MGT 3900 Exam 2 QUESTIONS AND ANSWERS/ STUDY NOTES

MGT 3900 Exam 2 QUESTIONS AND ANSWERS/ STUDY NOTES MGT 3900 Exam 2 QUESTIONS AND ANSWERS/ STUDY NOTES Questions: 1. There can be no more than two firms on the efficient frontier. False 2. If the takt time is shorter than the cycle time, the process needs to run faster. True 3. When an operation improves its efficiency, its revenue will always stay constant while its costs will go down. False. 4. You and three of your friends run a car wash for a fundraiser. Between interior and exterior cleaning, you spend about 40 minutes per vehicle. You are so successful that the next day, you invite four more friends to help. How does this impact the labor content? The labor content stays the same. 5. The capacity of a nonbottleneck resource is the capacity of the process. Larger than. 6. The of a resource is how long that particular resource takes to complete one flow unit. Processing time. 7. A resource with a utilization of less than 100% is never the bottleneck. False. 8. A bottleneck resource in a process has the least idle time. True 9. Which of the following statements about process analysis is true? Process analysis helps one analyze all the activities involved in providing one unit of supply. 10. In a process with rework, we find the bottleneck as the resource with the highest implied utilization. True 11. A suburb of Dayton, Ohio, has four local dry cleaners which compete with each other on the basis of price and service speed. Each of them can perform the same basic services at the same level of quality. The table below provides the price that each dry cleaner charges to clean a two-piece suit as well as the quoted number of days that the service will take. Which of these dry cleaners are not on the efficient frontier? (B) 12. The resource with the largest total demand rate is the bottleneck. False. 13. A group of workers works really hard. In fact, they work so hard that one of them claims to have an average labor utilization of 120%. Is that possible? No 14. Little’s Law describes the relationship between the following metrics EXCEPT: flow unit. a. It does involve flow time, flow rate, inventory. 15. A non-bottleneck worker currently has an idle time of 20 seconds per unit. Because of the large demand, the company improves the process by adding more capacity to the bottleneck. How does this impact the idle time of the worker? The idle time would decrease. 16. The process capacity determines the a process can provide per unit of time. Maximum flow rate 17. What is the highest possible yield a process can obtain? 100% 18. From the perspective of a cashier in a supermarket, the appropriate level for the process scope is: the customer checkout process. 19. How does the target manpower change as the demand rate increases? The target manpower increases. 20. You are sitting in a restaurant and the waiter brings you the food that you ordered a while ago. If you think about you being the flow unit in the process of the restaurant - which step of this process will be downstream relative to your current position in the process? Paying the bill. 21. A process has a yield of 50%. How many units are needed as inflow to create an outflow of 40 units per day? 80 22. You observe a vehicle registration department at your local township. Assume that all employees are ready to work at 9 a.m. You arrive at 9 a.m. sharp and are the first customer. Is your time through the empty process longer or shorter or equal to the flow time averaged across all customers that arrive over the course of the day? Shorter than average time. 23. Specialization increases the costs of labor as specialists will command a higher wage rate. False 24. Customers are driving away after failing to find a place to park at a supermarket. The process currently is: capacity constrained. 25. Rework can increase the costs of an operation, but has no impact on the capacity of the process. False. 26. Inventory is shown as in a process flow diagram. Triangles 27. Resources are shown in a process flow diagram as: Boxes 28. CodeDesk Inc matches programmers with freelance jobs. They have 30 employees who staff their online chat room. They receive on average 250 chat requests per hour and the average chat session takes 3 minutes to complete (i.e. from start to finish). On average how many chat sessions are active (i.e., started but not completed)? (Round to nearest integer) 13 chat session. 29. LaVilla is a village in the Italian Alps. Given its enormous popularity among Swiss, German, Austrian, and Italian skiers, all of its beds are always booked in the winter season and there are on average 1050 skiers in the village. On average, skiers stay in LaVilla for 11 days. H ow many new skiers are arriving – on average – in LaVilla every day? (Round to nearest integer) 95 skiers. 30. The table below provides the time stamps for the 8 people who called a reservation desk for a ferry service between 8:00 am and 8:20 am. Based on the data in the table, what is the flow rate of callers? 0.4 per minute. 31. Consider the baggage check-in process of a small airline. Check-in data indicates that from 9am to 10am, 240 passengers checked in. Moreover, based on counting the number of passengers waiting in line, airport management found that the average number of passengers waiting for check-in was 30. 7.5 minutes. 32. Consider a four-step serial process with the number of workers at each step and processing times given in the list below. Assuming that the process starts out empty and is worker-paced, how long will it take (in minutes) to serve 16 customers? (Round to nearest minute) 115 minutes to serve 16 customers. 33. An automated car wash serves customers with the following serial process: pre-treat, wash, rinse, wax, hand dry. Each of these steps is performed by a dedicated machine except for the hand dry step, which is performed manually on each car by one of 4 workers. The steps of the process have the following processing times a. If the car wash has a demand of 11 cars per hour, what is the flow rate of the process? (Do not round intermediate calculations. Round your answer to 2 decimal places) 8.57 cars per hour b. If the car wash has a demand of 11 cars per hour, what is the utilization of the machine that performs the Wax process? (Round to nearest integer) 7.1 percent 34. It takes a lawyer 120 minutes to serve one customer. Demand is 2 customers per eight hour day. The lawyer has a wage rate of $200 per hour. What is the cost of direct labor for the lawyer expressed in $ per customer? $800 per customer Exam 1 Practice: 1. What are the subcomponents of inconvenience in a customer utility function? Location and time 2. Custom-built windows are designed and produced for the unique needs of a particular building. Which dimension of the customer utility function is particularly emphasized with the concept of “custom-built”? fit 3. Which of the following characteristics is a subcomponent of consumption utility in a customer utility function? performance 4. A national restaurant chain has just opened a sit-down location at Chicago’s O’Hare International Airport. Next to the sit-down location, it has also established a “to-go” section where travelers can purchase pre-made sandwiches and salads as well as drinks and snacks. Which dimension of the customer utility function is particularly emphasized with the “to-go” section? Timing 5. A car manufacturer has designed a special edition version of its popular two door coupe. This special edition has increased horsepower compared to the standard model and a sports suspension. Which dimension of the customer utility function is particularly emphasized with the special edition coupe? Performance 6. Which of the following items would be considered an input in the operations of a soft drink manufacturer? Empty bottles 7. Which of the following items would be considered a resource in the operations of a soft drink manufacturer? Bottling machines 8. Which of the following items would be considered an input in the operations of a doctors office? Needle 9. Which of the following items would be considered a resource in the operations of a movie theater? Projector 10. Which of the following inefficiencies in a grocery stores operation results from inflexibility? Employee work schedules set a week in advance 11. Which of the following inefficiencies in a bank’s operations results from variability? Customers incorrectly list information on forms 12. Which of the following operations decision correspond to the convinces component of the consumer utility function? When will the demand be fulfilled and where will the demand be fulfilled? 13. Which of the following operational decision correspond to the price component of the consumer utility function? How efficiently will the products or the services be delivered? 14. Which of the following operations decisions correspond to the consumption utility component of the consumer utility function? What Is the product or service to be delivered? Efficient Frontier: Flow rate and Flow Time Teacher Notes: Labor content, idle time, labor utilization, pre/post question for a process. Exam 2 Questions: 1. Inventory holding costs are generally expressed as a of the cost to an item. Percentage, purchase. 2. Which of the following consequences of stockouts is the least costly? Customer waits for the item to become available 3. A company turns its inventory six times a year. What is its months-of-supply? 2 (12/6=2) 4. C&A sells 2,000 dozen eggs each day. If C&A’s days-of-supply increases from 2 days to 5 days, what will happen to its average inventory? Increase from 4,000 to 10,000. 5. The actual inventory holding cost incurred by an item depends on how long it actually spends in inventory. True. 6. Which of the following is NOT a category of inventory? Human resources. 7. Which of the following is a reason for batching? Fixed costs associated with starting the process 8. Sweet Shop Bake Shop uses 111 bags of chocolate chips each month. The chocolate chips are purchased from a supplier for a price of $21 per bag and an ordering cost of $44 per order. Bakery A’s annual inventory holding cost percentage is 25%. If Bakery A’s demand for the chip is multiplied by 2, what will be the percentage change in its economic order quantity? .41 9. When solving for an optimal order quantity in the presence of order quantity restrictions, a rule of thumb is to order at a feasible quantity closest to the economic order quantity. Flase. 10. Which of the following graphs correctly portrays the relationship between inventory level (y-axis) and time (x-axis) according to the economic order quantity model? 11. Limited inventory always increases demand because of the scarcity effect. False. 12. The assumptions behind the economic order quantity (EOQ) model include all of the following EXCEPT: A fixed ordering cost per year. 13. When solving for an optimal order quantity in the presence of a quantity discount, a rule of thumb is to select an order quantity which takes advantage of the discount. False. 14. The Sweet Spot Bake Shop uses 451 bags of flour each month. The flour is purchased from a supplier for a price of $97 per bag and an ordering cost of $15 per order. The Sweet Spot’s annual inventory holding cost percentage is 10%. If the Sweet Spot chooses to use the economic order quantity for flour purchases, what will be the total of its holding and ordering costs per year? 1254.95 15. Dan's sporting goods sells fishing jackets for $260 that it purchases for $130 (they are premium hand-made by Dan jackets). Its annual holding cost is 1.7%. Dan's sporting goods has 525 jackets in inventory today and sells 5 jackets per day. What is the holding cost Dan's sporting goods incurs for each jacket? Assume 365 days per year. .64 16. Dan's Taxi Service has a critical ratio of 0.059 after running the newsvendor model. They order taxis every 3 weeks with an ordering cost of 3110. Their average demand is 60 taxis per year. What is their service level? .059 17. The inputs to the newsvendor model include all of the following except: fixed cost. 18. Which of the following statement is TRUE regarding the optimal order quantity that maximizes expected profit? It is a balance the underage cost and overage cost. 19. Coefficient of variation is the ratio of the to . Standard deviation of demand, expected demand. 20. A critical ratio of 0.8 means there is an 80% chance that demand is less than or equal to the optimal order quantity. True. 21. Product pooling demand across correlated products to coefficient of variation, thereby reducing mismatch costs. Aggregates, decrease. 22. The difference between the and is the mismatch costs in the newsvendor model. maximum profit, expected profit. 23. Store A uses the newsvendor model to manage its inventory. Demand for its product is normally distributed with a mean of 500 and a standard deviation of 300. What is its stockout probability if Store A’s order quantity is 800 units? 15.9% 24. Store A uses the newsvendor model to manage its inventory. Demand for its product is normally distributed with a mean of 500 and a standard deviation of 200. What is its expected sales if Store A’s order quantity is 400 units? 360. 25. Demand is modeled with a normal distribution that has a mean of 300 and a standard deviation of 50. What is the probability that demand is between 200 and 400? 95.4% 26. Bakery A sells bread for $2 per loaf that costs $0.80 per loaf to make. Bakery A gives a 75% discount for its bread at the end of the day. What is the critical ratio? .80 27. Demand for its product is normally distributed with a mean of 50 and a standard deviation of 10. What is the coefficient of variation of its demand forecast? .2 28. Bakery A sells bread for $2 per loaf that costs $0.50 per loaf to make. Bakery A gives a 70% discount for its bread at the end of the day. What is the salvage value of its bread? $.60 29. Demand is modeled with a normal distribution that has a mean of 300 and a standard deviation of 50. What is the probability that demand is 400 or more? 2.3% 30. Bakery A sells bread for $2 per loaf that costs $0.50 per loaf to make. Bakery A gives an 80% discount for its bread at the end of the day. What is the underage cost? $1.50 31. Store A uses the newsvendor model to manage its inventory. Demand for its product is normally distributed with a mean of 500 and a standard deviation of 300. What is its stockout probability if Store A’s order quantity is 800 units? 15.9% 32. Demand for its product is normally distributed with a mean of 50 and a standard deviation of 10. What is the coefficient of variation of its demand forecast? 10/50=.2 33. Magician's Paradise sells live pigeons for magicians to use in their magic shows. However, they recently changed suppliers of pigeons as their last supplier was not eco- friendly. The cost per pigeon went up by $7 and they have a new ordering cost of $148. The new supplier has a better lead time, 6 weeks, over their last supplier. Magician's Paradise holds the pigeons in a very large aviary, causing their holding costs to be high (51%!). Magicians are constantly ordering from Magician's Paradise and the pigeons are their biggest seller. In fact, their average weekly demand for pigeons is 6518. =45626 34. Dan's sporting goods sells fishing jackets for $260 that it purchases for $130 (they are premium hand-made by Dan jackets). Its annual holding cost is 1.7%. Dan's sporting goods has 525 jackets in inventory today and sells 5 jackets per day. What is the holding cost Dan's sporting goods incurs for each jacket? Assume 365 days per year. =.64 Exam 3 Questions: 1. A queue will not form if capacity exceeds demand. False. 2. A good way to improve waiting time is to simply turn customers away. False. 3. A queue of customers will form if the demand rate is greater than the process capacity and customers are willing to wait. True. 4. A server is idle 5% of the time. What is the server's utilization? 95% 5. The average time to serve a customer at a fast-food restaurant is 5 minutes. The standard deviation of the service time is 4 minutes. What is the coefficient of variation of the service time? 0.8 (1/5=.2) then .2*4=0.8 6. What is the key assumption for the single-server queue model? The average interarrival time is greater than the average process time. 7. Given the following data at the drive-through of a bank, what is the average processing time from 8:06 to 8:36? 6 minutes. ---chart below 8. During the two hours of the morning rush from 8 a.m. to 10 a.m., 100 customers per hour arrive at the coffee shop. The coffee shop has a capacity of 80 customers per hour. How long does the customer arriving at 10 a.m. have to wait to be served? 0.5 hour (100/80)=1.25 ----1.25-1=.25 ----- .25*2=.5 hour 9. During the two hours of the morning rush from 8 a.m. to 10 a.m., 100 customers per hour arrive at the coffee shop. The coffee shop has a capacity of 80 customers per hour. What is the number of customers waiting at 10 a.m.? 40 (100-80)=20 ….20X2hours=40 10. Which of the following is a reason why queues will form even if capacity exceeds demand? Customers do not arrive in a consistent pattern. 11. Which of the following is NOT a performance measure of a single-server queue system? The average number of customers who leave the system 12. Which of the following is the best measure to compare the variability of two arrival processes? Coefficient of variation. 13. One way to reduce a queue is to reduce during times. Demand, peak. 14. A server operates with 80% utilization. The coefficient of variation for the service process is 0.5 and the coefficient of variation of the arrival process is 1. The average processing time is 3 minutes. What is the average time a customer waits in the queue according to the single-server queue model? 7.5 minutes. 15. Which of the following statements about queues is FALSE when demand exceeds supply? The queue grows as long as the supply rate exceeds capacity. 16. Which of the following statements is true regarding a stable queue? The utilization is less than 100%. 17. Peak-load pricing means to during times. Charge more, peak. 18. Which of the following is not a forecasting method? Linear programming. 19. Which of the following statements is FALSE regarding the moving average forecast? It assigns a heavier weight to the most recent observation in the forecast window. 20. Two methods are used to predict how many customers will call in for help in the next four days. The first method predicts the numbers of callers to be 23, 5, 14, and 20 for the four respective days. The second method predicts 20, 13, 14, and 20 for the four respective days. The actual numbers of callers turn out to be 23, 10, 15, and 19. Which method has the smaller mean absolute error (MAE)? The first method. 21. Which of the following statements is TRUE regarding the exponential smoothing forecasting method? It corresponds to the naïve method when the smoothing parameter equals one. 22. The forecasting method creates a forecast for the next period by using the value of the last period. Naïve, actual. 23. Demand forecasting is the process of creating statements about of demand that are . Future realizations, currently uncertain. 24. When the demand data has an exponential growth trend, one should forecast the of demand when using the double exponential smoothing method. Logarithm. 25. The biggest strength of subjective forecasting is: use of human intelligence to replace forecasts done by analytical methods. 26. Seasonality is a demand change that constitutes a fluctuation over time. Significant, repetitive. 27. The exponential smoothing forecasting method is not responsive to changes in demand. False. 28. Dan's Duck Distillery (DDD) processes ducks that are harvested in the local area. Barrels of ducks arrive on trucks to DDD’s facility at a rate of 597 barrels per hour and are processed continuously at a rate of 400 barrels per hour. Trucks arrive at a uniform rate over 8 hours, from 6:00 a.m. until 2:00 p.m. What is the maximum number of barrels of ducks that are waiting on the trucks at any given time? 1576.0 29. Camille owns Crunch Code, a company that provides quick programming solutions. Clients send projects to Crunch via their web page and a programmer develops the needed code as quickly as possible. Camille has five programmers, who do all of the coding. On average, a project arrives once every 5 hours, with a standard deviation of 17 hours. Each project is assigned to one programmer and that programmer takes on average 21 hours to complete each project with a standard deviation of 33 hours. How many uncompleted projects does Crunch Code have in the queue? 23.965 Last 2 homework’s: 1. If the demand rate increase, the takt time: decreases 2. If the takt time increases, the operations requires: fewer workers 3. An executive declares that his company has achieved an OEE of 115%. Is this possible? No 4. An orthopedic surgeon has read an article about the Toyota Production system and now wants to organize her surgery operation based on lean principles. To eliminate all idle in the operating room, she decides to call in patients six hours before the scheduled surgery time. Is this a lean process? No 5. Which of the following does not belong to the seven sources of waste? Over time 6. Students have to change buildings between classes, which often times involve walks of 5 minutes or more. Walking from one building to another is: non-value add time 7. For one and the same process, what scenario corresponds to a higher variation? A three sigma process 8. Following the announcement of a major quality problem, the share price of a company falls substantially. These decreases is a result of assignable cause variation. True 9. Which of the following definitions describes a robust process? A process is robust if it can tolerate variation in input and environmental variables without producing a defect. 10. How many standard deviations is the upper control limit, UCL, about the long-run center line, X-bar-bar? 3 11. In a p-chart, the upper control limit is how many estimated standard deviations about the average p-bar? 3 12. Mary and Tom operate a lemonade stand. They are concerned that the lemonade does not taste fresh at the end of the day. Which of the following variables is an environmental variable in their operation? The temperature of the air during the day. 13. Which of the following statements about Pareto diagrams are correct? The Pareto diagrams shows the possible root cause of a problem with the number of defect occurrences. 14. In the production of pizza, which of the following four variables is not an input variable? The time that the customer leaves the pizza in the fridge 15. Which of the following objectives is more important in a pull system? Producing at the rate of demand Chapter 1 Operations Management Exam 1 (Chapters 1-5) • Business or Organization Supply o Offer products or services to our customers • Supply o Products or services a business offers to its customers ▪ Supply and Demand ▪ Competitive advantage (not easily matched by competitor, hard to reproduce) • Customer (Consumer) Demand o Created by our customers • Demand o Set of products and services our customers want • Operation Design o Better match supply with demand o Gain competitive advantage o Implementation of models o Operational strategies • Utility: a measure of the customer preference of a product or service. Drivers of Customer Utility A. Consumption Utility: measurement of how much you like a service, ignoring the effects of price and its inconvenience. Comes from various attributes such as performance and fit. B. Price: total cost of owning a product or receiving the service. Included expenses such as shipping and financing. (no one wants to pay more) C. Inconvenience: The reduction (lose) in utility that results from the effort of obtaining the product or service. (ex. “tough mudder” before ability to buy a product) Location and timing. Strategic Trade-Off • Capabilities: dimensions of the customer’s utility function a firm is able to satisfy. Capabilities allow a company to do well on some but not all components for customer utility. • Trade-Offs: The need to sacrifice one capability in order to increase another one. • Strategic Trade-Off: When selecting inputs and resources, the firm must choose between a set that excels in one direction of customers utility or another, but not single set of inputs and resources can excel in all dimensions. • Market Segments: A set of customers who have similar utility functions. Strategic Trade-Off between Responsiveness and Productivity Effective Frontier • Top performers • Compare the top performers (above the line is good, below is bad) • Derived from the industry you are in. • Set of firms that are not Pareto dominated. Inefficient firms (performing below the line) gap between a firm and efficient frontier. Overcoming Inefficiencies Pareto Dominated: when firm performs better or equally on all attributes of the customer’s utility function. The difference between the revenue we earn and the costs it incurs is its profit. • Costs for inputs: inputs are the things that a business purchases. (fast food restaurants- meat, salad, buns, soda) (car manufacturer- steel, seats, tires, computer makers have to buy displays, chips, power supplies) (hospitals-medication, bandages, food) • Costs for resources: resources are the things in a business that help transform input into out-put and thereby help provide supply for what customers demand. (fast food restaurants- cooking equipment, real estate of restaurant, employees) (car manufacturers- computer makers have plants, warehouses, employees) (Hospitals-doctors, nurses, the building) Three system inhibitors A. Waste: does not add value to the customer. Consumption of inputs and resources that do not add value to the customer. B. Variability: Predictable or unpredictable changes in the demand or the supply process. (Projector doesn’t work in the room, so can’t be used for the class) C. Inflexibility: The inability to adjust to either changes in the supply process or changes in customer demand. Little’s Law I=RT Average # claims = average # claims/ x Average Time Weakness: dealing with averages, which means if we are looking at information about process or business, we might want to consider taking out outlier. A firm reduces inefficiencies by making trade-offs. FALSE • Process o A set of activities that take a collection of inputs, perform some work or activities with those inputs, and then yield a set of outputs. • Process flow Diagram o Graphical way to describe the process. It uses boxes to depict resources, arrows to depict flows, and triangles to depict inventory location. • Process scope o Set of activities and processes included in the process • Flow Unit o Basic unit that moves through a process Rules to Define Flow Unit 1. Choose flow unit that corresponds to what you want to track and measure (with respect to the process). 2. Stick with the flow unit you define. 3. Choose a flow unit that can be used to measure and describe all of the activities within the process. Key Process Metrics • Process Metric o Something we can measure that inform us about the performance and capability of a process. 1. Inventory: number of units within a process 2. Flow rate: the rate at which flow units travel through a process 3. Flow time: the time a flow unit spends in a process, from start to finish • Inventory tells us how much “stuff” is in the process • Inventory takes up space and cost money. • Flow Rate: tells us how much time spends in the process o More units flowing through a process is generally more desirable because the point of the process is to produce output. Little’s Law • Little’s Law: the law that describes the relationship between three key process metrics. • Inventory: Flow rate x Flow time o I=RxT o Flow Rate=R o Flow Time=T If you know (or observe) any of the two key process metrics, you can use Little’s Law to derive the third. • Inventory=Rate x Time o I=RxT o I=R(T) • Little’s Law tells us the average time a flow unit spends in the process. • The Process flow diagram provides a visual chart that represents the steps of a process. • Process Analysis o A rigorous framework for understanding the detailed operations of a business. ▪ A framework that can be used for everyone running a business. ▪ (Process capacity) determines how many flow units can be processed per unit of time. ▪ (Utilization) determines how busy the resources of the process are. • The best way to begin any analysis of an operation is by drawing a process flow diagram. • Process flow diagram o Graphical way to describe the process. • Flow unit o Unit of analysis, we use arrows in a process to capture the flow unit’s journey from input to output. ▪ ALWAYS stick to ONE flow unit. (stay with customers, don’t go to the food or employees) ▪ Same number of customers come in, same amount leave. • Upstream o Part of the process that are at the beginning of the process flow. ▪ Ex. Go to Subway and you pick out the kind of bread you would like. • Downstream o Parts of the process that are at the end of the process flow ▪ Ex. When you’re at Subway, it is at the end of the order. Understanding the Process • Process flow diagrams remain flexible so the manager decides what aspects to study. • Drawing the process flow design should always be the first step in the process analysis. • Many different processes to analyze. • Defining different flow units. Capacity for a one-step process • Processing Time o The time it takes a resource to complete one unit flow. ▪ Must be concise for example there is a difference between seconds and seconds/persons. ▪ Think in terms of averages. • Processing Rate o Hours of operations, don’t need people in your store to calculate rate. You still calculate the “dead time”. Capacity • The maximum number of flow units that can flow through that resource per unit of time. • Process Capacity o The maximum flow rate a process can provide per unit of time. The process capacity determines the maximum flow rate a process can provide per unit of time. It thus determines the maximum supply of the process. ▪ If you can wash 5 cars per hour and the person who cleans the tires before you can only do 4 an hour, then you can only do 4 per hour because he is slowing you do. ▪ These are SLOWER. The MINIMUM number. • Demand Rate o The number of flow units that customers want per unit of time. • Capacity-constrained o The case in which demand exceeds supply and the flow rate is equal to process capacity. ▪ Bottleneck in the process ▪ You can’t handle everyone who comes in. • Demand-constrained o The case in which process capacity exceeds demand and thus the flow rate is equal to the demand rate. ▪ You can handle everyone who comes, over the same period of time. • Throughput o A synonym for flow rate • Utilization o The ration between the flow rate (how fast the process is currently operating) and the process capacity (capturing how fast the process could be operating if there was sufficient demand). o Utilization=flow rate/capacity o NEVER below 0 and should NEVER be 200% (over 100%). o 30/30=1 therefore, 100% • Cycle Time o The time between completing two consecutive flow units. Time between people or units. ▪ How long you will be running a process. Averages. 10 minutes and then the next ones take 5 minutes. o Cycle time= 1/flow rate o expressed in units of time per unit • Lead Time o Time between when an order is placed and when it is received. Process lead time is frequently used as an alternative term for flow time. ▪ Time between asking question and someone giving an answer. • Bottleneck o Resource with the lowest capacity in a process ▪ Understanding the location of the bottleneck is critical for involving a process. ▪ Searching ▪ Running o A non-bottleneck resource has, by definition, some extra capacity relative to the bottleneck. o In the case of a demand-constrained process, even the bottleneck would not be working at 100 percent. • Worker paced o Process line in which each resource is free to work at its own pace. If the first resource finishes before the next one is ready to accept the flow unit, then the first resource puts the completed flow unit in the inventory between the two resources. • Machine Paced o Process in which all steps are connected through a conveyor belt and all the of steps must work at the same rate even if some of them have more capacity than others. o Time through the empty system: the time is takes the first flow unit to flow through an empty process, that is, a process that has not inventory. o No “triangle”, no inventory time, the machine has one conveyer belt that continues to keep going. Chapter 4 • Obtaining high output at low costs is the key idea behind efficiency. • Efficiency is only one of multiple dimensions of operational performance. Business should not set efficiency as their only goal. • Setting ethical considerations aside, we can think of profit maximization as the primary goal for most corporations. o Profit=flow rate x (average price-average cost) • Profit maximization the object of an enterprise-to maximize the difference between revenue and costs. Improving the efficiency of a process • Develop a set of measures of efficiency-you cannot manage what you cannot measure. • Identify the right number of employees to meet demand, • Assist the bottleneck resource to increase it’s capacity. • Equal distribution of work • Specialization • Evaluate improvement opportunities. o Small efficiency improvements can have large financial benefits. Measure of process efficiency • Efficiency: a process is efficient if it is able to achieve a high flow rate with few resources. • Cost of direct labor: the labor cost associated with serving one customer, which is the totally wages paid per unit of time divided by the flow rate. o Cost of direct labor=wages per unit of time/flow rate • Labor content: the amount of work that goes into serving one customer (generally one flow unit) which is the sum of the processing times involving labor. o A high number is less desirable than a low number. o Focus on the ratio of input to output. • Average labor utilization: average utilization across resources. o Measure of efficiency o Average labor utilization should be as high as possible. • Idle time: the amount of time per flow unit for which a resource is paid but is not actually working. o An unutilized worker creates unnecessary expense. o Efficient process would reveal the average labor utilization is as high as possible. ▪ Idle time (resource i)=cycle time-process time (resource i) o Measures how long the resource is idle for each flow unit it serves. o Idle time is expressed in units of time. • Total Idle time: the amount of idle time per flow unit added up across all resources. ▪ Total idle time=sum of idle time across resources o For every customer we serve, we incur and pay for idle time. o To evaluate the cost of idle time it is necessary to compare idle time with the labor content. o Labor content is the productive time of our resources. o Laborers get paid while they are working and while they are idle. • Average labor utilization o Average labor utilization=labor content o Labor content=idle time • Or based on cycle time o Average labor utilization=labor content/number of employees • Takt time: ration between the time available and the quantity that has to be produced to serve demand. o Measure driven by demand ▪ Goal to design a process flow that meets the demand rate ▪ Process should not operate at the discretionary flow of resources ▪ Should happen at the rate of demand o Takt time= available time/required quantity (which is demand) • Takt time= 1/demand rate (in which we set the available time equal to one unit of time) o Does not depend on process capacity o Driven by demand rate • Cycle time=1/flow rate (and the flow rate is the minimum of demand and process capacity). o Depends on process capacity The goal is to have the cycle time that is as close to the takt time as possible. • Target manpower: the ratio between the labor content and the takt time determines the minimum number of resources required to meet demand. This minimum does not have to be an integer number and it is assuming all resources are perfectly utilized. o Target manpower=labor content/takt time ▪ People x time/unit divided by time/units ▪ Cancels out and it is just people. • More demand means a shorter takt time-shorter takt time requires more employees to handle the same amount of labor content. • Leveling the Demand: setting an expected demand rate for a given period of time so that one can look for an appropriate staffing plan for the time period. • Process improvement start by looking at the bottleneck. • Line Balancing: reassign activities to other resources with more capacity. o Automating the consuming activities o Outsourcing some of the activities o Consider adding more employees or consider overtime ▪ Balancing for a fixed sequence of activities. ▪ Balancing for activities with no fixed sequence ties. o Reshuffle activities/assigning activities to resources. • Provides flexibility thus assigning activities to balance resources more efficiently. • Specialization o Reduction in processing times due to elimination of setups. Specialization increases efficiency by eliminating setups. Setups are considered disruptions. o Reduction in processing times due to learning. The fact that specialization increases efficiency by providing more practice to the operator in the execution of a particular activity. Practice makes perfect. Perfection makes shorter processing times. • Pros and Cons of Specialization o Lower-skilled labor: labor that is not able to master multiple activities and can only work as a resource with short processing times. Specialized labor tends to require shorter training period and oftentimes receives lower wages. o Equipment replication: the need to provide extra equipment to non-specialized labor at resources often leads to a low level of equipment utilization. o Work cells: organization of work where small teams perform a job from start to finish. Opposite of specialization. ▪ The benefits of specialization must be compared to the costs of speciation in the form of increased idle time. • The goal of most operations is to help generate profits. o Profits=flow rate x (average price-average costs) ▪ Fixed costs-firms pay anyway regardless of production. ▪ Variable costs-costs that grow in proportion to the amount a firm produces and sells. ▪ Profits=flow rate x (average price-variable costs)-fix costs. • Gross margin the ratio between profits and revenues. Chapter 5 • Product mix: a combination of different flow unit types moving through a process. • Demand Matrix: determines how many flow units of each type are flowing through each resource. From resource I and for each flow unit of type j the demand matrix is: o D (i, j) ▪ Number of flow units of type j that needs to be processed at resources i o Each row in demand matrix corresponds to a resource and each column in the demand matrix corresponds to a flow unit type. o (rows, columns) rows-resources (process nodes) columns-flow units o when you see a ZERO that means that the flow unit does not have to go through that process. • Total demand rate: tells us how many flow units’ j need to be processed at a resource I across all different flow units. • Demand side of the process: how much work is required from each resource. • Supply side of the process: how much work each resource is capable of doing. • Not every flow unit will go to every resource thus we must redefine our definition of bottleneck. • Implied utilization – the ration of demand capacity o Implied utilization=total demand at the resource/capacity at the resource • Utilization- the ratio between flow rate and capacity. Utilization only carries information about excess capacity which is strictly less than 100% • Implied utilization- captures the mismatch between what could flow through the resource (demand) and what the resource can provide (capacity). • Implied utilization can exceed 100%. Any excess over 100% reflects that a resource does not have the capacity available to meet demand. • If a resource has an implied utilization above 100% does not make it the bottleneck. o It is possible to have several resources with an implied utilization however there is only one bottleneck in this process. ▪ When capacity-constrained things are somewhat more complicated. • Attrition Losses, Yields, and Scrap Rates o Ina process with attrition losses, all flow units start at the same resource but then drop out of the process (or actively removed from the process) at different points. Attrition losses are more commonly associated with the manufacturing industry. o Scrap or scrapping occurs when defective flow units are eliminated from the process. o Yield-of a resource measures the percentage of good units that are processed at this resource. • Flow unit-dependent processing times o Flow unit dependent processing times can vary across flow unit times, impacting process analysis. ▪ Different processing times at the same resource. ▪ Change in flow unit ▪ Change in demand ▪ Change in capacity of each resource • Designing the workload matrix o Designing the workload matrix is like the demand matrix. Each cell is multiplied by the appropriate processing time. o Helpful to first create a table with the number of rows corresponding to the number of resources and the number of columns corresponding to the number of flow units. o Write the different flow unit types in an extra row above the table (as column headers) and the different resources in front of each row (as row headers). o Add the workloads for each resource. • How to find the bottleneck and the flow rate in the process with flow unit depend processing time. • Rework o The repetition of activities or an extra set of activities that have to be completed by a defective flow unit in order to be restored to a good flow unit. The term rework originated in manufacturing. ▪ If rework is able to turn a defective unit into a good unit, the process yield returns to 100%. ▪ Mean that a resource needs to be process more flow units. MGT 3900 Operations Exam 2 Material (Chapter 10,12,13,14) Chapter 10 • Inventory – The number of flow units within the process. Inventory is found in all stages of processes o Raw material – has not been “worked on” o Work-in-process – inventory that is inside the process has been “started on” o Finished goods – the process is complete and does not require additional processing • Inventory Management – The practice of regulating the quantity, location, and type of inventory in a process. o Critical for the success of the organization • Forecasting – Requires forecasting (how well can future demand be predicted) • Data Tracking and analysis – Does the organization know how many units of product it actually has. • Mandates investments – building, equipment etc. • Inventory exists for a number of reasons and in any situation, there may be multiple reasons present: o Flow time – it takes time to move something from one place to another o Seasonality – predictable periods of high or low demand • Batching – fixed ordering costs • Buffers – to deal with variability within a process o Ex. Workers working slow or machines breaking down • Uncertain demand – unpredictable variations in demand • Pricing – quantity discounts • Production Smoothing Strategy – A strategy for scheduling production such that the rate of output remains relatively stable over time even though demand varies predictably over the same period. • Stochastic Demand – Unpredictable variations in demand • Safety Inventory – Inventory needed to buffer against demand uncertainty. Also called Safety stock. • Inventory turns and days-of-supply are ways to measure the amount of inventory in a process relative to some period of time. • Days-of-Supply – The average amount of time (in days) it takes for a unit to flow through the system • Inventory Turns – The number of times the average inventory flows through a process in a designated interval of time. Days-of-supply = T = Flow time Turns = R/I Annual turns = Annual cost of goods sold/Inventory Days-of supply = 365 X Inventory/Annual cost of goods sold • Publicly reported financial information can be used to evaluate a company’s annual inventory turns and days-of-supply. • Stockout – A stockout occurs when a customer demands an item that is not available in inventory. • Opportunity Cost of Capital – The income not earned on the amount. • Inventory Storage Cost – The cost incurred to properly store, maintain, and insure inventory. • Obsolescence Cost – The cost associated with losing value over time because of either technological change or shifts in fashion. • Spoilage and Shrinkage Costs – Costs associated with theft or product deterioration over time. • Holding Cost Percentage – The ratio of the cost to hold an item in inventory during a designated time period relative to the cost to purchase the item. Evaluate the Holding Cost of an Item Held in Inventory Using an Annual Holding Cost Percentage and Days-of-Supply or Turns • Inventory holding costs as a % of COGS = Annual holding cost percentage Annual turns • Most companies assess their inventory holding costs as a percentage of the cost to purchase an item. o For example: If an item costs $50. and the firm assigns a holding cost percentage of 30%, then it costs the firm 0.3 X $50 = $15 to hold that item in inventory for an entire year. • The actual inventory holding costs incurred by the item depend on how long it actually spends in inventory. • Sample Question: The holding cost of inventory at a retailer is 35 percent per year. The retailer’s annual turns are 3. How much does it cost the retailer to hold a dress that it purchased for $50? o Answer: To hold the dress for one year would cost the retailer 35% X $50 = $17.50, but It won’t hold the dress for an entire year. Years of supply = T = 1/Annual turns = 1/3 turns per year. So it hold the dress, on average, for one third of a year. Hence, the cost to hold the dress is $17.50 x (1/3) = $5.83. Chapter 12 • Economic Order Quantity (EOQ) – A model used to select an order quantity that minimizes the sum of ordering and inventory holding costs per unit of time. The model is built on the following assumptions: o Demand occurs at a constant rate R o There is a fixed order cost K per order. Is independent on amount ordered o There is a holding cost per unit of time h This includes all costs associated with keeping a unit of inventory in stock for a period of time. • All demand is satisfied from inventory • Inventory never spoils, degrades, or is lost. • Assumption that everything is eventually sold. • Orders are delivered with a reliable lead time. • Lead time – the time between when an order is placed and when it is received. Process lead time is frequently used as an alternative term for time flow. o There is a purchase price per unit that is independent of the quantity purchased. • The goal of EOQ is to minimize the sum of all order costs in a period of time. • Ordering cost per unit of time o The sum of all fixed order costs in a period of time • Holding cost per unit of time o The total cost to hold inventory for a period of time • EOQ cost per unit of time. o The sum of ordering and holding costs per unit of time • Purchase cost o The cost to purchase in a period of time • Order cost K – The fixed cost incurred per order, which is independent of the amount ordered. • Holding cost per unit h– The cost to hold one item in inventory for one unit of time. • Economies of scale – Describes a relationship between operational efficiency and demand in which greater demand leads to a more efficient process. • Product substitution – This occurs when people may be willing to purchase a less- preferred version if their most preferred version is not available. • It is possible to evaluate the sum of ordering and holding costs per period for a given order quantity. • If the EOC is chosen: o This cost increases as the flow rate (demand) increases o The cost increases at a slower rate than demand • It can be costly to add a product to an assortment. o If adding the product reduces the demand of existing products. o Then the existing products lose scale and become less efficient • This means the sum of ordering and holding costs becomes a smaller percentage of the purchase cost as the demand rate increases. • Pallet – Either a platform which is used to stack inventory or the quantity of inventory that is stacked on the platform • Distribution Center (DC) – A facility designed to receive product from suppliers, store inventory, and ship products to retail stores. • Tier – the quantity of product in one layer of a pallet. • A quantity discount can be used as a motivator to order larger quantities. • Larger quantities increase the sum of ordering and holding costs (above minimum). • Reduces the purchasing cost. • A very large quantity may be optimal even if the discount appears to be small. • Firms are more price sensitive than consumers. Holding cost= Q*h/2 Order cost=K*R/Q Total cost=Holding + Order Chapter 13 • This model represents one of the canonical (recognized) challenges faced in operations: o The combination of uncertain demand with inflexible supply. • Choses an order quantity that either fails to satisfy all demand or leaves some units left over • Can make smart tradeoffs too much (overage) – too little (underage) • The critical ration balances the two types of costs, determining the quantity that maximizes expected profit. • The quantity is seldom the mean of the demand distribution o More is ordered when the underage cost o Less is ordered when the overage cost dominates • Has considerations implicating customer service • Change the economics (e.g. increasing critical ratio • Reduces uncertainty faced by the newsvendor (e.g. product pooling, make-to-order production) • Increases flexibility of the supply process. (e.g. quick response) • Salvage value – The value that can be obtained per unit for inventory left over at the end of the selling season. • Density function – A function that returns the probability a given outcome occurs for a particular statistical distribution. • Underage cost – The cost of ordering one unit too few; that is, the cost of under ordering by one unit. • Overage cost – The cost of ordering one unit too few; that is, the cost of over ordering by one unit • Critical rate – The ratio of the underage cost to the sum of the overage and underage cost • Round-up rule – When considering probability in a statistical table if the probability falls between two entries, chose the larger probability • Standard normal distribution – A normal distribution with mean 0 and standard deviation of 1. • The Newsvendor Model: For any order it is possible: • Evaluate several performance measures • As the order quantity increases, so do • expected sales and inventory • Expected sales are never greater than expected demand • The in-stock and stockout • The in-stock and stockout probability equals the critical ratio. • It is possible to increase the in-stock probability beyond that point by ordering a larger quantity • Doing so will lowers expected profit. Newsvendor Performance Measures • Expected inventory – The expected number of units not sold at the end of the season and that are therefore salvaged. • Expected sales – The expected number of units sold during the season at the regular price. • Expected profit – The expected profit earned from the product, which includes leftover inventory. • In-stock probability – The probability that all demand was able to purchase a unit. • Stockout probability – The probability that some demand was not able to purchase a unit; demand experienced a stockout. • Stockout – The event in which one or more customers are unable to purchase a unit because inventory was not available • One benchmark to which we can compare the newsvendor profit is Maximum profit. • Maximum profit – The highest possible expected profit. This occurs when inventory is available for all customers. • Maximum profit = Expected demand X Profit per unit sold • Maximum profit depends on two factors: o The expected demand o The profit per unit sold. o Demand uncertainty – measured by the standard deviation o Too much too little challenge • Mismatch costs –Costs related to mismatch between demand and supply. These usually include the cost of leftover inventory and the opportunity cost of stock outs. The difference between maximum profit and the newsvendor expected profit equals the sum of mismatch costs: • Expected profits = Maximum profit – Mismatch costs • Factors that influence mismatch costs: • Coefficient of variation – The ratio of the standard deviation to the mean. The standard deviation is only an absolute measure of uncertainty. o Captures that difference in uncertainty o Can vary considerably low – high • Factors that influence mismatch costs (Cont.) • Critical Ratio – Occurs when the cost of leftover inventory is negligible compared to the underage cost. • You don’t want to be a newsvendor if you are highly unsure about demand • It is costly to have inventory left over relative to the profit that can be earned on each sale. Strategies to manage the newsvendor environment: product pooling, quick response and make to order: • Throw in the towel • Increase profit margin relative to the cost of leftover inventory o Either one of these changes increases the critical ratio, thereby reducing mismatch costs. (What lever do we pull?) • Reduce the purchase cost. Limits to this strategy. o Even suppliers must earn a profit. o Cheaper supplier might have lower quality or less reliable delivery. • Expected sales from 2nd order=mean-expected sales from 1st order • One way to reduce demand uncertainty is improve the quality of the forecast. • Forecasting – even with the best data and forecasting methods uncertainty still exists. Cannot eliminate all uncertainty. Another approach to reduce demand uncertainty would be Product pooling. • Product pooling – The strategy to reduce the variety offered to customers by combining, or pooling, similar products • To understand Product pooling must first be clear as to how demand uncertainty should be measured. • The key measure of demand uncertainty is the coefficient of variation o Reduce the coefficient of variation you reduce mismatched costs o Can reduce by combining or pooling the demand across products. • Correlation – A measure of the interaction between two uncertain events. Correlation ranges from -1 to 1. o If two events are positively correlated (have positive correlation) the outcomes tend to have similar magnitudes. If the outcome of one event is “high” then the outcome of the other event tends to be “high” as well. o If two events are negatively correlated (correlation is negative) when the outcomes tend to have dissimilar magnitudes the outcome of the other even tends to be “low” Product Pooling • Two events that are found to be independent if their correlation is zero. • Independent – Two events are independent (Their correlation is 0) when the outcome of one event has no relationship to the outcome of the other event. • Product pooling is an example of statistical economies of scale. The property in which aggregating demand into a large scale tends to reduce uncertainty, as measured by the coefficient of variation. • Quick response – A strategy that increases supply flexibility to allow a response to updated information about demand. For example, with quick response a firm can obtain additional supply for products that are selling above expectation, thereby reducing the number of stockouts. • The capacity used in the second order is sometimes called reactive capacity. • Make-to-stock – A production system in which an item’s production begins before the customer for the item is known. In a make-to-stock system, units are generally placed in inventory to await customer demand. • Make-to-order – A production system in which an item’s production begins after the customer for the item is known. In a make-to-order system, units are generally delivered to a customer immediately after production is completed, thereby not spending time in inventory. • Make-to-order is opposite of make-to-stock • Make-to-order system will not have leftover inventory requiring to be salvaged • Make-to-order systems help to reduce stockouts • Make-to-order system customers wait to receive their units o Production could begin after demand is observed o Yields maximum profit • Make-to-order does have challenges o Queuing systems o Wait times o Wait times growing exponentially as utilization increases o Times is Achilles heel of make-to-order o Consumers prefer “now” versus “later” o How long will consumers wait before going to another supplier • Customer must be patient • Customers have a strong preference for variety o Mass customization – Each customer’s order is unique, customized to her/his exact preference • Leftover inventory is expensive • Production is reasonably quick • Assemble-to-order – A make-to-order system in which a product is assembled from a set of standardized modular components after an order is received. Chapter 14 • Order up to model: Appropriate for managing the inventory of a product that has many replenishment opportunities because it does not become obsolete or deteriorate in the short term. One such example is the Medtronic’s InSync device – a device that can be ordered on a daily or weekly basis but is expected to last several years. • Medtronic’s Supply Chain: Medtronic’s designs and manufactures medical technology. Inventory for Medtronic’s supply chain is held at three levels: o Manufacturing facilities ▪ Located throughout the world ▪ Hold very little finished goods o Distribution centers ▪ Ships finished goods to sales representatives ▪ Field locations • Critical performance measures include: o Expected on-hand inventory o On-order inventory o In-stock probability o Perishability is not a concern o Reasonability high Order Up To Model • Can be used to manage the inventory of a product that has a lead time to receive orders in which the orders are feasible over the lifetime of the product. o The quantity in each period equals the difference between the chosen order-up-to level and the inventory position o Generally equal to demand in the previous period • Three performance measures in the order-up-to model: 1. On-hand inventory – average inventory on hand at the end of a period 2. On-order inventory – inventory that has been ordered but not yet received and not available to satisfy demand 3. In-stock probability- a measure of customer service • Period – The time between when orders can be served • Lead time – The time between when an order is placed and when it is received. Process lead time is frequently used as an alternate term for flow time • On-order Inventory – Inventory that the supplier has shipped but has not been received. • Backorder – The total amount of demand that is waiting for inventory to arrive before it can be satisfied. • Inventory position – On-order inventory plus on-hand minus the backorder. • Order-up-to level – The number of units of inventory that are available to serve demand immediately. • Pull system – The resource furthest downstream is paced by market demand. In addition to its own production, it also relays the demand information to the next station upstream, thus ensuring that the upstream resource also is paced by demand. That is, it is an operating system in which the production or replenishment of a unit is only initiated when demand occurs. • Push system – An operating system in which the production or replenishment of a unit is initiated in anticipation of demand. • Poisson distribution – A statistical distribution that is suitable for modeling demand with a low mean (20 or lower) • Expected on-hand Inventory – The average amount of inventory on hand at the end of each period. • On hand inventory at the end of a period equals the order-up-to level S, minus demand over (1 + I) periods or zero, whichever is greater • In-stock and Stockout probability – The probability that all demand is satisfied. • In-stock probability = Probability demand over (I = 1) periods in S or lower. • Stockout probability = 1 – In-stock probability • Expected on-order Inventory – The average amount of inventory on order at any given time. • Pipeline Inventory – Another term to describe expected on-order inventory • Inventory = Flow rate X Flow time What are the factors that determine the amount of inventory in the order-up-to model? 1. As the in-stock probability increases, inventory increases. To give customers better service requires increasing the expected on-hand inventory. It is costly to hold inventory, and more costly to hold more inventory. Thus, better customer service creates additional inventory holding costs. 2. The higher the coefficient of demand, the greater the needed inventory for any in-stock probability. As the coefficient of variation of demand changes so does the required amount of inventory. 3. The required amount of inventory increases at an increasing rate as the target in-stock probability app0roaches 1.0 • The longer the lead time, the more inventory is needed to achieve an in-stock probability • The higher the in-stock probability, the more sensitive inventory is to the lead time • Most of the inventory in the supply chain may be on order rather than on hand, especially with long lead times. • Tactical Decisions – Decisions that impact short-term performance. • Strategic Decisions – Decisions that have long-term implications. • Location Pooling – A strategy of combining the inventory from multiple territories/locations into a single location • Brick-and-Mortar Retailer – A retailer with physical stores in which consumers are able to immediately purchase goods. • Lead-Time Pooling Strategy – Reduces the demand uncertainty faced in a supply chain, while keeping inventory reasonably close to customers • Delayed Differentiation – A strategy in which product differentiation is delayed as late as possible in the supply chain. Works when: o Customers have a strong preference o Variety can be added quickly and cheaply late in the supply process o The components needed to create variety are inexpensive relative to the genetic component MGT 3900 Operations Exam 2 Material (Chapter 10,12,13,14) Chapter 10 • Inventory – The number of flow units within the process. Inventory is found in all stages of processes o Raw material – has not been “worked on” o Work-in-process – inventory that is inside the process has been “started on” o Finished goods – the process is complete and does not require additional processing • Inventory Management – The practice of regulating the quantity, location, and type of inventory in a process. o Critical for the success of the organization • Forecasting – Requires forecasting (how well can future de