Operations Management
Midterm Exam
Rod Jacobson
Spring 2012
Joel Lenoir
1. Why do we study Operations Management? What two words do I use consistently to
describe the benefits?
We study Operations Management (OM) for 4 main reasons. OM one of the main
business functions and is related to all other functions so studying OM helps us to
understand OM works with all the other functions to create a productive environment.
OM refers to the operations aspect of an organization; we study this to understand
how goods or services are produced. This way we can find the best way to conduct
operations to achieve both efficiency and effectiveness.
Because operations management is so important to all organizations it is
important to understand what OM mangers do. This will allow others in the organization
to work with the OM manager if they understand what he OM manger is trying to
accomplish.
Lastly OM is studied because of its cost within an organization. OM is a very
expensive part of any organization, understanding OM can greatly improve the
profitability of an organization.
The two words associated with OM are efficiency and effectiveness. Good
operations results in both, it allows a company to deliver an effective product or service
while still being efficient. Proper operations management can take a company for a small
business to a large firm with the right implementation. These two words are the benefits
to an organization that practices good operations management.
2. In December, General Motors produced 6600 customized trucks at their Flint plant. The
labor productivity at the plant is known to have been 0.10 trucks per labor-hour during
the month. There were 300 laborers employed at the plant that month.
a) How many hours did the average laborer work that month?
Productivity = Units produced / Labor-hours used
0.10 = 6,600 units / Labor-hours used
6,600 / 0.10 = Labor-hours used
66,000 = Labor-hours used
Average hours worked per laborer = 66,000 / 300
Average hours worked per laborer = 220 hours
b) If productivity can be increased to 0.11 trucks per hour, how many hours would
the average laborer work that month?
Productivity = Units produced / Labor-hours used
0.11 = 6,600 units / Labor-hours used
6,600 / 0.11 = Labor-hours used
60,000 = Labor-hours used
Average hours worked per laborer = 60,000 / 300
Average hours worked per laborer = 200 hours
3. Rod Jacobson operates a bakery in downtown Lyndonville Vermont. Due to an excellent
product and high traffic location, demand has increased by 25% in the past year. On far
too many days, Rod’s bakery ran out of bread before all customers could be served. Due
to the size of the bakery, no new ovens can be added without a very costly addition. One
of the staff bakers suggested ways to load the ovens differently so that more loaves of
bread can be baked at one time. This new process will require the ovens be loaded by
hand, requiring additional man power. This is the only thing to be changed. Each baker
works 160 per month. If the bakery makes 1500 loaves per month with a labor
productivity of 2.344 loaves per labor-hour, how many workers will Rod need to add?
New demand = current demand * 1.25
1,500 * 1.25 = 1,875
New Productivity:
2.344 = 1,875 / labor hours
Labor hours = 1,875 / 2.344 = 800
Total workers needed = 800 labor hours / 160 hours per month
Total workers needed = 5 workers
Current Productivity:
2.344 = 1,500 / labor hours
Labor hours = 1,500 / 2.344 = 640
Total workers needed = 640 labor hours / 160 hours per month
Total workers needed = 4 workers
Rod will need to add to hire 1 more worker.
4. Brandon Production is a small firm focused on the assembly and sale of custom
computers. The firm is facing stiff competition from low-priced alternatives, and is
looking at various solutions to remain competitive and profitable. Current financials for
the firm are shown in the table below. In the first option, marketing will increase sales by
50%. The next option is Vendor (Supplier) changes, which would result in a decrease of
10% in the cost of inputs. Finally there is an OM option, which would reduce production
costs 25%. Which of the options would you recommend to the firm if it can only pursue
one option? In addition, comment on the feasibility of each option.
Business Function Current Value
Cost of Inputs
$50,000
Production Costs
$25,000
Revenue
$80,000
Option 1: Increased Revenue
80,000 * 1.50 = $120,000
120,000 – (50,000 + 25,000) = 45,000
Doubling sales is not always easy and should not be the only way to remain competitive
and profitable. Cutting costs is more feasible and more controlled than increasing sales
revenue for a business.
Option 2: Decrease in Cost of Inputs
50,000 * 0.10 = $5,000
50,000 – 5,000 = $45,000
80,000 – (45,000 + 25,000) = 10,000
This option seems feasible because it does not call for a huge cut in costs and should be
able to be achieved without much trouble. I would say this is one of the most feasible
options.
Option 3: Reduce Production Costs
25,000 * 0.25 = 6,250
25,000 – 6,250 = 18,750
80,000 – (50,000 + 18,750) = 11,250
Again this is a more feasible option than doubling sales, but still cutting costs by ¼ is not
an easy task.
5. Starbucks is one of the best known coffeehouse chains in the world. Each store sells a
variety of innovative products to complement the array of coffee choices available.
However, 75% of current stores are located in the United States and the expensive nature
of the coffee leaves Starbucks vulnerable to changes in consumer spending behavior
(such as recessions). Recently Starbucks has begun initiatives to sell its specialty coffee
beans for home use, presenting a chance for a large increase in revenue and
diversification. However, Starbucks faces fierce competition seeking a piece of its
lucrative market share and the threat of consumer behavior changes, given its reputation
rides on a singular product. Perform a SWOT analysis for Starbucks.
Internal
Negative
Strengths
-Large selection of coffee, and specialty
beverages
-Unique style compared to competitors
-Provides customers with internet access
-Innovative ordering system, incorporating
technology
-Differentiation from competitors with
many offerings and the environment of
Starbucks is much different than that of
many other coffee chains
Weaknesses
-Single product
-Lack of a large global market compared to
competitors
-High prices
Opportunities
-Increasing products to include selling their
specialty coffee for home use
-Expand to other countries to create a
larger global presence
Threats
-Increasing cost of coffee beans
-Customer behavior
-Social trends, customers want more than
just coffee
-Competition moving in on their market
External
Positive
6. Identify and explain the four basic global operations strategies. Give an example of each
strategy.
When organizations go global they need to approach the way they operate
differently to suit the new areas they are expanding to. They can use one of the following
global operations strategies to help them succeed in the global market, international,
multidomestic, global, and transnational strategies. All of these strategies have their
differences and make them effective and useful in different organizations.
An international strategy basically deals with exports to gain a foot in the global
market. It is simple for the companies doing it because they don’t have to change their
ways of operation very much to accomplish this. International strategy is low in both cost
reduction and responsiveness. They are not aiming to lower costs or provide locations
globally, just to get their product into the global market. Licensing is also seeing in
international markets because it is low risk, all the risk is passed onto the licensee. An
example of a company in an international market would be Harley-Davidson.
A multidomestic strategy is driven by decentralization; operating decisions
ultimately come down to the locations themselves no matter what country they are in, the
advantage gained with this is highly competitive local responsiveness. This is seen
primarily in franchises such as McDonald’s or other chain type of dining and stores. The
focus is on exporting the operations that made them successful not the products
themselves. It does not carry much cost advantage but is still a commonly see strategy to
taking on the global market.
Next is global strategy, seemingly just the opposite of multidomestic strategy,
takes a centralized approach controlled by headquarters. This strategy is cost effective
because it coordinates all the plants together learning from one another but still producing
the same product no matter where the location. Caterpillar for example has factories
around the globe, being the largest producer of earth moving equipment, but it is always
the same no matter the factory it rolls out of. The result of this is low responsiveness but
high cost reduction and creating economies of scale.
Lastly is transnational strategy, this tries to combine the best of worlds, local
responsiveness and cost reduction. This is achieved by spreading out resources but
keeping them specialized, there is no centralization or decentralization, each subsidiary of
the company operates locally. They try to create a network of flexible and efficient
subsidiaries to stay cost effective. A company like this would be Nestle; although they
are Swiss their assets are not even held there.
7. A network consists of the activities in the following list. Times are given in weeks.
Activity
A
B
C
D
E
a.
Preceding
--A
A, B
C
Time
8
3
7
3
4
Draw the network diagram.
A
C
E
Start
D
End
B
b.
Calculate the ES, EF, LS, LF, and Slack for each activity.
Activity
A
B
C
D
E
Time
ES
8
3
7
3
4
EF
0
0
8
8
15
LS
8
3
15
11
19
LF
0
13
8
16
15
Slack
8
16
15
19
19
0
13
0
8
0
c.
What is project completion time?
Total project completion time is 19 weeks.
8. The network below represents a project being analyzed by Critical Path Methods.
Activity durations are A=5, B=2, C=12, D=3, E=5, F=1, G=7, H=2, I=10, and J=6.
a. What task must be on the critical path, regardless of activity durations?
Activity J will be on the path no matter what
b. What is the duration of path A-B-E-H-J?
5 + 2 + 5 + 2 + 6 = 20
c. What is the critical path of this network?
The critical path is A-B-G-I-J
d. What is the length of the critical path?
The length of the critical path is 5 + 2 + 7 + 10 + 6 = 30
e. What is slack time at activity H?
Slack time of H is 5
f. What is the Late Finish of activity H?
LF of H is 24
g. If activity C were delayed by two time units, what would happen to the project duration?
The project duration would not change because the slack time of C is 5 so it can be
delayed up to 5 days without affecting the project.
Supporting Calculations
Activity
a
b
c
d
e
f
g
h
i
j
Time
ES
5
2
12
3
5
1
7
2
10
6
EF
0
5
5
0
7
3
7
17
14
24
LS
5
7
17
3
12
4
14
19
24
30
LF
0
5
10
11
17
13
7
22
14
24
Slack
5
7
22
14
22
14
14
24
24
30
0
0
5
11
10
10
0
5
0
0
Critical
yes
yes
no
no
no
no
yes
no
yes
yes
9. A partially solved PERT problem is detailed in the table below. Times are given in weeks.
Activity Preceding
A
-B
A
C
A
D
A
E
B
F
B
G
C, F
H
D
I
H
J
G, I
K
E, J
Optimistic Probable Pessimistic Expected
Time
Time
Time
Time Variance
7
9
14
9.5
1.361
2
2
8
3
0
8
12
16
12
0
3
5
10
5.5
1.361
4
6
8
6
0
6
8
10
8
0
2
3
4
3
0
2
2
8
3
1.000
6
8
16
9
2.778
4
6
14
7
2.778
2
2
5
2.5
0.250
a.
Calculate the expected time for each activity. Enter these values in the appropriate
column in the table above.
b.
Which activities form the critical path?
A-D-H-I-J-K
c.
What is the estimated time of the critical path?
9.5 + 5.5 + 3 + 9 + 7 + 2.5 = 36.5
d.
What are the project variance and the project standard deviation?
Project variance = sum (variances on critical path)
1.316 + 1.316 + 1 + 2.778 + 2.778 + 0.250 = 9.528
Project standard deviation = sqrt (project variance)
Sqrt (9.528) = 3.1
e.
What is the probability of completion of the project after week 40?
Z = (40 – 36.5)/3.1
Z = 1.13 = 0.87076 = 87% chance of completion after week 40
10. Pirmin's Bike Shop is behind on a custom bike and needs to crash 8 hours of time from the
8-step project. Given the project table below calculate the crash cost for 8 hours of time-savings.
Suppose Pirmin calls the customer and asks for a project extension, reducing the amount of time
he needs to crash. Calculate both the maximum time-savings available on a $25 crash budget
and the cost to crash four hours of savings.
Activity
A
B
C
D
E
F
G
H
Normal
Duration
(hours)
2
3
5
3
6
1
7
10
Normal
Cost ($)
10
15
25
20
30
5
35
50
B
Crash
Duration
(hours)
2
2
4
1
4
1
6
7
Crash
Cost (S)
0
23
30
24
45
0
50
80
Immediate
Predecessors
None
A
B
C
C
C,E
F
D,G
D
A
C
H
F
E
Critical Path is: A, B, C, E, F, G, H
activity
A
B
C
D
E
F
G
Normal - crash
0
1
1
2
2
0
1
crash $ - normal $
crash $ per period
-10
17
17
5
5
4
2
15
7.5
-5
15
15
G
H
3
30
10
11. Weekly sales of ten-grain bread at the local organic food market are in the table below.
Based on the following data, forecast week 9 using a five-week moving average.
WeekSales
1
2
3
4
5
6
7
8
415
389
420
382
410
432
405
421
Five-week moving average = past 5 months / 5
= 382 + 410 + 432 + 405 + 421 = 2050
= 2550 / 5 = 410
Forecast for week 9 = 410
12. A management analyst is using exponential smoothing to predict merchandise returns
at an upscale branch of a department store chain. Given an actual number of returns of
154 items in the most recent period completed, a forecast of 172 items for that period,
and a smoothing constant of 0.3, what is the forecast for the next period? How would
the forecast be changed if the smoothing constant were 0.6? Explain the difference in
terms of alpha and responsiveness
New forecast = last periods forecast + a(last periods actual demand – last periods
forecast)
Forecast for smoothing constant of 0.3
= 172 + 0.3(154 – 172)
= 172 – 5.4 = 166.6
Forecast for smoothing constant of 0.6
= 172 + 0.6(154 – 172)
= 172 – 10.8 = 161.2
Alpha is changed to give more weight to either past or recent data. This is used to give
a more accurate forecast.
13. Jim's department at a local department store has tracked the sales of a product over the
last ten weeks. Forecast demand using exponential smoothing with an alpha of 0.4, and
an initial forecast of 28.0 for period 1. Calculate the MAD. What do you recommend?
month
price per chip
forecast
forecasting error error * a forecast forecasting error
1
2
3
4
5
6
7
8
9
10
24
23
26
36
26
30
32
26
25
28
28.00
26.00
24.50
25.25
30.63
28.31
29.16
30.58
28.29
26.64
-4.00
-3.00
1.50
10.75
-4.63
1.69
2.84
-4.58
-3.29
1.36
-2.00
-1.50
0.75
5.38
-2.31
0.84
1.42
-2.29
-1.64
0.68
26.00
24.50
25.25
30.63
28.31
29.16
30.58
28.29
26.64
27.32
total
MAD
4.00
3.00
1.50
10.75
4.63
1.69
2.84
4.58
3.29
1.36
37.63
3.763
14. A firm has modeled its experience with industrial accidents and found that the number
of accidents per year (Y) is related to the number of employees (X) by the regression
equation Y = 3.3 + 0.049*X. R-Square is 0.68. The regression is based on 20 annual
observations. The firm intends to employ 480 workers next year. How many accidents
do you project? How much confidence do you have in that forecast?
Y = 3.3 + (.049 * 480)
= 26.82 accidents
R-squared is the coefficient of determination which in this case is 0.68, thus 68% of the
variation is from the dependent variable (y). I am confident in this forecast because
more than half of the variation is related to this equation and that there are other factors
that contribute to the number of accidents per year besides the number of employees.
15. A company is deciding if it should do design of a product in-house or outsource the
design. If outsourced the cost for a low bidder would be $40,000 and the cost for an
expensive bidder $100,000. To do the design in-house would require over-time for an
already stretched design team with total costs of $70,000. If all three designs (in-house,
low bid, high bid) are equal in quality and the likelihood of finding a low bidder is 60%
(meaning that 40% of the time the firm will have to hire the expensive bidder), should
the company outsource design or do it in-house?
EMV =
(.4)(100,00) +
(.6)(40,000)
0.4 High Bidder
100,000 total cost
= 64,00
Outsource
0.6 Low Cost
In-house
40,000 total cost
70,000 total cost
I would suggest the company outsource because the EMV in this case is the cost and it is
lower for the outsourcing options than the total cost of designing in-house.
16. A company is deciding if it should design an advertising system for use on Twitter©.
The first option is to skip out on designing, with no net costs or gains. The second
option is System A, which would result in additional sales of either $50,000 under good
conditions or $10,000 under bad conditions. The final choice is System B, which
would increase sales by $20,000 under both good and bad conditions. Suppose that
good conditions are twice as likely as bad conditions. Which option should the
company pursue if developing a system costs $25,000?
Based on this decision tree I would suggest system B because it has the highest EMV
which in this case is the potential increase in sales from the system.
EMV =
(.66)(50,000) +
(.33)(10,000)
Good (0.66)
= 36,300
50,000 sales increase
System A
EMV =
(.66)(50,000) +
(.33)(50,000)
= 49,500
Bad (0.33)
10,000 sales increase
Good (0.66)
50,000 sales increase
System B
Bad (0.33)
50,000 sales increase
Skip Designing
No costs or gains
17. JDI, Inc. is trying to decide whether to make-or-buy a part (#J-45FPT). Purchasing
the part would cost them $1.50 each. If they design and produce it themselves, it will
result in a per unit cost of $0.75. However, the design investment would be $50,000.
Further, they realize that for this type of part, there is a 30% chance that the part will
need to be redesigned at an additional cost of $50,000. Regardless of whether they
make-or-buy the part, JDI will need 100,000 of these parts. Using decision trees
analysis and EMV, what should JDI do? Show the decision tree.
EMV =
(.7)(175,000) +
(.3)(125,000)
50,000 Initial Cost
50,000 Additional Cost
75,000 Mfg cost (100,000 * .75)
175,000
0.7
= 160,000
Make
50,000 Initial Cost
75,000 Mfg cost (100,000 * .75)
125,000
0.3
Buy
150,000 Mfg cost (100,000 * 1.50)
Based on this decision tree I would suggest they buy because the cost of buying the part
is lower than the EMV which in this case is cost.
18.Construct a cause and effect diagram for why students arrive to class late. Include at
least three reasons for each of the M's.
Material (Class Supplies)
Finishing current homework
Method (Where they’re coming from)
Meeting with another professor
Previous class ran late
Forgot the Book
Coming from work
Didn’t read the chapter
Coming from burke
Student Late To Class
Oversleeping (dismissing alarm)
Staying up night before
Bad roads due to weather
Forgot they had class
Car breaks down
No motivation to go
Manpower (Student)
Machine (Transportation)
19. Management is concerned that workers create more product defects at the very
beginning and end of a work shift than at other times of their eight hour workday.
Construct a scatter diagram with the following data, collected last week. Is management
justified in its belief?
First hour at work
Second hour at work
Third hour at work
Fourth hour at work
Fifth hour at work
Sixth hour at work
Seventh hour at work
Eighth hour at work
Monday
12
6
5
4
1
4
7
5
Number of Defects
Tuesday Wednesday Thursday
9
6
8
5
3
4
2
4
3
0
5
2
6
2
4
3
3
2
4
4
6
7
8
5
Friday
7
5
3
3
5
1
3
9
Defects vs Hour at Work
14
Number of Defects
12
10
8
Monday
6
Tuesday
4
Wednesday
2
Thursday
Friday
0
1st 2nd 3rd
4th
5th
6th
7th
8th
hour hour hour hour hour hour hour hour
at
at
at
at
at
at
at
at
work work work work work work work work
I would say they are justified because in looking at this it can be seen that the most
defects happen during the 1st, 2nd, 7th, and 8th hours of work.
20. Mary is considering purchasing a machine from two suppliers. Supplier A's machine
has an annual fixed cost of $10,000 and a unit variable cost of $2.10. Supplier B's
machine has an annual fixed cost of $16,000 and a unit variable cost of $3.00. How
large should Mary's annual demand be in order to make Supplier B's machine the better
choice?
10,000 + 2.10x = 16,000 + 3.00x
-0.9x = 6,000
In this case it doesn’t matter how large Mary’s annual demand is because Supplier B’s
machine will always be more expensive because both the fixed and variable costs to use
their machine are higher. It will always be a better choice for Mary to use Supplier A.
21. A non-profit organization is planning a raffle to raise money. It has two options for
tickets. The first option is to do the tickets by hand, with fixed costs of $50 and
variable costs of $.05 per ticket. The second option is to outsource production. This
would result in fixed costs of $500 and variable costs of $.01. If the organization plans
to sell 10,000 tickets which option should it choose?
Option A: 50 + (.05 * 10,000) = $550
Option B: 500 + (.01 * 10,000) = $600
If they sell 10,000 tickets they should choose option A.
22. Brandon's computer shop is considering two different configuration options. The first
one is to have each computer built by the sales associates when they have free time.
The second option is to hire a dedicated assembly technician. Option A has variable
costs of $50 per computer and no fixed costs. Option B has a fixed cost of $1,000 but
variable costs of only $5 per computer. What is the cross-over point?
50x = 1000 + 5x
45x = 1000
x = 22.22
The crossover point is about 22 computers
At this point both options will cost $1111, any number below this option A is better and
anything above it option B is better.
23. How is benchmarking data used in the quality analysis of our own products and
services?
Benchmarking is where an organization selects a standard that is seen as the very
best performance for doing any activity or process. The point of this is to set a target to
hit, by doing this you can compare your performance to that of the organization that
you’re using as a benchmark. To do this companies choose other organizations that are
seen as the best, and that are similar to their own, even if they are not in the same
industry then compare their performance to them. This gives an organization a direction
and help them see where they can improve processes or activities to reach or surpass
their benchmark.
24. What is the highest level quality belt anyone can obtain?
Six sigma master black belt is the highest quality belt anyone can obtain.
25. What does APICS stand for…..and how many certification exams must you take?
Formerly the American Production & Inventory Control Society, APICS, stands for The
Association of Operation Management. The APICS exam that will make one certified in
production and inventory management (CPIM) consists of 5 exams that must be passed to be
certified.
The exams are:





Basics of Supply Chain Management
Master Planning of Resources
Detailed Scheduling and Planning
Execution and Control of Operations
Strategic Management of Resources
apics.org