LECTURE 5: Quality ManagementProcess control: process of detecting whether or not there has been a change in the underlying process (1) to identify the reasons behind the variability (2) to take corrective actionsProcess capability: check the current process variability relative to required specifications- There is not necessarily a connection between product specifications and how the process currently behaves.Statistical Process Control (SPC): Statistical evaluation of the output of a processChance causesdue to Normal variability:- Natural variability,minor factors, Day-to-day variation, typical, white noise Nothing wrong and nothing to fixAssignable causesdue to Abnormal variability:- Cause can be identified & eliminated and it can be a good thing- Something unusual has happened- The process has changed significantly- There is a need for intervention- Change for the worse investigate and fix the problem- Change for the better investigate, reinforce/institutionalize the changeCost of defect depends on where it is detected:Internal Failure: discovered during production process lost materials & utilization of all upstream resourcesExternal Failure: discovered after product reaches consumers- lost reputation, recall, warranty liability costEliminate causes: reduce process variability/do things consistently Process ControlImproving Process Capability- Simplify- Standardize- Automate- Mistake-proof- Upgrade equipment+ Sample Mean (for X-bar Chart):Monitors the central tendency of a process

+ Sample Range: (for R-Chart)

Control Charts:+ Centre Line represents the expected performance, i.e. expected mean x-bar or range R+ Upper and Lower Control Limits (UCL, LCL) define the range of acceptable variation Purpose: to monitor process outputs to see if it is- In control all data points randomly fall between the UCL and LCL- Out of control stop the process and correct itTypes of Control Chart to detect shifts:- X-bar Chart- R-Chart A process is out of control if:- A point outside the 3 control limits- A point near either 3 control limits; gather more data- A run (up, down, or on either side of the centreline [expected value]) of 7 points in a row- Cycles or other non-random patterns- 2 out of 3 points in a row outside of either 2 limits- 4 out of 5 points in a row outside of either 1 limits- Specifications: Range of acceptable values established by engineering design or customer requirements (note: different from UCL and LSL)- Process variability: Natural or inherent variability- Process capability: Process variability relative to specifications (comparison)Cp (Process Capability Index): compares what we need/want (upper specifications USL and lower specifications LSL) to what we can do (the actual 3 process spread)Process is capable (meets specification) Cp 1.33Improve process capability: reduce variability Cp can be misleading if the mean is not centred between the upper and lower limitsCpk is used when a process is not centredCapable to meet specifications when Cpk 1.336 Quality: USL and LSL are each 6 from mean- Having no more than 3.4 defects per million- Program designed to reduce defects, to an extent that US-LS captures +/- 6 Sigma. That is, Cp=12Sigma/6Sigma=2.0- Improving quality, reducing costs, and increasing customer satisfaction4 Sigma 99.5% Defect Free- a common thing of Six Sigma is that when a process achieves 6 Sigma, its defect rate will be 3.4 ppm, Why isnt this 1.98 ppb? To allow a drift of 1.5 SigmaISO 9000 Quality Standards- Monitored by International Standards Organization - document processes and monitor quality that follows the PDCA cycle (Plan-Do-Check-Act)- ensures consistency in processes not quality products Total Quality Management: A philosophy that involves everyone in an organization in a continual effort to improve quality and customer satisfaction.TQM Approach:1. Find out what the customer wants 2. Design a product or service that meets or exceeds customer wants 3. Design processes that facilitate doing the job right the first time 4. Keep track of results 5. Extend these concepts throughout the supply chainIndependent Demand: Demand not related to other items; the final end-productDependent Demand: Derived demand items; component parts, subassemblies, raw materials; use MRP to manage theseTOTAL COST (TC) Purchasing/Manufacturing cost (P) = P x D Ordering/Setup cost (S) = D/Q x S Holding/Carrying cost (H) = Q/2 x h Shortage/Stockout/Backorder cost (B) assume 0P + S + H +B = TCOptimal Order Quantity : Q*No. of optimal orders/period : N* = D/Q*Time between optimal orders : T* = Q*/DOptimal Total Controllable Cost per period : TCC*TCC = S + H + BOptimal Total Cost per period : TC*TC = TCC + Purchasing cost per periodEOQ

Assumptions:1. Demand known and constant2. No shortages/stock outs allowed3. Lead time known and constant4. One batch delivery (instantaneous delivery)5. Unit purchase cost does not change with order quantity6. All other costs remain unchanged (constant)Reorder Point:1. If T >= L

2. If T < L

LECTURE 7: Inventory Management IIEPQApplicable Old Assumptions: 1,2,3,5 and 6New Assumption: Gradual delivery, R>D

1. D: Demand rate (Units per period) R: Production Rate (Units per period) tp: Time when Production occurs2. Average stock level

3. Total Cost:

ALL UNIT QUANTITY DISCOUNTSApplicable Old Assumptions: 1, 2, 3, 4 and 6New Assumption: All Units Quantity DiscountPurchase Cost per Unit changes with Order QuantityUnder this new assumption, the higher the order quantity, the lower will be the cost per unit. There will be several values of P, for various ranges of quantity per order

Inventory Counting System- Periodic System: physical count at periodic intervals- Perpetual Inventory System: keeps track of removals from inventory continuously, thus monitoring current levels of each item- Two-Bin System: two containers of inventory; reorder when the first is emptyMarginal Analysis: NEWSBOYs PROBLEMIf use Cs and Ce representing shortage (too few) and excess costs (too much), and suppose we have tentatively decided to order Q units; what happens if we increases this order to Q+1?If D>Q:Net marginal benefit: Cs (unrealised profit per unit)Chance of this happening is P(D>Q) = 1-F(Q)If DQ:Net marginal cost: Ce (pertains to items left over at the end of period)Chance of this happening is P(D Q) = F(Q)

If F(.) is Normal, Q = +z, where z can be found in the Standard Normal Distribution N(, ) Function Table F(z) = SL = CR, and Q* Q (due to round ups) = mean = standard deviation If F(.) is Discrete, use the given cumulative F(.)If F(.) is Poisson, find Q* using Poisson Distribution Function TableIf F(.) is Uniform Dist. between a and bQ = a+SLx(b-a)ASSUMPTIONS1. Only one product2. Demand is random with known probability distribution, i.e. F(.)3. Product is salvaged after the selling period4. Order arrives in single batch before selling periode.g. Newsboy in retail:D= random demand with mean and standard deviation and probability distribution F(.)w = unit wholesale pricep = unit retail pricev = markdown price (salvage value) for leftoversCs = p-w Ce = w-vLECTURE 8: Inventory Management II - RFID and Inventory ErrorRecordActual Inventory:- Misplaced inventory lost items in the warehouse- Transaction errors unintentional, intentional- Spoilage oudated products, loss of product properties while staying in the warehouse (e.g. car batt)- Theft continuous pilferage or shoplifting- Product quality and yield inventory should not include defective products, which are not observed- Information delay inventory is counted to eliminate uncertainty in the records; the time between two consecutive counts can be termed as information delay, large organization takes time to process demand data and to pass the results to the inventory managerRFID (Radio Frequency Identification): a wireless technology to transmit information from small tags attached to objects in order to automatically identify and track those items tag | reader | back end processing systemsRevenue Management (RM): Get higher revenue while selling same amt of productprice discriminationConditions:Perishable Resource i.e. seats in plane, hotel roomWell-defined market segmentssame resource can be used for different segmentse.g. business vs. leisure travellers, price sensitive vs. price insensitiveUncertainty more-valuable future demands on that perishable resourceRandomness in the future demandHigh sales volume at the lower price levelDecision(s) to be madeProtection level: quantity to be reserved for the high-paying customersBooking limit: total number of resources overbookingDecision must be made before uncertainty is resolvedRM: e.g. Hotel Reservation ChallengeQ = Number of rooms reserved for business travelersR = Number of business travelers who request roomsSL =The probability that all the business travelers are accommodated = Prob(R Q)p =Profit from a business travelerw =Profit from a leisure travelerAssume that there is plenty of leisure travel demand (otherwise, the decision goes away).Cs = p-w Ce = w SL = Cs/(Cs+Ce)Protection of booking = Total Room QThe optimal Q* can then be found by first solving Q from the equation: Prob(RQ) = F(Q) = SL, and then round upIf F(.) is Normal, Q = +z, where z can be found in the Standard Normal Distribution N(, ) Function Table F(z) = SL = CR, and Q* Q (due to round ups) = mean = standard deviationIf F(.) is Uniform Dist. between a and bQ = a+SLx(b-a)Revenue management works as follows:If additional supply is impossible, adjust the demandRM: OverbookingCs = Rent Variable CostCe = Compensation CostQ is the number to overbookTrade-offs behind this decisionThe high-paying customers may not show resource goes unused (reserved too many)The high-paying customers have to be denied service resource generates less revenue than it could haveLECTURE 9: Aggregate PlanningForward Planning- Intermediate-range capacity/supply planning- Typically covers a time horizon of 2 to 12 months- Aggregation can be used to better predict future demand- Useful for organizations that experience seasonal or other variations in demandAggregate planning should be periodically updated: results in a rolling planning horizonAggregate Planning: concerned with qty & timing of expected demandGoal: achieve a production plan that will effectively utilise the organisations resources to satisfy demandCentral issue: lowest cost way to satisfy the aggregated intermediate future demandqty & timingTypes of Strategies:Proactive: alter demand to match capacity- Pricing: shifting demand from peak to off-peak periods- Promotion: advertising and other forms of promotion- Back orders: orders are taken in one period and deliveries promised for a later periodReactive: alter capacity (supply) to match demand- Hire and layoff regular full time workers or overtime/slack time- Part-time workers (seasonal work)- Subcontracting (temporary capacity)Mixed / combination of bothAP Strategies:1. Level Capacity: maintaining a steady rate of output+ Stable output rates and workforce+ Good employee morale - Greater inventory costs- Backordersrecord-keeping, lost sales, overtime/idle!!! Keep employees at the same level !!!2. Chase Demand + Low inventory cost+ No backorders- The cost of adjusting capacity/output rates and/or workforce is high- Workforce moral maybe lowOvertime or Hire more employees (Full/Part-time)Techniques for Aggregate PlanningGeneral procedure:1. Determine demand for each period2. Determine capacities for each period3. Identify company or departmental policies that are pertinent/relevant4. Determine unit costs5. Develop alternative plans and costs 6. Select the plan that best satisfies objectives.

Aggregate planning in Services vs Manufacturing1. Demand for service can be difficult to predict2. Service Capacity availability - difficult to predict3. Labor flexibility can be an advantage in services4. Services occur when they are rendered (can't build inventory)The resulting plan in services is normally a time-phased projection of service staff requirementsDisaggregation (Material Requirement Planning: PUSH SYSTEM)LECTURE 10: Supply Chain ManagementSupply Chain Management (SCM): The strategic coordination of business functions within a business organization and throughout its supply chainThe goal of SCM: match supply to demand as effectively and efficiently as possible- Flow Management - Product and service flow; Information flow; Financial flowSCM Issues:Logistic: movemt of materials, svc, cash, infoContainers/ Cargos3PL (3rd Party Logistics)outsourcing logistics mgmt4PL (consulting)Inventory- Inventory location- Inventory velocity- The bullwhip effect (inventory variability): distortion of demand information while it passes from one stage to the next across the supply chain

Causes:- demand forecast updating- worse if (1) order batching (2) price fluctuation (3) rationing and shortage gaming phantom orders: additional order more than what is neededSolutions:- demand forecast information sharing- order batching reduce fixed ordering cost, schedule deliveries- price fluctuation Everyday Low Price (EDLP)- shortage gaming penalize order cancellations, prioritize retailersDells success stories:- direct sales no reseller markups; build to order mass customization; quick delivery; supply chain management

Globalization- Global supply chainsInput from overseas, outsourcing, sell pdt overseas- ComplexitiesLanguage/cultural differences, currency fluctuations, political instability, high transport costs & lead timeSupplier Management- Choosing suppliers Supplier audits, certification- Supplier relationship management Long, short- term- Supplier partnerships (contracts) CPFR: Collaborative Planning, Forecasting, and Replenishment >A supply chain initiative that focuses on information sharing among supply chain trading partners in planning, forecasting, and inventory replenishment Strategic partnering >VMI (Vendor-Managed Inventory- Trust among trading partners- Effective communications- Supply chain visibility- Event-management capability- Performance metricsThe role of Distribution centres:(1) reduction in transportation links (e.g. 100 suppliers for 100 customers 100x100links, after using distribution center 100+100 links)(2) demand aggregation: The Square Root Law cost decrease in proportion to the square root of num aggregatedAdvantages:(+) lower inventory cost(+) ability to offer a large product selectionDisadvantages:(-) inventory further away from customers(-) high delivery cost and time, less responsive(-) cannot customize for regional preferencesLECTURE 10: JIT/Lean Production SystemJustintime: Pull system (just as needed)JIT is characteristic of lean production systems Minimal inventories & continuous improvements Elimination of wasteBig JIT broad focus Vendor, human relations Technology, materials and inventory managementLittle JIT narrow focus Scheduling materials, productionUltimate Goal: balanced, rapid flow of inventoriesSupporting Goals:- Eliminate disruptions, facilitating production flow- Make system flexible by reducing setup times and lead times, leading to small lot production- Eliminate waste, especially excess inventorySources of Waste- Waste from overproduction- Waste of waiting time / Transportation waste- Inventory waste / Processing waste- Waste of motion /Waste from product defects

Converting to a JIT System:- Start by trying to reduce setup times- Gradually convert operations; produce in smaller lots- Management may not be committed- Workers/management may not be cooperative- Suppliers may resistThe basic goal of the demand flow/pull technology in the service organization is to provide optimum response to the customer with the highest quality service and lowest possible cost- Change from traditional thinking and practices frequent ontime delivery of small quantities- Long term relationships with suppliers as partnersJIT Benefits- Reduced inventory levels- High quality products- Reduced lead times; better flexibility & responsiveness- Increased productivity and equipment utilization- Reduced scrap, rework and space requirements- Pressure for good vendor relationships- Reduced need for indirect laborJIT Limitations- JIT is not suitable for fluctuationg demand- Cannot handle large spikes in demand- Cannot handle vastly different product mixes