Miguel Carvalho
Production and Operations Management
Exam preparation.
Session #1: Operations management in a service context (Shouldice Hospital)
2
Session #2: Operations Strategy (American Connectors Company)
3
Session #3: Service Strategy (Xenon )
4
Session #4: Reengineering (Manzana Insurance)
5
Session #5: Build-to-Order (COMPAQ)
6
Session #6: Customer Service Concept(American Semiconductor)
8
Session #7: Supply Chain Acquisition Management (SCAM) Simulation
9
Session #8: JIT II (BOSE)
10
Session #9: The economic cost of uncertainty & Newsboy (Night & Day)
11
Session #10: Speculative and reactive capacity (Obermeyer)
13
Session #11: Repetitive inventory decisions &EOQ (American Hospital BloodBank) 14
Session #12: Managing supply chain inventory at HP
17
Session #13: Statistical Process Control (Dinamic Seal)
18
Session #14: Total Quality Management (Bekaert)
20
Supply Chain
22
Managing complex projects
22
Inventory problems
22
Statistical Process Control
23
CONWIP
23
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Miguel Carvalho
Session #1: Operations management in a service context
(Shouldice Hospital)
Concept: Process Management: the “Focused” Factory (small differences between customers);
managerial issues in a line flow: high utilization, limit variability, dedicated equipment, minimal
planning (scheduling arrivals of patients and of those operating the process). Very limited
variability in the process enables Shouldice to overcome the trade-off between customer service
quality (almost no congestion) and utilisation
 reduced variability on the system, focus on 1 task (=standardised); pre-selection of
homogeneous easy cases of ingenual hernias; 1 proven technique.
 reduced variability in arrivals: arrival time in the morning, 35 people
 reduced variability in inputs: quality control (self-diagnosed, pre-selected patients)
 flexibility of doctors through cross-training, to avoid bottlenecks.
 flow regulation: additional work requirements are absorbed by the workforce
 incremental improvement due to specialization: high volume of similar cases means steep
learning curve, so better intervention & quality of treatment.
 better ability to manage variability through diagnosis.
 process risk: radical technological change.
 what, if anything, makes it so hard to replicate the system? it is more than a technique (culture
= customer involvement with exercise and reassuring newcomers; strategy = tight quality
control (pre-selection) reduces variability, use of same techniques; infrastructure)
 customers are part of the operational system (characteristic of services)
 A perfect process for a very standardised product (DJC, etc.)
Session 1: Applying operations management in a service context (Shouldice Hospital).
mapping a process: the flowchart, experiencing the process as the customer does, what is the
process I (as employee) am contributing to?. an example of a line process in a service context.
the characteristic of services: customers form an integral part of the operational system (this is
particularly well illustrated here). managerial issues in a line flow: high utilisation, limit variability,
dedicated equipment, minimal planning (scheduling arrivals of patients and of those operating
the process), standard relations with suppliers . in sum: a world of constancy, repetition, and
incremental improvement. advantages of the focused 'factory': the system focuses on 1 task
(system = task), minimise trade-offs, clarity in vision, and in execution, no confusion, almost no
- the world champions of ingenual hernia operations. analysis of system throughput times, and
of potential bottlenecks. flow regulation: additional work requirements are absorbed by the
workforce . process risk: radical technological change. what, if anything, makes it so hard to
replicate this system?
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Miguel Carvalho
Session #2: Operations Strategy (American Connectors
Company)
Concept :Operations Strategy; Material Requirements Planning (MRP)
 Conclusions: link between products and process characteristics; pay attention to
business dynamics; mass customisation has its limits.
 There are different operations that should not be mixed: Product-oriented (DJC) and
batch-oriented (ACC).If you mix them, none works.
Product-oriented: focus on product (simplify it); line flows; standardised/repetitive work; high
volume; dedicated/optimised and non-flexible machinery; high utilisation / low variability;
simple planning (pull); low number of suppliers (close relationship); low customisation; low
number of references; increase process efficiency; stabilise demand; do not accept all orders;
makes money in the late phases of the product life cycle.
Batch oriented: focus on the process; layout by functions; jumbled flows; customised/variable
work; medium/low volume, performing/flexible machinery (need investment); low utilisation /
high variability; complex planning (MRP) high number of suppliers (lose relationship); high
customisation; high number of references; accept all new orders; makes money in the early
phases of the product life cycle (higher margins).
DJC showed how powerful the continuous learning can be. DJC improves the process, not the
product. ACC does the opposite.
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Miguel Carvalho
Session #3: Service Strategy (Xenon )
XENON Service Strategy
 Variability  capacity/response-time trade-offs
1. capacity utilisation is like the sun, you will burn up before you get there
2. how close you can get depends on the level of variability in your system
 low variability (Shouldice, DJC) allows for high capacity utilisation
 high variability (hospital emergency room, ACC) requires low utilisation
Decreasing marginal returns to "slack"
 At high levels of capacity utilisation () - that is, low levels of "slack" (1-) - small
decreases in utilisation yield large improvements in response time.
 However, these marginal improvements decrease as slack is increased.
Decreasing marginal returns to capacity utilisation
 Initial increases in capacity utilisation may yield large reductions in labour costs.
 However, these marginal improvements decrease as capacity utilisation is increased.
Pooling
 Pooling servers can yield response-time improvements
1. Pooling reduces impact of "temporary bottlenecks"
2. The greater the variability and utilisation rate, the larger the potential benefits
from pooling
 Pooling also yields decreasing marginal improvements as the number of servers in the
pool is increased.
Study Notes
Queuing theory
CV 

CV=0 deterministic, CV=1 purely random, CV>1 positive correlation.

Average of nbr of item in the
  1
2
2
Wq   
 (CV A  CVS )
1


2


queue
Lq  Wq
Utilisation rate
Rate of arrival
The formula for Wq is valid only if one pool. For more pools, find Lq in a table &
compute Wq by Little law.
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Miguel Carvalho
Session #4: Reengineering (Manzana Insurance)
Concept: Business Process Reengineering, redesign the process(clean sheet app.)
 Move away from functional to process-based operations; streamline/simplify
processes; remove obstacles to customer responsiveness (boundary less); eliminate
non-value-added time; introduce IT to enable process - exploit synergies.
 Problems:
business processes are different and interfering with each other; the incentive system
is driving people to pay insufficient attention to policy renewal (too much attention
to new business) - less renewals and more new policies mean increased risk and
greater claims losses; backlogs of all policies, primarily renewals; underwriting process
represents bottleneck; incentive system reduces throughput by favoring slowest
policies to process; geographic orientation of underwriters leads to over-utilization of
UW1 (98%) and unavoidable bottleneck
 Solutions:
Short-run: process flow organization: pool the UW's to allow much quicker response
time.; change incentives to ensure timely (earlier) handling of the renewal business,
can still be done second priority if they are started on time.
BPR solution: introduce IT for file exchange and sharing with agents - more
effective information transmission; DC’s become scanners or disappear; integration of
underwriting, rating and policy writing; retain two processes: underwriting and
administrative (agent interaction, data-integrity checking, writing, identification of
special cases); let UW’s manage exceptions, standardize other activities.
Session 4: Reengineering (Manzana Insurance). BPR: what are some of the key ideas
. What is the goal? Renew policies or grow the portfolio? If both, realize that the
business processes are different, and that currently they are interfering with each other
(too much attention to new business). the infrastructure (incentive system) is driving
people to pay insufficient attention to policy renewal (which is key to long term
performance). short-run process flow organization: pooling of the UW's allow much
greater service quality (response time) -- verification through utilization and queueing
formulas (of Chapter 9). A key requirement: the effective (and early) handling of the
renewal business -- can be done second priority if it is started on time. the BPR solution:
introduce IT for customer exchange and file sharing, for more effective information
transmission, pooling of operators, integrating of functions, difficulty of integrating the
UW's with the administrators, managing exceptions, standardizing others
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Miguel Carvalho
Session #5: Build-to-Order (COMPAQ)
Build-to-Forecast (BTF)
 Finished-goods-inventories (FGI) are used to buffer production from demand
 Customer response time (CRT) is 0 when demand is filled from FGI
 Order fill rate  the % of orders filled from FGI less than 100% because it takes
(a substantial amount of) time to build up FGI (while simultaneously responding to
demand)
 Trade-off between CRT and FGI: computers lose 1% of their value for each week
they sit in FGI!
Build-to-Order (BTO)
 Computers are only assembled after an order has been received
 Customer response time (CRT) becomes an important measure of service
 Work-in-process inventory (WIP) becomes an important measure of congestion and
of financial investment in operations
 Little’s Law ( L =   W ) indicates that, for a given throughput rate (), WIP (L) is
proportional to CRT (W) : WIP = throughput rate  CRT
 The key to improving customer service (CRT) is to reduce WIP, while keeping the
throughput rate unchanged
Kanban WIP inventory control in BTF (Pull_BTF)
Processing variability (CVS>0) will cause blocking and starvation under inventory
control, thus reducing the capacity of the process below that of its bottleneck station
Conversely, reduction in process variability (CVs) yields improvements in process
capacity
Decreasing marginal returns to increasing Kanban size
Location of buffer is key: place buffers so as to yield balanced sublines
Filling a buffer is costly, emptying it is value creating (if the inventory is pulled out by
customer demand): the value of a buffer is determined by the speed with which the
inventory goes through the buffer
Pfeiffer's Question
Use Kanban to control work-in-process (WIP) inventory to reduce manufacturing cycle
times (MCT) the time a computer spends in assembly
The basic idea is to limit entry into manufacturing when it already is congested.
This will improve customer response times
This is incorrect: since entry into manufacturing is now more controlled, the orders will
spend more time in the order queue
BTO with No Inventory Control
CRT = TPT = 349 min
OQT = 0 min
BTO with Kanban Inventory Control
CRT = TPT = 589 min
OQT = 338 min
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Miguel Carvalho
MCT = 349 min
WIP = 13.2 units
MCT = 251 min
WIP = 9.4 units
Kanban control limits the entry of customer orders into assembly and increases the time
spent in the order queue
Kanban inventory control will improve customer response times only if it also
decreases processing variability and/or increases processing capacity (increased yields,
etc..): Kanban control becomes a means to force the process to improve itself
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Miguel Carvalho
Session #6: Customer Service Concept(American
Semiconductor)
Diagnosis
Concept: Planning and Controlling Operations; match processes and products
 What is 'The Goal'? To what extent is on-schedule delivery important?
 Identification of key business decisions: extent of standardization in the standard
business, and growing importance of customized business
 Operations in the respective business processes:
1. standard business: customer pull from the die bank, replenish the die bank
using a reorder point policy (customer values speed)
2. customized business: you are selling engineering, fab time, as well as final
assembly and testing (customer can deal with uncertainty, lead time estimates)
 Importance of planning if both business processes co-exist: determine average
customer leadtimes for the fab, then limit congestion in the fab by allowing new
orders to be processed only when others are completed (CONWIP or constant WIP
policy)
 Simplify planning and increase customer focus: let marketing decide which order
to process next, let production manage throughput once the orders are released
 Two manufacturing tasks: maximize today's throughput and tomorrow's
throughput (learning and yield improvement)
 Problem of OASIS: conservative (focus on OSD), but market values speed!
 Benefits of TEMPO: linking OASIS (order entry) with WIPSYS (production and
inventory status) for improved production control (leadtime quotation, status update
for customers)
 Limits of TEMPO: fluid flow models ignore congestion due to variability - makes
deterministic assumptions with regard to flow
 Variability of re-entrant flow lines and effect of re-entry on congestion (the
'effective' processing rate of lots is a function of how often they need to re-enter the
system).
Session 6: Planning and controlling operations (American Semiconductor) What
is 'The Goal'? To what extent is OSD important? Identification of key business decisions:
extent of standardisation in the standard business, and growing importance of
customised business. Operations in the respective business processes: - standard business:
customer pull from the die bank, replenish the die bank using a reorder point policycustomised business: you are selling engineering, fab time, as well as final assembly and
testing. Importance of planning if both business process co-exist: determine average customer
lead-times for the fab, then limit congestion in the fab by allowing new orders to be
processed only when others are completed (constant WIP policy). Simplify planning and
increase customer focus: let marketing decide which order to process next (customer priority),
let production manage throughput once the orders are released. Two manufacturing
tasks: maximise today's throughput and tomorrow's throughput (learning and yield reduction).
Benefits of TEMPO: linking OASIS (order entry) with WIPSYS (production and
inventory status) for improved production control (lead-time quotation, status update for
customers). Limits of TEMPO: fluid flow models ignore congestion due to variability -makes deterministic assumptions with regard to flow. Variability of re-entrant flow lines
and effect of re-entry on congestion (the 'effective' processing rate of lots is a function of
how often they need to re-enter the system)
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Miguel Carvalho
Session #7: Supply Chain Acquisition Management (SCAM)
Simulation
The Game:
 Supply chain management is a real competence and value is saved by good coordination and communication across partners
 It was the structure of the game that drove pipe-line whiplash
 Various strategies for playing the game only affected the magnitude of the whiplash
On supply chains:
 Co-ordination as one of the key challenges to be addressed by the different firms
belonging to the same supply chain
 Who takes responsibility for the entire chain, or for the business process?
 Importance of information flows in supply chains
 Need for decision-makers across a supply chain to adopt a systems perspective:
 How do my decisions affect my supply chain partners?
 Conversely, how do the decisions of these partners impact my own profit?
 Importance of stabilising the supply chain (in contrast to nervously optimising my
own position)
 Need for a supply chain strategy
 Consider structure of supply chain
 Value of simple replenishment rules
 Activity is not value creation!
On organisations:
 Everybody is trying their best: it is the system which fails, not people!
 Structure consists of people, procedures, and information as well as (even more than)
physical infrastructure
 Importance of strategy as a guide for action: what will we aim to achieve together?
On management:
 Activity is not the same as value creation: the best score is achieved when the retailer
leads the supply chain, and the others simply passively react by replenishing (I simply
order what is asked from me)
 Importance of mental models in decision-making and how these mental models are
established (eg. through structure, communication, incentives…)
On life:
 No need to immediately blame others, the problem starts with ourselves: what are we
doing to reduce the chaos, or do we actively contribute to it?
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Miguel Carvalho
Session #8: JIT II (BOSE)
Concept: Just-In-Time (JIT): seamless flow of raw materials to customers, through
entire value-chain; improved co-ordination
 Supplier must do the same thing, work within the same high quality levels.
 Benefits of bringing suppliers ‘in-house’:
1) Reduce costs (less staff, less inventory, setup cost reduction)
2) Volume, economies of scale when ordering (price, logistics)
3) Alignment, commitment from suppliers (common goal)
4) Suppliers get involved in Engineering, eventually supplier does it all
5) focus on core competency (Shouldice lesson)
6) Supplier is better in R&D in its business, experience with other customers
 Conditions for success (JIT II):
1. Trust, partnership (supplier/producer) - confidentiality and common goals
2. Location of supplier (close)
3. Mutually beneficial to both supplier (volume) and producer (cost), winwin Kanban: Limit the WIP in the system (Little’s Law)
Session 8: Just-in-time operations (Bose Corporation: JIT II) Procurement: the 'virtual'
or the 'administrative' factory (it is the part of the factory that handles the items that are
not made internally (growing importance due to the organisations refocusing on 'core
competencies') Benefits and liabilities of the make/buy decision on plastics JIT: concept,
goal, implication Benefits and risks of JIT II for Bose A new way of working with
suppliers: partnerships for (final) value: joining forces to conquer market share (in
finished goods), and their requirements in terms of trust, discipline, Illustration of
moving to a service notion of supply and of business simplification in supply
relationships
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Miguel Carvalho
Session #9: The economic cost of uncertainty & Newsboy
(Night & Day)
Introduction to capacity choices: base versus peak, fixed versus variable. economic
analysis of the decision problem: expected value calculation of various capacity choices,
going beyond the expected value: examination of the entire profile of risk, risk aversion:
avoiding the large deviations from the expected value. a short-cut: marginal analysis:
calculation of the break-even probability of use of the marginal unit (= investment
cost/potential value), or of calculating the economic stockout probability. the notion of
safety stock (excess of order quantity over average demand). application to inventory
theory: look at inventory as an investment which might generate potential value (with
some probability), verify the rapidly decreasing marginal value of inventory, invest into
inventory until you break-even on the last unit. pricing out information: expected value of
(perfect) information. the basic problem to be solved: the lack of fit between a relatively
rigid technology (day crews) and a variable demand
Concept: Capacity choice (base/peak, fixed/variable, safety stock), economic and marginal analyses
Economic analysis: Minimize Expected cost (E(C) =  pi * Ci); use the payoff matrix
(line: actual demand; column: what you can provide)
Marginal analysis: invest in an extra unit while expected benefits - expected cost > 0 (-c + V*p
>0), where p is the cumulative probability
Value of perfect information: Expected value of the best payoffs (i.e, with the perfect
information E(C) =  pi * min(Ci) - Expected cost without the info.
Concept : introduction to capacity choices: base / peak, fixed / variable, problem of
stockout. Use economic analysis of the decision problem: minimize expected value of
costs. Beyond expected value: examination of the entire profile of risk, risk aversion:
avoiding the large deviations from the expected value.
Invest in inventory until marginal value = 0 (or just < 0), expressed by : Expected value of investment
= -C (investment in one more unit of resource) + p (probability that demand will be above number of
units purchased - here day crews) * Value (cost) of stock out (here the fact that you have to use night
crews).
Notion of safety stock (excess of order quantity over average demand). Pricing out
information: expected value of (perfect) information. Basic problem to be solved: the
lack of fit between a relatively rigid technology (day crews) and a variable demand.
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Miguel Carvalho
Professor Notes - Night & Day
The Newsboy problem:
 speculative capacity - that is, the number of day crews¾ has to be decided upon
before knowing exact demand
 demand at time of decision is known only through its probabilistic distribution,
which consists of a set of possible demand values together with their likelihood (or
probability)
 after speculative capacity has been decided and demand becomes known, reactive
capacity - that is, the number of night crews¾ is called upon to remedy capacity
shortages
 the objective is to minimise newsboy losses consisting of the expected cost of excess
capacity (too many day crews) and the expected cost of capacity shortages (too many
night crews).
Scenario analysis
Calculation of expected costs for each possible capacity level¾ that is, for each number
of days crews (3 to 12)
Marginal costing:
the marginal value of a day crew is its expected benefit (pV) minus its cost (C) marginal
value = pV - C one invests in additional day crews as long as the marginal value of this
investment is non-negative
A lesson in inventory theory:
 The optimal inventory decision is a trade-off between the costs of excess inventory
and the opportunity costs of lost sales.
 The economic level of inventory is reached when the last unit of inventory breaks
even: when its expected revenue is equal to its cost.
 Initial units of inventory are more valuable then later units¾ that is, the marginal
value of inventory decreases with increasing inventory
 This is so because the expected value of a unit of inventory is its expected benefit
(pV) minus its cost (C): the more likely its use¾ that is, the higher p - the higher its
contribution to profit - that is, pV-C.
Valuing information and flexibility
 Variable demand can be uncertain or predictable
 Flexibility allows response to predictable but variable demand
 Flexibility has value to the extent that it reduces (or eliminates) the need for reactive
capacity
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Miguel Carvalho
Session #10: Speculative and reactive capacity (Obermeyer)
Speculative and reactive capacity
What is speculative production? Production before retail orders at Las Vegas show
Why is speculative production necessary? Insufficient production capacity to meet
demand before start of season Thus, production must start before Las Vegas show
What does speculative production cost? Newsboy losses from speculative production
because of demand uncertainties before Las Vegas show
Newsboy losses in the fashion market:
balancing opportunity costs of lost sales with the costs of mark-down of excess stock
Risk-based production planning of speculative capacity
"Low-risk" parkas correspond to the left tail of the demand distribution
For example, if speculative capacity was filled with demand that corresponds to at most 1
s to the left of the mean , then the probability of mark-downs is 16%
Operational considerations in this production environment:
China vs Hong Kong
China is cheaper but has negative externality costs from larger minimum batch sizes, and
longer lead times, less flexibility
Labor cost as a limited determinant of total cost differences:
notwithstanding substantial labor cost advantages of China, the difference with HongKong in terms of total costs could easily be off-set by riskissues (potential newsboy
losses)
China and Hong Kong
Increased capacity will require less use of speculative capacity
But problems with idle capacity Swimsuits
Skiwear for southern hemisphere
Options for increasing reactive capacity:
Dyeing after assembly for color determination once seasonal tastes forcolor become
known (as done by Benetton)
Standardize raw material inventories (long lead-times of customised zippers)
Reduce minimal production quantities
Provide local production capacity for further lead-time reduction during the season
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Miguel Carvalho
Session #11: Repetitive inventory decisions &EOQ
(American Hospital BloodBank)
Structure of a continuous review inventory management policy: reorder point (R), order
quantity (Q). The economic approach to setting the policy parameters or controls:
minimise the expected cost function (inventory cost, order cost, and stockout costs). Relation with the
EOQ and the newsboy models: cycle stock and safety stock. Measuring service quality:
by stockout (or backorder) frequency, by the expected number of stockouts (or backorders)
per inventory cycle, or by the expected number of stockouts (or backorders) per year.
measuring economic performance: computing the various cost components of the total
cost: inventory holding cost, setup or order cost, and stockout (or backorder) cost
periodic review: similarity of arguments, different controls
Concept: Continuous review model; managing uncertain demand
 Minimise total cost (TC = ordering cost + cycle stock holding cost + safety stock
holding cost + stockout penalty). Adapt the EOQ formula.
 Find cost minimising R: Find optimum probability of stockout (analysis per cycle)
marginal benefit = marginal cost, P(DL>R) * b = H (Q/D); take E(units short per
cycle) from table, stockout penalty = E(uspc)*D/Q*b
 What you control in the inventory policy: Q (order quantity) and R (reorder point).
 What you don’t control: demand (follows a normal distribution)
 Reorder point R = L + ZR * L (average demand during lead time + safety stock), with
L = sqrt(L)*1 (portfolio theory);
 Safety stock = R - L
 Service quality: stockout frequency (i.e., ns/Q: the fraction of back-ordered demand),
expected number short per cycle or expected number of stockout per year
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Miguel Carvalho
Professor Notes
 The Economic Order Quantity (EOQ) model:
 Assumptions: constant demand rate, fixed order cost, per unit inventory cost
rate
 Inventory graphs (in fact, they are triangles)
 Balancing ordering costs with inventory costs
 The square root formulas (for quantities and for costs)
 Economies of scale in distribution
 Insensitivity of costs around the EOQ (flatness of cost curve at that point)
 Replenishment lead-times

The Continuous Review model:
 Introducing uncertainty and stock-out penalties in the EOQ model
 Inventory cycles of variable length and fixed re-order levels (R)
 Cycle stock and safety stock
 Determining the re-order quantity (and hence the cycle stock) by balancing
re-order costs and inventory costs of cycle stock
 Determining the re-order level (and hence the safety stock) by minimising the
joint sum of stock-out costs and the inventory holding cost of safety stock
 Computation of expected lost sales per inventory cycle (using the
standardised normal loss table)
 Revision of the re-order quantity to adjust for the stock-out costs in the
computation of the optimal re-order quantities

Definitions of service:
 Probability of a stock-out per inventory cycle
 Expected number of stock-out units per inventory cycle
 Expected number of stock-outs per year
 Expected number of stock-out units per year

Equivalence of service level and economic approaches to setting inventories:
 Through the introduction of an ‘equivalent’ value for the unit stock-out
penalty parameter b that yields an ‘economic’ approach equivalent with the
service level approach
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Miguel Carvalho
Study Notes
Inventory, Newsboy
pi 
C
cs

R rsq
where:pi is the probability that demand is greater than the inventory level i.
R : revenue generated by the marginal unit when it is demanded.
C : cost of the marginal unit.
C 
r "real" values.
s 
pi
Distribution of
demand
Little law:
WIP=Throughput rate x Time in system
Reorder policies
Ordering cost + holding cost.
S: ordering cost=SD/Q
EconomisOrderQuantity  Q * 
2SD
H
H: holding cost=HQ/2
The reorder level is straight forward under certain demand (dL).
Uncertain demand - continuous review
 L  leadtime  
Introduction of backlog cost :b $/unit
At the optimal level of reorder point R, marginal cost of an extra unit of inventory = marginal benefit of that
unit
pr b  H
Q
D
pr is the probability that demand over the lead time is greater than the reorder level.
C=(S+bnr)D/Q + H(Q/2+R-dL)
ModifiedEconomisOrderQuantity  Q * 
2( S  bnr ) D
H
nr can be found in a normal loss table by computing zr=(R-dL)/L
nr= L x Ln(zr); nr is the stock out in a reorder cycle.
Periodic review
I need to cover my supply for T+L, if T is the period
review and L the lead time to get the stuff.
 T  L  leadtime  T  
L
T
L+T
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Miguel Carvalho
Session #12: Managing supply chain inventory at HP

The context
 New technology
 HP moves into commodity products
 Multiple options and localisation issues
 Importance of good supply chain management

Supply chain characteristics
 Centralised manufacturing in Vancouver
 Long transit times (4 to 5 weeks)
 JIT production (TPT = 1 week)
 DC is pure distribution and storage
 Inventory unbalances: inventory grows with stockouts!

Roots of inventory crisis
 Product diversity (models+languages+power supply)
 Long replenishment lead-times + uncertainty
 Lack of coordination between subunits (mfg, dist, mktg, and eng all have
different interests with respect to supply chain availability)

Immediate action: safety stock rationalisation
 Need for a systematic approach to safety stock determination: rule-based
system allows predictability and rationality
 Multiplicity of products induces a periodic review approach: review the
inventory regularly, order-up to an ideal level of on-hand and on-order
inventory (ideal given by a newsboy calculation that gives you a safety
until the next order comes in, which is one review and one lead-time
period later)

Other alternatives:
 Air shipment for complex, low volume items
 European factory to reduce lead-times
 Simplify model range

One interesting alternative: postponement
 Produce one generic printer that can be adapted in the regional DC’s to
local standards (languages and power supply, eg)
 Requires design for localisation
 Requires local assembly capabilities at DC’s (more than shipping boxes)
 Advantages of risk pooling: CV of pooled demand is much reduced (high
CV items are blended amongst the others)
 Safety stocks are reduced by as much as 50% (esp gains are relatively
higher for lower volume items)
 Supply chain gains require coordinated approach Eng/Mktg/Mfg/DC and
completely changes the system (given an apparently small change)
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Miguel Carvalho
Session #13: Statistical Process Control (Dinamic Seal)
Concept : Quality and process control; Statistic Process Control (SPC)
Process in stat. control: If subject only to random causes (stable, free of assignable
causes)
Gaining control : investigating => identify assignable cause => eliminating cause from
process => reduced variability
Control limits : establish UCL, LCL and hereafter sample to catch problems early on in
process => reduce rework/scrap and minimize defects => higher throughput, minimize
oper. expense, leadtime, inventories and inspection costs.
Control charts : R-charts : UCL = D4* R and LCL=D3*R (R = average of several past
R values, D3 and D4 = constants providing 3 limits. Xbar-charts : UCL = m+A2* R;
LCL= m-A2*R (R = average of several R values, A2 and A2 = constant providing 3
limits for process mean). Xbar-charts : UCL = m+z/sqrt(n); LCL= m-z/sqrt(n);  =
sqrt(n)*A2*R(avg)/3
Capability analysis : establish m, , distribution through continous examination of
output (+statistics), before starting operating process (ideal conditions).
Process Capability Ratio (Cp) = (upper specification - lower specification) / 6
Cp < 1 => process not capable; Cp>1 => capable; Cp >>1 capable and robust
Process Capability Index (Cpk) = minimum of ((m - lower specification) / 3) or
((upper specification - m) / 3)
Improve capability : systematic changes (often identified through elimination of
assignable causes)
Conformance analysis : establish that process still under control through sampling
(+statistics) at regular intervals (increasingly spaced as you gain control).
SPC build quality into the process and fosters atmosphere of continous improvement.
Based on empowerment and on-line monitoring. All staff participating in the production
process is responsible for quality control, not only inspectors, creating ownership of the
quality control and improvement. Traditional systems react to errors, SPC anticipates, is
active.
Management role : empower workers to control own processes and decide when to
redesign. Worker role: eliminate assignable causes and maintain process in control
(produce, control and take corrective action).
Cost of quality / non-quality : prevention, appraisal (inspection), internal failure (scrap,
rework etc.) and external failure (lost customers etc.)
Advantages of introducing gradually (ex: limited part of factory): demonstration
value, easier investigations, choose demanding client, learn before extending, get
worker’s input and commitment in return
Session 13:Identifying and controlling for quality (Dynamic Seal). SPC view of the
world (Deming). QC issues in the United Aircraft cell. Preliminary estimation of quality
costs (or better costs of non-quality). Quality assurance through inspection (separating
good output from bad one). Illustrating capability analysis (housing) . An example of
conformance verification through control charting (ring). How do you introduce SPC at
Dynamic Seal: the benefits of starting in small part of the plant (demonstration value,
investigations are easier, you have a demanding client with clear customer specifications,
you can learn from this effort before extending it, you give the workers the chance for
their input and you can obtain their commitment in return
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Miguel Carvalho
Statistic Process Control
Control chart
R-chart: UCLR =D4 R ; LCLR =D3 R ; R is the average range on past measurement.
R is the maximum range in each sample.
x-chart: UCLx = x + A2 R ; LCLx = x - A2 R ; x is the average of past samples mean x or the
target value for the set-up.
When std deviation is known use x +/- sx z where   
x
n
Note: a possible relationship to find sx:  x 
A2 R
(z=3)
z
Capability
Cp 
Upper . spec. Low. spec.
6
should be > 1
Std deviation of the process
distribution
Cp &Cpk
Process capability index
  x   Low. spec Upp. spec  x  
Cpk  Inf 
;

3
3

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Miguel Carvalho
Session #14: Total Quality Management (Bekaert)
TQM
1. Customer Satisfaction
2. Employee involvement
3. Continuos improvement in quality
Quality is a competitive advantage - Customer driven definition of quality may be - the
conformance to specifications of customer critical dimension values. eg match
expectations. Fitness to use for intended purpose; Support (rework, service) and finally
appearance.
Good quality increase market share because customer are looking for none failure
products. Good quality decrease manufacturing costs because has lower scrap and
reworks.
Employee involvement in order to increase awareness in the entire organization for the
need to produce quality; everyone is responsible to practice quality while at work and to
interrupt the assembly line when non quality products are being produce. This is a highly
responsible action, because by interrupting the assembly line the level of throughput in
inevitably be lower. We are all customer of the previous department or division and
suppliers of the next one. By working in this kind of framework. Quality should be a way
of living and not a group of inspectors that check if the product are in conformance with
the expected specifications. TQM must have higher priority than the level of output.
The implementation of TQM implies that there will be room for on-the-job training,
managers need new skills. Awards and incentives - tie incentives to quality
improvement and level. Teamwork different from work groups, with TQM the teams
must shared leadership and all must be empowered and responsible from insuring a high
quality level within the process.
Problem solving teams - dynamic teams that should act as a fire brigade in order to
identify and give recommendations, but this type of teams are not responsible for the
implementation, the line managers should be responsible for it. If there is a lack of
support to these teams the impact will die shortly.
How to implement TQM
1. train employees in SPC and other tools
2. Make SPC a normal aspect of daily operations
3. Build work teams with employees involvement
4. Utilise Problem solving teams within work teams
5. Develop a sense of ownership of the process
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Miguel Carvalho
Planning complex tasks
PERT diagram
6
5
Critical path
11
6
11
3 7
4
10
11
11 10 21
2
11
1
Slack time =1
When time crashing, be aware of the creation of new critical path.
With variability (Beta): Mean 
a  4n  b
ba
; 
a: optimistic time; b: pessimistic ; m most
6
6
likely time estimate.
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Miguel Carvalho
Supply Chain
A change in demand should not be followed by a change in the quantity order, because
due to the lack of communication our immediate supplier would see that change as a
permanent change and will also start to order 8 to the previous one. If by any chance we
are becoming short of inventory one should start increase the order quantity by few
units.
Managing complex projects
Two main problems that happen frequently:
1. By cost-effectively reducing task times on the critical path, sometimes new critical
paths appear and we don’t keep track of them. The manager may be facing more
expensive crash costs in order to complete the project on time.
2. Sunk cost may be not relevant, but one should always evaluate the total cost of the
project at each milestone and decide upon keep the project or abandoned.
Inventory problems
Marginal analysis
one should look for the Newsboy equation
p
C
cs

R rsq
Where s=salvage value and be careful because salvage value is what one gets if a no show
scenario. On the workers problem this represent the 100%-20% of the daily wage 250*.8
and the revenue is the revenue is 1.5*250, so we should consider that the r is the cost of
calling another 1st worker. after one finds up the p don’t forget that one should look in
the tables for the 1-p and find the Rz
Afterwards the number of workers should be I=u+Zr*Std
Never forget that H represent unit annual holding cost in the workers problem one
should calculate 20%*250*5*50=12.500 (20% of 250 times days per week and weeks per
year)
Demand is 30*5*50= 7500
but daily demand due to the lead time dl should be 30*3=90
and the std deviation Sqrt L*std
the b is given and is 250, because they are made available at half price.
EOQ 
2 SD

H
2 * 600 * 7500
 27
12,500
the reorder level should be p=H*Q/b*D and we find a probability and one should look
into the tables and find Zr
After one should compute the new reorder level. Should be higher for p=.18 Rz=.915.
R*=90+.915*10.4=100
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Miguel Carvalho
nr=ln(zr)*std l= this will give the nuber of backlogs per reorder cycle
we know zr=.915 in the table we may find the loss probability associated to this level.
And we may find b*nr that is an additional ordering cost, with the new order cost one
should check the EOQ and know is lower, so finally the new reorder quantity is the new
p but with the corrected EOQ and should be higher than the previous because Q is
bigger and the rest is constant.
Find the Zr and the R*=u+zr*std.
Statistical Process Control
Tolerances are the 2 times the required minimum and TOL*2/6*std it must be higher
than 1. Or how many std with .02/.005=4
CONWIP
Advantages
1. Greater accuracy of predicting response times when order is a known order queue
position
2. Allows manufacturing to concentrate on process effectiveness and reduce cycle time
mean and variance
3. Gives a clear rule, integrating sales objectives with manufacturing objectives
Disadvantages
1. Initial order response times will increase until productivity improvements are in place.
2. May make it difficult to expedite orders once in the shop.
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