long-term product demand, technological changes, and

Time consuming to develop


Quantitative Methods

• Strengths:– Consistent and objective– Can consider a lot of data at once

• Weaknesses:– Necessary data isn’t always available– Forecast quality is dependent upon data

quality


Types of Quantitative Methods

• Time Series Models:– Assumes the future will follow same

patterns as the past

• Causal Models:– Explores cause-and-effect relationships– Uses leading indicators to predict the

future


Patterns in Time Series Data


Logic of Time Series Models

• Data = historic pattern + random variation

• Historic pattern may include: – Level (long-term average) – Trend – Seasonality – Cycle


Time Series Models

• Naive:– The forecast is equal to the actual value observed

during the last period

• Simple Mean:– The average of all available data

• Moving Average:– The average value over a set time period (e.g.: the

last four weeks)– Each new forecast drops the oldest data point &

adds a new observation


Weighted Moving Average

• All weights must add to 100% or 1.00

• Allows the forecaster to emphasize one period over others

• Differs from the simple moving average that weights all periods equally

ttt ACF 1


Exponential Smoothing

• Forecast quality is highly dependent on selection of alpha:– Low alpha values generate more stable forecasts– High alpha values generate forecasts that respond

quickly to recent data

• Issue is whether recent changes reflect random variation or real change in long-term demand

ttt FAF 11


Forecasting Trends

• Trend-adjusted exponential smoothing

• Three step process:– Smooth the level of the series:

– Smooth the trend:

– Calculate the forecast including trend:

))(1( 11 tttt TSAS

11 )1()( tttt TSST

ttt TSFIT 1


Adjusting for Seasonality

• Calculate the average demand per season– E.g.: average quarterly demand

• Calculate a seasonal index for each season of each year:– Divide the actual demand of each season by the

average demand per season for that year

• Average the indexes by season– E.g.: take the average of all Spring indexes, then

of all Summer indexes, ...


Adjusting for Seasonality

• Forecast demand for the next year & divide by the number of seasons– Use regular forecasting method & divide by four

for average quarterly demand

• Multiply next year’s average seasonal demand by each average seasonal index– Result is a forecast of demand for each season of

next year


Casual Models

• Often, leading indicators hint can help predict changes in demand

• Causal models build on these cause-and-effect relationships

• A common tool of causal modeling is linear regression:

bxaY


Linear Regression


Forecast Accuracy

• Forecasts are rarely perfect• Need to know how much we should rely on

our chosen forecasting method• Measuring forecast error:

• Note that over-forecasts = negative errors and under-forecasts = positive errors

ttt FAE


Tracking Forecast ErrorOver Time

• Mean Absolute Deviation (MAD):– A good measure of the actual error

in a forecast

• Mean Square Error (MSE):– Penalizes extreme errors

• Tracking Signal– Exposes bias (positive or negative)

1

forecast - actual2

nMSE

MAD

TS forecast - actual

nMAD

forecastactual


Factors for Selecting a Forecasting Model

• The amount & type of available data

• Degree of accuracy required

• Length of forecast horizon

• Presence of data patterns

Production and Operations Mangement- Chapter 1-8

Education

Transcript of Production and Operations Mangement- Chapter 1-8