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Operations management
Chapter 1 - Goods, Services,
and Operations Management
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Learning outcome
1-1 Explain the concept and importance of operations
management.
1-2 Describe what operations managers do.
1-3 Explain the differences between goods and services.
1-4 Describe a customer benefit package.
1-5 Explain the role of processes in OM and identify
three general types of processes.
1-6 Summarize the historical development of OM.
1-7 Describe current challenges facing OM.
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Basic functions of business organizations
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Definition
Operations management (OM) is the science
and art of ensuring that goods and services are
created and delivered successfully to customers.
Planning
Controlling
OM
Organizing
Leading
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Definition
The role of operations management is to transform a
company’s inputs into the finished goods or services
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Definition
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OPERATION MANAGEMENT
Marketing
Option
Current
Sales
Cost of
Goods Sold
Gross
Margin
Finance
Costs
Net
Margin
Taxes @
25%
Contribution
$100,000
Sales
Revenue :
+50%
$150,000
-80,000
Finance &
OM Option
Accounting
Option
Finance
Production
Costs: -50% Costs: -20%
$100,000
$100,000
-120,000
-80,000
-64,000
20,000
30,000
20,000
36,000
-6,000
-6,000
-3,000
-6,000
14,000
24,000
17,000
30,000
-3,500
-6,000
-4,250
-7,500
10,500
18,000
12,750
22,500
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What Do Operations Managers Do?
https://www.youtube.com/watch?v=FbbGlVle3oU&t=25s
✓ Forecasting
✓ Supply chain management
✓ Facility layout and design
✓ Technology selection
✓ Quality management
✓ Purchasing
✓ Resource and capacity
management
✓ Process design
✓ Job design
✓ Service encounter design
✓ Scheduling
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OM in the Workplace
Shelly Decker, an accounting and information systems major
in college, and her sister created an entrepreneurial venture
to manufacture and sell natural soaps and body products.
Shelly uses OM skills every day:
• Process design – When a new product is to be
introduced, the best way to produce it must be
determined. This involves charting the detailed steps
needed to make the product.
• Inventory management – Inventory is tightly controlled
to keep cost down and to avoid production that isn't
needed.
Inventory is taken every four weeks and
adjusted in the inventory management system
accordingly.
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OM in the Workplace
Shelly uses OM skills every day:
•
•
Scheduling – Production schedules are created to
ensure that enough product is available for both retail
and wholesale customers, taking into account such
factors as current inventory and soap production
capacity.
Quality management – Each product is inspected and
must conform to the highest quality standards. If a
product does not conform to standard (for example,
wrong color, improper packaging, improper labeling,
improper weight, size, or shape), then it is removed from
inventory to determine where the process broke down
and to initiate corrective action.
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OM in the Workplace
Ryan is Process Manager of Credit Card Division in Bank of
America
What are his responsibilities:
• Planning and budgeting: ???
• Inventory management: ???
• Scheduling and capacity: ???
• Quality: ???
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Understanding Goods and Services
• A good is a physical product that you can see, touch,
or possibly consume, including durable good (is a
product that typically lasts at least three years) and
non-durable good (is perishable and generally lasts
for less than three years)
• A service is any primary or complementary activity
that does not directly produce a physical product.
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Service characteristics
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Service characteristics: Intangibility
• Services can not be seen, tasted, felt, heard, or
smelled.
• Rely on references, reputation and facilities to judge
a service
• Intangibility increases the level of uncertainty
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Service characteristics: Inseparability
• Services are produced and consumed
simultaneously.
• Producer and consumer must normally interact in
order for the benefits of the service to be realized
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Service characteristics: Perishability
• Services cannot be stored for later sale or use
• Particular service irreversibly vanishes as it has been
consumed by the consumer
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Service characteristics: Variability
• The
quality of the service may vary depending on
who provides it, as well as when and how it is
provided.
• Reducing variability involves determining the causes.
•
•
•
Personality traits
Poor training and supervision
Lack of regular support
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- Goods and services provide
value and satisfaction to
customers who purchase and
use them.
- They
both
can
be
standardized or customized to
individual wants and needs.
- A process creates and
delivers each good or service,
and therefore, OM is a critical
skill.
- Goods are tangible while
services are intangible.
- Customers participate in many
service processes, activities,
and transactions.
- The demand for services is
more difficult to predict than
the demand for goods.
- Services cannot be stored as
physical inventory.
- Service management skills are
essential to a successful service
encounter.
- Service facilities typically need
to be in close proximity to the
customer.
- Patents do not protect services.
Differences Between Goods
and Services
Similarities Between Goods
and Services
Understanding Goods and Services
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How Goods
and Services
Affect
Operations
Management
Activities
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Customer Benefit Packages (CBP)
• A customer benefit package (CBP) is a clearly
defined set of tangible (goods-content) and intangible
(service-content) features that the customer recognizes,
pays for, uses, or experiences.
•
In simple terms, a CBP is some combination of goods
and services configured in a certain way to provide value
to customers.
•
A CBP consists of a primary good or service, coupled
with peripheral goods and/or services.
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Customer Benefit Packages (CBP)
•
A primary good or service is the “core” offering that attracts
customers and responds to their basic needs. For example, the
primary service of a personal checking account is the capability to
do convenient financial transactions.
•
Peripheral goods or services are those that are not essential to
the primary good or service, but enhance it. Examples for a
personal checking account: online access and bill payment, debit
card, designer checks , paper or electronic account statement
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Customer Benefit Packages (CBP)
Exhibit 1.2
Example for
Purchasing a
Vehicle
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Working in Group
Draw the customer benefit package (CBP) for three of the
items in the following list and explain how your CBP provides
value to the customer.
• A new personal computer
• A trip to Disney World
• A credit card
• A fast-food restaurant
• A new smartphone
• A hotel
• ……
You can either create them by yourself or collect them from
internet
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Six Eras of Operations Management
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Sustainability
• Sustainability
refers to service and production
processes that use resources in ways that do not
harm ecological systems that support both current
and future human existence
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Sustainability
+ Waste management
+ Energy optimization
+ Transportation optimization
+ Technology upgrades
+ Air quality
+ Sustainable product design
+Performance excellence
+ Financial management
+ Resource management
+ Emergency preparedness
- Product safety
-Workforce health and safety
-Ethics and governance
- Community
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Group discussion
Prepare for Case study: Hazel (30 minutes)
Answer: Question 1
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www.website.com
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OPERATIONMANAGEMENT
VALUE CHAINS
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Learning outcome
2-1 Explain the concept of value and how it can be increased.
2-2 Describe a value chain and the two major perspectives that
characterize it.
2-3 Explain outsourcing and vertical integration in value chains.
2-4 Explain offshoring and issues that managers must consider in
offshoring decisions.
2-5 Identify important issues associated with value chains in a
global business environment.
2-6 Describe how sustainability plays an important role in value
chains.
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Value and Supply Chains
• The value chain is a process in which a company
adds value to its raw materials to produce products
eventually sold to consumers.
• The supply chain represents all the steps required
to get the product to the customer.
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VALUE AND SUPPLY CHAINS
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The Concept of Value
Value is the perception of the benefits associated with
a good, service, or bundle of goods and services (i.e.,
the customer benefit package) in relation to what
buyers are willing to pay for them.
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The Concept of Value
If the value ratio is high, the good or service is perceived favorably
by customers, and the organization providing it is more likely to be
successful. To increase value, an organization must:
Perceived benefits
Value =
Price (cost) to the customer
(a) increase perceived benefits while holding price or cost
constant,
(b) increase perceived benefits while reducing price or cost, or
(c) decrease price or cost while holding perceived benefits
constant.
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Value Chain Paradigms and Perspectives
• Input-Output Model: A value chain begins with
suppliers who provide inputs that are transformed
into value-added goods and services through
processes that are supported by resources such as
equipment and facilities, labor, money, and
information. These goods and services are delivered
or provided to customers and targeted market
segments.
❖ Value-creation processes
❖ Support processes
❖ General management processes
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• Input-Output Model
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Value Chain Paradigms and Perspectives
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Integration
•
•
Vertical integration refers to the process of acquiring
and consolidating elements of a value chain to achieve
more control.
• Backward integration refers to acquiring
capabilities toward suppliers
• Forward integration refers to acquiring capabilities
toward distribution or even customers.
Horizontal integration is the acquisition of a business
operating at the same level of the value chain in a similar
or different industry.
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Outsourcing
• Outsourcing
is the process of having
suppliers provide goods and services that
were previously provided internally.
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Potential advantages and disadvantages of
Outsourcing
•
Group working
Discuss the advantages and disadvantages of outsourcing
------------------When do we decide to outsource?
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The Economics of Outsourcing
•
•
•
•
•
•
•
VC1 = Variable cost/unit if produced
VC2 = Variable cost/unit if outsourced
FC = Fixed costs associated with producing the part
Q = Quantity produced (volume)
Total cost of production = (VC1)Q + FC
Total cost of outsourcing = (VC2)Q
Find the breakeven point: (VC2)Q = (VC1)Q + FC
𝑭𝑪
Q* = 𝐕𝐂𝟐 −𝑽𝑪𝟏
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The Economics of Outsourcing
Solved Problem—In-House versus Outsource
• Suppose
that a manufacturer needs to
produce a custom aluminum housing for
a special customer order. Because it
currently does not have the equipment
necessary to make the housing, it would
have to acquire machines and tooling at a
fixed cost (net of salvage value after the
project is completed) of $250,000. The
variable cost of production is estimated to
be $20 per unit. The company can
outsource the housing to a metal
fabricator at a cost of $35 per unit. The
customer order is for 12,000 units.
• What should they do?
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Problem
A university currently has a recycling program for paper
waste. The fixed cost of running this program is $8,000
per year. The variable cost for picking up and disposing
of each ton of recyclable paper is $40. If the work is
outsourced to a recycling company, the cost would be
$70 per ton.
• Find Q*.
• If the university
recycles 200 tons each year, what
should it do?
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Break-even point analysis
• Break Even Analysis in economics, business, and
cost accounting refers to the point in which total cost
and total revenue are equal.
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Break-even point analysis
A book publisher has fixed costs of $300,000 and
variable costs per book of $8.00. The book sells for
$23.00 per copy.
a) How many books must be sold to break even?
b) If the fixed cost increased, would the new break-even point
be higher or lower?
c) If the variable cost per unit decreased, would the new
break-even point be higher or lower?
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Assignment
A language center organizes a training course lasting
within 18 weeks with the following information
• The
course take place on Saturday and Sunday,
weekly
• The total tuition fee the course is 29,000,000 VND
• The operation cost are listed in the following slide.
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Assignement
Expenditure
Cost
Educator expense
$4,000,000 / day
Transportation allowance
$500,000 / day
Teaching facilities
$1,500,000 / day
Tax
6% revenue
Fee for recruiting one new student 10% revenue
Fee for issuing one certificate
$100,000 / 1 certificate
Management expense
10% revenue
Other expense
6% revenue
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Hữu Phúcare needed to break even?
→ How many
students
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OFFSHORE
•
•
Offshoring is the building, acquiring, or moving of process
capabilities from a domestic location to another country location
while maintaining ownership and control.
Offshoring is the relocation of a business process from one
country to another—typically an operational process, such as
manufacturing, or supporting processes, such as accounting.
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OFFSHORE
Things to Consider When Making Offshore Decisions
-------------------
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OFFSHORE – TAX HAVEN
Normal
Offshore
A buy Rolex at $100
B buy Rolex at $100
Example
A buy Rolex from B at $1000
A sell Rolex at $1000
A sell Rolex at $1000
A get a profit for $900
A get a profit for $00
B get a profit for $900
A pay for tax about 20% = $180
A pay for tax about 20% = 0
B do not pay for tax
Totally, pay for tax $180
Totally, pay for tax $0
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Value Chains in a Global Business Environment
• A multinational enterprise is an organization that
sources, markets, and produces its goods and
services in several countries to minimize costs, and
to maximize profit, customer satisfaction, and
social welfare.
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Value Chains in a Global Business Environment
Group working
Research the potential issues related to Value
Chains in a Global Business Environment?
• --------• --------• ---------
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www.website.com
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Group assignment
• Find out the international corporation and analyze its value
chain based on Porter model. It does not matter if that
company is successful or failed.
• Each
group is going to prepare PPT file and deliver
presentation on last 2 days of this course.
• The content includes:
•
•
•
Brief introduction about the company
Detail analysis about its value chain based on Porter model
Some lessons from its success or failure.
• Choose the company for analysis. Ensure that each group
analyzes different company. Register your choice in our
Zalo group.
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Operation Management
Forecasting and Demand Planning
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Learning Outcomes
• Describe the importance of forecasting to the value chain.
• Explain basic concepts of forecasting and time series.
• Explain how to apply single moving average and
exponential smoothing models.
• Describe how to apply regression as a forecasting
approach.
• Explain the role of judgment in forecasting.
• Describe how statistical and judgmental forecasting
techniques are applied in practice.
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Basic Concepts in Forecasting
A time series is a set of observations measured at successive
points in time or over successive periods of time.
A time series pattern may have one or more of the following five
characteristics:
•
•
•
•
•
Trend
Seasonal patterns
Cyclical patterns
Random variation (or noise)
Irregular (one time) variation
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Basic Concepts in Forecasting
❖ A trend is the underlying pattern of growth or
decline in a time series.
❖ Seasonal patterns are characterized by repeatable
periods of ups and downs over short periods of time.
❖ Cyclical patterns are regular patterns in a data
series that take place over longer periods of time.
❖ Random variation (sometimes called noise) is the
unexplained deviation of a time series from a
predictable pattern, such as a trend, seasonal, or
cyclical pattern.
❖ Irregular variation is a one-time variation that is
explainable.
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Seasonal Pattern of Home Natural Gas
Usage
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Trend and Business Cycle Characteristics
(each data point is 1 year apart)
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Statistical Forecasting Models
• Statistical
forecasting is
based on the assumption that
the future will be an
extrapolation of the past.
• Judgmental
forecasting
relies upon opinions and
expertise
of
people
in
developing forecasts.
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Naïve Method
The naïve method is one of the simplest forecasting models.
It assumes that the next period’s forecast is equal to the current period’s
actual.
Ft+1 : Forecast of demand for next period, t+1
At : Actual value for current period t
t
: Current time period
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Single Moving Average
A moving average (MA) forecast is an average of the most recent “n”
observations in a time series.
Ft+1 : Forecast of demand for next period, t+1
At : Actual demand observed in period t
n
: number of periods or data points to be averaged
MA methods work best for short planning horizons when there is no major trend,
seasonal, or business cycle pattern.
•
As the value of “n” increases, the forecast reacts slowly to recent changes in
the time series data.
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Solved Problem
Develop three-period moving-average forecasts
Period
Demand
Period
Demand
1
86
7
91
2
93
8
93
3
88
9
96
4
89
10
97
5
92
11
93
6
94
12
95
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Weighted Moving Average (WMA)
• Weighted moving averages assign a heavier weighting to
more current data points since they are more relevant than
data points in the distant past
• The
sum of the weighting should add up to 1 (or 100
percent). In the case of the simple moving average, the
weightings are equally distributed
Ft+1 = wtAt + wt-1At–1 + ... + wt-nAt-n
Ft+1 : Forecast of demand for next period, t+1
At : Actual demand observed in period t
wt : the weighting in period t
n
: number of periods or data points to be averaged
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Weighted Moving Average (WMA)
Date
Closing Price of AAPL
Weighting
June 26
$90.90
5/15
June 25
$90.36
4/15
June 24
$90.28
3/15
June 23
$90.83
2/15
June 20
$90.91
1/15
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Single Exponential Smoothing
• Single
Exponential Smoothing (SES) is a forecasting
technique that uses a weighted average of past time-series
values to forecast the value of the time series in the next
period.
Ft+1 = At + (1 – )Ft = Ft +  (At – Ft)
where α is called the smoothing constant (0 ≤ α ≤ 1).
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Trend-Adjusted Exponential Smoothing
•
Step 1: Calculate the forecast using Single Exponential
Smoothing (Ft);
Ft= Ft-1 +  (At-1 – Ft-1)
•
Step 2: Adjust the trend
Tt =  x (Ft − Ft -1) + (1− )Tt-1
where  is called the trending constant (0 ≤  ≤ 1).
where T is called the trending adjustment.
•
Step 3: Calculate Forecast Including Trend (FITt):
FITt= Ft + Tt
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Exponential Smoothing with Trend
The last demands related to a product are listed in the
following table:
Month
Demand
1
2000
2
2100
3
1500
4
1400
5
1300
6
1600
Let’s assume that α = 0.8,  = 0.5, F1 = 2200 và T1 = 0
Forecast the next month using the exponential smoothing
with trend.
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Exponential Smoothing with Trend
Month
α = 0.8
Ai
Ft = Ft-1 +  (At-1 –
Ft-1)
 = 0.5
Tt =  x (Ft − Ft -1)
+(1−)Tt-1
FIT
1
2000
2200
0
2200
2
2100
2040
-80
1960
3
1500
4
1400
5
1300
6
1600
7
-
???
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Problem
•
Sunrise company deliveries its own Donuts through a food
chain. The demand for Donuts within the last 4 weeks are in the
following table.
4 weeks ago
3 weeks ago
2 weeks ago
1 weeks ago
Monday
2200
2400
2300
2400
Tuesday
2000
2100
2200
2200
Wednesday
2300
2400
2300
2500
Thursday
1800
1900
1800
2000
Friday
1900
1800
2100
2000
Saturday
2010
2020
2000
2300
Sunday
2800
2700
3000
2900
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4 weeks ago
3 weeks ago
2 weeks ago
1 weeks ago
Monday
2200
Tuesday
2000
2400
2300
2400
2100
2200
2200
Wednesday
2300
2400
2300
2500
Thursday
1800
1900
1800
2000
Friday
1900
1800
2100
2000
Saturday
2010
2020
2000
2300
Sunday
2800
2700
3000
2900
Forecast the demand for this week with:
a. Forecast the daily demand using single moving average (4 weeks).
b. Forecast the daily demand using weighted moving average, the weights are 0,4; 0,3;
0,2; 0,1.
c. This firms is planning to purchase the material for Donuts. Assume that the forecast for
last week was 22000 units, while the actual need was 21000 units. Forecast for this
week using the Exponential Smoothing With Trend with  = 0,10, β = 0.5, and last T =
150
d. With the result from question C, the actual demand for this week is 22500 units, make
the forecast for next week?
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Regression as a Forecasting Approach
•
Regression analysis is a method for building a statistical
model that defines a relationship between a single dependent
variable and one or more independent variables, all of which
are numerical.
•
•
•
•
•
•
Y : dependent variable
x : independent variable (time)
a : intercept of the regression line
b : slope of the regression line
CusSatis = 2.85 - 0.34*Price
Ice-cream Revenue = 34 + 0.75*Temperature
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Causal Forecasting with Multiple Regression
A linear regression model with more than one independent
variable is called a multiple linear regression model.
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Basic Concepts in Forecasting
• Forecast error is the difference between the
observed value of the time series and the forecast, or
At – Ft
Mean Square Error (MSE)
MSE =
Σ(At – Ft )2
n
Mean Absolute Deviation Error (MAD)
MAD =
Σ‫׀‬At – Ft ‫׀‬
n
Mean Absolute Percentage Error (MAPE)
MAPE =
Σ‫(׀‬At – Ft )/At ‫ ׀‬X 100
n
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Example
• Standard Parts Corporation is comparing the accuracy of
two methods that it has used to forecast sales of its
popular valve. Forecasts using method A and method B
are shown against the actual values for January through
May. Which method provided better forecast accuracy?
Month
Actual Sales
Forecast
Method A
Method B
January
30
28
30
February
26
25
28
March
32
32
36
April
29
30
30
May
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30
28
77
Judgmental Forecasting
• Judgmental
forecasting relies upon opinions and
expertise of people in developing forecasts.
−
−
Grass Roots forecasting is simply asking those
who are close to the end consumer, such as
salespeople, about the customers’ purchasing
plans.
The Delphi method consists of forecasting by
expert opinion by gathering judgments and
opinions of key personnel based on their
experience and knowledge of the situation.
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www.website.com
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Individual Assignment
• The below table shows the real demand of a product within
last 7 months. Using MSE to compare the forecasting
methods between 2-period SMA and Exponential
Smoothing with Trend (α = 0.8, β = 0.4, F1= 2100, T1=0)
Month
Demand
1
2000
2
2100
3
1500
4
1400
5
1300
6
1600
80
7
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1550
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Operation Management
Managing Inventories
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Learning outcomes
•
•
•
•
•
•
Explain the importance of inventory, types of inventories, and
key decisions and costs.
Describe the major characteristics that impact inventory
decisions.
Describe how to conduct an ABC inventory analysis.
Explain how a fixed order quantity inventory system operates,
and how to use the EOQ and safety stock models.
Explain how a fixed period inventory system operates.
Describe how to apply the single-period inventory model.
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Concept
•
Inventory is any asset held for future use or
sale.
Objectives:
•
−
−
Maintain sufficient inventory
Incur lowest possible cost
Inventory management
involves planning,
coordinating, and controlling the acquisition,
storage, handling, movement, distribution, and
possible sale of raw materials, component parts
and subassemblies, supplies and tools,
replacement parts, and other assets that are
needed to meet customer wants and needs.
Stock Management V.s Inventory Management
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Understanding Inventory
•
•
•
•
•
•
Raw materials
Component parts
Work-in-process (WIP) inventory
Finished goods inventory
Distribution inventory
Maintenance, repair, and operational (MRO) inventory
84
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Role of Inventory in the Value Chain
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Group Activities
Thinking about your local food supermarket
•
•
What are the main risks of running out of stock?
How can they manage the inventory?
Taking 30 minutes for research and then report the above
issues
-
Upload your group report to LMS
Present your group report (randomly choose)
86
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Inventory Management Decisions and Costs
Inventory managers deal with two fundamental decisions:
1. When to order items from a supplier or when to initiate
production runs if the firm makes its own items.
2. How much to order or produce each time a supplier or
production order is placed.
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Inventory Management Decisions and Costs
Four categories of inventory costs:
•
Shortage costs
•
Unit cost of the stock-keeping units (SKUs)
•
Ordering or setup costs
•
Inventory-holding costs
88
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Inventory Management Decisions & Costs
•
Shortage costs or stockout costs are the costs
associated with a SKU being unavailable when needed
to meet demand, including
•
•
•
Back-order cost
Lost sale
Unit cost is the price paid for purchased goods or the
internal cost of producing them.
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Inventory Management Decisions & Costs
•
Ordering costs or setup costs are incurred as a result of
the work involved in placing purchase orders with
suppliers or configuring tools, equipment, and machines
within a factory to produce an item.
It normally include
•
•
•
•
Clerical costs of preparing purchase orders
Cost of finding suppliers and expediting orders
Transportation costs
Receiving costs
90
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Inventory Management Decisions & Costs
•
Inventory-holding costs or inventory-carrying costs
are the expenses associated with carrying inventory.
Holding costs are typically defined as a percentage of
the dollar value of inventory per unit of time (generally
one year).
➢Storage cost
➢Capital cost
➢Risk cost
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Inventory Management
Decisions & Costs
Holding Costs
Category
Housing costs (including rent or
depreciation, operating costs, taxes,
insurance)
Material handling costs (equipment lease or
depreciation, power, operating cost)
Labor cost
Cost (and Range)
as a Percent of
Inventory Value
6% (3 - 10%)
3% (1 - 3.5%)
3% (3 - 5%)
Investment costs (borrowing costs, taxes,
and insurance on inventory)
Pilferage, space, and obsolescence
11% (6 - 24%)
Overall carrying cost
26%
3% (2 - 5%)
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Inventory Characteristics
•
Stockout
−
A stockout is the inability to satisfy
demand for an item.
−
A backorder occurs when a customer
is willing to wait for an item.
−
A lost sale occurs when the customer
is unwilling to wait and purchases the
item elsewhere.
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ABC Inventory Analysis
94
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ABC Inventory Analysis
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Procedure for an ABC Inventory Analysis
1. Calculate the annual dollar usage for each item.
2. List the items in descending order based on annual
dollar usage.
3. Calculate the cumulative annual dollar volume.
4. Classify the items into groups
96
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ABC Inventory Analysis
•
The data shows
projected annual dollar
usage for 20 items.
97
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ABC Inventory Analysis
•
•
Excel ABC Template
After Sorting,
98
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ABC Inventory Analysis
•
ABC Histogram for the Results
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Cycle Counting Example
5,000 items in inventory, 500 A items, 1,750 B items, 2,750
C items
Policy is to count A items every month (20 working days), B
items every quarter (60 days), and C items every six months
(120 days)
→ How can we assign a person to check such items
following the regulation?
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The economic order quantity (EOQ)
•
•
The Economic Order Quantity (EOQ) model is a classic
economic model developed in the early 1900s that minimizes
total cost, which is the sum of the inventory-holding cost and
the ordering cost.
Assumptions:
✓
✓
✓
✓
✓
✓
Demand for the product is known and constant
Lead time is constant
Quantity discounts are not considered
Ordering and setup costs are fixed and constant
Does not permit back orders
The quantity ordered arrives at once
101
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Managing Fixed Quantity Inventory Systems
•
Fixed Quantity System (FQS) under Stable Demand
102
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The EOQ Model
Average cycle inventory = (Maximum inventory + Minimum inventory) / 2
= Q/2
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The EOQ Model
Inventory Holding Cost
•
The cost of storing one unit in inventory for the year, H, is:
H = (I) (C)
Where:
•
•
I = Annual inventory-holding charge expressed as a percent of
unit cost.
C = Unit cost of the inventory item or SKU.
Annual inventory-holding cost is computed as:
Annual inventory
=
holding cost
(
)(
average
inventory
)
annual holding
cost per unit
=
1
QH
2
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TS. Đặng Hữu Phúc
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The EOQ Model
Ordering Cost
If D = Annual demand and we order Q units each time, then we
place D/Q orders/year.
Annual ordering cost is computed as:
annual
=
ordering cost
(
number of
orders per year
)(
cost
per order
) ()
=
D
Q
S
Where S is the cost of placing one order/ setting up.
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The EOQ Model
Total Annual Cost
•
Total annual cost is the sum of the inventory holding cost plus
the order or setup cost plus annual purchase cost
TC =
1
D
S + DC
QH +
Q
2
Where
TC is total annual cost
S is setting up/ordering cost
H is holding cost
C is unit cost
D is annual quantity demand
Q is Volume per Order
106
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The EOQ Model
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The EOQ Model
Economic Order Quantity
•
The EOQ is the order quantity that minimizes the total annual
cost:
Q* =
√
2DS
H
108
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The EOQ Model
• Number of orders per year
*
• Time between orders (TBO)
Where N is number of orders
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The EOQ Model
Calculating the Reorder Point
•
The reorder point, r, depends on the lead time and demand rate.
r = Lead
r = (Average demand) x (lead time) = (d) x (L)
Where:
d = Average daily demand (constant)
L = Lead time in days (constant)
110
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The EOQ Model
Given the following information, find the economic order
quantity, the reorder point, and total cost. Comparing to Q =
2000, how much company can save?
D = 24,000 cases per year.
S = $38.00 per order.
I = 18%
C = $12.00 per case.
L = 3 days
Working days per year = 250
111
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Question
• A company faces an annual demand of 2,000
units. It costs the company $1,000 for every
order placed and $250 per unit of the product.
It faces a carrying cost of 10% of a unit cost.
Lead time is 2 weeks. What is the economic
order quantity? Time between orders? Reorder point?
• Assuming the working days: 360
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Managing Fixed Quantity Inventory Systems
•
Fixed Quantity System (FQS) with highly variable Demand
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Safety Stock and Uncertain Demand in a Fixed
Order Quantity System
When demand is uncertain, using EOQ based on the
average demand will result in a high probability of a
stockout.
✓Safety
stock is additional planned on-hand
inventory that acts as a buffer to reduce the risk of
a stockout.
✓A service level is the desired probability of not
having a stockout during a lead-time period.
114
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Safety Stock and Uncertain Demand in a Fixed
Order Quantity System
Re-order point after including safety stocks:
R = mL + zsL = (d x L) + zsL
Where
•
•
•
mL : Average demand during the lead time.
sL: Standard deviation of demand during the lead time.
z : The number of standard deviations necessary to achieve the
acceptable service level.
• “zsL” : represents the amount of safety stock.
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Safety Stock and Uncertain Demand in a Fixed
Order Quantity System
• We may not know the mean and standard deviation
•
of demand during the lead time, but we may know
mean and standard deviation of daily demand
Suppose that md and sd are the mean and standard
deviation of daily demand.
mL = md L
sL = sd √L = √ L x s2d
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Example
• d = 60
• sd = 7
• S = $10
• H = $0.50
• L=6
• Working days = 365
→ Calculate Q* and re-order point with confident level
at 95% (z=1.64)
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Question 1
Southern Office Supplies, Inc. distributes laser printer paper.
•
•
•
•
•
•
Ordering costs are $45.00 per order.
One ream of paper costs $3.80.
Annual inventory-holding cost rate is 20%.
The average annual demand is 15,000 reams, or about 15,000/52
= 288.5 per week.
The standard deviation of weekly demand is about 71.
The lead time from the manufacturer is two weeks.
- Find out EOQ.
Desired service level of 95% (z=1.64), find out reorder point, the cost
of the additional safety stock.
118
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Break
119
2. POQ – Production Order Quantity
120
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2. POQ model
POQ model have the same assumptions with EOQ,
except:
• The entire order quantity (Q) arrive in the inventory at
more than one time and finish after t.
Used when units are produced and sold simultaneously
p : Daily production rate
d : Daily demand/usage rate
Inventory
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2. POQ model
• Example
The requirement: 100 units (Q)
Daily production rate: 50 units (p)
Daily usage rate: 10 units (d)
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2. POQ model
• Example
On the first day: Assume that there is no inventory:
+ 50 units are produced (p)
+ 10 units are consumed (d)
 At the end of first day: inventory → 40 units (p-d)
On the second day:
+ 50 units are produced
+ 10 units are consumed
 At the end of second day: inventory → 40 units (1st) + 40 units (2nd)
= 80 units
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2. POQ model
• Example
On the third day:
+ 0 units are produced (since 100 units already be produced)
+ 10 units are consumed
 At the end of third day: inventory → 80 units – 10 units = 70 units
Similarity
 At the end of fourth day: inventory → 60 units
 ….
 At the end of tenth day: inventory → 0 unit
→ Conclusion: maximum inventory (80 units), minimum inventory (0 unit)
124
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2. POQ model
Inventory level
Q = Number of pieces per order
p = Daily production rate
H = Holding cost per unit per year
d = Daily demand/usage rate
t = Length of the production run (in days)
Part of inventory cycle during
which production (and usage) is
taking place
Demand part of cycle with
no production
Maximum
inventory
t
Time
125
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2. POQ model
• t = Q/ p;
• Imax = (p – d)t = (p – d).Q/p = Q (1 – d/p)
• Imin = 0
➔Iaveg = Q (1 – d/p)/2
TCHH =
1
2
Q(1 – d/p) H +
D
S + DC
Q
Average annual inventory
126
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2. POQ model
Q = Number of pieces per order
H = Holding cost per unit per year
D = Annual demand
p = Daily production rate
d = Daily demand/usage rate
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2. POQ example
D = 1,000 units
S = $10
H = $0.50 per unit per year
p = 8 units per day
d = 4 units per day
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Question
• The
average monthly demand for a material is 125
units. According to the agreement, the price is
$10/unit and the order will be executed many times
with an average supply of 40 units / week. The
average ordering cost is $15; holding cost equals to
20% of the purchase price. Number of working days
is 250 days/year, a 5-day working week.
• Determine the optimal order quantity?
129
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3. FIXED PERIOD SYSTEM – FPS
(P-model)
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3. FPS model
• Inventory counted only at end of period
• Orders placed at the end of a fixed period
• Order brings inventory up to target level
• May be scheduled at convenient times
• Appropriate in routine situations
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Inventory Level in a Fixed Period System
Various amounts (Qi) are ordered at regular time intervals
(p) based on the quantity necessary to bring inventory up
to target maximum
Target maximum
Q1
Q4
Q2
d Inventory
Q3
p
p
p
Time
TS. Đặng Hữu Phúc
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3. FPS model
Average demand
Order
amount
+ Safety stock - Inventory
= in the review
position
period
q
=
d(T+L)
z s(T+L)
+
-
IP
q = order quantity
T = the number of days between reviews
L = Lead time
d = daily/weekly forecast demand
Z = the number of standard deviations for a specified
service probability
s(T+L) = Standard deviation of demand over the review
and lead time
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3. FPS model
Average demand
Order
amount
+ Safety stock - Inventory
= in the review
position
period
q
=
d(T+L)
+
z s(T+L)
-
IP
IP = (Inventory position)
•
Inventory position (IP) is the on-hand quantity (OH) plus any orders
placed but which have not arrived (scheduled receipts, or SR), minus
any backorders (BO).
IP = OH + SR – BO
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3. FPS model
• Question:
Daily demand for a product is 10 units, with a standard
deviation of 3 units. The review period is 30 days, and
the lead time is 14 days. Management has set a policy
of satisfying 98 percent (z = 2.05) of demand from
items in stock. At the beginning of this review period,
there are 150 units in inventory.
How many units should be ordered?
135
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3. FPS model
136
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4. QUANTITY DISCOUNT MODEL – QDM
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4. QDM Model
• Reduced prices are often available when
larger quantities are purchased
• Trade-off is between reduced product cost
and increased holding cost
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4. QDM Model
A typical quantity discount schedule
Discount
Number
Discount Quantity
Discount (%)
Discount
Price (P)
1
0 to 999
no discount
$5.00
2
1,000 to 1,999
4
$4.80
3
2,000 and over
5
$4.75
TS. Đặng Hữu Phúc
4. QDM Model
Steps in analyzing a quantity discount
1. For each discount, calculate Q*
Q* =
√
2DS
H
2. If Q* for a discount doesn’t qualify, choose the
nearest possible order size to get the discount
(Q**)
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4. QDM Model
Steps in analyzing a quantity discount
3. Compute the total cost for each adjusted value
Q** from Step 2
**
**
4. Select the Q** that gives the lowest total cost
TS. Đặng Hữu Phúc
Example
Suppose that
Annual demand = 5,200
Ordering cost = $200,
Annual holding cost = 28% price.
→ Calculate the optimal order quantity
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4. QDM model
•
Step 1:
Q*1 = 273 units ; Q*2 = 276 units ; Q*3 = 279 units
• Step 2: Adjust Q* into Q**
▪ Q*1 = 273 units → Q**1 = 119 units
▪ Q*2 = 276 units → Q**2 = 276 units
▪ Q*3 = 279 units → Q**3 = 1,500 units
143
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Q**1= 119
Q*1= 273
Q**3 = 1500
Q*2 = Q**2 = 276
Q*3 = 279
144
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4. QDM model
• Step 3: compute total cost
**
**
•
•
•
TC1 = $530.405
TC2 = $517.155
TC3 = $520.053
• Step 4
Since TC2 is smallest, the optimal order quantity is 276
units, and the total cost is $517.155.
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www.website.com
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Operation management
Operations Scheduling and Sequencing
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150
Learning Outcomes
•
Explain the concepts of scheduling and sequencing.
•
Describe staff scheduling and appointment system decisions.
•
Explain sequencing performance criteria and rules.
•
Describe how to solve single- and two-resource sequencing
problems.
•
Explain the need for monitoring schedules using Gantt charts.
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Scheduling
•
•
Scheduling
refers
to
the
assignment
of
start
and
completion times to particular
jobs, people, or equipment.
Examples: Scheduling restaurant
employees, airline crews and
planes, sports teams, factory jobs.
QUẢN TRỊ ĐIỀU HÀNH
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Scheduling Applications and Approaches
•
Tools
❖ Spreadsheets
❖ Software packages
❖ Web-based tools
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Scheduling Applications and Approaches
Staff scheduling attempts to match available personnel with the
needs of the organization by:
1. Accurately forecasting demand and translating it into the
quantity and timing of work to be done.
2. Determining the staffing required to perform the work by time
period.
3. Determining the personnel available and the full- and part-time
mix.
4. Matching capacity to demand requirements and developing a
work schedule that maximizes service and minimizes costs.
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Staff scheduling problem
Given minimum worker requirements for each day of the week,
schedule employees so that each has number of consecutive days
off and all demand requirements are met.
Method:
1. Locate the set of number of consecutive days with the smallest
requirements
2. Circle the requirements for these days, and assign a worker to
all days not circled.
3. Subtract 1 from the requirement of each day not circled,
removing existing circles, and repeat this process until all
requirements are satisfied.
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Example
•
T.R. Accounting Service is developing a workforce
schedule for three weeks from now, and has forecast
demand and translated it into the following minimum
personnel requirements for the week.
Day
Mon
Min Personnel
•
Tue
8
Wed
Thu
6
6
6
Fri
Sat
9
Sun
5
3
The staff requirements are for fulltime accountants.
Company wants to schedule the employees so that each
employee has two consecutive days off and all demand
requirements are met.
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Day
Min Personnel
Mon
8
Tue
6
Wed
6
Thur
6
Fri
9
Sat
5
Sun
3
Employee 1:
New requirements:
Employee 2:
New requirements:
Employee 3:
New requirements:
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Ex: Remaining assignments
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TS. Đặng Hữu Phúc
Ex: Final Accountant Schedule
Minimum
requirements
8
6
6
6
9
5
3
159
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Assignment
•A
swimming pool needs lifeguards seven days a
week. Develop the schedules so that each lifeguard
has two consecutive days off during the week.
•
Monday as the first day of the week. Thus an
employee cannot be off on Sunday and Monday.
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Understanding Scheduling and Sequencing
•
•
Sequencing refers to determining
the order in which jobs or tasks are
processed.
Examples:
Emergency room
patients, automobile models on an
assembly line, outgoing flights on
runways.
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Sequencing
•
•
Sequencing is required when several activities must be
processed using a common resource.
Commonly Used Priority Rules
1. First come, first served (FCFS):
2. Earliest due date (EDD)
3. Shortest processing time (SPT)
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Sequencing: Measuring performance
Flow time is the amount of time a job spent in
the shop or factory.
Fi = ∑pij + ∑wij = Ci - Ri
Fi = Flow time of job i
∑pij = Sum of all processing times of job i at
workstation or area j (run + setup times)
∑wij = Sum of all waiting times of job i at
workstation or area j
Ci = Completion time of job i
Ri = Ready time for job i where all materials,
specifications, and so on are available
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Sequencing
Makespan: is the time needed to process a
given set of jobs.
M=C-S
M = Makespan of a group of jobs
C = Completion time of last job in the group
S = Start time of first job in the group
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Sequencing
• Lateness is the difference between the completion time and the due
date (either positive or negative).
• Tardiness is the amount of time by which the completion time
exceeds the due date.
(Tardiness is defined as zero if the job is completed before the due
date.)
Li = Ci - Di
Ti = Max (0, Li)
Where
Li
Ti
Di
Ci
= Lateness of job i
= Tardiness of job i
= Due date of job i
= Completion time of job i
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Sequencing
Sequencing rules for a fixed set of
jobs:
•
Shortest Processing Time (SPT)
✓ SPT sequencing
maximizes resource
utilization and minimizes
average flow time and
work-in-process inventory.
•
Earliest Due Date (EDD)
✓ EDD minimizes the
maximum job tardiness
and lateness.
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Example
• Consider
a work station that has one maintenance
mechanic to repair failed machines. We can think of
the mechanic as the processor (scarce resource) and
the machines awaiting repair as the jobs. Let us
assume that six machines are down, with estimated
repair times given here, and that no new jobs arrive.
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Example:
SPT Rule
Job
Sequence
Flow
Time
Sum
Job
Sequence
Flow
Time
Sum
Job
Sequence
Flow
Time
Sum
#1
10
10
#4
2
2
#6
6
6
#2
3
13
#2
3
5
#2
3
9
#3
7
20
#6
6
11
#4
2
11
#4
2
22
#3
7
18
#3
7
18
#5
9
31
#5
9
27
#5
9
27
#6
6
37
#1
10
37
#1
10
37
Sum
133
Sum
100
Sum
108
Average
22.16667
Average
16.66667
Average
18
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Suppose an insurance underwriting work area (that is, the single
processor) has five commercial insurance jobs to quote that have these
processing times and due dates:
FCFS Rule
Job
1
2
3
4
5
Processing Time (days)
4
7
2
6
3
Due Date
15
16
8
21
9
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Examples of Sequencing Rules
SPT Rule
Job
1
2
3
4
5
Processing Time (days)
4
7
2
6
3
Due Date
15
16
8
21
9
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Examples of Sequencing Rules
EDD Rule
Job
1
2
3
4
5
Processing Time (days)
4
7
2
6
3
Due Date
15
16
8
21
9
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Examples of Sequencing Rules
Comparison of Three Ways (By-the Numbers, SPT, and EDD)
to Sequence the Five Jobs
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Solved Problem
Five tax analysis jobs are waiting to
be processed by Martha at T.R.
Accounting Service. Use the
shortest-processing-time (SPT) and
earliest-due-date
(EDD)
sequencing rules to sequence the
jobs. Compute the flow time,
tardiness, and lateness for each
job, and the average flow time,
average tardiness, and average
lateness for all jobs. Which rule do
you recommend? Why?
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Applications of Sequencing Rules
Two-Resource Sequencing Problem (Johnson’s Rule)
1. List the jobs and their processing times on Resources #1 and
#2.
2. Find the job with the shortest processing time (on either
resource).
3. If this time corresponds to Resource #1, sequence the job first;
if it corresponds to Resource #2, sequence the job last.
4. Repeat steps 2 and 3, using the next-shortest processing time
and working inward from both ends of the sequence until all
jobs have been scheduled.
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Applications of Sequencing Rules
Example: Two-Resource Sequencing
Problem (Johnson’s Rule)
Each job requires first a shearing operation
(Resource #1) and then a punch-press
operation (Resource #2).
Next, both job 1 on the shear and job 3 on the punch press have the
next shortest time. Choose job 1:
Continuing, choose job 3 and finally job 4:
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Applications of Sequencing Rules
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Schedule Monitoring and Control
•
•
Schedule progress must be monitored on a continuing basis.
Reschedules are a normal part of scheduling.
Gantt charts are useful tools for monitoring schedules. This
helps to track jobs that are behind, on, or ahead of schedule.
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Schedule Monitoring and Control
Gantt Chart Example for Monitoring Schedule Progress
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www.website.com
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