Operations as a Competitive Weapon PDF

Operations as a Competitive Weapon Recommended book: Lee J. Krajewski, Larry P. Ritzman, Pearson, 2019  How Operations As a Competitive Weapon fits the Operations Management...

Operations as a Competitive Weapon Recommended book: Lee J. Krajewski, Larry P. Ritzman, Pearson, 2019  How Operations As a Competitive Weapon fits the Operations Management Philosophy Operations As a Competitive Weapon Operations Strategy Project Management Process Strategy Process Analysis Process Performance and Quality Constraint Management Process Layout Supply Chain Strategy Lean Systems Location Inventory Management Forecasting Sales and Operations Planning Resource Planning Scheduling © 2007 Pearson Education  Operations Management is… “The systematic design and control of processes that transform inputs into services and products for internal, as well as external, customers.” Transformation Processes Inputs Outputs (Adding value) © 2007 Pearson Education  Operations Management  An operations system is defined as one in which  several activities are performed  to transform a set of inputs into useful output  using a transformation process  Operations Management is  a systematic approach to  address all the issues pertaining to  the transformation process that converts some inputs into output that are useful, and  could fetch revenue to the operations system © 2007 Pearson Education Operations Management as a Function  Processes  Processes should add value.  Processes can be broken down into sub-processes, which in turn can be broken down further.  Any process that is part of a larger process is considered a “nested process.”  Each process and each nested process has inputs and outputs. © 2007 Pearson Education  Process View of an Ad Agency Accounting process Advertisement Output interface Inputs Outputs design and process planning process Communicate with Create the ad to the client, get needs, and needs of the client coordinate progress and prepare a plan for media exposure Production process Prepare ad for publication and deliver to media outlets  External vs. Internal Customers  External Customers are those who purchase the goods and services.  Internal Customers are those who receive the output of others within the firm. They are part of the transformation process. Outputs to Inputs from other Transformation Processes Internal or (Adding value) to External processes customers © 2007 Pearson Education  Service Processes and Manufacturing Processes Manufacturing processes change materials in one or more of the following dimensions:  Physical properties  Shape  Fixed dimensions  Surface finish  Joining parts and materials If a process isn’t doing at least one of these, then it is a service (non-manufacturing) process. © 2007 Pearson Education  Manufacturing & Service Manufacturing Organizations Service Organizations Physical durable product Intangible, perishable product Output can be inventoried Output can’t be inventoried Low customer contact High customer contact Long response time Short response time Regional, national, Intl. markets Mostly local markets Large facilities Small facilities Capital intensive Labour intensive Quality easily measured Quality hard to measure Similarities Is concerned about quality, productivity & timely response to its customers Must make choices about capacity, location, layout Has suppliers to deal with Has to plan its operations, schedules and resources Balance capacity with demand by a careful choice of resources Has to make an estimate of demand © Most firmsEducation 2007 Pearson provide both goods and services.  Value Chains  Value chains are an interrelated series of processes that produce a service or product to the satisfaction of customers.  Value chains may have core processes or support processes.  Core processes deliver value to external customers.  Support processes provide vital inputs for the core processes. © 2007 Pearson Education  Core Processes 1. Customer relationship processes  Identify, attract, and build relationships with external customers and facilitate the placement of orders. 2. New service/product development processes  Design and develop new services or products from inputs received from external customer specifications. 3. Order fulfillment processes  The activities required to produce and deliver the service or product to the external customers. 4. Supplier relationship processes  Select suppliers of services, materials and information and facilitate the timely and efficient flow of these items into the firm. © 2007 Pearson Education  Support Processes Internal Value-Chain Linkages  Firms have many processes that support the core processes. Support processes External customers External suppliers New service/ product Customer development relationship process process Supplier Order relationship fulfillment process process  Operations as a Set of Decisions Basic Decision-making Steps (1) Recognize and clearly define the problem. (2) Collect the information needed to analyze possible alternatives. (3) Choose the most attractive alternative. (4) Implement the chosen alternative. © 2007 Pearson Education  Operations as a Set of Decisions Strategic Decisions Tactical Decisions  Development of new  Process improvement capabilities and performance  Maintenance of existing measures capabilities  Management and  Design of new processes planning of projects  Development and  Generation of production organization of value and staffing plans chains  Inventory management  Key performance  Resource scheduling measures © 2007 Pearson Education  Productivity  Productivity is the value of outputs (services and products) produced, divided by the value of input resources(wages, costs of equipment, etc.) Output Productivity = Input © 2007 Pearson Education  Productivity Calculation Example 1.1 1. Single factor Three employees process 600 insurance policies in a week. They work 8 hours per day, 5 days per week. Calculate the productivity in policies per hour. Policies Processed Labor productivity = Employee Hours 600 Policies = (3 Employees) (40 hours/employee) = 5 policies/hr © 2007 Pearson Education  Productivity Calculation Example 1.1 continued 2. Multi-factor A team of workers makes 400 units of a product, valued by its standard cost of $10 each (before markups for other expenses and profit). The accounting department reports that the actual costs are $400 for labor, $1,000 for materials, and $300 for overhead. Calculate the productivity. Quality at standard cost Multifactor productivity Labor cost + Materials Cost + Overhead cost = (400 units) ($10/unit) $4,000 = = 2.35 $400 + $1000 + $300 = 1,700  These figures must be compared with performance levels in prior periods and with future goals. © 2007 Pearson Education  Homework Recommended book: Lee J. Krajewski, Larry P. Ritzman, Pearson, 2019 © 2007 Pearson Education  Solved Problem 1 a. Multifactor productivity is the ratio of the value of output to the value of input resources © 2007 Pearson Education  Solved Problem 1 b. Labor productivity is the ratio of the value of output to labor hours: © 2007 Pearson Education  Solved Problem 2 © 2007 Pearson Education  Application Calculate the year-to-date labor productivity: Calculate the multifactor productivity: © 2007 Pearson Education Demand Forecasting in Supply Chains Amit Upadhyay Department of Management Studies 24  What is Forecasting? ► Process of predicting a future event ► Underlying basis of all business decisions ► Production ► Inventory ► Personnel ► Facilities 25  Forecasting Time Horizons 1. Short-range forecast ► 1-3 months ► Purchasing, job scheduling, workforce levels, job assignments, production levels 2. Medium-range forecast ► 3 months to 2 years ► Sales and production planning, budgeting 3. Long-range forecast ► 2-3+ years ► New product planning, facility location, research and development 26  Distinguishing Differences Medium/long range forecasts deal with more comprehensive issues and aggregate level data Short-term forecasting usually employs different methodologies than longer-term forecasting Short-term forecasts tend to be more accurate than longer-term forecasts 27  Types of Forecasts 1. Economic forecasts ► Address business cycle – inflation rate, money supply, housing, etc. 2. Technological forecasts ► Predict rate of technological progress ► Impacts development of new products 3. Demand forecasts ► Predict sales of existing products and services 28  Seven Steps in Forecasting 1. Determine the use of the forecast 2. Select the items to be forecasted 3. Determine the time horizon of the forecast 4. Select the forecasting model(s) 5. Gather the data needed to make the forecast 6. Make the forecast 7. Validate and implement the results 29  The Reality ! ► Forecasts are seldom perfect ► unpredictable outside factors may impact the forecast ► Most techniques assume an underlying stability in the system ► Product family and aggregated forecasts are more accurate than individual product forecasts 30  Forecasting Approaches Qualitative Methods Quantitative Methods ► Used when situation is ► Used when situation is vague and little data ‘stable’ and historical data exist exist ► Existing products ► New products ► Current technology ► New technology ► Involves intuition, ► Involves mathematical experience techniques ► e.g., forecasting sales 31 of LED TVs  Overview of Qualitative Methods 1. Jury of executive opinion ► Pool opinions of high-level experts, sometimes augmented by statistical models 2. Delphi method ► Panel of experts, queried iteratively 3. Sales force composite ► Estimates from individual salespersons are reviewed for reasonableness, then aggregated 4. Market Survey ► Ask the customer 32 Overview of Quantitative Approaches 1. Naive approach Time-series 2. Moving averages models 3. Exponential smoothing 4. Trend Projection 5. Linear regression Associative model 33  Time-Series Forecasting ► Set of evenly spaced numerical data ► Obtained by observing response variable at regular time periods ► Forecast based only on past values; no other variables considered ► Assumes that factors influencing the past will continue to influence in future 34  Time-Series Components Four components of variations: (i) Trend, (ii) Seasonality, (iii) Cyclic, (iv) Random Trend component Demand for product or service Seasonal peaks Actual demand line Average demand over 4 years Random variation | | | | 1 2 3 4 Time (years) 35  Trend Component ► Overall upward or downward pattern ► Changes due to population, age, PLC stage, etc. ► Typically, long duration trend 36  Seasonal Component ► Regular pattern of up and down fluctuations ► Due to weather, customs, etc. ► Occurs within a single year PERIOD LENGTH “SEASON” LENGTH NUMBER OF “SEASONS” IN PATTERN Week Day 7 Month Week 4 – 4.5 Month Day 28 – 31 Year Quarter 4 Year Month 12 Year Week 52 37  Cyclical Component ► Recurring up and down movements ► Affected by the business cycle, and economic factors ► Typically, multiple years duration 0 5 10 15 20 38  Random Component ► Random, uncertain fluctuations ► Due to unknown or inexplicable reasons ► Short duration and nonrepeating 1 2 3 4 5 6 7 8 9 10 11 39  Naive Approach ► Assumes demand in the next period is the same as demand in the most recent period ► If January sales were 70, then February sales will be 70 ► Sometimes cost-effective and efficient ► Can be a good starting point 40  Moving Averages ► Moving Average is a series of arithmetic means 41  Moving Average: An example MONTH ACTUAL SALES 3-MONTH MOVING AVERAGE January 10 February 12 March 13 April 16 May 19 June 23 July 26 August 30 September 28 October 18 November 16 December 14 42  Moving Averages… ► Used if there is little or no trend ► Used often for smoothing 43  Weighted Moving Average ► Used when some trend might be present ► Usually, older data less important ► Weights based on experience and intuition Weighted moving average 44 Weighted Moving Average: An example MONTH ACTUAL SALES 3-MONTH WEIGHTED MOVING AVERAGE January 10 10 February 12 12 March 13 13 April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 12 1/6 May 19 June WEIGHTS 23 APPLIED PERIOD July 26 3 Last month August 30 2 Two months ago September 28 1 Three months ago October 18 6 Sum of the weights November Forecast for 16this month = December 3 x Sales 14 last mo. + 2 x Sales 2 mos. ago + 1 x Sales 3 mos. ago Sum of the weights 45  Weighted Moving Average MONTH ACTUAL SALES 3-MONTH WEIGHTED MOVING AVERAGE January 10 10 February 12 12 March 13 13 April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 12 1/6 May 19 June 23 July 26 August 30 September 28 October 18 November 16 December 14 46  Graph of Moving Averages Weighted moving average (Ex. 2) 30 – 25 – Sales demand 20 – Actual 15 – sales Moving average (Ex. 1) 10 – Potential Problems With Moving Average? 5– | | | | | | | | | | | | J F M A M J J A S O N D Month  Potential Problems With Moving Average 1. Increasing n smooths the forecast but makes it less sensitive to changes 2. Does not forecast trends well 48  Common Measures of Error The objective is to obtain the most accurate forecast irrespective of the technique. Select a method that gives us the lowest forecast error. Three commonly ► Mean used Absolute measures: Deviation (MAD) ► Mean Squared Error (MSE) ► Mean Absolute Percent Error (MAPE) 49 Mean Absolute Deviation (MAD) S. Name of Observed Forecasted Rainfall Deviatio Absolute mm) X X- |X - | No. Catchmen Rainfall (in (in mm) n Deviation t 1. Roorkee 114.8 92.94 21.86 21.86 2. Nainital 75 63.14 11.86 11.86 3. Tehri 92.5 110.64 -18.14 18.14 4. Dehradun 80.3 63.44 16.86 16.86 5. Chamoli 55.9 82.04 -26.14 26.14 6. Rudrapray -0.14 0.14 121.88 122.02 ag -6.14 6.14 Total Absolute deviation = 101.14 mm 7. Pithoragar Total No. of Catchments (N) = 7 63.4 69.54 h Mean Absolute Deviation (M.A.D) = = = 14.44 mm 𝛴 𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑣𝑎𝑙𝑢𝑒𝑠𝑜𝑓 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑓𝑟𝑜𝑚 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 101.14 𝑇𝑜𝑡𝑎𝑙𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠 7 50 Mean Squared Error (MSE) X- (X - )^2 S.N Name of Observed Forecasted Rainfall Deviation Squared Deviation X o. Catchment Rainfall (in mm) (in mm) 1. Roorkee 114.8 92.94 21.86 477.86 2. Nainital 75 63.14 11.86 140.66 3. Tehri 92.5 110.64 -18.14 329.06 4. Dehradun 80.3 63.44 16.86 284.26 5. Chamoli 55.9 82.04 -26.14 683.3 6. Rudrapray -0.14 0.019 121.88 122.02 ag -6.14 37.7 Total No. of Catchments (N) = 7 Total Squared deviation = 1952.86 7. Pithoragar 63.4 69.54 h Mean Squared Error (M.S.E) = = = 278.98 𝛴 𝑆𝑞𝑢𝑎𝑟𝑒𝑑 𝑣𝑎𝑙𝑢𝑒𝑠 𝑜𝑓 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑓𝑟𝑜𝑚 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 1952.86 𝑇𝑜𝑡𝑎𝑙𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠 7 51 Thanks 52 Mean Absolute Percent Error (MAPE) X- S. Name of Observed Forecasted Deviation Absolute Relative Absolut X |X - | No Catchmen Rainfall (in mm) Rainfall (in mm) Deviation Error e%. t Error 1. Roorkee 114.8 92.94 21.86 21.86 0.190 19.0 2. Nainital 75 63.14 11.86 11.86 0.158 15.8 3. Tehri 92.5 110.64 -18.14 18.14 0.196 19.6 4. Dehradun 16.86 16.86 0.209 20.9 80.3 63.44 5. Chamoli 55.9 82.04 -26.14 26.14 0.467 46.7 6. Rudrapray -0.14 0.14 0.001 0.1 121.88 122.02 ag 7. Pithoragar -6.14 6.14 0.096 9.6 63.4 69.54 h M.A.P.E = 𝛴 𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 percent 𝑣𝑎𝑙𝑢𝑒𝑠𝑜𝑓 𝑑𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑓𝑟𝑜𝑚 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 131.7= 18.81 = 𝑇𝑜𝑡𝑎𝑙𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛𝑠 7 53 Understanding Big Q UG Course – Operations Management Department of Management Studies Quality?  Quality - Meaning and Definition The term quality has different meanings and has been variously defined as value (Feigenbaum, 1951), conformance to specifications (Levitt 1972, Gilmore, 1974), conformance to requirements (Crosby, 1979), loss avoidance (Taguchi, 1979), defect avoidance (Crosby, 1979), excellence (Peters and Waterman, 1982), meeting or exceeding customers’ expectations (Gronroos 1983) fitness for use (Juran and Gryna, 1988),  Different Views ► User-based: better performance, more features ► Manufacturing-based: conformance to standards, making it right the first time ► Product-based: specific and measurable attributes of the product  Defining Quality The totality of features/characteristics of a product or service that bears on its ability to satisfy stated or implied needs American Society for Quality Needs: No defects, functionality, performance, reliability, safety, durability, etc.  Defect Anything that dissatisfies the Customer (internal or external)  Customer requirements are dynamic  Lower the Defects  Lower Cycle time (Delivery in time)  Lower Cost of Manufacturing  Higher Customer Satisfaction  Higher People Satisfaction  Higher Profits  Eight Dimensions of Product Quality 1. Performance: A product's primary operating characteristics. 2. Features: The "bells and whistles" of the product. 3. Reliability: The probability that a product will operate properly over a specified period under stated conditions of use. 4. Conformance: The degree to which physical and performance characteristics of a product match pre-established standards. 5. Durability: The amount of use one gets from a product before it physically deteriorates or until replacement is preferable. 6. Serviceability: The speed, courtesy, and competence of repair. 7. Aesthetics: How a product looks, feels, sounds, tastes, or smells. 8. Perceived quality: Subjective assessment resulting from brand image.  Quality Improves Profitability Sales Gains via Improved response Flexible pricing Improved reputation Improv Increas ed Reduced Costs via ed Quality Increased productivity Profits Lower rework and scrap costs Lower warranty costs  Implications of Quality 1. Company Reputation ► Perception of new products ► Employment practices ► Supplier relations 2. Product Liability ► Reduce risk 3. Global Implications ► Improved ability to compete  Costs of Quality ► Prevention costs: reducing the potential for defects ► Appraisal costs: evaluating products, parts, and services ► Internal failure costs: producing defective parts/service before delivery ► External failure costs: defects discovered after delivery  Costs of Quality Total Total Cost Cost External Failure Internal Failure Prevention Appraisal Quality Improvement Amit Upadhyay IITR 64  Costs of Quality Source: Juran’s quality control handbook  7QC Tools ► Tools to Organize the Data ► Check Sheet ► Pareto Chart ► Flowchart (Process Diagram) ► Tools for Generating Ideas ► Scatter Diagram ► Cause-and-Effect Diagram ► Tools for Identifying Problems ► Histogram ► Statistical Process Control Chart 1. Check Sheet: An organized method of recording data  Seven QC Tools 2. Scatter Diagram: Graph of the value of one variable vs. another Productivity Absenteeism 3. Cause-and-Effect Diagram  Cause-and-Effect Diagrams Material Method (ball) (shooting process) Grain/Feel Aiming point (grip) Size of ball Air pressure Bend knees Hand position Balance Lopsidedness Follow-through Missed Training free-throws Rim size Conditioning Motivation Rim height Consistency Rim alignment Backboard stability Concentration Machine Manpower (hoop & (shooter) backboard)  4. Pareto Chart A graph to describe problems or defects in descending order of frequency A bar graph that shows which factors are more significant. 71  Pareto Charts Data for October – 100 70 – – 93 – 88 60 – 54 Frequency (number) Cumulative percent – 72 50 – 40 – Number of 30 – occurrences 20 – 12 10 – 4 3 2 0 – Room svc Check-in Pool hours Minibar Misc. 72% 16% 5% 4% 3% Causes and percent of the total 72  5. Flowchart (Process Diagram) A chart that describes the steps in a process 73  Flow Charts MRI Flowchart 1. Physician schedules MRI 7. If unsatisfactory, repeat 2. Patient taken to MRI 8. Patient taken back to room 3. Patient signs in 9. MRI read by radiologist 4. Patient is prepped 10. MRI report transferred to 5. Technician carries out MRI physician 6. Technician inspects film 11. Patient and physician discuss 8 80% 1 2 3 4 5 6 7 11 9 10 20% 74  6. Histogram A frequency distribution shows how often each different value in a set of data occurs 75  7. Process Control Chart ► A chart with Upper control limit time on the 40% horizontal axis to plot values of 20% Target value a statistic ► Uses statistics | | | | | | | Lower control limit 0% | | and control 1 2 3 4 5 6 7 charts to tell when to take corrective action ► Drives process improvement  A Paradigm Shift in Thinking From Microscope to Telescope To see the FLOW Money making process X Unsustainable strategy Money making process Sustainable Strategy To GET, you must first GIVE or to reap you must first sow Process Output: Class 1 eggs Input Output..........................  TQM Origin In the 1950s, American industry enjoyed a boom. Whatever was made could be sold. Few industrialists heeded Deming's work and ideas about Total Quality. However, things were different in Japan. The Japanese economy was depressed, and goods made in Japan were known for their poor quality and high prices. Japanese industrialists were very receptive to Deming's ideas on TQM and set about implementing them. By the mid-70s, Japan was beginning to seriously undermine its American and other Western competitors, first in cars, then in a whole range of goods, including videos, Hi-fi, and computers. The rest is history. The whole world started taking TQM seriously.  TQM: Deming Philosophy The aim of continuous improvement is not just a goal. It is a fundamental principle that should reflect in an organization’s strategy. Zero defects. Defects are expensive and unnecessary. Organizations should aim to improve their systems for better quality rather than depend upon inspections. Organizations must stop awarding business contracts solely based on price tags. Lower prices only come with sacrificed quality. Institute training on the job. Make everyone in the organization work to accomplish the transformation.  Total All Stakeholders of the Organization (internal or external)  Total Commitment of CMD & Board  Total Commitment of All Stakeholders  Total Top Management Team  All Executives, Supervisors, Workers  All Suppliers (Internal & External)  All Functions  All Processes  All Activities  Management Managing the Total Quality Culture  Facts & Data-based Decisions  Inspirational Leadership  Rewards  Recognition  Aspirational Targets Setting  Facilitation  Continuous Training  New Skills Development  Innovation Total Quality Management - Dimensions Total : Balancing and Satisfying needs of all Stake Holders Quality : Sustained Customer Focus Management : Continuous Improvement with Fact and Data based decisions in a Planned & Systematic way 85  Total Quality Management Continuously maximizing Customer Satisfaction Continuously identifying and eliminating Non- Value Adding activities Continuously harnessing Human, Material, and other Resources of an Organisation in most effective way to achieve Company Objectives Embedding a culture of Continuous Improvement in all areas of operation with Customer focus 86 TQM Means v Improvement v Improvements over Improvement Continuous Improvement To achieve Excellence Continuous Improvement of What? ¨ Customer Results ¨ People Results ¨ Business Results §Non financial § Financial ¨ Society Results  Customer Satisfaction Quality Key to success in winning orders. Cost Ensure Customer Delivery Loyalty Service after Sales International competition determines Customer expectations  Current Scenario Increasing Globalisation Emergence of New Partnerships Mergers and Acquisitions Rapid growth in IT and Communication Networks Reduced technological gap between developed and developing world The key concern is not mere customer satisfaction but Customer retention Companies worldwide have adopted Standards like ISO 9001, ISO 14001, and OHSAS 18001 to focus on sustainability and improvements. Current Scenario “Three most important things you need to measure in the business are Customer Satisfaction, Employee Satisfaction, and Cash Flow.” - Jack Welch  Total Quality Culture The aim of TQM is to get everyone to take personal responsibility for the quality of their own work. No one blames others for defective work, as “the buck stops at Self.” However, if management insists that, in spite of a company-wide commitment to TQM, the faulty work should be passed, it is not TQM but PQM. If the company succeeds in changing employees' attitudes, the people concerned will not allow defective work to go ahead of their work area. This will make it an organisational priority to address the root cause of fault, underlining the urgency and significance of this action in the new TQ culture. TQM….. is the belief in human progress. It is the training of mind and development of attitudes of the people as a whole which determines whether the nation will realize high productivity and an affluent life or low productivity and poverty. The future of mankind demands excellence, know-how and quality of life 93  WORLD-CLASS means BEST OF BEST Any Where in the World... Dr. Robert C Camp THANK YOU  Managing Inventories 96 What is Inventory Management? Inventory Management The planning and controlling of inventories to meet the competitive priorities of the organization. 97 What is Inventory? Inventory A stock of materials used to satisfy customer demand or to support the production of services or goods. 98  Inventory Trade-Offs Input flow of materials Inventory level Scrap flow Figure 9.1 Output flow of materials 99  Pressures for Small Inventories Inventory holding cost Cost of capital Storage and handling costs Taxes Insurance Shrinkage – Obsolescence – Deterioration 100  Pressures for Large Inventories Customer service Ordering cost Setup cost Labor and equipment utilization Transportation cost Payments to suppliers 101  Types of Inventory Accounting Inventories – Raw materials – Work-in-process – Finished goods 102  Types of Inventory Figure 9.2 103  Types of Inventory Operational Inventories – Cycle Inventory – Safety Stock Inventory – Anticipation Inventory – Pipeline Inventory 104  Cycle Inventory Lot sizing principles  The lot size, Q, varies directly with the elapsed time (or cycle) between orders.  The longer the time between orders for a given item, the greater the cycle inventory must be. Q+0 Q Average cycle inventory = = 2 2 105  Pipeline Inventory Average demand during lead time = DL Average demand per period = d Number of periods in the item’s lead time = Pipeline inventory = DL = d L 106  Example 9.1 A plant makes monthly shipments of electric drills to a wholesaler in average lot sizes of 280 drills. The wholesaler’s average demand is 70 drills a week, and the lead time from the plant is 3 weeks. The wholesaler must pay for the inventory from the moment the plant makes a shipment. If the wholesaler is willing to increase its purchase quantity to 350 units, the plant will give priority to the wholesaler and guarantee a lead time of only 2 weeks. What is the effect on the wholesaler’s cycle and pipeline inventories? 107  Example 9.1 The wholesaler’s current cycle and pipeline inventoriesQare Cycle inventory = = 140 drills 2 Pipeline inventory = DL = d L =drills/week)(3 weeks) (70 = 210 drills 108  Example 9.1 The wholesaler’s cycle and pipeline inventories if they accept the new proposal Q Cycle inventory = = 175 drills 2 Pipeline inventory = DL =(70 d L drills/week)(2 = weeks = 140 drills 109  Inventory Reduction Tactics Cycle inventory – Reduce the lot size Reduce ordering and setup costs and allow Q to be reduced Increase repeatability to eliminate the need for changeovers Safety stock inventory – Place orders closer to the time when they must be received Improve demand forecasts Cut lead times Reduce supply uncertainties Rely more on equipment and labor buffers 110  Inventory Reduction Tactics Anticipation/ Seasonal inventory – Match demand rate with production rates Add new products with different demand cycles Provide off-season promotional campaigns Offer seasonal pricing plans Pipeline inventory – Reduce lead times Find more responsive suppliers and select faster transport Change Q in those cases where the lead time depends on the lot size 111 What is an ABC Analysis? Class C 100 — Class B ABC Percentage of dollar value 90 — Class A Analysis 80 — 70 — 60 — The process of 50 — dividing SKUs into three 40 — classes, 30 — according to 20 — their dollar 10 — usage 0— 10 20 30 40 50 60 70 80 90 100 Percentage of SKUs 112  Solved Problem 2 Booker’s Book Bindery divides SKUs into three classes, according to their dollar usage. Calculate the usage values of the following SKUs and determine which is most Quantity likely to be SKU classified as class A. Unit Description Used per Number Value ($) Year 1 Boxes 500 3.00 2 Cardboard 18,000 0.02 (square feet) 3 Cover stock 10,000 0.75 4 Glue (gallons) 75 40.00 5 Inside covers 20,000 0.05 6 Reinforcing tape 3,000 0.15 (meters) 7 Signatures 150,000 0.45 113  Solved Problem 2 SKU Quantity Unit Annual Numb Description Used per Value Dollar er Year ($) Usage ($) 1 Boxes 500  3.00 = 1,500 2 Cardboard 18,000  0.02 = 360 (square feet) 3 Cover stock 10,000  0.75 = 7,500 4 Glue (gallons) 75  40.0 = 3,000 0 5 Inside covers 20,000  0.05 = 1,000 6 Reinforcing 3,000  0.15 = 450 tape (meters) 7 Signatures 150,00  0.45 = 67,50 0 0 Total 81,310 114  Solved Problem 2 Figure 9.14 115  Solved Problem 2 Figure 9.14 116 Economic Order Quantity Lot size, Q, that minimizes total annual inventory holding and ordering costs Key assumptions 1. Demand rate is constant & known with certainty. 2. No constraints are placed on the size of each lot. 3. The only two relevant costs are the inventory holding cost and the fixed cost per lot for ordering or setup. 4. Decisions for one item can be made independently of decisions for other items. 5. The lead time is constant and known with certainty. 117 Economic Order Quantity Don’t use the EOQ – Make-to-order strategy – Order size is constrained Modify the EOQ – Quantity discounts – Replenishment is not instantaneous Use the EOQ – Make-to-stock strategy with relatively stable demand. – Carrying and setup costs are known and relatively stable 118  Calculating EOQ Recei Inventory ve depletion Q order (demand rate) On-hand inventory Q Average 2 cycle (units) inventory 1 cycle Time 119  Calculating EOQ Annual holding cost= (Average cycle inventory)  (Unit holding cost) Annual ordering cost = (Number of orders/Year)  (Ordering or setup cost/ order) Total annual cycle inventory cost = Annual holding cost + Annual ordering or setup cost 120  Calculating EOQ Annual cost (dollars) Total cost Holding cost Ordering cost Lot Size (Q) 121  Calculating EOQ Total annual cycle-inventory cost Q D TC= (H) + 2 Q (S) where TC = total annual cycle- inventory cost Q = lot size (in units) H = holding cost per unit per year D = annual demand (in units) 122  Example 9.2 A museum of natural history opened a gift shop which operates 52 weeks per year. Top-selling SKU is a bird feeder. Sales are 18 units per week, the supplier charges $60 per unit. Ordering cost is $45. Annual holding cost is 25 percent of a feeder’s value. Management chose a 390-unit lot size. What is the annual cycle-inventory cost of the current policy of using a 390-unit lot size? Would a lot size of 468 be better? 123  Example 9.2 We begin by computing the annual demand and holding cost as (18 units/week)(52 weeks/year) = 936 D =units 0.25($60/unit) = H =$15 The total annual cycle-inventory cost for the current policy is Q D 390 936 C= (H) + = (S) ($15) + ($45) 2 Q 2 390 = $2,925 + $108 = $3,033 The total annual cycle-inventory cost for the alternative lot size is 468 936 C($15) = + ($45) = $3,510 + $90 = $3,600 2 468 124  Example 9.2 Current cost 3000 – Total Q D Annual cost (dollars) = cost (H) + (S) 2 Q 2000 – Q Holding cost = (H) 2 1000 – D Ordering cost = (S) Lowest Q cost 0 – | | | | | | | | 50 100 150 200 250 300 350 400 Lot Size (Q) Best Q Current Figure 9.7 (EOQ) Q 125  Calculating EOQ The EOQ formula: 2DS EOQ = H Time Between Orders (TBO): (Inverse of no. of orders) EOQ TBOEOQ = (12 months/year) D 126  Example 9.3 For the bird feeders in Example 9.2, calculate the EOQ and its total annual cycle-inventory cost. How frequently will orders be placed if the EOQ is used? Using the formulas for EOQ and annual cost, we get 2DS 2(936)(45) EOQ = = = 74.94 or 75 units H 15 127  Example 9.3 Below shows that the total annual cost is much less than the $3,033 cost of the current policy of placing 390-unit orders. Figure 9.8 128  Example 9.3 When the EOQ is used, the TBO can be expressed in various ways for the same time period. EOQ 75 TBOEOQ = = = 0.080 year D 936 EOQ 75 TBOEOQ = (12 months/year) (12) = 0.96 month = D 936 EOQ 75 TBOEOQ = (52 weeks/year) = (52) = 4.17 weeks D 936 EOQ 75 TBOEOQ = (365 days/year) = (365) = 29.25 days D 936 129  Application 9.1 Suppose that you are reviewing the inventory policies on an $80 item stocked at a hardware store. The current policy is to replenish inventory by ordering in lots of 360 units. Additional information is: D = 60 units per week, or 3,120 units per year S = $30 per order H = 25% of selling price, or $20 per unit per year What is the EOQ? 2DS 2(3,120)(30) EOQ = = = 97 units H 20 130  Application 9.1 What is the total annual cost of the current policy (Q = 360), and how does it compare with the cost with using the EOQ? Current Policy EOQ Policy Q = 360 units Q = 97 units C = (360/2)(20) + C = (97/2)(20) + (3,120/360)(30) (3,120/97)(30) C = 3,600 + 260 C = 970 + 965 C = $3,860 C = $1,935 131  Application 9.1 What is the time between orders (TBO) for the current policy and the EOQ policy, expressed in weeks? 360 TBO360 = (52 weeks per year) = 6 weeks 3,120 97 TBOEOQ =(52 weeks per year) = 1.6 week 3,120 132  Managerial Insights from the EOQ SENSITIVITY ANALYSIS OF THE EOQ Paramet EO Parame EOQ Comments er Q ter Chan Change ge Increase in lot size is in Demand 2DS ↑ ↑ proportion to the square H root of D. Weeks of supply Order/ 2DS decreases and inventory Setup H ↓ ↓ turnover increases Costs because the lot size decreases. 2DS Larger lots are justified Holding Costs H ↓ ↑ when holding costs decrease. Table 9.1 133 Project Management Amit Upadhyay IIT Roorkee NPTEL course: Project and Production Management Prof. Arun Kanda, IIT Delhi  https://youtube.com/playlist?list=PLmRHsw28LDC-BGZtdEdU5EY-zJ51aq6Gm Project Management  What is a project?  A series of temporary jobs directed toward the creation of a unique product, service, or output.  What is project management?  Planning, directing, and controlling resources (people, equipment, material, etc.) to meet the technical, cost, and time constraints of the project.  Why is project management important? Amit Upadhyay IITR Amit Upadhyay IITR Project Management  How to start ?  Project Appraisal ?  Project Selection ?  Defining the project objectives  Appointment of Project Manager  Selection of Project team members  Briefing meetings amongst team members  Broad consensus about scope of work and time frame  Development of work breakdown structure and allocation of responsibilities Amit Upadhyay IITR Project Terminology  Task  Subdivision of a project – usually a few weeks or months, and performed by a single group or organization  Work Package  A group of activities combined based on a desired criterion  Work Breakdown Structure  Breakdown of project tasks into components  Project Milestone Amit Upadhyay IITR WORK BREAKDOWN STRUCTURE A breakdown of the total project task into components to establish  How will work be done?  How will people be organized?  How would resources be allocated?  How would progress be monitored? Amit Upadhyay IITR Illustrative WBS Missile Guidance Rocket Launching Warhead control sys platform Ballistic Propulsion Re-entry shell engine vehicle I Stage Solid fuel II Stage Amit Upadhyay IITR ALTERNATIVE WAYS TO BREAKDOWN WORK Amit Upadhyay IITR WORK BREAKDOWN STRUCTURE Project System I System II System N Subsystem Subsystem Subsystem Task Task Subtask Subtask Subtask Amit Upadhyay IITR WORK BREAKDOWN STRUCTURE…  Agency orientation (Based on assignment of responsibility to different agencies)  Function oriented (e.g. Design, Procurement, Construction and Commissioning)  Hardware orientation (Identification of basic work packages) Amit Upadhyay IITR WORK BREAKDOWN STRUCTURE…  Generally, a WBS includes 5-6 levels. More or less may be needed for a situation.  All paths on a WBS do not go down to the same level.  WBS does not show sequencing of work.  A WBS should be developed before scheduling and resource allocation are done. Amit Upadhyay IITR WORK BREAKDOWN STRUCTURE…  A WBS should be developed by individuals knowledgeable about the work.  Many groups involved in this process.  Break down a project only to a level sufficient to produce an estimate of the required accuracy. Amit Upadhyay IITR PROJECT REPESENTATION  Project name and description.  List of jobs that constitute the project. What next? Amit Upadhyay IITR Amit Upadhyay IITR WHY USE PROJECT NETWORKS ?  A convenient way to show activities and precedence in relation to the whole project.  Basis for Responsibility Allocation  Definition of subcontracting units  Role of different players  Basic scheduling  Time table for implementation  Critical path determination and selective management control Amit Upadhyay IITR WHY USE PROJECT NETWORKS…  Resource planning, Resource allocation  Project crashing with time cost tradeoffs  Project implementation  Monitoring and reporting progress  Updation of schedules and resources  Coordination of work with different agencies Therefore, the project network is a common vehicle for planning, communicating, and implementing the project right from inception. Amit Upadhyay IITR  PROJECT REPRESENTATIONS  Gantt or bar chart showing when activities take place.  Project network showing activities, their dependencies and their relation to the whole. Activity on Arc (A-O-A) Activity on Node (A-O-  Event oriented N) networks  Activity oriented activity, a networks i j a Amit Upadhyay IITR  EXAMPLE 1: AoA v/s AoN a Job Predecessors d a -- b Start End b -- e c -- c d a,b e b,c Activity on Node Amit Upadhyay IITR Critical Path method  Deterministic time estimates  when previous experience yields fairly accurate estimates of activity duration, e.g. construction activity, market surveys.  A single time estimate is used for each activity. This is taken from experts who have prior knowledge and experience of the activity. Amit Upadhyay IITR CRITICAL PATH  The longest path in the network  Lower bound on the project duration  Selective control for management of project  Can be determined by  Enumeration of all paths in the network  Event based computations (A-O-A networks)  Activity based computations (A-O-N networks) Amit Upadhyay IITR EXAMPLE Job Predecessors Duration (days) a -- 2 b -- 3 c a 1 d a, b 4 e d 5 f d 8 g c, e 6 h c, e 4 i f, g, h Amit Upadhyay IITR 3 PROJECT NETWORK EXAMPLE (A-O- N) 2 1 a c 6 g 4 d e 5 h 4 i 3 3 b f 8 Amit Upadhyay IITR FORWARD PASS (A-O-N Networks) Initialization  Early start (ES) for all beginning activities = 0 (or the start date of the project)  Early finish (EF) for activity = ES + duration  ES(j)= Max (EF all predecessors) ES/EF ES/ EF ES/EF i1 j ES/EF i2 ip Amit Upadhyay IITR BACKWARD PASS (A-O-N Networks) Initialization  Project duration, T = Max (EF of ending jobs).  LF(all ending jobs) = T ;  LS = LF- Duration  LF = Min (LS of successors) LS/LF LS/LF LS/LF LS/LF Amit Upadhyay IITR EARLY & LATE SCHEDULE - EXAMPLE Job duration ES EF LS LF TF a 2 0 2 1 3 1 b 3 0 3 0 3 0 c 1 2 3 11 12 9 d 4 3 7 3 7 0 e 5 7 12 7 12 0 f 8Amit Upadhyay IITR 7 15 10 18 CRITICAL PATH - EXAMPLE a 2 c 1 6 g 3 d 4 5 h 4 i 3 e b f 8 Amit Upadhyay IITR GANTT CHART SHOWING ACTIVITY SCHEDULE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 a *** ] b ^^^^^ c ** ] d ^^^^^^^^ e ^^^^^^^^^^^^^ f ****************** ] g ^^^^^^^^^^^^^^^ h ********** ] i Assignment: Interpretation of different types of floats ? ^^^^^^^^^ Amit Upadhyay IITR Thanks Amit Upadhyay IITR