Operations Final Exam Study Guide
Test 1 Study Guide:
Know Shewart and Demming”
I) Supply chain management: what contributed to the belief in the importance of the concept
a) Definition: focuses on the relationship between customers and their suppliers
i) Recognized that resource decisions within one business affect outcomes of customers and suppliers
ii) They had to extend the realm of decision making beyond the business’s walls and considers effects up and down
the supply chain
iii) Began to realize the financial gain and advantage they could achieve if they formed long lasting relationships with
their suppliers. This relationship would allow them to adapt to the changing environment since they had a
supplier that would be willing to work with them
iv) Realized decisions aren’t limited to the business that made them but extended to customers and supplers as well
b) Optimizing the value of the entire supply chain creates and minimizes the costs require a decision making perspective
that includes the entire supply chain
II) Value: ways to describe it.
a) Value is created by a company’s capabilities
b) Benefits over costs or outputs over inputs
c) The value attributes that make the difference in a purchasing decision are those that DIFFERENTIATE the product or
service from the competition
d) Ways to describe value:
i) Cost
- The expenses associated with ownership
- The amount of scarce resources consumed to achieve a specified objective
- Critical component of value and an important criterion for many operations decisions
ii) Quality
- Product quality
 How well does the product meet expectations?
 Did it do what it was designed to do?
 Reliability
 Durability
- Service quality
 The concept of quality is broader and more difficult to define
- Timeliness
 Associated with the product’s creation, delivery and availability
 Something now is more valuable than the same thing later
 more critical for business customers than regular consumers
 Often lumped together with quality when services are evaluated
III) Profitability
a) A measure of the productivity of money invested in a business, typically a ratio of net income to some input such as
net sales or total assets
i) Primary objective of a business
ii) Operations management: managing the productive resources to provide profitability
IV) Future profitability
a) A company strategy is how a company positions itself for future profitability
b) A business must determine how it can create value as its environment changes and as customer desires change
c) Strategy: the way of offering value to a specific set of customers and is the means by which the company positions
itself for future profitability
V) Product life cycle and Operations
a) Product life cycles 4 stages:
(1) Introduction
- Changes in the product may still be occurring and demand is unknown
- Operations must be flexible and prepared to suffer losses in the short term
(2) Growth
- Competition begins to be an issue
- Operations must be prepared to meet demand, provide good service and a quality product to stay ahead
of the pack
(3) Maturity
- Competition is intense and often based primarily on price
- Operations must find ways to reduce costs
(4) Decline
- The decision is made to either discontinue the product or improve/redesign it to get it back to the growth
stage
- Operations has to be flexible and prepare to produce a redesigned product or get ready for its
replacement
VI) Lean systems
a) Primary focus is on the elimination of waste in producing goods and services
b) Used to eliminate waste related to inventory, processes, and the workforce. Also used to help reduce inventory
VII) Processes and capabilities
a) Capabilities: the abilities a business has that result from its processes (capabilities create value)
i) Capabilities are created by processes
ii) Answers the questions:
- What can a company do for me?
- What am I paying for?
b) Processes: organized tasks accomplished by grouping resources together (create capabilities)
i) These activities are specifically designed to contribute to a product or service in a way that will be valuable to the
customer
ii) Play two critical roles in defining the financial return of a resource investment
(1) The lower the cost (value staying the same), the greater the difference between cost and market value
(2) The process is a major factor in the customer’s perceived value
VIII)
ROA and Operations
a) Return on Assets: is the broadest measure of asset productivity (Profit per dollar of asset)
b) This return on assets has big implications on the operations on the company because operations is in charge of a large
amount of the company’s assets
c) Measures how well assets are used to generate income
d) ROA can raise a red flag, but it doesn’t point to which asset needs to be attended to, to allow it to work at its full
potential
IX) Productivity: how is it measured
a) Profit Margin: Income/Sales
i) How much profit is generated per dollar of sales
ii) Operations decisions effect:
- High level sales result from products and services valued highly by customers
- Efficient processes that use resources productively can reduce costs and increase income
- Can eliminate costs by eliminating processes that don’t add value
b) Return on assets: Net income/Total Assets
i) Indication of profit per dollar of asset
ii) Can raise a red flag if assets aren’t producing, but cannot point to which asset isn’t efficient
c) Return on equity: Net income/Total Equity
i) Quantifies how well stockholders did during a year by providing a measure of the productivity of their investment
ii) Helps stockholders asses how well their investment is working, and how well the company is using their assets
iii) ROE not commonly used for operations performance measure
X) Expected value, as you would calculate it in a decision tree.
a) Expected value: the expected revenues associated with the different alternatives in the decision tree
i) Calculation: At a chance node (circle node) multiply the percentage change of the branch happening, by the
outcome of the branch. Then add the totals together to get the expected value for that chance node
XI) Inventory: measuring average inventory. Taking steps to reduce average inventory.
a) Average Inventory= (Inventory at the beginning of the month + Inventory at the end of the month)/2
b) Average Inventory Investment = Average inventory x Cost of a piece of inventory
c) “reengineering” and “continuous replenishment (at the time they did not refer to it as “JIT”): the act of companies
streamlining processes and slashing inventory
i) They did this because they realized that excess inventory was a huge drain on the productivity of assets
d) Inventory turnover: most frequently used measure of inventory productivity
i) More often inventory turns over, the better
XII) Utilization (more time related)
a) A productivity measure for machines that is equal to actual running time/time available
b) An increase in utilization will:
(1) Cause more units to be produced, which will spread the fixed costs associated with buying the resource
(machine) over more units
(2) This spreading won’t necessarily result in an increase in net income
- Ex. If production rate exceeds the demand rate in the marketplace
 Costs are increasing but sales revenue is not (costs of storing excess inventory would rise as well)
XIII)
Efficiency (more output/unit related)
a) The ratio of actual output to standard output (actual output/standard output)
i) Standard output being an industry standard for output
ii) “Compares what actually happened to what actually happened)
- Unlike Utilization, efficiency can be greater than 100% (if a resource is performing better than the
standard)
XIV)
Balanced score card
a) A performance measurement system that combines financial and nonfinancial measures of business performance
b) “Financial measures only looked at the past, and businesses needed to look into the future”
c) Creates a mechanism by which the organization’s strategy can be more tightly linked to the day-to-day activities and
decisions of employees
d) Balanced scorecard’s approach based on four perspectives:
(1) Financial objectives
- Doesn’t eliminate the use of financial measures, it recognizes the importance but understands that they
alone cannot guide a firms actions and strategic decisions
- Financial measures on the scorecard can be tailored to the organizations objectives
(2) Customer outcomes
- Customer satisfaction is absolutely necessary
- The scorecard utilizes metrics that focus on the processes customers interact with
(3) Internal business processes
- Define value and quality for the customer and dictate how well resources are used
- They capture how well the processes contribute
- Scorecard recognizes 2 types of internal processes
 Mission oriented: those that contribute directly to product and service value and are more likely to
be unique to the business
 Support processes are more repetitive and generic and are more likely to be similar to those used in
other organizations
(4) Learning and growth
- Includes issues that are associated predominantly with the workforce
 Training, education, coaches, communication systems etc.
XV) Design capacity. What is it and is it the foundation of the measurement of efficiency?
a) The maximum rate of output achieved under ideal conditions.
b) It is not a foundation for the measurement of efficiency.
i) Efficiency is measured using the standard output (the average output in an industry, which isn’t always the IDEAL
output)
XVI)
Effective capacity. Does it relate to the measurement of efficiency?
a) Usually less than design capacity, taking into account real world variations (lunch breaks, bathroom breaks and other
inefficiencies)
b) IS the foundation of efficiency
c) Not always ideal but is more realistic
XVII) Capacity. What is it? How does it relate to unexpected disruption and the possibility of a missed due date?
a) The capability of workers, machines, plants, servers, or organizations to produce output in a specific period of time.
b) When there are unexpected disruptions, capacity is lowered because the asset (machine) is unable to run or its ability
is greatly hindered, which could dramatically decrease output (possibly allowing it to miss a due date)
XVIII) Lowering cost per unit.
a) Increasing utilization will result in more products being produced. This will lower cost because the fixed cost of the
machine, will be spread out over more units (making the cost attributed to each unit lower)
b) Increasing efficiency can be looked at in the same manner. If efficiency is increased and as actual output grows, the
cost of the fixed asset (machine) can be spread out over more units produced
c) If employees are well trained, they can also lower unit cost by reducing waste and time spent on individual products,
therefore reducing the cost spent on the product
d) Cost per unit is at its lowest when the production or service rate matches the design capacity
XIX)
Outsourcing versus not outsourcing.
a) There is a trend toward outsourcing
i) This trend gives companies a way to enhance value while at the same time remaining focused on core capabilities
ii) Results in a higher quality product, because companies are allowed to exercise their core competencies and
combine to make a superior product
iii) Make or buy decision: must decide whether it is cheaper (or adds more value) to make in house or outsource a
certain process or product
XX) What is meant by structural decisions in Operations Management?
a) Bricks and mortar type issues (actual structure of the business)
i) Relates to tangibles such as buildings, equipment, the way equipment and personnel are organized in processes
and how the business links to other businesses
ii) Strategic decisions in operations
- Structural decision:
 Capacity
 Facilities
 Process technology
 Vertical integration/supplier relationships
XXI)
Layout: different types and service versus manufacturing.
a) Different types
i) How facilities will be arranged
- Critical to enhancing or limiting the business’s range of capabilities
- Type of equipment purchased, facility design, skill level of employees
ii) General Layout decisions: strategic decisions for process requirements
(1) Product oriented
- Used where there is little variation from one item to the next, provides the necessary resources in a fixed
sequence that matches the sequence of steps required to produce the product or service
Advantages:
 Repetitive tasks to gain efficiency
 Processing speed
 Low cost per unit
 Can be viewed as a linear series of processing steps
- Disadvantages:
 Lack of flexibility
 Customization is virtually impossible
 Employee boredom, dissatisfaction, and potential quality problems
(2) Process oriented
- Key advantages
 Flexibility and customization
- Resources are arranged by function
- Each functional department has a range of capabilities
- Weaknesses:
 Higher cost per unit
 Inability to take advantage of economies of scale
 Requires more highly skilled employees
 More transportation time (customers/products may wait in line to be served)
(3) Cellular layout (Hybrid of process and product oriented)
- Products whose processes require similar resources are grouped into product families. Each cell contains
all the resources necessary to produce products in that family
- Has flexibility, but not as much as process oriented
- Movement costs are reduced since all the resources and work centers needed are found in the one place
b) vs. Services
i) Service
- Customer contact has two significant effects
 The more customer contact, the greater the opportunity for service providers to make additional
sales to the customer
 As customer contact increases, efficiency and productivity of the service process declines (spending
more time with the customer, efficiency goes down)
XXII) Flexible manufacturing systems
a) Project: extremely flexible, a set of activities aimed at meeting a goal, with a defined beg and end
i) unique one of a kind, customers or products
ii) generally large in size and have a reasonably long duration
iii) may be used only temporarily
-
b) Job Shop: A manufacturer, typically a process-oriented layout, that is able to produce custom tools and equipment for
others bc of its flexibility
i)
higher volume than project but high degree of customization
c) Batch production: production in which identical products or customers are processed through one step, and then the
entire batch goes to the next
i) used bc some flexibility on the part of the equipment
ii) time required to change equip= changeover or setup (more changeover greater motivation to produce large
batches)
d) Assembly Line: manufacturing processing made up of equipment with little flexibility in a product oriented layout
e) Continuous Processing: any equipment or workshop dedicated to one product or service, yielding high levels of
efficiency
XXIII) Process types: the “diagonal”
XXIV) Service systems: process efficiency versus sales opportunities.
a) Process efficiency and sales opportunity are both significantly affected by customer contact:
i) The greater the customer contact the higher the sales opportunity (face to face) direct relationship
ii) The greater the customer contact the lower the process efficiency (Mail and E-mail contact) Inverse relationship
- Process efficiency and sales opportunities are inversely related
XXV) Concurrent engineering
a) Ultimate in integrating process design and new product and service design
i) development team members are responsible for each of the necessary tasks but they work together throughout
the development process (more cooperative approach to design, allows for best possible product)
b) Process and product/service design tasks are completed simultaneously
i) Adds to the compatibility between product/service and process design
ii) Reduces time required to accomplish all design functions
iii) Enables communication and coordination between various aspects of the product and service development
process
iv) Results in higher levels of quality and reduced costs
XXVI) Service blueprints
a) An approach to creating a diagrammed model of a service to enhance management’s ability to analyze its strengths
and weaknesses
b) Identifies decision points, failure points, and the line of visibility
i) Failure points: places in the process that can result in the failure to the service
- Identification is critical because it provides an opportunity to create a control mechanism such as a pokayoke
- Points in the process that make customers wait is critical because they are non value adding activity
ii) Line of visibility
- The line where customers are exposed to the processes, the processes under the line are not visible by
customers
c) Primary advantages: these key points can be identified and addressed prior to the development of a new service or a
change in an existing one
XXVII) Dimensions of product and service quality
a) Product specific quality dimensions
- Performance: specific characteristics and capabilities of the product or service
- Features: additional capabilities which can be added to the product/service
- Durability: how long a product will last under different conditions
- Serviceability: the amount of effort required to repair a product
b) Service-specific quality dimensions:
- Assurance: level of trust and confidence generated by employees that customers interact with
- Empathy: the approachability and sensitivity employees demonstrate
c) Dimensions shared between products and services:
- Reliability: addresses the constancy of performance
- Responsiveness: the companys ability to respond promptly
- Reputation: the business’s performance history
- Tangibles: physical facilities, equipment, and written material the customer comes in contact with
- Aesthetic: dimension covers the aspects like look, sound, or smell of the product, or the way it feels
XXVIII) W. Edwards Deming: his approach to quality and process improvement.
a) Studied the works of Shwehart, was one of the principal trainers of Japanese manufacturers in the 1950s
b) Deming extended the techniques and tools developed by Shewhart to a set of principles (14 points) to guide
management in the development of business systems
c) Places a great importance on the managerial aspects of quality
i) Stressed the significant quality improvement only comes from changing the organization and that responsibility
rests with upper management
XXIX) Walter Shewhart
a) His primary contribution to product and service quality was the recognition that variability existed in all
manufacturing processes and statistical tools could help explain that variability
b) Developed the use of statistics process control charts, which provided operations to control the variability of
processes
XXX) The cost of quality: All costs associated with maintaining the quality of goods and services
a) External failure costs
i) Cost incurred when a customer is exposed to poor quality
ii) The most expense of all costs
- More costs have been spent on the product (transportation and stocking costs)
- Potential loss of customer (negative word of mouth)
b) Internal failure costs
i) Associated with correcting a defect before the customer comes into contact with the product or service
ii) Cost of scrapping the item, reworking the item, and selling it at a discount rate
c) Appraisal costs
i) Costs associated with product inspection, testing and auditing of quality related systems
ii) Testing: a specific type of inspection that is used when visual inspection cannot reveal whether or not products
meet specifications
- Used a lot in electronics or expensive products or have a high failure rate
iii) In services, usually precede the customer’s involvement
d) Prevention costs
i) Associated with efforts to prevent errors or defects from happening
- Employee training
- Process improvement and control activity
- Quality planning activity
ii) Most proactive of the firms investments in quality management
Test 2 Study Guide (Items not in final exam guide):
1. Process capability: the ability of a process to consistently meet customer expectations, demonstrated by the control
limits being within the customer specifications
a. Capability index (Cp): the ratio of the spread of the customers acceptability (upper limit – lower limit)
divided by the spread of the process (6 standard deviations):
Upper Customer Specification Limit – Lower Customer Specification Limit/6
b. Cpk, for processes that are not centered:
a.
Compute and interpret
a. Cp index = 1; minimally acceptable and means that the 3 control limits are exactly the same as the
upper/lower customer specification limits
Cp index > 1; the 3 control limits are within the limits
*the greater the Cp index, the farther inside the limits the 3 limits are
b. Cpk = 1, or greater: considered a “capable process”
b. Find probability of producing within specification limits
2. Statistical Process Control: a preventative approach to managing quality by monitoring processes in a way that
identifies potential problems before defects are even created
a. X-bar chart, R charts
b. X-bar chart: used to monitor the sample means of variables that result from a process; values plotted are
means of subgroups; the center line (representing X-double bar) is the mean of the subgroup means
c. R-chart: used to monitor sample ranges; always used with an X-bar chart
b. Calculate control limits and interpret the results
a. X-Bar chart Upper and Lower Control Limits (X: the mean of the sample means, A 2: X-Chart factor, R:
average range from the samples)
b.
R-chart Upper and Lower Control Limits (D3 and D4: R-chart factors, R: average range from the samples)
c. Nonrandom Patterns on Control Charts
Pattern
Possible Meaning
The process average has changed.
Individual points above UCL or below LCL
The process average has changed (assuming a
9 points in a row, all above/below the mean
symmetrical distribution around the mean, which
may not be the case for R-charts).
There is a drift in the process average.
6 points in a row, all increasing/decreasing
Two alternating causes are producing different
14 points in a row alternating up and down
results.
Potential process shift
4 our of 5 points in a row in zone b or beyond
Smaller variability than should be expected
15 points in a row in zone 3, above and below the
center line
Different samples are affected by different factors,
8 points in a row in zone b, a, or beyond, on either
resulting in a bimodal distribution of means
side of the center line, without points in zone c
3. Job sequencing: Determine sequence and evaluate the decision rule, such as EDD or SPT
a. Sequencing (dispatching) rules: used to determine which order or client to process next
b. First come, first serve (FCFS): prioritizes by when a person or job arrived in the queue; usually used in the
case of actual customers waiting in line to be served
c. Earliest due date (EDD): prioritizes customers or jobs by the due date, job or order due earliest gets the
highest priority
d. Shortest processing time (SPT): gives the highest priority to the job with the shortest expected processing
time
e. Critical ration (CR): prioritizes by the ratio of the time remaining to the time needed to complete the job; the
smallest ratio goes first
Client
Smith Clothing
Thomas Retail
Stevens Sports
L&P Financial Services
Simmons Retailing
Basic Information on Jobs in a Queue
Order Arrival Sequence
Due Date
Estimate Completion Time for Design
(days)
1
17
11
2
9
5
3
6
3
4
11
4
5
29
7
Job Sequencing Using EDD
Client
Stevens Sports
Thomas Retail
L&P Financial Services
Smith Clothing
Estimated Completion
Time (days)
3
5
4
11
Due
Date
6
9
11
17
Expected
Completion Date
3
8
12
23
Lateness
0
0
1
6
Simmons Retailing
7
29
30
1
*Lateness: if the expected completion date is after the required completion date, the number of days late is the
lateness for that order
Job Sequencing Using SPT
Client
Stevens Sports
L&P Financial Services
Thomas Retail
Simmons Retailing
Smith Clothing
Estimated Completion
Time (days)
3
4
5
7
11
Due
Date
6
11
9
29
17
Expected
Completion Date
3
7
12
19
30
Lateness
0
0
3
0
13
Job Sequencing Using CR
Client
Estimated Completion
Due
Critical Ratio
Expected
Time (days)
Date
Completion Date
Smith Clothing
11
17
1.55
11
Thomas Retail
5
9
1.8
16
Stevens Sports
3
6
2
19
L&P Financial Services
4
11
2.75
23
Simmons Retailing
7
29
4.14
30
* Critical ratio rule: the time remaining until the job is due/the time needed to complete the job
Lateness
0
7
13
12
1
4. Crashing: a methodical approach to reducing a projects duration
a. Any attempt to reduce the project duration must focus on the time of activities on the critical path
b. Process:
i. Identify critical path
ii. Identify activity on CP that has the lowest crashing cost
iii. Crash the activity with the lowest cost (identify the new critical path if it changes)
iv. If two or more CP exist, identify activities common to them to crash if they exist and crash common
activities first
v. As soon as one CP can no longer be crashed the process stops
vi. **Example 8.8, pg. 333
5.
Supply Chain Management: objective is to optimize performance of the chain to add as much value as possible for
the least cost possible
a. Motivating factors - most important reasons for adapting SCM:
a. Increased competition to meet customer expectations for value and differentiate capabilities from those
of competitors (cost and timeliness)
b. Recognition that customer decisions and actions often dictate costs and limitations for suppliers
(promotions, sales, other changes in price)
c. Recognition that supplier decisions and actions often dictate costs and limitations for customers (missed
delivery due date, defective products, dissatisfied customers)
d. Increased potential for timely communication and feedback brought about by technological advances
(internet)
6. Inventory Management
a. ROP: fixed-quantity reorder point model: an independent demand inventory management system that reorders
when inventory drops to a specific level
a. An order is placed whenever the level of inventory drops to a predetermined point; the rate of demand
determines how long it takes for the inventory to drop to the level of the reorder point
b. Formula for the fixed-quantity reorder point:
b.
c.
Fixed quantity, variable period: the order quantity is the same each time an order is placed
a. To adapt to the varying rates of demand, the time interval between orders changes
b. Common implementation of this system is an ROP model (ABOVE)
EPQ: used when a firm or process receives its inventory over a period of time; requires a model that does not
require the instantaneous receipt assumption; the daily production and daily demand rate are taken into account
D = annual demand
S = setup/ordering cost
H = holding/carrying cost
d = daily demand rate
p = daily production rate
Final Exam Guide:
7. Statistical process control: a preventative approach to managing quality by monitoring processes in a way that
identifies potential problems before defects are even created
a. Percent defective chart (P chart): used to monitor the proportion or percentage of items defective in a
given sample
b. P Chart Standard deviation of the distribution of percent defectives (n: sample size, p: the long run average
and central line on the chart)
c.
8.
P Chart Upper and Lower Control Limits
Reliability: a value attribute that is an important dimension of product design; the probability that a product, service
or part will perform as intended for a specified period of time under normal conditions
a. Reliability can be quantified
i. Ex: a product with a 90% reliability has a 90% chance of functioning as intended; the probability that
this product will fail is 10% (1 out of 10 products will not function as expected)
b. Component reliability: the probability that a type of part will not fail in a given time period or # of trials under
ordinary conditions of use; usually measured by reliability (CR), failure rates (FR and FR n) and mean time
between failures (MTBF)
i. Ex: for a particular car tire with an expected life of 40,000 miles, if 1% of the tires fail within that
span, the tire has a reliability of .99
c. System reliability (SR): when component parts are combined into a product, the combined reliability of all the
components forms the basis for the product; determined by multiplying the reliabilities of all the interacting
critical components
i. Ex: 4 tires, each with a reliability of .99, would have a system reliability of .961 (.99 x .99 x .99 x .99)
d. 3 ways to increase the reliability of products:
i. Overdesign: enhancing a design to avoid a particular type of failure (ex: higher quality materials)
ii. Design simplification: the reduction of interacting parts in a product
iii. Redundancy: built into the system by placing components in parallel so that when one component
fails, the other takes over (backup parts)
1. Ex: Two power generators (main and backup) provide electricity. The main has a reliability
of .95 and the backup has a reliability of .9. The reliability of the system is:
e.
EXAMPLE (Chapter 7, Problem 30): The specification of the height for a small pin that goes into a fuel
injection system is 20+/-.05 millimeters. The cutting process has a standard deviation of .018
millimeters. Calculate the Cp. Is the process in control?
1.
Cp 
USL  LSL 20.0519.95

 0.93 The process is not capable.
6
60.018
ii. Assuming a mean of 20mm, what is the probability that a pin will be within specifications?
Z
x  mean

1.
Z1 
20.05  20
 2.78
0.018
iii. Corresponding probability = .9973 (use cumulative standardized normal distribution table)
1. Z2 = 19.95 – 20/.018 = -2.78
iv. Corresponding probability = 0.0029. Probability that a pin will be within specifications is
1. 0.9973-0.0029 = 0.9946
v. What will the upper and lower specifications need to be to achieve a process capability of 1?
1.
0.108
20.05 19.95 0.10

The numerator must equal the denominator, i.e.
0.108
60.018 
0.108
2.
Divide 0.008 by 2 and add the value to 20.05 and subtract the value from 19.95
3.
0.008
 0.004
2
2 0.0 5 4 1 9.9 4 6
1
60.0 1 8
vi. If you wish to achieve a process capability of 1 by reducing variation, what will the standard
deviation need to be?
20.05  19.95  0.10
6 x  0.10
x  0.01667
20.05 19.95
1
60.01667
1.
Scatter diagrams: chart that seeks to identify relationships between variables by plotting one variable on the x axis
and another on the y axis
a. The existence of a positive correlation is not sufficient to conclude that a cause and effect relationship exist;
correlation is a prerequisite to cause and effect
b. This serves as an important first step towards identifying the cause of a particular problem
10. Project Management: a variety of techniques that recognize the dependencies present among the project activities
and manage those activities in order to complete the project on time
a. Key objective: to accomplish the project’s goals, complete it on time and complete it on budget
11. Network construction and analysis
a. Network diagram: illustrates the steps in a project; crucial to understanding the relationships among the
activities and resources and determining the projects duration
b. Construction:
i. Break project into small, specific activities
ii. Have accurate time estimate for the completion of each activity
iii. Order activities must follow must be specified; sequence is defined by identifying the immediate
predecessors of each activity
iv. **Chapter 8, pg. 325, Exhibit 8.15 – interpretation of network diagram
9.
12. Slack: time until due minus the expected processing time (sequencing rule: highest priority is given to the job with the
least amount of slack)
a. Positive slack: implies there are more days remaining than necessary to complete the job
b. Negative slack: even if the job is started immediately, it will be late
13. Critical path: the path that takes the longest; defines the length of the project
a. The amount of time an activity on a non-critical path can be delayed without affecting the duration of a
project is known as the activity’s slack; activities with zero slack define the critical path
b. Critical path method to managing projects (example on pg. 327):
i. 4 values for each activity in the project: early start (ES), early finish (EF), late start (LS) and late
finish (LF)
ii. ES for any activity (besides the first, which is 0) is equal to the EF of the activity of the immediate
predecessor
1. If an activity has more than one predecessor, the ES is the largest of the EF times)
iii. EF = ES + t (t is time estimated to complete activity)
iv. LF for the last activity is equal to the EF of the last activity
1. If the activity is the predecessor of more than one activity, the LF is equal to the smallest LS
value
v. LS = LF – t
14. Single estimate versus three time estimates: when a project is new, the activity time estimates are likely to be
inaccurate; assumed that the times follow the beta distribution; uncertainty is factored into the problem by
identifying 3 time estimates:
a. Optimistic (o), pessimistic (p), most likely (m); used to compute expected time:
t = (o + 4m + p)/6
b. Variance for a single activity:
2 = [(p – o)/6]2
c. Standard deviation of the variance:
p = SQRT[(variances on the CP)]
d. Completing path by a specified date (D); # of standard deviations D is from t:
Z = (D – t)/ p
e. **Example 8.7, pg. 331
15. Inventory Decision: Quantity Discount Model (and EOQ)
a. Basic EOQ model: (economic order quantity) an approach used to determine an order quantity that minimizes
the sum of ordering and carrying costs
i. Makes the following assumptions in order to provide an optimal solution:
1. Annual demand is known
2. Demand is even
3. Lead time is constant
4. There are no quantity discounts
5. Only one product is involved
6. Orders are received in single deliveries
ii. Formula:
b.
c.
EOQ variation; Discounts:
D = annual demand
Q = order quantity
S = cost per order
H = carrying cost
P = price per unit
Step-by-step to determine the EOQ with quantity discounts
i. Compute the basic EOQ; it will fall within one of the price ranges specified by the supplier
ii. If the EOQ falls within the cheapest price range, the EOQ is the optimal order quantity
iii. If the EOQ does not fall within the cheapest price range, all price ranges having lower prices than the
range the EOQ falls in must be evaluation; use discount model formula to make analysis
iv. The optimal quantity will be at the lowest allowable quantity of a price range; for each quantity,
compute the total cost for the quantity at each price break
v. **Example 11.4, pg. 497
16. Inventory Decision: Fixed Interval – Variable Quantity (Periodic Review System)
a. An independent demand management system that orders inventory on fixed time intervals; order quantity
could be different with each order; inventory ordered must satisfy demand during the order interval and
must satisfy demand during the replenishment lead time
Q  dOI  LT   d Z OI  LT  A
b. DIFFERENT EQUATION USED IN BOOK; example 11.5, pg. 500
17. Inventory Decision: ABC Analysis
a. Based on the Pareto principle, which states that approx. 80% of the effects are the result of 20% of the causes;
tells you which items to watch carefully
b. In inventory, 80% of the annual dollar usage might come from 20% of the inventory items
c. Classifies inventory in order of importance: A is more important, B items are next, and C items are of
relatively little importance
18. Inventory Decision: Lot-for-Lot and EPQ
a. Lot-for-Lot: releasing an order exactly equal to the net requirement
i. As soon as the initial starting inventory is consumed, ending and beginning on-hand inventory levels
equal zero because the orders placed are equal to the net
b. EPQ: used when a firm or process receives its inventory over a period of time; requires a model that does not
require the instantaneous receipt assumption; the daily production and daily demand rate are taken into
account
19.
20.
21.
22.
D = annual demand
S = setup/ordering cost
H = holding/carrying cost
d = daily demand rate
p = daily production rate
The Bullwhip Effect: the increasing variability of demand as one moves upstream in a supply chain; can detract from
the productivity and increase costs of the entire chain
a. At each level, the variability of the purchases a company makes is often greater than the variability of the
demand that consumes its products
b. Causes: demand forecast updating, order batching, price fluctuation, rationing and shortage gaming
c. Impact on cost, quality and timeliness:
i. Costs added anywhere trickle down to costs carried by the customer
ii. Takes attention away from other needs such as process improvement and productivity enhancement
iii. Difficult to maintain level load where capacity matches design capacity (results in increased cost per
unit)
iv. Business is placed in “feast and famine” mode (placed in reactive position)
d. Solutions: suppliers should have access to their customer’s actual orders:
i. Make orders available for access by suppliers electronically
ii. Maintain closer relationships and eliminate price discounts
iii. Continuous replenishment: very frequent deliveries of small quantities
Risk Pooling: inventory held in one warehouse to service a large number of retailers requires less inventory than if
held at the individual retailers
a. Uncertainty associated with customer demand must be accommodated through inventory safe stocks
b. Placing all inventory at a centralized location to reduce variability
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Distribution Strategies
a.
Direct Shipment: shipping directly from manufacturer suppliers to retailers
i. Eliminates all warehousing costs, but it is less likely to use FTL shipments
ii. Inventory service levels at each store require high levels of safety stock; much more inventory is
required to obtain an acceptable service level
iii. Economies of scale are difficult to gain for shipments because they can be coming from different
places
b. Warehousing (discussed in depth below)
c. Consolidation warehousing: retailer-owned warehouses will take shipments from suppliers and hold them
until ordered by the retail stores
i. Inventory in the warehouse is sufficient to meet all demands
ii. Likely to use FTL shipments to warehouses, and LTL shipments to retail stores
iii. Strengths: risk pooling and reducing inbound transportation costs
d. Cross-docking: continuous shipment from suppliers to warehouses, where goods are redirected and delivered
to retailers in continuous shipments (made popular by Walmart)
i. Most sophisticated strategy
ii. Requires excellent communication links between suppliers and retailers
iii. Depends on a reliable transportation system to ensure continuous delivery of goods
iv. Strength: no inventory is stored, so those costs are eliminated; very cost effective
23. Warehousing
a. Serves a variety of purposes:
i. Reduce transportation costs
ii. Reduce response time to customers
iii. Increase the variety of product available for consumers
iv. Protect against supply chain disruptions
b. These decisions can reduce the amount of inventory in a supply chain, reducing costs and increasing value
c. Warehousing location decision: Center of Gravity Method
i. Placement of a distribution center needs to consider the different volumes of goods shipped to
different stores
ii. A similar problem is where to place or store a factory, considering shipments from suppliers that are
already located
iii. COG method identifies the best location for a single distribution center
iv. The most central location is found by calculating the x and y coordinates for the distribution center to
minimize transportation costs
Cx 
Cy
d V
 Vi
ix i
d V

V
Where
C x  x coordinate of the center of gravity
C y  y coordinate of the center of gravity
d ix  x coordinate of the ith location
d iy  y coordinate of the ith location
Vi  volume of goods moved to or from the ith location
iy i
i
24. Full Truck Load (FTL) and Less than Full Truck Load (LTL)
a. FTL: transporting goods in a truck that is full
i. Provide the cheapest mode of truck transport
ii. Often used by businesses moving goods from the manufacturer to a warehouse or distribution center
b. LTL: transporting goods in a truck that is not completely full
i. Specialize in smaller, mixed loads
ii. More expensive
c. Express consignment transport: consists of the door-to-door overnight and two-day delivery market
i. Used when volume is small and the need for a quick delivery dominates
ii. UPS, FedEx, DHL
25. C-TPAT
26. Aggregate Planning: Capacity Match in Manufacturing
a. The ability to buffer capacity from demand swings by utilizing inventory buildup creates an opportunity for
manufacturers to examine their future capacity needs and create a plan for meeting them; done on an
aggregate basis
i. Aggregate demand: the total demand for all products or services
ii. Aggregate demand forecast is more accurate than individual forecasts; gets the effect of averaging
27. Rough-Cut Planning: detailed capacity planning approach used in manufacturing that uses the master production
schedule to provide the quantity of units that must be produced
a.
Capacity bill is created: details all of the capacity required to manufacture the end item specified in the master
production schedule
i. For each resource utilized, the total time required to produce all components and the finished
products are calculated
ii. Those times are then multiplied by the quantity required in each time period to get the capacity
needs for the period
iii. Note: Available capacity is generally calculated by converting the actual hours available on a
particular work center into standard hours. Standard hours result from making two adjustments to
the actual hours available. First, actual hours are adjusted to account for the historical utilization of
the work center. Standard hours available should also recognize if a work center does not produce at
100 percent efficiency.
b. Frequently used as a tool to ensure the master production schedule is feasible
c. EXAMPLE (14.4, pg. 627)
28. Demand Chase and Level Production Plans (Aggregate Planning): uses inventory and variable labor to deal with
demand fluctuations in an attempt to reduce costs; two extreme options available:
a. Demand chase aggregate planning: uses hiring and firing of employees to increase and decrease output to
match fluctuating demand
i. Production levels are changed to match changes in demand
ii. No inventory is needed to buffer against demand changes
iii. Changes in production levels must be dealt with through hiring/firing
iv. Costs associated with this plan are the costs of hiring/laying off workers
v. EXAMPLE (Chapter 14, problem 1): A manufacturer of molded fiberglass products uses a demand
chase strategy for aggregate planning. A total of 14 labor hours are required per unit produced.
There are currently 72 employees. Each quarter has 65 working days. Each employee works 8 hours
per day. Use the demand data provided in the table below to determine the number of fires and hires
required each quarter. Determine the hiring and firing costs based on a hiring cost of $325 and a
firing cost of $340.
Quarter
1
2
3
4
Demand
136
150
160
125
ANSWER:
b.
Period
Demand
Workdays
ANSWER:
Level production aggregate planning: approach that uses inventory stored from period to period to reduce the
need to change the output rate as demand changes
i. Hiring/firing is avoided
ii. Demand fluctuations are dealt with using a buffer of finished-product inventory
iii. 3 kinds of costs: hiring/firing with initial adjustment, carrying costs, stockout costs
iv. EXAMPLE (Chapter 14, Problem 7): Chase Services has the monthly demand given in the following
table. Use that information to construct a level production aggregate plan. Each unit requires 3.6
hours of labor. Inventory carrying costs are $24 per unit per month. Each worker works 8 hours per
day. How many workers should chase employ? What is the cost of this plan?
1
810
21
2
920
21
3
960
22
4
868
21
5
1,050
22
6
962
21
7
1,138
22
8
950
22
9
974
21
10
740
22
11
876
21
12
1,010
21