Chapter 2: Competitiveness, Strategy, and...

For comments: [email protected]

1 | P a g e

Chapter 2: Competitiveness, Strategy, and Productivity

Definitions:

Competitiveness: How effectively the organization meets the needs of the customers relative

to others that offer similar goods or services.

Strategy: Plans to achieve organization goals.

Productivity: Measure of effective use of resources, usually expressed as the ratio of outputs to

inputs.

Productivity =Output / Input

Competitiveness: Organizations compete with each other in various ways including:

1. Price: amount customer must pay for the product or service. If all other factors are equal

customers will choose lowest price.

2. Quality: Material, workmanship and design. Quality is related to buyer’s perception.

3. Service: like after-sale such as delivery, setup, warranty, technical support etc.

4. Differentiation: any special feature (design, cost, quality, ease of use, etc) that cause a

product or service to be perceived by the buyer as more suitable than competitor’s.

5. Flexibility: the ability to respond to changes.

6. Time: like, how quickly product is delivered, how quickly product is developed, and rate of

product improvement.

7. Managers and workers: people are the heart and soul of an organization. Their skills can be a

competitive edge. Skills example is answering the phone: persons handling calls should be

helpful, cheerful, prompt.

Global competition criteria:

1. Changing in nature.

2. Quality, service and prices competition.

3. Continued growth of service sector.

4. Scarcity of operations’ resources represents a limitation in competition.

5. Rapid expansion of advanced technologies, to compete with global companies, you have to

use a similar technology.

6. Strategic alliances: joint ventures among international companies to exploit global business

opportunity. Alliances are motivated by:

a. Product or production technology

b. Market access

c. Production capability

d. Pooling of capital

7. Production sharing: means that a product might be designed and financed in one country, its

materials produced in other countries, assembled in another country, and sold in yet other

countries. The country with best quality and least cost of a portion of the final product, will share

in production by providing that portion. It is a chain that starts from the company that performs

the design, and ends with company that produces the final product.

o Example: Nokia phones designed in Finland, screen manufactured in Korea, batteries

from China, software from India, and main board from Finland.

8. Fluctuation of international financial reports due to instability in: inflation, interest rates,

currency rates, trade imbalances, national debts, and stock markets.

9. Social responsibility issues: towards customers, employees, and environment. Influenced by

consumer attitudes, regulations, and self interest of the company.

o ISO 14000: set of standards developed by the international Standardization

Organization and can be considered as environmental guidelines, containing ways to

help better management and control of firms activities, products and services on the

environment (focus on prevention and improvement). If the company follows the ISO

14000 guidelines, it can apply to get ISO 14000 certificate.

Pros and Cons of Globalization:

Pros (advantages):

1. Increase of standard of living due to increased productivity.

2. Global competition resulted in cost reduction.

3. Innovation encouraged by fresh ideas from abroad.


2 | P a g e

4. Export jobs became available with relatively higher income.

Cons (Disadvantages):

1. Workers lost jobs, new jobs found with less payments.

2. Workers face pays cuts demands from employers.

3. Fluctuation of cost with movements in currency exchange rates.

Reasons of organization FAILURE:

1. Failing to take advantage of strengths and opportunities, or failing to recognize weakness and

threats (SWOT).

2. Absence of operations strategy.

3. Putting emphasis on short term financial performance > R&D.

4. Putting too much emphasis on product and service design > process design and improvement.

5. Neglecting investment in capital and human resources.

6. Lack of good internal communication among different functional areas.

7. Failing to consider customer wants and needs.

Strategy: Plan to achieve organization goals.

It affects the ability of the organization to compete. Organization strategy and operations strategy affects the organization performance.

Strategy depends on organization mission.

Mission The reason of the existence of an organization. Mission statement: a statement of purpose that

serves as a long term guide for strategy and decision making: What business are we in? What we want

to be? Who are our customers? and how to achieve growth and profitability?

Mission is affected by:

Philosophy and values.

Environment and customers.

Public image.

Profitability.

Strategies and tactics:

Mission statement provides a direction for an organization and gives rise to organization

goals.

Mission and goals:

establish a destination

for the organization.

Strategies are the

roadmaps – long term

Tactics are “how to”

reach destinations –

intermediate term

Operations are the actual

“doing” part – short

term

Organization strategies:

Overall strategy related to

the entire organization.

Functional strategies: related to each of the functional areas of the organization (Finance,

Marketing, and Operations), should support the organization strategy, and should support the

goals and missions of the organization.

Tactics: Methods and actions taken to accomplish strategies.

Example: Mission: Live a good life.

Goal: Successful career, good income.

Strategy: obtain a college education.

Tactics: Select a college, select a major, decide how to finance college.

Operations: Register, buy books, take courses, study.


3 | P a g e

Operations Strategy:

It is the approach consistent with the organization strategy that is used to guide the operations

function. Should be formulated with link to the organization strategy, and should support the

organization goals.

Narrower in scope than organization strategy.

It deals with operations aspect of the organization.

Related to: products, processes, methods, operating resources, quality, costs, lead

times, and scheduling.

Should consider the operations strengths, weaknesses.

Should avoid conflict with other functional units of the organization.

Has a major influence on competitiveness and success of the organization.

When operation strategy was neglected in 1970s and 80s, due to higher focus on marketing and

finance, performance of companies showed that they became less competitive. From late 1980s

focus was on operation strategy.

Strategy Formulation:

First the management should carry out SWOT analysis

(strength, weakness, opportunities and threats) by defining distinctive competencies and scan the

environment.

Organization must take in account:

Order qualifiers:

characteristics that are perceived by

customers as minimum standards of

acceptability to be considered as a

potential for pur-chase.

Order winners:

Characteristics of an organiz-ation’s

goods or services that cause it to be

perceived as better than the

competition.

Price, delivery reliability, delivery

speed, and quality may be considered order qualifiers or order winners. Over time, a

characteristic that was once an order qualifier may become order winner and vice versa.

Relative weight of characteristics are determined by marketing functions, and communicated to

operations.

Distinctive competencies: (internal) The special attributes or abilities that give an organization a

competitive edge. This may include price, quality, time, flexibility, customer service and location.

o It’s usually not sufficient to match competitor competencies, but the organization has to

exceed competitor’s quality, or excel in one or more other dimensions. Marketing and

operations work together to satisfy customer needs. o Japanese manufacturers employed some strategies after WWII:

Low labor cost strategy: immediately after the war labor was inexpensive.

Scale-based strategy: by achieving higher labor productivity and lower unit cost. (60s)

Focused factories strategy: smaller factories focused on narrow products line. (70s)

Flexible factories strategy: reduced time needed for new product and new process

designs. (80s)

Environmental scanning: (PEST ND)

o Definition: it is the considering of events and trends that present threats or opportunities

for a company.

o Nature of environment depends on nature of organization, and location of its customers.

o May be global, national, regional or local.

o Environment include: competitors, changing consumer needs, legal, political, economic,

and environmental.


4 | P a g e

o Example: disintegration of USSR in 1992, and reunion of Germany, and formation of EU,

form major input for strategy in global companies like IBM, and Pepsi and their suppliers,

but had no effect on local business.

Technological changes is a key factor in strategy formulation, Examples:

o Products: improved computer chips and cellular phones.

o Services: faster order processing and faster delivery.

o Processes: robotics, automation and flexible manufacturing systems.

Important environmental factors

o External:

Economic: like interest rate, inflation, deflation, and tax laws.

Political: political stability, instability, and wars.

Legal: government regulations, labor laws, trade regulations, and patents.

Technology: process, equipment, material and design technologies.

Competition: number and strength of competitor, their advantages, and ease of

market entry.

Markets: include size, location, brand loyalties, ease of entry, long term stability,

ease of entry.

o Internal: (8 M )

Human resources: skills and abilities of workers and managers, special talents,

loyalty, and experience.

Facilities and equipment: capacities, locations, age, cost of maintenance.

Financial resources: cash flows, debts, and cost of capital.

Customers: loyalty, relationships, understanding of their needs and wants.

Products and services: existing and new.

Technology: existing technologies, ability to integrate new technology, and effects

on operations.

Suppliers: relations with suppliers, quality, dependability, flexibility and services.

Other: like patents, labor relations, company image, distribution, access to market,

access to resources.

After assessing all factors and the steps above, then strategy is formulated, considering

the following:

1. Role of internet.

2. Global presence. (you don’t have to go abroad to experience global competition, the world

will come to you)

3. Outsourcing: used to reduce overhead, increase flexibility, and benefit from suppliers’

experience.

4. New products and services.

5. Rate of growth desirable and sustainable. Avoid over expansion. (Boston Markets, over

expanded and was bankrupt before being acquired by McDonalds in 2000)

6. Lean production: system that uses minimal amounts of resources to produce high volume,

high quality goods with some variety.

Strategy may be:

1. Single strategy (like price leader strategy). It allows the company to focus on particular

strength.

2. Multiple strategies.

Quality and Time Strategies:

Quaity based strategy: focuses on quality in all phases of an organization.

o Quality is an important factor in attracting and retaining customers.

o This strategy may aim at:

Overcoming an organization image of poor quality.

Maintaining image of high quality.

Facing the competition.

o Quality strategy is the rule not the exception and it can be a part of other strategy like cost

or increased productivity.

Time based strategy: focuses on reduction of time needed to accomplish tasks.

Aiming to reduce time required for new products development, product delivery and

response to change in customer demand.

o Reducing time, leads to reduction of cost, and increase in productivity.


5 | P a g e

o Improved customer service and quality tends to be higher. New products appear on the

market sooner.

o Time reduction can be achieved through reducing:

Planning time: time needed to develop strategies, select tactics, etc.

Product/service design time: time needed to design and market new redesigned

products or services.

Processing time: time needed to produce goods and services.

Changeover time: the time needed to change from producing one type of product

to another.

Delivery time: time needed to fill orders.

Response time for complaints: either customer or employees complaints.

Elements of Operations Strategy

1. Positioning the production system (detailed below)

2. Product/service plans (Chapter 4)

3. Outsourcing plans (Chapter 11)

4. Process and technology plans (Chapters 4 & 6)

5. Strategic allocation of resources (Chapter 8)

6. Facility plans: capacity, location, and layout (Chapter 5)

Positioning the Production System: Means selecting the type of product design and type of production processing system and type

of finished goods inventory policy for each product group in the business strategy. Select the type of product design

o Standard: Results in only few products models. Produced either:

Continuously, or In very large batches.

Characteristics: Fast delivery and low production costs. Examples: production of TV

o Custom: Designed according to the needs of individual customers. Many different products result. Each product is produced in small batches.

Characteristics: Flexibility and on time delivery are needed.

Example: luxury cruise ship, and a super computer.

Select the type of production processing system o Product focused:

Also called: line flow production, or production lines, or assembly lines. The machines and workers needed to produce a product are grouped together.

It is the best type where there are few standard products, each with a high volume.

Changing to other product design and production volume is difficult and expensive (not very flexible).

Examples: Assembly lines of auto manufacturing (30-60 vehicle per hour). o Process focused:

Best when producing many unique products each in relatively low volume.

Each production department performs only one type of process. Example: Painting, al products that are needed to be painted would be

transported to the painting department.

Easier and less expensive to change to other products and volumes (great flexibility).

Required for custom products. Advantages: Flexibility and on time delivery.

Select the type of finished-goods inventory policy

o Produce-to-stock policy: Produced a head of time and placed in inventory. When orders are received immediate shipping from inventory.

Preferred if fast delivery is important.

Example: McDonald’s produce to stock. o Produce-to-order policy:

Production takes place only after receiving an order. Delivery only after production. Example: Burger king “have it your way”


6 | P a g e

Stages in a Product’s Life Cycle

Introduction- Sales begin, production and marketing are developing, profits are negative.

Growth - sales grow dramatically, marketing efforts intensify, capacity is expanded, profits begin.

Maturity - production foc-uses on high-volume, effi-ciency, low costs; market-ing focuses on

competitive sales promotion; profits are at peak.

Decline - declining sales and profit; product might be dropped or replaced.

Evolution of product strategy:

The characteristics of production systems tend to evolve as products move through their product life

cycles.


7 | P a g e

Chapter 3: Forecasting

Definition: Forecasting is a statement about the future. It is estimating future event (variable), by

casting forward past data. Past data are systematically combined in predetermined way to obtain the

estimate. Forecasting is not guessing or prediction.

Forecasting help managers to:

Plan the system

Plan the use of system

Forecasts affect decisions and activities throughout an organization

Accounting, finance

Human resources

Marketing

MIS

Operations

Product / service design

Accounting Cost/profit estimates

Finance Cash flow and funding

Human Resources Hiring/recruiting/training

Marketing Pricing, promotion, strategy

MIS IT/IS systems, services

Operations Schedules, MRP, workloads

Product/service design New products and services

Common features of forecasting:

1. Forecasting is rarely perfect (deviation is expected).

2. All forecasting techniques assume that there is some degree of stability in the system, and

“what happened in the past will continue to happen in the future”.

3. Forecasting for a group of items is more accurate than the forecast for individuals.

4. Forecasting accuracy increases as time horizon increases.

Elements of good forecast:

1. Timely: Forecasting horizon must cover the time necessary to implement possible changes.

2. Reliable: It should work consistently.

3. Accurate: Degree of accuracy should be stated.

4. Meaningful: Should be expressed in meaningful units. Financial planners should know how many

dollars needed, production should know how many units to be produced, and schedulers need to

know what machines and skills will be required.

5. Written: to guarantee use of the same information and to make easier comparison to actual

results.

6. Easy to use: users should be comfortable working with forecast.

يعتمد عليها -سهلة -مفهومة -الة حاسبة -ورقة -ساعة

Types of forecast by time:

Short-range (days – weeks – months): Job scheduling, work assignments

o Time spans ranging from a few days to a few weeks.

o Cycles, seasonality, and trend may have little effect.

o Random fluctuation is main data component.

Medium term (1-2 years): Sales, production

Long range forecast (> 2years): change location

o Time spans usually greater than one year.

o Necessary to support strategic decisions about planning products, processes, and

facilities.


8 | P a g e

Steps in forecast development:

1. Determine purpose of forecast.

2. Establish a time horizon: time limit, accuracy decreases with shorter durations.

3. Select forecasting technique.

4. Gather and analyze data.

5. Prepare the forecast

6. Monitor forecast. Compare with actual

Example of sales forecast:

Months Forecast of

Sales

Actual Sales Error Squared

Error = E2

1 10 8 2 4

2 8 12 4 16

3 11 7 4 16

4 14 16 2 4

5 10 8 2 4

Total 14 44

Forecast accuracy:

Total absolute deviation (TAD)= 14

Mean absolute deviation (MAD)= ∑ (Actual-forecast)/n = 14/5 = 2.8

Total Squared Error (TSE) = 44

Mean Square Error (MSE)= 44/5 = 8.8

Methods of forecast:

1. Quantitative (based on time series data):

Time series data: a time ordered sequence of observation taken at regular intervals over time.

Patterns resulting from plotting of these data are:

a. Trend: A long-term upward or downward movement in data.

b. Seasonality: Short-term regular variations related to calendar or time of day.

c. Cycle: Wavelike variation lasting more than one year.

d. Random variations: residual variations after all other behaviors are accounted for.

e. Irregular variations: caused by irregular circumstances, not reflective of typical

behavior.

Naïve forecast: The forecast for any period equals the previous period’s actual value.

Simple to use.

Virtually no cost.

Quick and easy to prepare (no data analysis required).

Easily understandable.

Cannot provide high accuracy.

Can be a standard for accuracy and cost. Q: is the increased accuracy of another

method worth the additional cost?

Can be applied in stable demand (moving around average), seasonal, and trend

Examples:

1. Sales of air conditioning units next July, will be the same as the sales in last July.

(Seasonal).

2. Highway traffic next Tuesday will be the same as last Tuesday (stable, moving around

average).

3. If the last 2 actual values were 50 and 53, the next will be 56 (trend).


9 | P a g e

2. Qualitative methods: (based on judgment and opinion)

1. Jury of executives: opinions of high level executives.

2. Sales force composite: estimates from sales individuals are reviewed for

reasonableness (they may tend to make under estimates), then aggregated.

3. Consumer market survey: Asking the customers may give best forecasts but it is

higher in cost, difficult to apply.

4. Delphi method:

(a) Panel of experts queried.

(b) Chosen experts to participate should be of a variety of knowledgeable people in

different areas (finance, marketing, production etc). They are unknown to any one,

except for the coordinator.

(c) Through questionnaire the coordinator obtains estimates from all participants.

(d) Coordinator summarizes results and redistributes them to participants along with

appropriate new questions.

(e) Summarize again and refine forecasts and develop new question.

Differences between qualitative and quantitative

Qualitative Methods Quantitative Methods

Uses when situation is vague Used in stable situations

Little data available Historical data available

New products Existing products

New technology Current technology

Judgement Involves mathematical techniques

Example: forecasting newly introduced

online sales

Example: sales of color TVs

Selection of foresting method: 1- Cost 2- Accuracy

A trade off between cost and accuracy.

More accuracy will cost more.

High accuracy needs more data, which may be difficult to obtain, and models are more costly to design implement and operate.


10 | P a g e

Such methods as: statistical models, historical analogies, and executive committee consensus, tend to be of low or moderate cost. Where as complex econometric models, Delphi, and market research tend to be higher in cost and takes more time.

Each organization must make the cost and accuracy trade off that is suitable for its own situation.

3- Data available: Important in choosing forecasting method a. Customer surveys: It is appropriate in demand forecasting if:

Attitudes and intentions are relevant factors.

Data are economically obtained. b. Historical sales data:

To apply mathematical and stat. methods, linear egression, moving average, exponential smoothing etc

New products: customer survey will not suitable.

4- Time span:

Short range: Workers, cash, machines scheduled, and inventory can be forecasted by moving average of exponential smoothing models.

Long range: factory capacities, capital funds, can be estimated by regression, executive committee consensus, market research.

5- Nature of products and services:

a. Is the product/service high cost or high volume? b. Where is the product/service in its life cycle? c. Does the product/service have seasonal demand fluctuations?

6- Impulse response and noise dampening.

An appropriate balance must be achieved between: How responsive we want the forecasting model to be to changes in the actual

demand data Our desire to suppress undesirable chance variation or noise in the demand data

Linear regression analysis:

Establishes a relationship between a dependent variable and one or more independent variables.

In simple linear regression analysis there is only one independent variable.

If the data is a time series, the independent variable is the time period.

The dependent variable is whatever we wish to forecast. (e.g. sales)

Regression Equation

Y

Delta Y

Delta X

a

X

Y = a + b X

b = Delta Y / Delta X = Slope

Example: b= 0.5 means that for

every one unit increase in X , 0.5

unit will increase in Y


11 | P a g e

Y = dependent variable (example: Company Sales)

X = independent variable (example: time periods, sales of other related company)

a = Y-axis intercept

b = Slope of regression line = delta Y/ delta X

Constants a and b:

o The constants a and b are computed using the following equations:

Or, Σy=na+bΣx a= (Σy – bΣx)/n

Σxy=aΣx+bΣx2

o Once the a and b values are computed, a future value of X (time, or sales of other elated

product) can be entered into the regression equation and a corresponding value of Y (the

forecast) can be calculated.

Example: College Enrollment

At a small regional college enrollments have grown steadily over the past six years, as evidenced

below. Use time series regression to forecast the student enrollments for the next three years.

Students Students

Year Enrolled (1000s) Year Enrolled (1000s)

1 2.5 4 3.2

2 2.8 5 3.3

3 2.9 6 3.4

x y x2 xy

1 2.5 1 2.5

2 2.8 4 5.6

3 2.9 9 8.7

4 3.2 16 12.8

5 3.3 25 16.5

6 3.4 36 20.4

Total 21 18.1 91 66.5

Y = 2.387 + 0.180X

Y7 = 2.387 + 0.180(7) = 3.65 or 3,650 students

Y8 = 2.387 + 0.180(8) = 3.83 or 3,830 students

Y9 = 2.387 + 0.180(9) = 4.01 or 4,010 students

Note: Enrollment is expected to increase by 180 students per year.

Coefficient of Correlation (r)

2

2 2

x y- x xya =

n x -( x)

2 2

xy- x yb =

n x -( x)

n

2

91(18.1) 21(66.5)2.387

6(91) (21)a

6(66.5) 21(18.1)0.180

105b


12 | P a g e

The coefficient of correlation, r, explains the relative importance of the relationship between x

and y.

The sign of r shows the direction of the relationship.

The absolute value of r shows the strength of the relationship.

The sign of r is always the same as the sign of b.

r can take on any value between –1 and +1.

Meanings of several values of r:

-1 a perfect negative relationship (as x goes up, y goes down by one unit, and vice

versa)

+1 a perfect positive relationship (as x goes up, y goes up by one unit, and vice versa)

0 no relationship exists between x and y

+0.3 a weak positive relationship

-0.8 a strong negative relationship

Equation:

Example: Railroad Products Co.

X (sales) Y (profit) x2 Xy y2

120 9.5 14,400 1,140 90.25

135 11.0 18,225 1,485 121.00

130 12.0 16,900 1,560 144.00

150 12.5 22,500 1,875 156.25

170 14.0 28,900 2,380 196.00

190 16.0 36,100 3,040 256.00

220 18.0 48,400 3,960 324.00

1,115 93.0 185,425 15,440 1,287.50

r = 0.9829

Seasonalized Time Series Regression Analysis

1. Select a representative historical data set.

2. Develop a seasonal index for each season.

3. Use the seasonal indexes to deseasonalize the data.

4. Perform linear regression analysis on the deseasonalized data.

5. Use the regression equation to compute the forecasts.

6. Use the seasonal indexes to reapply the seasonal patterns to the forecasts.

Seasonalized Times Series Regression Analysis

An analyst at CPC wants to develop next year’s quarterly forecasts of sales revenue for CPC’s line of

Epsilon Computers. She believes that the most recent 8 quarters of sales (shown on the next slide) are

representative of next year’s sales.

2 2

7(15,440) 1,115(93)

7(185,425) (1,115) 7(1,287.5) (93)r


13 | P a g e

Representative Historical Data Set

Year Qtr. ($mil.) Year Qtr. ($mil.)

1 1 7.4 2 1 8.3

1 2 6.5 2 2 7.4

1 3 4.9 2 3 5.4

1 4 16.1 2 4 18.0

1. Compute the Seasonal Indexes

2. Deseasonalize the Data

Quarterly Sales ( = actual quarter sales / seasonality index)

Year

Q1 Q2 Q3 Q4

1 8.72 8.66 8.80 8.74

2 9.78 9.85 9.69 9.77

Notice that results have no seasonal variations.

3. Perform Regression on Deseasonalized Data

X y x2 xy

1 8.72 1 8.72

2 8.66 4 17.32

3 8.8 9 26.40

4 8.74 16 34.96

5 9.78 25 48.90

6 9.85 36 59.1

7 9.69 49 67.83

8 9.77 64 78.16

Total 36 74.01 204 341.39

Y = 8.357 + 0.199X

4. Compute the Deseasonalized Forecasts

Y9 = 8.357 + 0.199(9) = 10.148

Y10 = 8.357 + 0.199(10) = 10.347

Y11 = 8.357 + 0.199(11) = 10.546

Y12 = 8.357 + 0.199(12) = 10.745

Note: Average sales are expected to increase by 0.199 million (about $200,000) per quarter.

Year Q1 Q2 Q3 Q4 Total

1 7.4 6.5 4.9 16.1 34.9 (year1)

2 8.3 7.4 5.4 18.0 39.1 (y2)

Totals 15.7 13.9 10.3 34.1 74.0

Qtr. Avg. 7.85 6.95 5.15 17.05 9.25

Seas. Ind. = Q.average/9.25 .849 .751 .557 1.843 4.000

2

204(74.01) 36(341.39)a 8.357

8(204) (36)

2

8(341.39) 36(74.01)b 0.199

8(204) (36)


14 | P a g e

5. Seasonalize the Forecasts: (= deseaonalized forecasts x seasonality index)

Yr. Quarter Index Deseasonalized

Forecast

Seasonalized

Forecast

3 1 .849 10.148 8.62

3 2 .751 10.347 7.77

3 3 .557 10.546 5.87

3 4 1.843 10.745 19.80

Moving Average

Technique that averages a number of recent actual values, updated as new values become available. It

can be calculated using the following equation:

Ft = MAn = Σ Ai / n

Where: Number of periods=n

Actual values in periodi = Ai

Moving Average = MA

Index corresponds to period = i

Forecast for time periodt = Ft

Example: MA3 refers to a three-period moving average forecast, and MA5 would refer to a five period

moving average forecast.

Calculate three period moving average for:

Period Demand

1 42

2 40

3 43

4 40

5 41

F6 = (43+40+41) / 3 = 41.33

If actual demand in period 6 turns out to be 39, so

F7 = (40+41+39) / 3 = 40.00

Note that: the forecast is updated by adding the newest actual value and dropping the oldest.

Advantage of moving average: Easy to use and to compute.

Disadvantage: values in the average are weighted equally. For example, in a ten- period moving average

each the same weight of 1/10, the oldest has an equal value to the most recent.

Weighted moving average:

More recent values in a series are given more weight in computing a forecast.

Example:

The weight of most recent value = 0.40, next most recent weight = 0.30, next = 0.20, and next= 0.10.

Total weights always = 1. In the last example: forecast of period 6 will be:

F6 = 0.40 (41) + 0.30(40) + 0.20(43) + 0.10(40) = 41

If actual demand of period 6 is 39. Forecast of period 7 will be:

F7 = 0.40(39) + 0.30(41) + 0.20(40) + 0.10(43) = 40.2

Advantage: more reflective of the most recent occurrences.

Exponential Smoothing:

Weighted averaging method based on previous forecast plus a percentage (α) of the forecast error.

Next forecast = Previous forecast + α ( Actual – Previous forescast)

Where (Actual – Previous forecast) = forecast error, α is a percentage of the error.


15 | P a g e

Ft = Ft-1 + α (At-1 – Ft-1)

Where,

Ft = Forecast for period t

Ft-1 = Forecast for previous period

α = Smoothing constant

At-1 = Actual demand or sales for the previous period.

Example: If the previous forecast was 42 units, actual demand was 40 units, and α = 0.10. The new

forecast would be:

Ft = 42 + 0.10 (40-42) = 41.8

Then if the actual demand turns out to be 43, the next forecast would be:

Ft = 41.8 + 0.10 (43-41.8) = 41.92

Period Actual

Demand

Forecast Error Forecast Error

1 42 - - - -

2 40 42 -2 42.00 -2

3 43 41.8 1.2 41.20 1.8

4 40 41.92 -1.92 41.92 -1.92

5 41 41.73 -0.73 41.15 -0.15

6 39 41.66 -2.66 41.09 -2.09

7 46 41.39 4.61 40.25 5.75

8 44 41.85 2.15 42.55 1.45

9 45 42.07 2.93 43.13 1.87

α = 0.10 α = 0.40

Relation between the smoothing constant and response to error:

Exponential smoothing is one of the most widely used techniques in forecasting.

The quickness of the forecast adjustment to error is determined by the smoothing constant α.

The closer the value of α to zero, the slower the forecast will respond to error more smoothing.

The closer the value of α to 1.00, the greater the forecast will respond to error less smoothing.

Smoothing means that values are less variable smooth curve

To choose the best forecasting method Calculate forecasts and choose method with least MAD.

So, steps will be: make forecasting by various methods calculate MAD for each method

method with the least MAD is the best. (in exam question) Notice that

1. MA3 means start by calculating F4.

2. If F1 is not given assume that F1=A1 (if F1 is given, don’t use it in calculation of MAD in MA)

3. In calculation of MAD to compare accuracy, use same periods.


16 | P a g e

Chapter FOUR: Product and Service Design

New Challenges in OM:

Traditional concepts Modern concepts

1- Local or national focus Global focus

2- Batch shipment Just in time

3- Low bid purchasing Supply chain

4- Lengthy product life cycle rapid product development

5- Standard products mass customization

6- Job specialization empowered employee

1- To succeed in global competition, companies must design, develop, and introduce products faster.

2- When a product/service is designed: The detailed characteristics of the product/service are established.

The characteristic of the product/service directly affects how the product/service can be produced/ delivered.

How the product/service is produced/delivered, determines the design of the production/ delivery system.

3- What does product and service design do? Steps of product design: Translate customer wants and needs into product and service requirement (Marketing and

operation).

Refine existing products and/or service (Marketing). Develop new product and/or service (Marketing and operation) Formulate quality goals (Marketing and operation). Formulate cost target (Accounting ,finance , operations). Construct and test prototype (operations, marketing , engineering). Document specification.

4- Sources of Product/Service Innovation Customers: comments and suggestions of customers may give new ideas. Managers. Marketing. Operations. Engineering.

Research and Development (R&D) : Research is either Basic research:

research with objective of advancing state of knowledge about a subject, without any near term expectation of commercial application.

Usually carried out by government and large corporations. Applied research:

Research for objective of achieving commercial application.

Done by business organizations. Advantages or research:

1. Patents, potential licensing and royalties. 2. Early products are priced high due to temporary monopoly till competitors

bring their versions out. 3. Process research leads to more competitive advantages.

Development: converting the results of applied research into commercial

applications.

5- Reason for product or service design or redesign: 1. Economic (e.g. low demand , excessive warranty claims, need to reduce cost) 2. Political and liability or legal (e.g. government change , safety issue) 3. Competitive (new advertising / promotion, new product): introducing new products to

replace declining products (refer to product life cycle) 4. Cost (e.g. raw material ,labor, process) 5. Technological (e.g. in product component , process) 6. Avoid downsizing with development of new product. 7. Increase business growth and profit by attracting customers.


17 | P a g e

From 1725 New Ideas emerge only 25 Successful Products.

Objective of product and service design:

Objectives of product and service design differs somewhat.

The main focus of product and service design is customer satisfaction, while making a reasonable profit.

It essential for designer to understand what the customer want Quality is important priority in product and service design. Design for operations: Designers should take the organization capabilities to deliver and

produce a given product or service.

Manufacturability: The ease of fabrication and / or assembly.

Process Planning and Design System:

0200400600800

100012001400160018002000

ideas 1725 market 1000 functions, sp 500 prod sp. 100 success 25

new products

Input

1- Product

Product mix

Demand volume

Price

Competitive environment

2- Production

Resource available

Weakness and strength

Technology alternatives

3- Operation

Cost

Quality

Flexibility

Process planning and

design

1- Process type

Product focused

Process focused

2- Vertical integration

3- Process and product

design

4- Technology selection

5- Equipment studies

6- Facility layout

7- Production line

Output

Decisions about

1- facilities

Equipment

Building

2-Technology:

3- Manpower

Skills

Training

Management stuff


18 | P a g e

What is a product :

Need satisfy offering of an organization

Product concept

Concurrent engineering (or simultaneous development)

Concurrent engineering is the bringing of engineering, design, and manufacturing personnel

together in early phases of product design.

Advantages of concurrent engineering:

1. Manufacturing personnel are able to indentify production capacities, which help in

selection process. And reduce conflicts during production.

2. Shorter product development, which can be a key competitive advantage.

3. Early consideration of technical feasibility.

4. Emphasis on problem resolution in stead of conflict resolution.

Disadvantages of concurrent engineering:

1. Difficulty to overcome boundaries between design and manufacturing people.

2. Extra communication and flexibility are difficult to achieve.

The core

benefit

warranty

transportation

The product

core

The external

product

features

The broad

product

concept

delivery

maintenance

packing

size

brand quality


19 | P a g e

Trend in product design

1. Enhance customer satisfaction.

2. Reduce time to produce.

3. Reduce time to introduce new product.

4. 4-Environmental concern.

5. 5-Desidn product and services that are user friendly.

6. Designing product that use less material to cut down the cost.

Getting them to market

Speed creates competitive advantages.

Speed saves money.

Tools to improve speed:

o Autonomous design and development teams.

o Computer-aided design/computer-aided manufacturing (CAD/CAM)

- CAD product design using computer graphics.

o Simultaneous (concurrent) engineering.

Design and development process stages:

1. Need identification

2. New product idea development

3. Technical and economic initial feasibility studies:

o Determine the initial feasibility of establishing a project for developing the product.

o If initial feasibility studies are favorable, engineers prepare an initial prototype

design

4. Prototype design

o This design should exhibit the basic form, fit, and function of the final product.

o It will not necessarily be identical to the production model.

5. Perform testing of prototype:

o Performance testing and redesign of the prototype continues until this design-

test-redesign process produces a satisfactorily performing prototype.

6. Market sensing: Sensing/Evaluation and Economic Evaluation of the Prototype

o Accomplished by demonstrations to potential customers, market test, or market

surveys

7. If the response to the prototype is favorable, economic evaluation of the prototype is

performed to estimate production volume, costs, and profits.

8. If the economic evaluation is favorable, the project enters the production design phase.

a. Detailed production version.

Continuous

Interaction


20 | P a g e

b. Detailed feasibility study.

c. Detailed product proposal.

9. Management approval.

Reverser engineering and design for operation:

Reverse engineering: Is the dismantling and inspecting of competitor's product to

discover product improvement.

Design for operation: Taking into account the capabilities of organization in

designing goods and services

Manufacturability: The ease of fabrication and/or assembly.

1. Specification: The link between designer and operational personnel.

2. Tolerance: Minimum and maximum limits in dimension to allow the item to

function as designed. Example + or – of 0.5 mm in size is acceptable, beyond that

it is not acceptable.

3. Standardization: Reduce variety in products services or processes.

4. Simplification: Reduce or eliminate the complexity of a part or a product.

Standardization:

Standard products are produced in large quantities of identical items.

Standard processes deliver standard services, or deliver standard goods.

Examples of standardized products: Calculators and computers.

Standard services examples: Car wash.

Standardized products mean interchangeable parts.

Advantages of standardization:

1- Fewer parts to deal with inventory and manufacturing.

2- Reduce training cost and time.

3- More routine purchasing , handling and inspection procedure.

4- Order fillable from inventory.

5- Easier automation.

6- Need for fewer parts makes it easier to make perfect designs and control quality.

Disadvantages of standardization:

1- Design may be frozen with too many imperfection remaining

2- High cost of design change.

3- Decreased variety result in less consumer appeal.

Mass Customization : Mass customization is strategy of producing standardized good or service, but incorporating

some degree of customization.

Delayed differentiation:

Producing, but not quite completing a product or service, until customer preferences

are known.

Modular design

A form of standardization in which component parts are grouped into modules that

easily replaced and interchanged according to customer preferences.

Example: computers, modular parts can arranged in different configuration

according to customer needs.

Advantages:

1. Easy diagnosis of problems due to fewer parts.

2. Easy repair in cases of failure, by replacing the defective part.

3. Simple manufacturing and assembly.

4. Low training costs.

Disadvantages:

1. Decrease variety.


21 | P a g e

2. Inability to disassemble a module to replace one of its faulty parts; the

entire module must be replaced-usually at a higher cost.

Reliability Ability of product, part or system to perform its intended function under prescribed set of

conditions.

Failure

Situation in which product, part, or system, doesn't perform as intended.

Example:

Product A, has components B1, B2, and B3, with 98% reliability of each. What is the

reliability of the product A?

Answer: = 0.983

= approximately 94%

Normal Operating condition

The set of condition under which an item reliability is specified.

Improving Reliability

1- Component deign

2- System design

3- Backup and redundancy

4- Assembly technique

5- Testing

6- Preventive maintenance procedure

7- User education


22 | P a g e

Chapter 5: Capacity Planning

Capacity: the upper limit or ceiling of the load that an operating unit can handle.

- Kind of capacity depends on product.

- Capacity decisions are some times infrequent and some times regularly made.

- Rate and frequency of capacity decisions is governed by:

1. Stability of demand.

2. Rate of technology change.

3. Product design.

4. Competitive factors.

5. Type of product / service.

6. Importance of style change e.g. automobiles and clothing.

Capacity decisions are:

1. What kind of capacity?

2. How much needed?

3. When is needed?

Importance of capacity decisions:

Capacity decisions are among the most fundamental that managers make.

1. Capacity affects the ability of meeting demand.

2. Capacity affects operating cost.

3. Capacity is a major determinant of initial cost.

4. Capacity involves long-term commitment, as changing long term capacity is usually associated

with major costs.

5. Capacity affects competitiveness.

6. Capacity affects ease of management.

Defining and Measuring Capacity:

Capacity should be measured with tools that do not need updating, e.g. capacity in terms of $ will need

updating if prices changed.

Capacity may be measured in terms of:

1. Input: example: hospital beds, passenger seats and machine hours.

2. Output: example: 100 refrigerators / days, 80 freezers/ days.

Measuring capacity should be tailored to the situation.

Definitions of Capacity:

Design capacity: maximum output that can possibly be attained.

Effective capacity: Less than design capacity (machine maintenance, scheduling, quality factors)

Actual output: less than (or equals) effective capacity (machine breakdown, break time,

absenteeism, material shortage etc. (design > effective > actual)

Efficiency: Ratio of actual output to effective capacity

= Actual output / effective capacity

= actual output/ standard output

= actual time / standard time

Utilization = Actual output / design capacity

= time used / total time available

Sustainable practical capacity: the greatest level of output that a plant can maintain.

o within the framework of a realistic work schedule

o taking account of normal downtime

o assuming sufficient availability of inputs to operate the machinery and equipment in place

Capacity Cushion: an additional amount of capacity added onto the expected demand to allow for:

o Greater than expected demand.

o Demand during peak demand seasons.

o Lower production costs.

o Product and volume flexibility.

o Improved quality of products and services.

Example: design capacity 50 trucks, effective capacity 40 trucks, actual output 36 trucks.

Efficiency= Actual output / effective capacity = 36/40 = 90%

Utilization = Actual output / design capacity = 36/ 50 = 72%

The more the effective capacity, the more the utilization


23 | P a g e

NB: Disadvantages of increasing output 1. Increased variable cost , 2. Increased inventory cost,

3. Increase of waiting time in bottleneck conditions.

Factors affecting effective capacity:

1. Facilities factors:

- Design and size.

- Provision for expansion.

- Location factors:

o Transportation costs

o Distance from market

o Labor supply

o Energy source

- Layout

- Environmental factors:

o Lighting

o Heating

o Ventilation

2. Product / Service factors:

- Similar items more capacity, example: restaurants with limited menu faster meals >

extensive menu.

3. Process factors:

- Quantity capabilities of process

- Quality capabilities, less than standard quality more inspection time decreased capacity.

4. Human factors:

- Job content, job design.

- Training, skills, experience.

- Compensation, motivation, and learning rates.

- Absenteeism, labor turnover.

5. Operational factors:

- Scheduling.

- Materials management: inventory stocking (shortage of even one component will decrease

capacity).

- Delivery and acceptability of purchased material.

- Quality control procedures.

- Maintenance policy and equipment breakdown.

6. External factors:

- Product standards, increasing minimum quality standards restrict capacity.

- Safety an environmental regulations.

- Labor unions limit the number of working hours.

Determining Capacity Requirements:

Long term considerations: such as facility size

Short term considerations: such as fluctuation of demand (growth, decline, cyclical, stable)

Steps to determine long term capacity:

1. Estimate the capacity of the present facilities.

2. Forecasting of demand.

3. Identify and analyze sources of capacity to meet these needs.

4. Select one of the capacity alternatives Convert forecasts to capacity.

Trend considerations in capacity:

1. How long persist

2. Slope of the trend

Cycle considerations (variations more extended than seasonal variations):

1. Length of cycle

2. Amplitude of cycle.

Short term capacity considerations:

1. Annual demand fluctuations

2. Seasonal Variations: Year, Month, week, day

Marketing can supply vital info to operators for both long term and short term.


24 | P a g e

Developing Capacity Alternatives:

To enhance capacity management:

1. Design Flexibility into systems:

- Flexibility is essential when future expansion is expected. Example: restaurants design

considering future expansion in water, power, and waste disposal to minimize required

modifications.

- Flexibility allows an organization to be responsive.

2. Differentiate between new and mature products and services:

- Mature products are more predictable in terms of capacity requirements less risk in choosing

capacity. Limited life span of a product may necessitate finding an alternative use of capacity.

- New products carry higher risk due uncertainty about demand quantity and duration.

3. Take a “Big picture” approach to capacity changes:

- Considering all related parts of the system when developing capacity alternatives. Example:

Increasing number of rooms in a motel increase demand for parking, food, entertainment and

house keeping should be considered (the big picture)

4. Prepare to deal with capacity “Chunks”

- Capacity increase in large chunks rather than smooth increments

- If the required capacity of products is 55 units/ hour, and one machine capacity is 40 units/hour.

We will either have one machine with 15 units’ shortage/ hour, or 2 machines with 25 units

excess/hour. (not possible to increase capacity by single units; 41 42 43 etc)

5. Attempt to smooth out capacity requirements:

- Demand variability takes place in random variations and in seasonal variations

- Seasonal variations are easier to handle as they are more predictable.

- Demand variations will lead to alternation between overutilization and underutilization.

- Variability in demand can be a problem to managers: as increasing capacity to meet over

utilization (by increasing facility size and workforce), will increase fixed costs and decrease

flexibility.

- Response to higher than normal demand is by:

o Using overtime work.

o Using temporary work during overutilization periods.

o Replace the drawn stock (sold during high demand) during periods of low demand.

6. Identify optimal operating level:

- Optimal level of operation lowest cost per output unit

- Larger or smaller rates of output higher unit cost.

- Explanation of the curve:

o Economies of scale:

Cost per unit is at first high due to low quantity and relatively high fixed cost.

Cost per unit decreases from C to C1 when quantity increases from Q to Q2.

C1 is the optimal cost – Q2 is optimal quantity, reduction in cost is due to:

http://en.wikipedia.org/wiki/File:Economies_of_scale.PNG


25 | P a g e

1. Fixed cost is absorbed by optimal quantity.

2. Low setup cost due to longer production period.

3. Less material scrap.

o Diseconomies of scale:

As Quantity further increases beyond Q2, unit cost will increase

Cost increase is due to:

1. Workers fatigue

2. Increased overtime

3. Damaged goods

4. Equipment breakdown

5. Loss of flexibility

6. Difficulty in coordinating operations

Planning Service Capacity:

Important factors:

1. The need to be located near customers (in hotels, capacity and location are closely tied).

2. Variability in service systems is more than production systems.

3. Inability to store services (production and consumption at same time). Speed of delivery is a

major concern in services capacity planning.

4. Volatility of demand. Banks experience higher volume of demand in certain days of the week. To

cope with demand volatility, managers may consider:

A. Capacity management:

1. Hiring extra workers.

2. Outsourcing some or all of a service.

3. Change equipment and process.

4. Change methods.

5. Redesign product/service for faster processing.

B. Demand management: A strategy used to pricing promotions to shift demand from

peak periods to slower periods. This is through:

1. Pricing, discounts.

2. Promotions and similar tactics.

3. Change lead times (e.g. backorders)

4. Offer complimentary products.

Calculating processing requirements (e.g. number of machines):

To make this calculation one must have:

1. Reasonably accurate demand forecast

2. Standard processing time per unit

3. Number of workdays per year

4. Number of shifts and hours per shift.

Example 1:

A department works one 8 hours shift, 250 days a year, and has these figures:

Product Annual Demand Standard Processing Processing Time

Time per unit (Hr) Needed (Hr)=Qx processing T

1 400 5.0 2000

2 300 8.0 2400

3 700 2.0 1400

5800 hrs/year

Hours available = 250 x 8 = 2000 hours per year

No of machines required = 5800 / 2000 = 2.9 machines (= 3 Machines)

Example 2:

Product A

Demand 95,000

Defect rate 5%

Processes X1 X2

Processing time 4 min 5 min

Setup time/batch 10 hrs 5 hrs

Batch size 20,000


26 | P a g e

Machine efficiency 90%

Labor efficiency 80%

Shifts 3

Hours/shift 8

Working days/ year 250

How many machines needed?

Solution:

1. Define production quantity:

Production quantity = Demand = 95,000 = 100,000

1 - Defect rate 1- 0.05

2. Calculate gross time load = (Q*processing time) + total setup time

Where total setup time = demand / batch size * setup time per batch

For X1 = 100,000*4/60 + (100,000/20,000)*10 = 6667 hrs + 50 hrs = 6717 hrs

For X2 = 100,000 + 5/60 + (100,000/20,000)*5 = 8333 hrs + 25 hrs = 8358 hrs

3. Calculate Actual time load:

Actual time= Gross load .

Machine efficiency rate * worker efficiency

For X1 = 6717 / 90% * 80% = 9329 hrs

For X2 = 8358 / 90% * 80% = 11608 hrs

4. Number of machines:

Number of Machines = actual load / total available time

Total available time = 3*8*250 = 6000

X1 = 9329 / 6000 = 1.55 (actual = 2)

X2 = 11608 / 6000 = 1.9 (actual = 2)

Evaluating Capacity Alternatives:

1. Cost-volume analysis

2. Financial analysis

3. Decision Theory

4. Waiting line analysis

1- Cost-Volume Analysis:

Fixed Cost: remains constant regardless of the volume produced. (Rent, manager’s salaries, etc)

Variable cost: vary directly with volume output. VC = Q x v (Q: qty, v: variable cost per unit, material

cost).

Total cost: TC = FC + VC (TC: total cost, FC: fixed cost, VC: variable cost)

Total Revenue: TR = R x Q (TR: total revenue, R: revenue per unit)

Break Even Point (BEP): The point of output at which total cost and total revenues are equal. When

Q> BEP Profit. When Q<BEP loss.

P=TR-TC= R x Q – {FC +(v x Q)} (P: Total profit, v: variable cost per unit) by rearranging equation:

P= Q(R – v) – FC

Q = P + FC

R – v

At BEP, P = 0, so

QBEP = FC

R - v

Example:

A restaurant is planning to

Serve a pie, total variable cost

= $2, which will require leasing

Equipment for $6000/month,

Retail is $7 per pie. A) what is

the BEP ? B) What is the profit

or loss if 1000 pie is sold every month? C) how many pies should be sold to realize profit of

$4000/month? Answer:

A) QBEP= FC / R- v = 6000/ 7-2 =1200 pie / month


27 | P a g e

B) For Q=1000 , P = Q(R – v) – FC = 1000(7-2) – 6000 = -1000 $ (loss)

C) P=4000, so Q = (P+FC) / (R-v) = (4000+6000) / (7-2) = 2000 pies

Step costs:

Costs that increase stepwise as potential volume increases. For example, adding new machine will

increase the fixed cost.

Step cost may lead to multiple break even quantities, one for each range.

Operating Leverage (OL):

The relationship between change in profit and change in demand.

OL = Revenues – VC

Revenues - TC

Example:

Q = 5,000,000, FC = 20 mil, VC= 75 mil, TC = 95 mil, Rev = 100 mil., profit = 5 mil.

OL = 100-75 / 100-95 = 25/5 = 5

This means that any change in demand of 10%, will lead to change of 50% on the profit.

This is a decision tool according to market conditions.

In stable market conditions, high OL is preferred.

Example:

We have 2 system designs, A and B:

A B

Annual fixed cost 20,000,000 40,000,000

Variable cost / unit 15 10

Selling price 20 20

1. At what level the 2 systems are indifferent (equal)?

2. What is the minimum production quantity?

3. Which of the 2 designs is preferred, if the production will start in 2009 with 2,000,000

units, and increase by 40% annually?

Answer: (000,000)

A B Total

Rev

Profit

Q FC TVC TC FC TVC TC A B

Zero 20 0 20 40 0 40 0 -20 -40

1,000,000 20 15 35 40 10 50 20 -15 -30

2,000,000 20 30 50 40 20 60 40 -10 -20

4,000,000 20 60 80 40 40 80 80 0 0

8,000,000 20 120 140 40 80 120 160 20 40

1. Systems are indifferent at the point where TCA = TCB,, so:

FC a + (VC a x Q) = FC b + (VC b X Q)

20,000,000 + 15 Q = 40,000,000 + 10Q

15 Q – 10 Q = 40,000,000 – 20,000,000

5 Q = 20,000,000

Q = 4,000,000

Systems are indifferent at level of production of 4,000,000 units/month.

2. Break Even Point is at level of production of 4,000,000 units / month (profit is zero)


28 | P a g e

3. A is better in Q less than 4,000,000 – B is better at Q > 4,000,000. (in 2009 , Q is 2 mil A,

2010 Q is 2,800,000 A, in 2011 Q is 3,920,000 A, and in 2012 Q is 5,488,000 B)

Assumptions to be satisfied to use cost-volume analysis

1. One product is involved

2. Everything produced can be sold.

3. Constant variable cost per unit.

4. Constant fixed cost. (or they are step changed)

5. Constant revenue per unit.

6. Revenue per unit is more than variable cost per unit.

If a proposal looks attractive using the cost volume analysis, the next step would to develop cash flow

models to see how it fares with addition of time and more flexible cost functions.

2- Financial Analysis:

Cash flow: difference between cash received from sales and other sources and cash outflow for labor,

material, overhead, and taxes.

Four most commonly used methods for financial analysis are:

1. Payback: the length of time taken to return the original cost of investment. It ignores the time

value of money. (in terms of time, e.g. years)

2. Present value (PV): summarizes the initial cost of investment, estimated annual cash flow, and

expected return value in a single value called the equivalent current value, taking in account the

time value of money (interest rate). (in terms of value, $)

3. Internal rate of return: summarizes the initial cost, expected annual cash flows, and estimated

future return, for an investment proposal as an equivalent interest rate. (in terms of percent)

4. Profitability index: compared with average of industry. (Ratio)

Financial analysis techniques are appropriate when there is a high degree of certainty, associated with

estimates of future cash flows. When risk is high, or there is uncertainty decision theory is often

applied.

3- Decision Tree:

It is a helpful tool for financial comparison of alternatives.

For every decision there are alternatives.

Example: Choosing from the three alternatives A, B, and C. Each has various outcomes with different

probability levels:

Outcome Low Med High

A 10 50 90

B -120 25 200

C 20 40 60

Probability 0.1 0.5 0.4

What is the best decision?

0

20

40

60

80

100

120

140

160

180

0 1 2 3 4 5 6 7 8

System A

System B

Sales

FC - A

FC- B


29 | P a g e

A up 0.4 x 90

Mid 0.5 x 50

Low 0.1 x 10

B up 0.4 x 200

Decision point Mid 0.5 x 25

Low 0.1 x -120

C up 0.4 x 60

Mid 0.5 x 40

Low 0.1 x 20

A : (90 x 0.4) + (50 x .5) + (10 x 0.1) = 62

B : (200 x 0.4) + (25 x .5) + (-120 x 0.1) = 80.5

C : (60 x 0.4) + (40 x .5) + (20 x 0.1) = 46

Best decision is B

4- Waiting Line Analysis:

Lines are symptoms of bottle neck operations

Analysis is helpful to choose a capacity level that will be cost effective, through balancing:

a. The cost of having the customers wait, and

b. The cost of providing additional capacity.

Operations strategy:

- Capacity decisions are very important in making the operations strategy.

- Flexibility is a key issue in capacity decisions.

- Bottleneck management is essential to increase effective capacity.

- Non Bottleneck operations scheduling to achieve maximum utilization of bottleneck operations.

Steps of capacity planning: (capacity planning process)

Forecast Demand

Compute rated capacity

Compute the needed capacity

Develop alternative plans

Select best capacity plan

Evaluate capacity plans

Quantitative factors: e.g.

cost

Qualitative factors e.g. skills


30 | P a g e

Chapter 6: Process Selection and Facility Layout

Process selection: the way production of goods or services is organized.

Process selection is used when:

- New products and services are being planned.

- Technological changes in equipment

It has major implication for:

- Capacity planning

- Layout of facilities

- Equipment

- Design of work systems

Aspects of Process strategy:

1. Make or buy decisions

2. Capital intensity.

3. Process flexibility: ability to adjust in response to:

a. Change in processing requirements

b. Change in product or service design

c. Changes in volume

d. Change in technology

Make or buy decisions:

Buy decision lessen or eliminate the need for process selection.

Factors to consider in “make or buy” decisions:

1. Available capacity.

2. Expertise.

3. Quality considerations.

4. The nature of demand.

5. Cost.

Process Selection

3 primary questions:

1. How much variety in products or services will the system handle?

2. What degree of equipment flexibility?

3. What is the expected volume of output?

Forecasting Capacity planning

Product and service design Process selection Facilities and equipment

Technological change Layout

Work design

Process types:

1. Job shop:

- Small scale

- Used with small volume high variety of goods and services will be needed.

- Processing is intermittent, work shift from one small job to the next.

- Characteristics:

o High flexibility of equipment

o Skilled workers.

- Examples: tool shop that produces one-of-a-kind tools, and veterinarian office.

2. Batch:

- Moderate volume and moderate variety

- Equipment less flexible that job shop

- Processing intermittent

- Less experience workers

- Example: bakeries (make bread in batches), airlines (carry planeloads “batches” of people).

3. Repetitive:

- Higher volume of more standardized goods or services.

- Standardized output means only slight flexibility of equipment is needed.


31 | P a g e

- Low skills of workers

- Examples: production lines and assembly lines for automobiles, televisions, computers. Services

as automatic car wash and cafeteria lines.

4. Continuous:

- Very high volume with highly standardized output.

- Almost no variety and no equipment flexibility.

- Low skills of workers

- Examples: products; petroleum products, steel, and sugar. Services: supplying electricity and

internet.

5. Project:

- Non routine work

- Unique set of objectives to be accomplished in a limited time frame.

- Examples: launching a new product or service, making a motion picture or publishing a book.

Important notes:

Product Life Cycle: should be considered in choosing process type. PLC begins with low volume (e.g.

job shop), and increases by time (e.g. batch)

Hybrid processes: process that have elements of other process types embedded in them, examples:

o Companies operating on repetitive mode may have job shops to make new parts for

equipment that fails.

o Volume increase may lead to develop job shop batch repetitive, resulting that some

operations will be in job shop and others in batch or repetitive modes.

Automation:

Machinery that has sensing and control devices that enables it to operate automatically.

- Automated services are becoming increasingly important. Examples: email, ATM, FedEx package

sorting.

- Advantages of automation over human labor:

1. Low variability, task performed the same way, in the same amount of time.

2. Reduction of variable cost.

3. Improve quality and competitiveness.

- Disadvantages of automation:

1. It can be costly

2. Less flexible than human labor

3. Adverse effect on morale and productivity of workers for threats to loose their jobs.

- Automation decisions:

1. Automate or not?

2. Degree of automation?

3. Degree of automation integration into production system?

4. Effect on cost and flexibility?

5. How much fitting with overall strategic priorities?

- Types of automation:

1. Fixed automation

2. Programmable automation

3. Flexible automation

1. Fixed automation:

- Most rigid of the 3 types

- Introduced by Ford Motor Company in early 1900s

- Characteristics: High cost specialized equipment for fixed sequence of operations.

- Advantages: low cost and high volume.

- Disadvantage: minimal variety and high cost of making major changes.

2. Programmable automation

- Opposite of fixed automation

- Characteristics: High cost , general purpose equipment controlled by computer program that

provides sequence and specific details of operations.

- Advantages: Easy change of process through computer program.

- Suitable for low volume, small batches, and high variety


32 | P a g e

- Disadvantage: downtime while changing program.

- Examples: numerical control machines N/C

Computer aided manufacturing (CAM):

- It is the use of computer in process control.

- Numerically controlled (N/C) machines: machines that perform operations through

following mathematical processing instructions.

CNC (computerized numerical control) individual machines that have their own

computers.

DNC (direct numerical control) one computer controls a number of N/C machines.

- Suitable for:

o small batches of where parts are processed frequently

o Parts geometry in complex

o Close tolerance required, mistakes are costly.

o Frequent change of design

- Limitations:

o Higher skill labor

o Inability of machines to detect tool wear and material variation.

Robot: A machine consisting of 3 parts; mechanical arm, a power supply, and a controller.

- Most robots are stationery except for their mobile arms

- Can handle wide variety of tasks: welding, assembly, loading, unloading, painting, and

testing.

- Carry dirty and hard tasks.

- Types of robots: according to complexity

o Robots that follow simple set of instructions

o Programmable robots

o Robots that follow computer instructions

o Robots that can recognize objects and make simple decisions.

- According to movement:

o Point to point robots

o Continuous path robots

- According to power:

o Pneumatic (air driven by compressed air)

o Hydraulic (fluid under pressure)

o Electronic

3. Flexible automation

- Uses equipment that are more customized than programmable automation.

- Needs less changeover time, continuous operation with product variety, without the need to

produce in batches.

- Formats of flexible automation:

a. Manufacturing cell:

- One or few computer controlled machines that produce wide variety of parts.

b. Flexible manufacturing system (FMS):

- A group of machines designed to handle intermittent processing requirements and produce

variety of similar products.

c. Computer integrated manufacturing (CIM)

- A system for linking a broad range of manufacturing activities through an integrating

computer system.

Service Process Design

- It focuses on service delivery system. Examples: mail service, health care systems,

transportation systems, and educational systems.

- Creation of service and delivery of service occur at the same time.

- High degree of customer contact.

- Service blueprint: a method used in service design to describe and analyze a proposed service.

- Steps of service blue printing:

1. Establish boundaries for process and decide on the level of detail that will be needed.

2. Identify the steps involved and describe them.


33 | P a g e

3. Prepare a flowchart of major process steps.

4. Identify potential failure points.

5. Establish time frame for service execution:

6. Analyze profitability.

Management of Technology

- Benefits of technology: competitive advantage, improved quality, increased productivity,

reduced costs, reduced production and service times, and increased customer satisfaction.

- Risks of technology: reduced flexibility, increased fixed costs, short term disruptions while the

new technology is installed, training costs, integration difficulties with current systems, and

getting locked to a technology that is outdated.

- To manage technology:

1. On the short run, managers must work with technical experts, ask questions to

understand the benefits and risks of technology to make decisions themselves.

2. On the long run: managers must acquire managerial and technical skills and expertise.

- Technology and cost:

1. Technology has an impact on cost structure of the organization. Fixed cost increases,

while variable cost decreases, which is particularly burdensome during periods of slow

demand.

2. Technology decisions are sometimes long term commitments, and should be carefully

taken.

Three ingredients of technology:

1. Hardware

2. Software

3. People ware

HW= hardware, SW = software, PW=people ware

Automation Manual Process

Facility Layout

- Refers to the configuration of departments, work centers, and equipment, with particular

emphasis on movement of work (customers or materials) through the system.

- Importance of layout decisions:

1. They require substantial investments of money and efforts.

2. Involves long term commitment which makes mistakes difficult to overcome.

3. They have a significant impact on the cost and efficiency of operations.

- Reasons of redesign of layouts:

1. Introduction of new products and services.

2. Inefficient operations (bottlenecks, high cost).

3. Accidents or safety hazards.

4. Change in design of products and services.

5. Change in volume or mix of outputs.

6. Changes in methods or equipment.

7. Changes in environmental and legal requirements.

8. Morale problems.

1. Product Layouts:

- Layout that uses standardized processing operations to achieve smooth, rapid, high volume flow.

HW

SW

PW


34 | P a g e

- Work is divided into series of standardized tasks, permitting specialization of both labor and

equipment.

- No side tracking, no back tracking.

- In manufacturing environment: the lines are referred to as production lines or assembly lines.

- Preventive maintenance is the periodic inspection and replacement of worn parts or those with

high failure rates to reduce the probability of breakdowns during operations.

- Management must take measures to facilitate quick repair:

1. Maintaining an inventory of equipment spare parts

2. Repair personnel available to provide quick repair

- Advantages of product layout:

1. High rate of output (high volume)

2. Low unit cost due to high volume

3. Reduction of training cost through labor specialization.

4. Low material handling cost per unit.

5. High utilization of labor and equipment.

6. Routing and scheduling are established in the initial design of the system.

7. Accounting, purchasing, and inventory control, are fairly routine.

- Disadvantages of product layout:

1. Intensive division of labor usually creates dull repetitive jobs morale problems and

repetitive stress.

2. Poorly skilled workers are less interested in maintain the equipment or in the quality of

output.

3. Inflexibility in response to change in volume, change in product or process design.

4. System highly susceptible to shutdowns (equipment breakdown or excessive

absenteeism)

5. Preventive maintenance is necessary.

6. Incentive plans tied to individual output are impractical.

U-shaped Layouts

Advantages:

1. More compact, requires approximately half the length of the straight line.

2. Avoids the disadvantage of interference with cross-travel of workers and vehicles in

cases of straight lines.

3. Increased communications among workers thus facilitating teamwork.

4. Increased flexibility of work assignments as workers are able to handle stations on both

sides of the line.

5. Minimize material handling; finished goods leave the line at the same point of materials

input.

Disadvantages:

1. Entry and exit points may be at opposite sides of the building.

2. Noise and contamination in gathered operations.

3. Automated lines have less need for teamwork and communications.

2. Process Layouts

- Process Layouts are designed to handle varied processing requirements.

- System is built around process.

- Variety of jobs requires frequent adjustment of equipment intermittent processing

- Example: machine shop, with separate departments for milling, grinding, drilling etc.

- Items are moved in batches from job to job according to process sequence.

- Material handling equipment are needed (forklifts, jeeps)

- Use of general purpose equipment provides flexibility to handle wide range of processing

requirements.

- Workers are usually skilled or semiskilled.

- In services, examples are: hospitals, universities, airlines, public libraries and banks.

- Hospitals have departments; surgery, emergency, psychiatric et, universities have schools.

- Advantages:

1. Ability to handle variety of processing requirements.

2. Equipments are arranged by type rather than by process, less risk of shutdown.

3. Less interdependence between successive operations than with product layout.

4. Low cost of general purpose equipment.


35 | P a g e

5. Lower initial capital investment. Lower maintenance cost.

6. It is possible to use individual incentive system with workers.

- Disadvantages:

1. Continuous scheduling and routing to accommodate the variety of processing demand.

2. Inefficient material handling with higher cost of per unit handling.

3. High in process inventories due to batch processing.

4. Low equipment utilization rate.

5. Higher supervisory costs than with product layout.

6. Highly trained personnel.

7. Lower volume and higher unit cost than product layouts.

8. More difficult production planning.

9. Special attention needed for each customer or product (machine setup, routing, scheduling)

10. Accounting, inventory control and purchasing are much more involved than product layout.

3. Fixed Position Layouts

- Layouts in which products or project remains stationery, and workers materials and equipment

are moved as needed.

- Used with high weight, size, and bulk products.

- Examples: large construction projects, shipbuilding, large aircrafts manufacturing, drilling for oil,

road building, and space mission rockets.

- Lack of storage space.

- Difficulty in coordination of activities higher administration burden.

- Material handling resembles, process-type, variable-path, general-purpose equipment.

4. Combination Layouts

- Combination of the other 3 types of layouts.

- Examples:

1. Supermarkets layouts are process layouts, yet we find roller type conveyors in

stockrooms and belt type conveyors at cash registers.

2. Hospitals are essentially process layouts, yet frequently patient care involves fixed

position approach, in which nurses doctors, medicine and equipment are brought to the

patient.

3. Faulty output in products layouts, require offline reworking with customized processing.

5. Cellular Layouts:

Cellular manufacturing:

- Layout in which machines are grouped into a cell that can process items with similar processing

requirements.

- Grouping is determined by the operations and by part families that require similar processing.

- It is a miniature form of product layout; all parts pass through the same route, although minor

variations take place (e.g. skipping an operation).

- Advantages: faster processing, less material handling, less work-in-process inventory, and reduced

setup time.

Group technology

- The grouping into part families of items with similar design, or manufacturing characteristics.

- Design characteristics include size, shape and function.

- Manufacturing characteristics include type and sequence of operations required.

- No side, no back tracking.

- Design families may be different from processing families.

- The conversion to group technology and cellular technology requires a systematic analysis of parts

to identify the part families. This is done by:

1. Visual inspection: least accurate and least costly and simplest to perform.

2. Examination of design and production data: more accurate but much more time

consuming. Most commonly used method of analysis.

3. Production flow analysis: has a manufacturing perspective, not a design perspective to

find out similarities.

- Conversion may require costly realignment of equipment.

- Managers must weigh the benefits of a switch from a process layout to cellular one against the cost

of moving equipment and time needed for grouping.


36 | P a g e

- Advantages of group technology:

1. Process change over simplified.

2. Reduced task variability.

3. More direct routes through the system.

4. Improved quality control.

5. Simple production planning and control.

6. Easier automation.

- Disadvantage:

1. Duplication of resources.

2. Lower utilization of facilities.

3. Inefficient processing of items that don’t fit into a family.

Flexible manufacturing systems (FMS)

- More fully automated versions of cellular manufacturing.

- A computer controls the transfer of parts from machine to machine and start of work at each

machine.

- Expensive systems but have the advantages of product layouts with small batch sizes and much

greater flexibility; it works with little or no human intervention.

Other service layouts

Warehouse and storage layouts, Retail layouts, Office layouts

Deciding among processing alternatives:

1. Batch size and product service variety

Production line

Dedicated line

Production line with batches

Group Technology/Cellular manufacturing

Process focus

Common purpose machines

Degree of variety

2. Capital requirement ( to cover the cost of fixed assets)

3. Economic analysis.

a. Cost function of alternative process (economies and diseconomies of

scale) – example page 6

b. Break even analysis

c. Financial analysis

Designing Product Layouts: Line Balancing

- Assembly lines are either long or short

- Automobile lines are examples of long lines

- Tasks are grouped into manageable bundles and assigned to workstations staffed by one or two

operators

- Faster workstations will experience periodic waits for outputs from slower stations.

- Line balancing: is the process of assigning tasks to workstations in such a way that workstations

have approximately equal time requirements.

Bat

ch s

ize


37 | P a g e

- Goal of time balancing is to minimize idle time along the line high utilization of labor and

equipment.

- Unbalance lines inefficient utilization of labor and equipment. It created morale problems when

workers of slow stations must work continuously.

Example:

Machine 1 2 3 4

Processing T/unit 10 min 30 min 5 min 20 min

Units/ hr 6 2 12 3

How many units per hour will be produced by this line?

Answer: only 2 units, because machine 2 is a bottleneck.

What is the UTR of this line?

UTR = time used/ time available= 20 min + 60 +10+40/ (4 machines *60 min.) = 130/240 =54%

How to solve the bottleneck situation?

Highest output is machine 3=12 units/hr, balance the line to make every individual machine output=12

No. of machines 2 6 1 4

Units/ hr 12 12 12 12

Production of line is 12 units/ hour. UTR = 100%

- Cycle Time (CT): the maximum time allowed at each workstation to complete its set of tasks on a

unit.

- Cycle time is the output rate of a line. If the CT = 2 min., units will come off at the end of the line

at a rate of one every 2 min.

- Task: minimum work element that has a start and end points.

Example: a fabrication work can be divided to 5 tasks with the task time and precedence:

0.1 min 0.7 min 1.0 min 0.5 min 0.2 min

Minimum cycle time: equal to the longest task time = 1.0 min. it applies if we have 5 workstations

Maximum cycle time equal to the sum of the task times = 0.1 + 0.7+1.0+0.5+0.2=2.5 min. It applies

if the all tasks were performed at a single workstation.

Output capacity = Operating Time

Cycle Time

OT= operating time per day (if line will operate for hours, OT = 480 min.)

CT= Cycle time

With cycle time of 1.0 min, output will be 480 min per day /1.0 min per unit = 480 units per day

With cycle time of 2.5 min, output will be 480 min per day /2.5 min per unit = 192 units per day

Assuming that no parallel activities (two lines), the output level selected for the line must fall in the

range of 192 units per day, to 480 units per day.

Desired output rate can be used to calculi the Cycle time:

CT = Operating Time

Demand

Suppose that Desired output rate is 480 units per min., cycle time is:

CT= 480 min. per day / 480 units per day = 1 min. per unit

Number of workstations that will be needed is a function of:

Desired output rate and the ability to combine elemental tasks into workstations

Theoretical minimum number of workstations (Nmin)= sum of task times / cycle time

Nmin= 2.5 min per unit / 1 min per unit = 2.5 stations

2.5 stations is not feasible, by rounding up (because 2.5 is the minimum), so:

Actual number of stations = 3

Precedence diagram: a diagram that shows elemental tasks and their precedence (sequential)

requirements.


38 | P a g e

Line balancing techniques:

- Balancing involves assigning task to workstations

- Heuristic (intuitive) rules for line balancing:

1. Incremental Utilization (IN): used if one or more tasks are equal to, or larger than CT.

2. Longest task time (LTT): used if no tasks are longer than CT (all tasks are less or equal

to CT)

Example:

Tasks Task time (min) predecessor

Demand Rate: 25/hr

Production time: 50 min /hr

Suggest a production line

deign, and evaluate.

A 10 -

B 11 A

C 5 B

D 4 B

E 12 A

F 3 C&D

G 7 F

H 11 E

I 3 G&H

Solution:

1- Draw precedence relationship:

C

A B F G

D I

E H

2- Calculate the cycle time:

CT = OT = 50/25 = 2 min.

D

3- Select heuristic: All tasks are larger than 2 min Incremental Utilization (IN):

Work

Center

Tasks Time

(min)

Theoretical number of

workstations (task/ct)

Actual number of

workstations UTR

1 A 10 10/2=5 5 5/5 *100= 100%

2 B

B + E

B + E +C

11

23

28

11/2 = 5.5

11.5

14

6

12

14

5.5/6 = 91.7%

11.5/12 = 95.8%

14/14 = 100%

3 D 4 2 2 100%

4 F

F +G

3

10

1.5

5

2

5

75%

100%

5 H

H + I

11

14

5.5

7

6

7

91.7%

100%

Summary

WC 1 2 3 4 5

Tasks A B+E+C D F+G H+I

Theoretical WS 5 14 2 5 7 Total 33

Actual WS 5 14 2 5 7 Total 33

UTR = 33/33 = 100%, this is the optimal solution

In this example, if the demand rate was changed to be 4.166 units/ hr So,


39 | P a g e

In the example: If the CT = 50/ 4.166= 12 minutes, so:

According to rules, no task is more than 12 min, so we use Longest task time (LTT):

Largest task time:

Workstation Candidate Tasks Assigned task Assigned time Idle time

1 A A 10 12-10=2

2 B or E E 12 12-12 = 0

3 B or H B 11 1

4 C, D, or H H 11 1

5 C or D

D

F

C

D

F

5

9 (5+4)

12 (9+3)

7

3

0

6 G

I

G

I

7

10 (7+3)

5

2

Summary

WS 1 2 3 4 5 6

Task A E B H C+D+F G+I

Assigned time 10 12 11 11 12 10

UTR = total = 66 min / 6 WS * 12min = 66/72 = 91.6%


40 | P a g e

Last lecture Dr. Samir

Planning

3 systems of planning:

1. Traditional (pond-drainage) system.

2. Push strategy

3. Pull systems

4. Focusing on bottlenecks

1. Traditional (pond-drainage) system.

Keep inventory is the main focus

Stock has: minimum, maximum, batch, reorder point.

Characteristics:

1. Emphasis on inventory

2. Little information passing through the system

3. Batch size = max- min

4. Average = max + min / 2

2. Push strategy:

Called production time or release date

Date is defined and planning starts based on the release date.

3. Pull system

No prod, no purchasing unless an order is received from customer.

Order purchase production

Stock = zero inventory

Raw material = nearly zero

Pro rate = usage rate

4. Bottlenecks system


41 | P a g e

Sales forecast

Market demand

Rough cut capacity

Resource requirement planning

no Can we make these resources available?

yes

Master production schedule

MPS

Material requirement planning

MRP

No Capacity available?

Capacity planning

yes Problem?

no

Detailed scheduling


42 | P a g e

Aggregate planning:

2 alternatives to deal with Fluctuation of demand:

1. Follow the demand

- Example : market demand is 100 production = 100

- Demand goes down production goes down

- Through hire and fire

- Cost at hiring (training), and at firing (for compensation).

2. Leveling capacity: buffering by inventory

o When peak is more than capacity, consume the stock accumulated during slow demand.

o Buffer with overtime, and subcontracting.

Example:

A company is preparing an aggregate production plan:

- No of working days per quarter = 62 days

- No of standard hours to produce one unit = 1.6 hrs

- No. of hours per day = 8 hrs

- Demand for 4 quarters: 14500, 22800, 34600, 30200 respectively.

- Cost of hiring one worker = $600

- Cost of laying off one worker = $400

- Inventory carrying cost per unit per year = $5

- No of workers at end of Q4 = 98

Decide between leveling capacity and matching demand strategies


43 | P a g e

Solution

1- Matching the demand

Q Demand Planned production No. of workers H F Cost

1 14500 14500 =1.6*14500/62*8=47 51 =51*400=20400

2 22800 22800 74 27 =27*600=16200

3 34600 34600 112 38 = 38*600=22800

4 30700 30700 98 14 =14*400=5600

$65000

2- Leveling the capacity:

Q Demand Production rate Stock change Inv. beginning Inv. End Average

1 14500 25525 11025 Zero 11025 5512.5

2 22800 25525 2725 11025 13750 12387.5

3 34600 25525 (9075) 13750 4675 9212.5

4 30700 25525 (4675) 4675 zero 2375

102100 29450

Stock is at zero level at the end of the last quarter in which demand is more than production.

Average inventory = 29450/4 = 7362.5

Cost of this policy= 7362.5 x 5 = 36812.5

Choice is leveling capacity.

Master production scheduling:

The rules for scheduling:

Do not change orders in the frozen zone

Do not exceed the agreed on percentage changes when modifying orders in the other zones

Try to level load as much as possible

Do not exceed the capacity of the system when promising orders.

If an order must be pulled into level load, pull it into the earliest possible week without

missing the promise.

Chapter 2: Competitiveness, Strategy, and...

Documents

Transcript of Chapter 2: Competitiveness, Strategy, and...