 Performance – main characteristics of the product

 Aesthetics – appearance, feel, smell, taste

 Special features – extra characteristics
 Conformance – how well the product conforms to design
specifications
 Reliability – consistency of performance
 Durability – the useful life of the product
 Perceived quality – indirect evaluation of quality
 Serviceability – handling of complaints or repairs
 Consistency – quality doesn’t vary

9-7
LO 9.2
 Total number of defectives
p
Total number of observations
p (1  p )
ˆ p 
n
UCL p  p  z (ˆ p )
LCL p  p  z (ˆ p )

LO 10.5 10-28
 UTL - LTL
Cp 
6
where
UTL  upper tolerance (specification) limit
LTL  lower tolerance(specification) limit

LO 10.7 10-35
  Used when a process is not centered at its target, or
nominal, value

C pk  min C pu , C pl 
 UTL  x x  LTL 
 min  , 
 3 3 

LO 10.7 10-36
LO 10.7 10-38
Resources Costs
 Workforce/production rates  Inventory carrying
 Facilities and equipment  Back orders
Demand forecast  Hiring/firing
 Overtime
Policies
 Inventory changes
 Workforce changes
 subcontracting
 Subcontracting
 Overtime
 Inventory levels/changes
 Back orders

LO 11.2 11-11
 Proactive
 Alter demand to match capacity
 Reactive
 Alter capacity to match demand
 Mixed
 Some of each

LO 11.2
 Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800
Costs
Output
Regular time = $2 per skateboard
Overtime = $3 per skateboard
Subcontract = $6 per skateboard
Inventory = $1 per skateboard per period on average inventory
Back orders = $5 per skateboard per period

Planners for a company that makes several models of skateboards are about to
prepare an aggregate plan that will cover six periods.

They want to evaluate a plan that calls for a steady rate of regular-time output,
mainly using inventory to absorb the uneven demand but allowing some backlog.
Overtime and subcontracting are not used because they want steady output.
They intend to start with zero inventory on hand in the first period.

LO 11.5
 Period 1 2 3 4 5 6 Total
Forecast 200 200 300 400 500 200 1,800
Costs
Output
Regular time = $2 per skateboard
Overtime = $3 per skateboard
Subcontract = $6 per skateboard
Inventory = $1 per skateboard per period on average inventory
Back orders = $5 per skateboard per period

Planners for a company that makes several models of skateboards are about to
prepare an aggregate plan that will cover six periods.

They want to evaluate a plan that calls for a steady rate of regular-time output,
mainly using inventory to absorb the uneven demand but allowing some backlog.
Overtime and subcontracting are not used because they want steady output.
They intend to start with zero inventory on hand in the first period.

LO 11.5
Period 1 2 3 4 5 6 Total
Costs
Output
Regular time $600 $600 $600 $600 $600 $600 $3,600
Overtime --- --- --- --- --- ---
Subcontract --- --- --- --- --- ---
Hire/Layoff --- --- --- --- --- ---
Inventory $50 $150 $200 $150 $50 $0 $600
Backlog $0 $0 $0 $0 $500 $0 $500
Total $650 $750 $800 $750 $1,150 $600 $4,700

LO 11.5
 Hospitals:
 Aggregate planning used to allocate funds, staff, and supplies to meet the
demands of patients for their medical services
 Airlines:
 Aggregate planning in this environment is complex due to the number of
factors involved
 Capacity decisions must take into account the percentage of seats to be
allocated to various fare classes in order to maximize profit or yield
 Restaurants:
 Aggregate planning in high-volume businesses is directed toward
smoothing the service rate, determining workforce size, and managing
demand to match a fixed capacity
 Can use inventory; however, it is perishable

LO 11.6
An approach to maximizing revenue by using a strategy of
variable pricing; prices are set relative to capacity availability
 During periods of low demand, price discounts are
offered
 During periods of peak demand, higher prices are
charged
 Users of yield management include
 Airlines, restaurants, hotels, restaurants
 The master production schedule (MPS) is one of the
primary outputs of the master scheduling process
 Once a tentative MPS has been developed, it must be validated

 Rough cut capacity planning (RCCP) is a tool used in

the validation process
 Approximate balancing of capacity and demand to test the
feasibility of a master schedule
 Involves checking the capacities of production and warehouse
facilities, labor, and vendors to ensure no gross deficiencies exist
that will render the MPS unworkable

LO 11.7
 Inventory
from
Previous Inventory (70) Projected
Week Week Requirements before MPS MPS Inventory
1 64 33 31 31

2 31 30 1 1

3 1 30 -29 + 70 = 41

4 41 30 11 11

5 11 40 -29 + 70 = 41

6 41 40 1 1

7 1 40 -39 + 70 = 31

8 31 40 -9 + 70 = 61

LO 11.8
LO 11.8
 Material requirements planning (MRP):
 A computer-based information system that translates
master schedule requirements for end items into time-
phased requirements for subassemblies, components,
and raw materials.
 The MRP is designed to answer three questions:
1. What is needed?
2. How much is needed?
3. When is it needed?

12-4
LO 12.2
 12-7
LO 12.2
  Bill of Materials (BOM)
 A listing of all of the assemblies, subassemblies, parts,
and raw materials needed to produce one unit of a
product
 Product structure tree
 A visual depiction of the requirements in a bill of materials,
where all components are listed by levels

12-8
LO 12.2
  Low-level coding
 Restructuring the bill of materials so that multiple
occurrences of a component all coincide with the lowest
level at which the component occurs

Level 0 X

Level 1 B(2) C

Level 2 D(3) F(2)

Level 3 E(4) E E(2)

12-10
LO 12.2
  Primary Outputs
 Planned orders
 A schedule indicating the amount and timing of future
orders
 Order releases
 Authorizing the execution of planned orders
 Changes
 Revisions of the dates or quantities, or the cancellation of
orders

12-13
LO 12.2
  The MRP is based on the product structure tree diagram
 Requirements are determined level by level, beginning
with the end item and working down the tree
 The timing and quantity of each “parent” becomes the basis for
determining the timing and quantity of the “children” items directly
below it.
 The “children” items then become the “parent” items for the next
level, and so on

12-18
LO 12.3
  Pegging
 The process of identifying the parent items that have
generated a given set of material requirements for an
item

12-21
LO 12.3
  Lot-for-Lot (L4L) ordering
 The order or run size is set equal to the demand for that period
 Minimizes investment in inventory
 It results in variable order quantities
 A new setup is required for each run
 Economic Order Quantity (EOQ)
 Can lead to minimum costs if usage of item is fairly uniform
 This may be the case for some lower-level items that are common to different
‘parents’
 Less appropriate for ‘lumpy demand’ items because inventory remnants often
result
 Fixed Period Ordering
 Provides coverage for some predetermined number of periods

12-25
LO 12.3
  Enables managers to easily
 determine the quantities of each component for a given order size
 To know when to release orders for each component
 To be alerted when items need attention
 Additional benefits
 Low levels of in-process inventories
 The ability to track material requirements
 The ability to evaluate capacity requirements
 A means of allocating production time
 The ability to easily determine inventory usage via backflushing
 Exploding an end item’s BOM to determine the quantities of the components
that were used to make the item

12-26
LO 12.4
  Manufacturing resources planning (MRP II)
 Expanded approach to production resource planning, involving
other areas of the firm in the planning process and enabling
capacity requirements planning
 Most MRP II systems have the capability of performing simulation to
answer a variety of “what if” questions so they can gain a better
appreciation of available options and their consequences

12-29
LO 12.6
 12-30
LO 12.6
  When MRP II systems began to include feedback loops,
they were referred to as closed loop MRP
 Closed Loop MRP
 Systems evaluate a proposed material plan relative to available
capacity
 If a proposed plan is not feasible, it must be revised
 This evaluation is referred to as capacity requirements planning

12-31
LO 12.6
  Capacity requirements planning (CRP)
 The process of determining short-range capacity requirements.
 Inputs to capacity requirement planning
 Planned-order releases for the MRP
 Current shop loading
 Routing information
 Job time
 Key outputs
 Load reports for each work center

12-32
LO 12.7
 12-33
LO 12.7
  Enterprise resource planning (ERP)
 ERP was the next step in an evolution that began with MRP and
evolved into MRPII
 ERP, like MRP II, typically has an MRP core

 ERP provides a system to capture and make data available in real

time to decision makers and other users throughout an
organization.
 ERP systems are composed of a collection of integrated modules

12-35
LO 12.8
  The ‘big bang’
 Companies cast off all of their legacy systems at once and implement a
single ERP system across the entire company
 The most ambitious and difficult implementation approach
 Franchising strategy
 Independent ERP systems are installed in each business unit of the
enterprise while linking common processes across the enterprise
 Suits large or diverse companies that do not share many common processes
across business units
 Slam Dunk
 ERP dictates the process design where the focus is on a few key processes
 More appropriate for smaller companies expecting to grow into ERP

12-37
LO 12.8
 Module Brief Description
Accounting/Finance A central component of most ERP systems. It provides a range of financial reports,
including general ledger, accounts payable, accounts receivable, payroll, income
statements, ad balance sheets
Marketing Supports lead generation, target marketing, direct mail, and sales

Human Resources Maintains a complete data base of employee information such as date of hire,
salary, contact information, performance evaluations, and other pertinent
information
Purchasing Facilitates vendor selection, price negotiation, making purchasing decisions, and
bill payment
Production Planning Integrates information on forecasts, orders, production capacity, on-hand
inventory quantities, bills of material, work in process, schedules, and production
lead times
Inventory Management Identifies inventory requirements, inventory availability, replenishment rules, and
inventory tracking
Distribution Contains information on third-party shippers, shipping and delivery schedules,
delivery tracking
Sales Information on orders, invoices, order tracking, and shipping

Supply Chain Management Facilitates supplier and customer management, supply chain visibility, and event
management

12-36
LO 12.8
  Cycle counting
 A physical count of items in inventory
 Cycle counting management
 How much accuracy is needed?
 A items: ± 0.2 percent
 B items: ± 1 percent
 C items: ± 5 percent
 When should cycle counting be performed?
 Who should do it?

13-12
LO 13.7
  The basic EOQ model is used to find a fixed order
quantity that will minimize total annual inventory
costs
 Assumptions:
1. Only one product is involved
2. Annual demand requirements are known
3. Demand is even throughout the year
4. Lead time does not vary
5. Each order is received in a single delivery
6. There are no quantity discounts

13-14
LO 13.8
 Total Cost  Annual Holding Cost  Annual Ordering Cost
Q D
 H  S
2 Q
where
Q  Order quantity in units
H  Holding (carrying) cost per unit, usually per year
D  Demand, usually in units per year
S  Ordering cost per order

13-16
LO 13.8
  Quantity discount
 Price reduction for larger orders offered to customers to
induce them to buy in large quantities
Total Cost  Carrying Cost  Ordering Cost  Purchasing Cost
Q D
 H  S  PD
2 Q
where
P  Unit price

13-23
LO 13.10
 Total Cost  Annual Holding Cost  Annual Ordering Cost
Q D
 H  S
2 Q
divided by 2 (because throughout the year, on
average the warehouse is half full).
where
Q  Order quantity in units
H  Holding (carrying) cost per unit, usually per year
D  Demand, usually in units per year
S  Ordering cost per order

13-16
LO 13.8
 The Total-Cost Curve is U-Shaped
Annual Cost

Q D
TC  H  S
2 Q

Holding Costs

Ordering Costs

Order Quantity
QO (optimal order quantity) (Q)

13-17
LO 13.8
  Using calculus, we take the derivative of the total cost
function and set the derivative (slope) equal to zero and
solve for Q.
 The total cost curve reaches its minimum where the
carrying and ordering costs are equal.

2 DS 2(annual demand)(order cost)

QO  
H annual per unit holding cost

13-18
LO 13.8
  The batch mode is widely used in production. In
certain instances, the capacity to produce a part
exceeds its usage (demand rate)
 Assumptions
1. Only one item is involved
2. Annual demand requirements are known
3. Usage rate is constant
4. Usage occurs continually, but production occurs periodically
5. The production rate is constant
6. Lead time does not vary
7. There are no quantity discounts

13-19
LO 13.9
 TC min  Carrying Cost  Setup Cost
I  D
  max  H  S
 2  Q
where
I max  Maximum inventory
Qp
  p  u
p
p  Production or delivery rate
u  Usage rate

13-21
LO 13.9
 2 DS p
Qp 
H p u

13-22
LO 13.9
  Quantity discount
 Price reduction for larger orders offered to customers to
induce them to buy in large quantities
Total Cost  Carrying Cost  Ordering Cost  Purchasing Cost
Q D
 H  S  PD
2 Q
where
P  Unit price

13-23
LO 13.10
 Adding PD does not change EOQ

13-24
LO 13.10
 The total-cost curve
with quantity discounts
is composed of a
portion of the total-cost
curve for each price

13-25
LO 13.10
 ROP  d  LT
where
d  Demand rate (units per period, per day, per week)
LT  Lead time (in same time units as d )

13-27
LO 13.11
  Demand or lead time uncertainty creates the possibility
that demand will be greater than available supply
 To reduce the likelihood of a stockout, it becomes
necessary to carry safety stock
 Safety stock
 Stock that is held in excess of expected demand due to variable
demand and/or lead time

Expected demand
ROP   Safety Stock
during lead time

13-28
LO 13.11
  The amount of safety stock that is appropriate for a
given situation depends upon:
1. The average demand rate and average lead time
2. Demand and lead time variability
3. The desired service level

Expected demand
ROP   z dLT
during lead time
where
z  Number of standard deviations
 dLT  The standard deviation of lead time demand
13-31
LO 13.11
 The ROP based
on a normal
Distribution of lead
time demand

13-32
LO 13.11
 ROP  d  LT  zd LT
where
z  Number of standard deviations
d  Demand per period (per day, per week)
 LT  The stddev. of lead time (same time units as d )
LT  Average lead time (same time units as d )
Note: If only lead time is variable, then  dLT  d LT

13-34
LO 13.11
 Fixed Quantity

Fixed Interval

13-36
LO 13.12
 Expected demand
Amount  during protection  Safety  Amount on hand
to Order stock at reorder time
interval
 d (OI  LT)  z d OI  LT  A
where
OI  Order interval (length of time between orders)
A  Amount on hand at reorder time

13-37
LO 13.12
 Cs
Service level 
C s  Ce
where
Cs  shortage cost per unit
Ce  excess cost per unit
Ce Cs

Service level

Quantity
So
Balance Point
So =Optimum
Stocking Quantity 13-40
LO 13.13
  Few flow systems are entirely dedicated to a single
product or service
 Each product change requires
 Slightly different inputs of parts
 Slightly different materials
 Slightly different processing requirements that must be
scheduled into the line
 Need to avoid excessive inventory buildup
 Disruptions may result in less-than-desired output

16-7
LO 16.3
  The following factors often dictate the success of high-
volume systems:
• Process and product design
• Preventive maintenance
• Rapid repair when breakdowns occur
• Optimal product mixes
• Minimization of quality problems
• Reliability and timing of supplies

16-8
LO 16.3
  Outputs fall between the standardized type of output
of high-volume systems and the make-to-order output
of job shops
 Output rates are insufficient to warrant continuous
production
 Rather, it is more economical
to produce intermittently
 Work centers periodically
shift from one product to
another

16-9
LO 16.4
  Three basic issues:
 Run size of jobs
 The timing of jobs
 The sequence in which jobs will be produced

2 DS p
QO 
H p u

16-10
LO 16.4
  Important considerations
 Setup cost
 Usage is not always as smooth as assumed in the
economic lot size model
 Alternative scheduling approach
 Base production on a master schedule developed from
customer orders and forecasted demand

16-11
LO 16.4
  Job shop scheduling
 Scheduling for low-volume systems with many
variations in requirements
 Make-to-order products
 Processing requirements
 Material requirements
 Processing time
 Processing sequence and setups
 A complex scheduling environment
 It is impossible to establish firm schedules until actual job
orders are received

16-12
LO 16.5
  Loading
 the assignment of jobs to processing centers
 Gantt chart
 Used as a visual aid for loading and scheduling purposes
 Purpose of the Gantt chart is to organize and visually display the
actual or intended use of resources in a time framework
 Managers may use the charts for trial-and-error schedule
development to get an idea of what different arrangements
would involve

16-13
LO 16.5
  Demand or lead time uncertainty creates the possibility
that demand will be greater than available supply
 To reduce the likelihood of a stockout, it becomes
necessary to carry safety stock
 Safety stock
 Stock that is held in excess of expected demand due to variable
demand and/or lead time

Expected demand
ROP   Safety Stock
during lead time

13-28
LO 13.11
 13-29
LO 13.11
  As the amount of safety stock carried increases, the
risk of stockout decreases.
 This improves customer service level
 Service level
 The probability that demand will not exceed supply during lead
time
 Service level = 100% - Stockout risk

13-30
LO 13.11
  The amount of safety stock that is appropriate for a
given situation depends upon:
1. The average demand rate and average lead time
2. Demand and lead time variability
3. The desired service level

Expected demand
ROP   z dLT
during lead time
where
z  Number of standard deviations
 dLT  The standard deviation of lead time demand
13-31
LO 13.11
 The ROP based
on a normal
Distribution of lead
time demand

13-32
LO 13.11
 ROP  d  LT  z d LT
where
z  Number of standard deviations
d  Average demand per period (per day, per week)
 d  The stdev. of demand per period (same time units as d )
LT  Lead time (same time units as d )
Note: If only demand is variable, then  dLT   d LT

13-33
LO 13.11
 ROP  d  LT  zd LT
where
z  Number of standard deviations
d  Demand per period (per day, per week)
 LT  The stddev. of lead time (same time units as d )
LT  Average lead time (same time units as d )
Note: If only lead time is variable, then  dLT  d LT

13-34
LO 13.11
  Fixed-order-interval (FOI) model
 Orders are placed at fixed time intervals
 Reasons for using the FOI model
 Supplier’s policy may encourage its use
 Grouping orders from the same supplier can produce
savings in shipping costs
 Some circumstances do not lend themselves to
continuously monitoring inventory position

13-35
LO 13.12
 Fixed Quantity

Fixed Interval

13-36
LO 13.12
 Expected demand
Amount  during protection  Safety  Amount on hand
to Order stock at reorder time
interval
 d (OI  LT)  z d OI  LT  A
where
OI  Order interval (length of time between orders)
A  Amount on hand at reorder time

13-37
LO 13.12
  Single-period model
 Model for ordering of perishables and other items with
limited useful lives
 Shortage cost
 Generally, the unrealized profit per unit
 Cshortage = Cs = Revenue per unit – Cost per unit
 Excess cost
 Different between purchase cost and salvage value of
items left over at the end of the period
 Cexcess = Ce = Cost per unit – Salvage value per unit

13-38
LO 13.13
  The goal of the single-period model is to identify the order
quantity that will minimize the long-run excess and
shortage costs
 Two categories of problem:
 Demand can be characterized by a continuous distribution
 Demand can be characterized by a discrete distribution

13-39
LO 13.13
 Cs
Service level 
C s  Ce
where
Cs  shortage cost per unit
Ce  excess cost per unit
Ce Cs

Service level

Quantity
So
Balance Point
So =Optimum
Stocking Quantity 13-40
LO 13.13