OPIM 294

Flow of material or work (Shape in Diagram)

Arrow to right

Purchase cost per unit (Symbol)

C

Component 1 of Lean Operations or Toyota System (ACRONYM)

CLOSED MITT Complexity, Labor, Overproduction, Space, Energy, Defects Materials, Inventory, Time, Transportation

Inventory Turnover formula

COGS/Inventory

Competitive Dimensions

Cost, Quality (Product and Process), Delivery Speed, Delivery Reliability, Variety, Innovation, Demand Management

Competitive Priorities

Cost, Quality - 2 most important + Responsiveness, flexibility

Disadvantages of Increasing Inventory

Costly, Consumes spaces, slows down process

Calculating Capability Index

Cpk = min {[(X-LTL)/kσ],[(UTL-X)/kσ]} Cpk< 1 process is not capable at the kσlevel Cpk≥ 1 process is capable at the kσlevel

Order Winners

Criterion that differentiates one firm from another. Examples: Cost, Service Quality, Flexibility

Order Qualifier

Criterion that permits the firm's products to even be considered for purchase. Examples: Basic quality necessary to be considered a good car (consumer reports)

Benihana is make to order

Customers come in and only then can you order, but the back kitchen could be viewed as make to stock

Cycle Time formula for processing a fixed amount of work for a specific task

Cycle Time = (Set-up Time + (Batch Size)x(Time per Unit))/Batch Size

Increasing the capacity of a non-bottleneck step can help increase the capacity of the entire system.

False

Inventory (goal definition)

all the money that the system has invested in purchasing things which it intends it sells

operational expense (goal definition)

all the money the systems spends in order to turn inventory into throughput

2 Aspects of Quality

features: more features that meet customer needs = higher quality freedom from trouble: fewer defects = higher quality

Product Development

the set of activities beginning with the perception of a market opportunity and ending in the production, sale, and delivery of the product

If the utilization approaches 0...

the waiting time approaches 0.

If the utilization approaches 1...

the waiting time approaches infinity.

Lead Time

time elapsed between placing and receiving a replenishment order

Number of Servers

n

Under Just-in-time, the ideal batch size is...

one (or low as possible)

SPC with P Charts (formulas)

p=(total number of "defects")/(number of samples, t)x(sample size, n) sp = SQRT[(p(1-p))/n] UCL = p + zsp LCL = p - zsp

Equilibrium

rate at which objects arrive = rate at which objects leave

Throughput (goal definition)

rate at which the system makes money through sales

Inventory

raw materials, component parts, work-in-process, or finished products that are held at a location in the supply chain

With Limited WIP, Production variability...

reduces the effective throughput (capacity) of the system (st. dev or variance of throughput is decreased)

Make to Order

refers to the release of work into a system only when a customer order has been received for that unit.

Reasons to Outsource - organizationa reasons

-Focus on service -Focus on core capabilities -Transform the organization -Increase flexibility

Yield Management - What is it

"Selling the right capacity to the right customer at the right price" Key: segmentation-forecasting-allocation

Effect of fast server

(1) A fast server (short processing time) has a shorter queue behind it.

Forecasting Demand: Data Requirements

(1) High-level of detail -e.g. airlines, demand by -Origin-destination pair -Fare-class -Day-of-week -Departure time (2) Quantities tracked for forecasts -Demand for each rate category/fare-class/departure -Cancellation rates -No-show rates/go-show rates -Upgrade probabilities (3) Frequent processing and updates -Daily -Even more!

Reasons to Outsource

(1) Organizational reasons (2) Operational reasons (3)Financial reasons (4)Cost driven reasons (5)Revenue driven reasons -Expand and grow with the help of another organization. -Obtain access to outsourcing partner's network

Maximizing nightly profit

= (Price per dinner - Variable costs per dinner) * Throughput - Fixed Costs

ROQ=Reorder Quantity

=EOQ (How Much?)

Factors that Complicate the forecasting Problem

(1) Seasonality -Day of week -Day of month -Time of year (2)Trends -Long-term growth -Business cycle (3) Demand censoring -Data: reservation accepted -Actual demand: includes reservations lost, spillovers (4) Special events -Sale -Super bowl

Effect of Increasing Utilization

(2) For a given level of variability, increasing utilization causes waiting time to increase at an accelerating rate.

Inventory

(L): Average number of customers (or jobs or parts) in total in the system (including queue + server) = Lq+ ρ

Inventory in Queue

(Lq): Average number of customers (or jobs or parts) waiting in the queue

Throughput Time or Lead Time - Average Total Waiting Time

(W): Average total time spent in the system by a customer (including service + waiting) = Wq+ ms

Waiting Time

(Wq): Average time spent waiting in queue

Cycle time

(ma): Average time between departures = Average time between arrivals or "inter-arrival time" = 1/λ

Average service time or processing time

(ms): 1/service rate = 1/μ

Utilization formula

(ρ): The percentage of the time the server is busy = λ/nμ where n is number of servers

Option A - Add a new floor

+ 45 Beds, -$2 million

Pull System (Pros/Cons)

-Controls maximum WIP and eliminates WIP accumulating at bottlenecks -Keeps materials busy, not operators. Operators work only when there is a signal to produce. -Throughput time and WIP are decreased, faster reaction to defects and less opportunity to create defects. -If a problem arises, there is no slack in the system. -Works better in stable environments

Reasons to Outsource - Revenue driven reasons

-Expand and grow with the help of another organization. -Obtain access to outsourcing partner's network

Push System (Pros and Cons)

-Focuses on keeping individual operators and workstations busy rather than efficient use of materials -Volumes of defective work may be produced -Throughput time will increase as work-in-process increases (Little's Law) -Line bottlenecks and inventories of unfinished products will occur -Hard to respond to special orders and order changes due to long throughput time

Reasons to Outsource - Operational Reasons

-Improve performance (quality, productivity, etc.) -Obtain expertise, skill, and technology -Risk management

Yield Management - Business Requirements

-Limited Fixed Capacity -Business environment where YM can help •Ability to segment markets •Perishable inventory •Advance sales •Fluctuating demand •Accurate, detailed information systems

How there are conflicting objectives within a single firm?

-Marketing/Sales wants: more FGI inventory, fast delivery, many package types, special wishes/promotions -Production wants: bigger batch size, depots at factory, latest ship date, decrease changeovers, stable production plan -Distribution wants: full truckload, low depot costs, low distribution costs, small # of SKUs, stable distribution plan

Reasons to Outsource - Financial Reasons

-Transfer assets to the outsourcing partner. -Free up resources for investment in other purposes.

Reasons to Outsource - Cost Driven Reasons

-Transform fixed costs in variable costs. -Reduce costs through outsourcing partner efficiencies.

General Variability as described by coefficient of variability for arrivals (ca) or coefficient of variability in service (cs)

0<ca<1 or ca> 0<cs<1 or cs>

Average number of customers in the server

1 x percentage of the time the server is busy + 0 X percentage of the time the server is idle = 1 x ρ+ 0 x (1-ρ) = ρ

IDEO - 3 Decisions for Handspring Project

1) Accept Handspring Project 2)Ask for more time then accept 3) Decline it

Decisions For Wriston Corp

1) Close the Detroit Plant and Transfer Production to other plants 2) Replace existing detroit plant with a new one 3) help improve the detroit plant 4)none of the above/do nothing

Southwest Design of Union Relationships (7 steps)

1) Deliberately slow growth; permits 2)No layoffs; allows 3) Better union relationships; creates 4) Benefit of flexible job design; fosters 5)Faster aircraft turnarounds 6)Greater aircraft utilization 7) Significantly higher profit

How to find ROP & Q

1) Find Q*=EOQ=SQRT(2DS/H) 2) Determine service level 3) Find safety factor (z-table or graph) - number of standard deviations 4) Find Std. deviation in LT demand: Squart root law) 5) Safety Stock formula: Safety factor * Std. Dev in LT Demand 6) ROP = Expected LT Demand + SS

2 Main Points about EOQ Model Uncertain Demand + Non-immediate replenishment

1) Get units shipped at a point where we account for uncertainty 2) Guarantee a service level to our customers

Key Takeaways from Wriston

1) High Overhead may be natural 2)New products first launched at Detroit Plant - low volumes, the process is not perfected yet (not standardized) 3)Prototypes are tested at Detroit plant 4)Old products/spares are made in Detroit as well(low volumes) - whenever a product's volume increases it is transferred elsewhere 5) Key takeaway: product process spectrum 6) Trade-off: volume vs. variety 7) Detroit was a job shop in the introduction stage of product life cycle - 120 distinct products made 8) We should not evaluation Wriston/Detroit based on cost - batch shop will never be as efficient - Detroit should be evaluated individually

Efficient Supply Chain Performance Measures:

1) Inventory Turnover 2) Weeks of Supply

Make to Stock - Steps to analyze the process

1) Look at the process step by step 2) Determine the processing rate (or capacity) of each step 3) Identify the process bottleneck (smallest processing rate, or largest cycle time) 4) Throughput = capacity of the bottlekneck

Make to Order - Steps to analyze the process

1) Look at the process step by step 2) Determine the processing rate (or capacity) of each step 3) Identify the process bottleneck (smallest processing rate, or largest cycle time) 4a)Determine the demand rate for the process 4b)If Demand Rate > Capacity of the Bottleneck, then Throughput = Capacity of the bottleneck, cycle time = cycle time at the bottleneck (ignore demand rate) 4c) If demand Rate < Capacity of bottleneck, then throughput = demand rate, cycle time = inverse of demand rate=1/demand rate

Mark Down Cost (3)

1) Margin/Revenue down 2) Holding costs 3) Strategic Consumer - seeking not full-price items

2 Major Herbies discovered in Alex's plant and how were they found

1) NCX-10 Machine 2) heat treat furnances They eventually identified the bottlenecks by looking for huge piles of backlogged inventory waiting in front of an operation to be processed. They tried to identify them from scheduling records, routing sheets, and other paperwork but without much luck

Stock Out Costs (3)

1) Opportunity Cost 2) Backlog Cost 3) Reputation Cost

Types of Dimensions (2)

1) Order Qualifier 2) Order Winners

Attacking and Defending through Operations (2)

1) Positioning 2) Capabilities

Characteristics of Successful Product Development (5)

1) Product Quality 2) Product Cost 3)Development Time 4)Development Cost 5)Development Capability

3 Ways to Match Supply with Demand

1) Redesign the supply chain 2) manage the demand 3) coordinate the supply chain

Responsive Supply Chains do 3 things:

1) Reduce uncertainty 2) Avoid Uncertainty 3) Hedge against uncertainty

Physically Efficient Supply Chain - 1)Primary Purpose 2)Inventory Strategy 3)Lead-Time Focus, 4) Choosing Suppliers 5) Product-Design

1) Supply predictable demand efficiently at lowest possible cost 2) Generate high turns and minimize inventory, 3) Shorter only if it doesn't raise costs 4)Cost & Quality 5) Max. performance at min. cost

When to use P-charts

1) When decisions are simple "yes" or "no" by inspection 2) when the sample sizes are large enough (>50)

IDEO decline Handspring Project

1) conflict of interest - Palm is a client 2) Covertness - disturbs/contaminates culture 3) hurt's IDEO's reputation of being an innovator 4) breakthrough innovations require more time

IDEO ask for more time then accept Handspring Project

1) don't have to sacrifice legendary process (breakthrough innovations require more time) 2)better product with more time since don't have to sacrifice style and and settle on an inexpensive plastic housing/AAA batteries

when to use make to order system

1) products or parts are processed in low volume and high variety 2)customers are willing to wait for their order 3)it is expensive or difficult to store the flow units

Issues (3)

1)Market 2)Technical 3)Resource

Variations to the Product Development Process (6)

1)Market Pull Products 2)Technology Push Products 3)Platform Products 4)Process Intensive Products 5)Quick build Products 6) Complex Systems

Market Responsive Supply Chain - 1)Primary Purpose 2)Inventory Strategy 3)Lead-Time Focus, 4) Choosing Suppliers 5) Product-Design

1)Respondquickly to unpredictable demand to minimize stockouts, markdowns. 2) Deploy significant buffer stocks of parts or FGI 3) Aggressively try to reduce lead time 4) Speed, Flexibility, Quality 5) Modular, try to delay differentiation

Challenges of Product Development (6)

1)Trade-offs 2)Dynamics 3)Details 4)Time Pressure 5)Economics 6)Organizational realities

Supply chains perform two roles:

1. physical conversion of raw materials into goods (functional products) -production, transportation and inventory costs 2. market mediation (matching supply and demand) (Innovative) -markdown losses or shortage costs

Product Development Process (also called new product development funnel)

1a) Customer needs and Technological Possibilities; leads to 1b)Product design 2)Prototyping & testing 3a)Pilot Production 3b)Manufacturing ramp-up and release 4) Launch

Challenge 2: Design the bar

79 seats was optimal - the bar adds inventory of customers

If the setup time of a task is extremely large, would you prefer a small or a large batch size?

A large batch size to split the setup time over.

Sigma

A measure of Variability

P Control Charts

A plot of proportions over time (used for performance measures that are yes/no attributes) They help to calculate acceptable limits and help with statistical process control

Transformation/Production Process

A transformation/production process uses resources to convert inputs into some desired output

Option B - Add a Saturday shift

Against the culture - shouldice staff wouldn't like it

Adv. and Dis. of Outsourcing

ADv. cheap labor, focus on core competency, save fixed costs, bypass startup ideas disadv.: transaction cost, intellectual property, quality + design, more variable costs

How Benihana works to address high variability of customer demand

Add Inventory with the bar, Batching and the happy hours reduces variability, reducing the dining time reduces utilization

Challenge 6: Best combination

All 5 things - each is trying to reduce variability but in different ways - whether to add inventory, reduce variability, or reduce utilization.

Utilization

Average proportion of time the step is working on something = capacity of process (bottleneck throughput rate)/capacity of task

Cycle Time

Average time for completion of a unit at a production step. Measured as time/unit. Cycle Time = (Set-up Time + (Batch Size) x (Time per unit))/Batch Size

Little's Law

Avg Throughput time = Avg WIP/Avg Processing Rate W=L/λ or L =λW Applies to Bottlekneck

Shouldice bottleneck

BEDS - but could shift if they increase the capacity of the beds

Capacity Given Batch Size (formula)

Batch Size/(Setup Time+(Batch Size)x(Time Per Unit))

Capabilities (3)

Being better at "the same game" - (1) Process Based (2) System (Coordination) based (3) Organization based

Shouldice process

Blood checks -> exams -> Accounting/Processing -> Beds -> operating room -> surgeons

Which production step limits the process capacity?

Bottleneck

Bottlekneck

Bottleneck is the process stage with the lowest processing rate (highest cycle time)

How can we monitor quality?

By observing variation in output measures! 1.Assignable variation: we can assess the cause 2.Common variation: variation that may not be possible to correct (random variation, random noise)

How many units per unit time can go through each task? or through the process as a whole?

Capacity (or processing rate)

Performance Measures of Efficiency (4)

Capacity (or throughput rate), Throughput (or throughput rate), bottleneck, throughput time

Calculation for Net Benefit

Change in Waiting Time = W(old) - W(new) Net Benefit = Change in W x Savings/Time/Unit x λ

Walmart Distribution Decisions

Close location of stores to warehouses Hub and spoke model Logistics optimization

Better Measure of Variability

Coefficient of Variation c=σ/mean(m) Proportional to number of people in the place

Cost of Quality

Cost of quality can be 10-15 % of sales and include 1.Prevention costs 2.Appraisal costs 3.Internal failure costs 4.External failure costs 5.Opportunity costs

Horizontal Integration

Consolidation of power within industry Competition is based on "monopolization" of the industry Antitrust Issues might arise Can deter entry Ex. Financial Services, Hi-Tech industries, airlines Adv: economies of scale, eliminate pricing war Disadv=: antitrust, costly

Why Should firms not outsource?

Coordination reasons -Messy interfaces -Highly specialized information or technology Strategic Control reasons -Control over specific assets -Brand impacts -Long term R&D Intellectual Property reasons -Weak IP protection -Technology is easy-to-imitate

EOQ Model - Number of Orders=Order Frequency

D/Q

Ordering Cost (formula)

D/QxS number of orders x cost per order

6 Sigma Roadmap

DMAIC Define, Measure, Analyze (and fix the obvious), Improve, Control (move to next project)

Alternative paths

Decision - you only go through one path so you are focused on through. Grocery Store. Assume same rate for 2 pathways then btw. A&B = rate/2 Use the cycle time for a single path that produces one unit of the product at a time

Trade-offs

Decisions that arise because of the inability of processes to excel simultaneously across all competitive dimensions

Which Supply Chain to Use?

Depends if functional (Campbell Soup) or Innovative (Sport Obermeyer, Zara) products

Decision Point

Diamond

Exponential Distribution

Distribution of inter-arrival and service times where coefficient of variation is equal to 1 - standard deviation (σ) is equal to mean in exponential distribution

Benihana Bottleneck

During peak is capacity (# of seats) during pre/post-peak it is demand.

Purchasing Cost (Formula)

DxC Total Units x cost per unit

Southwest Culture - Evidence

Egalitarian Approach - To customers and employees Fun - Senior Leaders example, Employee Selection (Most embarassing moment, stand during interview, have customers observe interviews) Teamwork - Group incentives/shared goal/flexible scheduling

Efficient Supply of Functional Product: Campbell Soup

Electronic Data Interchange with retailers to ensure continuous replenishment and lower inventories.

Flow Shop

Equipment in process sequence. Expensive equipment but high utilization rates. (e.g. refinery, steel mill). Mass Production is the production of large amounts of standardized products, including and especially on assembly lines. With job production and batch production it is one of the three main production methods

Assembly Line

Equipment placed in assembly sequence. (e.g. automobile manufacturer). A manufacturing process (most of the time called a progressive assembly) in which parts (usually interchangeable parts) are added as the semi-finished assembly moves from work station to work station where the parts are added in sequence until the final assembly is produced.

Push System (How it works)

Every worker maximizes own output, making as many products as possible

Option C - Build a new facility

Expensive, hard to replicated process, institutional knowledge, but could possible to move closer to customers in the US, also there could be different government regulations

An hour lost on a bottleneck is an hour lost on the system

False

Throughput of a process > Bottleneck capacity

False

Challenge 4: Boost Demand w/Advertising and Special Programs

Happy hour - demand smoother of when and how people arrive, other 2 programs only boost demand but are too expensive. The peak time is the most profitable, but there this too much demand

Queue+server

Flow rate = λ Wait = W # = L Lq= λ W

Queue Only

Flow rate = λ Wait = Wq # = Lq Lq= λ Wq

Customer Flow at Benihana

Flow shops - Maximize efficiency, compared to job shop which maximizes flexibility

Jeff Hawkins

Founder of Palm Computing - sought out IDEO for Palm

David Kelley

Founder/CEO of IDEO

Push System (Diagram)

From RM to Final Assembly/FGI/Customer, at each step, information flow and material flow go from RM to Final Assembly with no information flowing back to RM.

Pull System (Diagram)

From RM to Final Assembly/FGI/Customer, at each step, information flows backward from Final Assembly to RM while material flows forward from RM towards FGI

Batch Shop

Groups similar equipment together. Batches provide some standardization(e.g. copy center making 10,000 copies of an ad piece for a business)

Job Shop

Groups similar equipment together. Jobs follow diverse paths. (e.g. copy center making single copies of student term papers). Typically small manufacturing systems that handle job production, that is, custom/bespoke or semi-custom/bespoke manufacturing processes such as small to medium-size customer orders or batch jobs. Job shops typically move on to different jobs (possibly with different customers) when each job is completed.

Littlefield 1: Product Lifecycle for DSS

Growth, Maturity, Decline "In the initial months, demand is expected to grow at a roughly linear rate, stabilizing after about 5 months. After another month, demand should begin to decline at a roughly linear rate for 3 months."

Annual holding cost of average inventory (symbol)

H

Walmart Merchandising/Marketing/Stores/Pricing Decisions

High Variety Price-matching strategy -EDLP (Everyday Low Prices) - (marketing maneuver + reducing variability) Mostly hard products (not many perishable goods) -more $ per space National brands and private label (called Great Value)

Advantage of Job Shop

High flexibility in product engineering High expansion flexibility (machines are easily added or substituted) High production volume elasticity (due to small increments to productive capacity) Low obsolescence (machines are typically multipurpose, not specialized/expensive) High robustness to machine failures

Why Shouldice was Successful

High quality/low recurrence rate, Cheaper, High customer satisfaction, low turnover of staff/doctors, quicker recovery with the Shouldice method, bonus linked to performance, highly profitable

Effect of Increasing Initial Inventory from 4 to 8 (Scenario 2 in poker chips)

Higher average Throughput, higher standard deviation of throughput

Push System - Throughput Time, WIP Inventory, Ability to Responds to customized or special orders

Higher, Higher, Lower

From The Goal: Alex tries to explain to Hilton that an hour lost on a bottleneck is an hour lost on the system. Why does Hilton disagree? (no more than 4 sentences please!)

Hilton is operating under the traditional assumption that every piece of equipment or operation should be evaluated on its stand-alone efficiencies, costs, and production output. Those assumptions ignore the two phenomena of dependent events and statistical fluctuations that link the equipment together into a production system. Because of these phenomena, disruptions on one piece of equipment affects the whole system.

Make to order process

If the system is make to order, throughput = MIN(Demand, Capacity)

Calculating the Coefficient of Variation

Inter-arrival times -mean = ma= 1 / λ -standard deviation = sa -ca= (std. dev.) / mean = sa/ ma Service times -mean = ms= 1 / μ -standard deviation = ss -cs= (std. dev.) / mean = ss/ ms

Problem with EOQ Model

It is highly insensitive to its parameters such as human error Ex. double holding costs Optimal per unit total only moves slightly because of square root . Remember slides

Capability Index ( Cpk)

It shows how well the performance measure fits the design specification based on a given tolerance level

Buffering

Keep some inventory between stages. ex. 1 unit in buffer of capacity 2.

average # of items in the system

L

Dennis Boyle

Leader of Palm V Project at IDEO

How Long does it take you to transform a dollar invested in inventory into sales? (Hopefully profitable)

Little's Law: L=λW Inventory=Flow Rate(COGS) x Flow Time (Inventory/COGS=1/Inventory turnover)

Functional - Product Life Cycle, Contribution Margin((Price-VC)/Price), Averagemargin of error in the forecast at the time production is committed, Average Stock out rate, Average forcedend of season markdown as percentage of full price

Long, Low, Low, Low, Low

Southwest Emphasis (10)

Low Price Fast Turnaround Simple Fares P2P (instead of hubs) Frequent short-haul flights Friendly interactions convenient airports rewards program multi-tasking employees uniform process and plane type (Boeing 747)

How are Benihana's costs different?

Low Variety in menu selection, Labor - not many people in the back room, not many waitresses

Smaller Batches translate to...

Lower Inventory Levels, lower wait time, losses in capacity

Effect of Just Reducing Variability (3 and 4 are 50% probabilities for each machine rather than 1-6 possibilities)

Lower Standard Deviation, higher average throughput rate than just increasing initial inventory

Effect of increasing initial inventory by 8 (from 4) Reducing Variability (3 and 4 are 50% probabilities for each machine)

Lower Standard deviation (same as scenario 3), higher average throughput rate

Pull System - Throughput Time, WIP, Ability to Responds to customized or special orders

Lower, Lower, Higher

Lq (formula)

Lq = ρ^(SQRT(2(n+1))/(1-p)*(((ca^2)+(cs^2))/2)

Goal

Make Money

High Time Pressure, Low Fixed Cost of Prototyping

Mixed Strategy

Low Time Pressure, High Fixed Cost of Prototyping

Mixed Strategy

Outsourcing

Moving some of the firms internal activities and decisions to outside providers (domestic or offshore)

Characteristics of Assembly Line/Flow Shop

Narrow Product Variety, Low Product Quality, Less Time spent on Product, Low Price High Volume per product, High structure on equipment and labor ex. McDonalds

Expected Payoff Newsvendor

Newsvendor will purchase the copy at X if it thinks underage cost is higher than overage cost. Pr(Sold) Cu - Pr(not sold)co >=0 Let Pr(not sold) = p, then Pr(Sold) = 1-p Newsvendor should purchase the Xth copy if and only the expected payoff is positive p<= cu/(cu+co)

Is the queue/buffer alwaysempty?

No

95% Service Level With Uncertain Demand + Non-immediate replenishment

Normal(D xL, σL2). 5% chance of stock out SS = z σL ROP = D xL + SS = D xL + z σL. Same EOQ.

IDEO Process

Phase 0 -Understand Phase Phase 1 - Visualize and Realize Phase 2 - Evaluation and Refinement (Human factors to engineering Phase 3 - Implementation (detailed engineering started) Phase 4 - Implementation (manufacturing liaison) -

Time between success orders

Number of Weeks in Year = 52 52/(D/Q)

Throughput Rate

Number of customers served/unit time = λ= arrival rate = departure rate

Capacity

Number of customers that can be served/unit time = μ

Booking Limit Model

Objective: Solve for the booking limitwhich is the number of rooms you are willing to sell at the discount rate. A single decision is made before uncertain demand is realized Similar to Newsvendor Model

Challenge 5: Use different types of batching

Optimal: 8, 8, 4 to 8

High Time Pressure, High Fixed Cost of Prototyping

Parallel

High Volume, High Standardization

Process = Flow Shop Point in Product Life Cycle = Entry

High Customization, Low Volume

Process = Job Shop Point in Product Life Cycle = Entry

Computing Cycle Times

Processing a fixed amount of workfor a specific task.

Phase 1 IDEO

Product direction is chosen through visualized potential solutions through tangible prototypes; 3D models made, understanding of context in which product is used, and outline of manufacturing strategy; storyboards instead of stats through market research

Pull System (How it works)

Production line is controlled by the last operation, Kanbancards control WIP

Partial Productivity Measures

Productivity = Output/Labor=Output/Capital=Output/Material

Productivity (formula)

Productivity = Outputs/Inputs(resources)

IDEO Accept Handspring Project Pros and Trade-offs

Pros 1) Leverage Palm V Experience 2) Simpler Project - Palm operating system licensed to Handspring, Low operating costs, limited/reduced time, follow client's orders, triple AAA bateries instead of lithium-ion batteries found in Palm V, challenge to firm 3) Customer is king - don't want to lose a client Tradeoffs If IDEO fails Handspring from accepting immediately, they can learn how to innovate on incremental products They could also lose future clients from not knowing how to innovate on incremental products

Total Cost (Formula with Words)

Purchasing Cost + Ordering Cost + Inventory Cost

Decision Variable in EOQ Model

Q* We use the optimal quantity to optimize the total cost with respect to the decision variable (the variable we control)

Average Inventory for each period is

Q/2

Inventory Cost (formula)

Q/2xH average inventory x holding cost

Value

Quality/Cost

In The Goal, what are the three primary financial measurements used to know whether the company is making money?

ROI, Net Profit, and Cash Flow

Deterministic Demand + non-immediate replenishment - EOQ model When to order?

ROP = LxD L=Lead time in periods=Receive Order - Place Order D=Demand per period Deterministic Demand + Lead Time (L) >= 0 If demand is known exactly, place an order when inventory equals demand during lead time

Processing Step ( Shape in Diagram)

Rectangle

Everyday Low Prices (EDLP)

Reduce variability marketing "bull-whip effect" If give periodic discount, then retailers will buy and stock up.

Effect of Reducing Variability

Reduces the standard deviation of the throughput

R&D Productivity (formula)

Revenue/R&D Expenses

SGA Productivity (formula)

Revenue/SGA

Overall Productivity (formula)

Revenue/Total Expenses

RRR

Rough - cheap Rapid - fail often Right - getting specific needs of customer

Order Cost (Symbol)

S

Q*

SQRT(2DS/H)

What Southwest Gives Up (7)

Seat Assignments Locations Meals Baggage Transfer First/Business Class Upgrades Variety

Low Time Pressure, Low Fixed Cost of Prototyping

Sequential

Deterministic

Service Time or Arrivals are held constant. No Randomness - complete certainty about the value of the random variable. Coef. of variation for arrivals = (std. dev.) / mean = ca= 0 Coef. of variation in service = (std. dev.) / mean = cs= 0

Innovative - Product Life Cycle, Contribution Margin((Price-VC)/Price), Averagemargin of error in the forecast at the time production is committed, Average Stock out rate, Average forcedend of season markdown as percentage of full price

Short, High, High, High, High

Challenge 3: Change Dining Time

Smooths out demand

Vertical Integration

Supplier's abilities are key to competitiveness Competition requires capital intensive assets Collaboration problems and supply risks are reduced. Double Marginalization is removed Adv: Reduce transaction cost, reliable supply Disadv: costly

Starving

Stoppage of activity because of lack of material. empty buffer.

Blocking

Stoppage of flow because there is no storage place. full buffer.

How did Shouldice become so successful?

System geared toward efficiency, flow shop/assembly line - correct process structure, they pre-screen patients with one type of survey, appointment only, only one type of patient - external abdominal hernias - selection bias, train surgeons to use exactly the same procedure. All this helps to reduce variability, making costs go down and throughput go up.

Total Cost (Formula w/ Symbol)

TC = D*C + (D/Q)*S+(Q/2)*H

Throughput Time

The Average time it takes for a unit to make it through a task/system. The time it take for a unit to go from start to finish of processing. Sum of Processing Steps (Add to Rectangles in Process Flow)

Challenge 1: Batch?

The Capacity remains the same, but there is a higher throughput = higher utilization

Capacity of the Process

The capacity of the process is: •minimum processing rate across all stages •capacity of the stage with the longest cycle time

What is a supply chain?

The concept of supply chain defines a series of companies interlinked together by a flow of material and information in order to serve the end customer. Contrast with a process which is just 1 company

Hypbrid/Mixed Prototype

The design team builds and tests multiple prototypes each period, for as many periods as are necessary to achieve a "good enough" design.

Parallel Prototype

The design team builds and tests multiple prototypes in a single period, then chooses the most profitable one.

Sequential

The design team builds and tests one prototype each period, for as many periods as are necessary to achieve a "good enough" design.

Make to Stock

The firm finds itself in this situation because it commits to its entire supply before demand occurs. This mode of operation is often called make-to-stock because all items enter finished goods inventory (stock) before they are demanded. In other words, with make-tostock, the identity of an item's eventual owner is not known when production of the item is initiated

Capacity or Processing Rate (of a step)

The maximum flow rate wat which a process can operate. Average number of units processed over a time interval. Measured as units/time. Processing Rate = 1/Cycle Time

Service Level (definition of EOQ calc. Uncertain Demand + Non-immediate replenishment

The probability of not stocking out

Productivity Measurement

The productivity index is a relative measure. It has to be compared with something else: 1) benchmarking - competitors 2) changes across time 3) normalized date

How many units per unit time does the process produce?

Throughput (or throughput rate)

How long does it take for a unit to get through the system?

Throughput Time

Importance of Inventory

To summarize, we build and keep inventory in order to match supply and demand in the most cost effective way.

Shouldice Problem

Too much demand - afraid to do marketing, backlog of patients already waiting - they needed solutions/options to expand capacity

How JIT accounts for problems of too much inventory stored

Too much inventory hides problems... Problems with inventory include: WIP queues (banks), paperwork backlog, scrap, engineering design redundancies, inspection backlogs, machine downtime, vendor delinquencies, change orders, design backlogs, decision backlogs

Quality Improvement

Traditional - Cyclical - Quality decreases then gets better Continuos Improvement - steady improvement with no cyclicality and major dips in quality

RM Process: How to allocate capacity?

Typical capacity control mechanisms -Ad hoc negotiation, booking limits, "bid prices" or hurdle rates Ultimately, an accept-deny decision for each service request How to properly quantify the decision?

Phase 0 IDEO

Understand everything about new client and its business; look at history of product and test existing products such as every remote that is on the market; look at consumer observations like people at home on their couches attempting to use their remotes; by end, team created a feasibility record along with major discoveries about the marketplace and users

Holding - RM, WIP, FGI (Shape in Diagram)

Upside down triangle

Std. Deviation in LT Demand

Variance over multiple periods = the sum of the variances of each period (Assuming independence) Standard deviation over multiple periods is the square root of the sum of the variances not the sum of the standard deviations

2 Ways to Design Supply Chain

Vertical Integration (Ex. Automotives, Aerospace) Horizontal Integration (Ex. Financial Services, Hi-tech Industries)

Walmart Procurement Decisions

Very cost-focused: -minimize expenses -intense negotiations -bypass wholesalers -buy low & stock up -global procurement Online info exchange in real-time Scan N' Pay (also good for suppliers)

Disadvantage of Job Shop

Very hard scheduling due to high product variability and twisted production flow Low capacity utilization

average time an object spends in the system.

W

Walmart Takeways

WMT makes 3 types of decisions to make their supply chain as efficient as possibly: Procurement, Distribution, Mechandising/Marketing/Stores/Pricing WMT sells functional products so they are focused on beining efficient as possible by driving down any cost in their supply chain

Measuring Variability

We know standard deviation ("σ") is a measure of variability

EOQ - Uncertain Demand + Non-immediate replenishment Distribution of Demand during 1) over some period 2) lead time

When the given demand (over some period) is random: Normal(D, L*σD^2), demand during lead time is also random: Normal(Lx D, L*σD^2). In other words,demand during lead time has a normal distribution with mean Dx L and standarddeviation σL=SQRT(L*σD^2)

Why not choose the largest possible batch size to maximize capacity?

While large batch sizes are desirable from a capacity perspective, they typically require a higher level of inventory, either within the process or at the finished goods level. Holding the flow rate constant, we can infer from Little's Law that such a higher inventory level also will lead to longer flow times (longer wait times - slows down process)

Characteristics of Job/Batch Shop

Wide Product Variety, High Product Quality, More Time spent on Product, High Price Low Volume per product, less structure on equipment and labor ex. Tombs

When a process is kσ capabale

X+kσ<=UTL 1<=(UTL-X)/kσ X-kσ<=LTL (X-LTL)/kσ>=1

Why can't achieve goal by focusing on efficiency

You can make system more efficiency by increasing the efficiency of a non-bottleneck operation (e.g. robots) but that does not help the firm make more money and can sometimes work against the goal. Efficiency does not necessarily increase throughput, reduce operating expenses, or reduce inventory

Organization Based

ability to master new technology, design, and bring new plants faster

System (Coordination) Based

better at managing supply chain partners

Process Based

better at transforming material or information

Coefficient of variability for arrivals - symbol

ca

Overage Cost

co= overage cost = loss margin -The cost of ordering one more unit than what you would have ordered had you known demand -In other words, suppose you have left over inventory (i.e., you over ordered). co is the increase in profit you would have enjoyed had you ordered one fewer unit. -For our newsvendor, co= Cost -Salvage value = $.7-$.2=$.5

Simultaneous

coffee shop. Between A&B = max (upper,lower) Both stages have to be finished before the cycle is complete so take the max time/unit of upper and lower branches.

Underage Cost

cu= underage cost = profit margin -The cost of ordering one fewer unit than what you would have ordered had you known demand -In other words, suppose you had lost sales (i.e., you under ordered). cu is the increase in profit you would have enjoyed had you ordered one more unit. -For our newsvendor, cu= Price -Cost = $1-$.7=$.3

In The Goal, the theory of bottlenecks re-prioritizes the traditional importance of improvement opportunities to:

d. 1. Throughput 2. Inventory 3. Operating Expense

Phase 2 IDEO

develop functional prototypes; resolve technical problems and problems faced by users; emphasis shifts from human factors to engineering and ergonomics; at end, functional model as well as a "looks like" design model is delivered; industrial design solutions becomes documented using CAD tools Technical specifications need to be finalized to do detailed engineering which occurs in Phase 3

Efficiency

doing something at the lowest possible cost

Effectiveness

doing the right things to improve the quality of the products/services

IDEO Process

first-hand knowledge, deep dive, wild ideas first, command decision, adults refocus, no time constraints, prototype driven, RRR (rough rapid right), enlighted trial and error, when meeting client for first time - don't show them everything

IDEO Culture

flat - lack of hierarchy, don't hire people that don't listen, ask for permission, diversity, team, democratic process, playful environment, experimentation, peer chosen reviews, understand/observe

The higher the variability...

higher the delay - Variability causes delays.

Innovative products exhibit:

highly uncertain market behavior

Weeks of Supply

how many weeks worth of inventory does the company have on hand. High value of weeks of supply means that the firm has a lot of inventory sitting around.

Inventory Turnover

how often the company replenishes inventory. High value of inventory turnover means that the inventory was not sitting around a long time

Increasing the batch size...

increases the capacity

ROP=Reorder Point

inventory balance at which your order is triggered (When?)

Job Production

involves producing custom work, such as a one-off product for a specific customer or a small batch of work in quantities usually less than those of mass-market products

If the setup occurs at a nonbottleneck step (or the process is demand-constrained)

it is desirable to decrease the batch size, as this decreases inventory as well as flow time.

If the setup occurs at the bottleneck step (and the process is capacity-constrained),

it is desirable to increase the batch size, as this results in a larger process capacity and, therefore, a higher flow rate.

Laying off people doesn't necessarily move the firm toward its goal because

it reduces operating expense but doesn't increase throughput or reduce inventory

Innovative products

short lifecycle products, products that require continuous innovation, unpredictable demand, high margins. E.g. Sport Obermeyer, Zara, Fashion Goods, consumer electronics

Functional Products

simple, commodities, stable demand patterns, long product life cycles, low product variety, low margins. E.g. Food products such as Campbell Soup

Phase 4 IDEO

smooth product release to manufacturing ensured; testing manufacutring feasibility is crucial - each day's loss of production line's output might cost the client company a substantial amount in lost revenues; by end, the product is formally handed over to client

What does Happy Hour do?

solves 2 problems - improves the situations across all times - smoothes demand

Functional products exhibit:

stability in market behavior

Phase 3 IDEO

team completes product designs and verified that the product worked; engineering predominates; design team visits machine shop;team delivers fully functional design model, tooling databases, and technical documentation; testing for govt regulations; selecting vendors

Supply Chain Management (definition)

the design and management of processes across organizational boundaries with the goal of matching supply and demand in the most cost effective way.

Service Level

the fraction of replenishment cycles over which you don't stock out.

average # of items in the system

λ

Average Arrival Rate

λ customers/unit time

Case to focus on

λ< μ

Average Service Rate

μ customers/unit time

Summary of Lean Operations

• know the Pros and cons of Lean Operations/Toyota System. •Lean Operations is the goal to achieve high quality at minimum cost and inventory. •The flow of material is pulled through the process by downstream operations. •Lean originated with the Toyota Production System: elimination of waste and just in time.

6 Sigma Quality

•A philosophy and set of methods companies use to eliminate defects in their products and processes •Seeks to reduce variation in the processes that lead to product defects •The name "six sigma" refers to the variation that exists within plus or minus six standard deviations of the process outputs 6sigma = 99.9997% X+6σ must occur before acceptable limit (see slides)

Lean Operations or Toyota System (Definition)

•A system that continually searches for and eliminates waste throughout the value chain. •Views every enterprise activity as an operation and applies its waste reduction concepts to each activity -from Customers to the Board of Directors to Support Staff to Plants to Suppliers.

Lean Operations (What it does)

•Attacks waste •Exposes problems and bottlenecks •Achieves streamlined transformation

Process Quality

•Conformance •Defects

What do you consider when deciding how much to buy?

•Cost of not having it. •Cost of going to the grocery or gas station (time, money), cost of drawing money. •Cost of holding and storing, lost interest. •Price discounts. •How much you consume. •Some safety against uncertainty.

Economic Order Quantity Model (EOQ)

•Demand,D, is known and deterministic on a yearly basis •We have a known ordering cost, S, and immediate replenishment •Annualholding costof average inventory is H •Purchasing cost C per unit •no lead time

Lean Operations (What is Requires)

•Employee participation •Continuing improvement •Quality control •Small lot sizes

What do we learn from the Newsvendor

•Forecasts are always wrong. A demand estimate that only gives the mean is too simple, you also need the standard deviation. •If cu= cothenp = cu/ (cu+co) = .5 andz = 0. We will have X = μ, i.e., one should order the expected demand. •When making a "bet", also consider the underage against the overage cost. -When underage cost is higher than overage cost, bet MORE than the expected demand (i.e., cu > co => X > μ) -When overage cost is higher than underage cost, bet LESS than the expected demand (i.e., cu < co => X < μ) •The smaller the standard deviation, the closer will be the optimal order quantity to the expected demand.

Benefits of Inventory

•Hedge against uncertain demand •Hedge against uncertain supply •Economies of Scale •Workload Smoothing

Inventory Costs from Holding

•Holding (carrying) costs ($) •Setup costs ($)

Lean Operations (What it is)

•Management philosophy •"Pull" through the system

Lessons from Littlefield 1

•Matching flow with demand is a continuous effort. •Watch bottlenecks and capacity-constrained resources closely. •To make capacity decisions, estimate the cost/benefits of -having "too much" or "too little" capacity. -being early or late in adding (or reducing) this capacity. •Queues can get huge as you approach high capacity utilization. •High utilization may not be helpful. •Remember "The Goal": reducing inventories, increasing throughput rate and reducing operating costs are keys to profitability and good cash flow. •Have a strategy (plan), be proactive (not reactive).

Pros of JIT

•Minimal inventory •Less space •More visual •Easier to spot quality issues

Newsvendor Framework

•One chance to decide on the stocking quantity for the product you're selling. •Demand for the product is uncertain. •Known profit margin for each unit sold and known loss margin for the ones that are bought and not sold. •Goal: Maximize expected profit

Component 2 of Lean Operations or Toyota System

•Only produce what's needed •The opposite of "Just In Case" philosophy •Ideal lot size is one •Minimize transit time •Frequent small deliveries

Inventory Costs on Supply Side

•Ordering costs ($) •Setup costs/time •Purchase costs ($) •Delivery times

Product Quality

•Performance •Reliability/Durability •Serviceability •Features •Aesthetics

Costs of Inventory

•Physical holding costs: -out of pocket expenses for storing inventory (insurance, security, warehouse rental, cooling) -All costs that may be entailed before you sell it (obsolescence, spoilage, rework...) •Ordering costs •Shortage costs: Lost revenues, customer goodwill. •Opportunity cost of inventory: foregone return on the funds invested. •Operational costs: -Delay in detection of quality problems. -Delay the introduction of new products. -Increase throughput times.

Cons of JIT

•Requires discipline •Requires good problem solving •Suppliers must be close •Requires high quality

Inventory Costs on Demand Side

•Shortage costs ($) •Salvage losses ($) •Demand levels

Lean Operations (What it Assumes)

•Stable Environment

Completely Random

•Time between arrivals or service times are distributed exponentially •#of arrivals or #of services in a given interval is distributed Poisson •Coef. of variation = (std. dev.) / mean = ca= 1

Why is it so Difficult to Match Supply and Demand

•Uncertainty in demand and/or supply •Changing customer requirements •Decreasing product life cycles •Fragmentation of supply chain ownership •Conflicting objectives in the supply chain •Conflicting objectives even within a single firm