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Suppliers Manufacturers Warehouses &Distribution Centers

Customers

Material Costs

TransportationCosts

TransportationCosts Transportation

CostsInventory CostsManufacturing Costs

The Supply Chain – Another View

Suppliers Manufacturers Warehouses &Distribution Centers

Customers

Material Costs

TransportationCosts

TransportationCosts Transportation

CostsInventory CostsManufacturing Costs

PlanPlan Source Source Make Make Deliver Deliver Buy Buy

What Is Supply Chain Management (SCM)?

• A set of approaches used to efficiently integrate– Suppliers– Manufacturers– Warehouses– Distribution centers

• So that the product is produced and distributed– In the right quantities– To the right locations– And at the right time

• System-wide costs are minimized and• Service level requirements are satisfied

Plan Source Make Deliver Buy

Why Is SCM Difficult?

• Uncertainty is inherent to every supply chain– Travel times– Breakdowns of machines and vehicles– Weather, natural catastrophe, war– Local politics, labor conditions, border issues

• The complexity of the problem to globally optimize a supply chain is significant– Minimize internal costs– Minimize uncertainty– Deal with remaining uncertainty

Plan Source Make Deliver Buy

The Objective of a Supply Chain

• Maximize overall value created• Supply chain value: difference between what

the final product is worth to the customer and the effort the supply chain expends in filling the customer’s request

• Value is correlated to supply chain profitability (difference between revenue generated from the customer and the overall cost across the supply chain)


• Supply chain incurs costs (information, storage, transportation, components, assembly, etc.)

• Supply chain profitability is total profit to be shared across all stages of the supply chain

• Supply chain success should be measured by total supply chain profitability, not profits at an individual stage


• Sources of supply chain revenue: the customer

• Sources of supply chain cost: flows of information, products, or funds between stages of the supply chain

• Supply chain management is the management of flows between and among supply chain stages to maximize total supply chain profitability

Decision Phases of a Supply Chain

• Supply chain strategy or design• Supply chain planning• Supply chain operation

Supply Chain Strategy or Design

• Decisions about the structure of the supply chain and what processes each stage will perform

• Strategic supply chain decisions– Locations and capacities of facilities– Products to be made or stored at various locations– Modes of transportation– Information systems

• Supply chain design must support strategic objectives• Supply chain design decisions are long-term and expensive to

reverse – must take into account market uncertainty

Supply Chain Planning

• Definition of a set of policies that govern short-term operations

• Fixed by the supply configuration from previous phase

• Starts with a forecast of demand in the coming year

Supply Chain Planning

• Planning decisions:– Which markets will be supplied from which locations– Planned buildup of inventories– Subcontracting, backup locations– Inventory policies– Timing and size of market promotions

• Must consider in planning decisions demand uncertainty, exchange rates, competition over the time horizon

Supply Chain Operation• Time horizon is weekly or daily• Decisions regarding individual customer orders• Supply chain configuration is fixed and operating

policies are determined• Goal is to implement the operating policies as

effectively as possible• Allocate orders to inventory or production, set order

due dates, generate pick lists at a warehouse, allocate an order to a particular shipment, set delivery schedules, place replenishment orders

• Much less uncertainty (short time horizon)

Process View of a Supply Chain

• Cycle view: processes in a supply chain are divided into a series of cycles, each performed at the interfaces between two successive supply chain stages

• Push/pull view: processes in a supply chain are divided into two categories depending on whether they are executed in response to a customer order (pull) or in anticipation of a customer order (push)

Cycle View of Supply Chains

Customer Order Cycle

Replenishment Cycle

Manufacturing Cycle

Procurement Cycle

Customer

Retailer

Distributor

Manufacturer

Supplier

Cycle View of a Supply Chain• Each cycle occurs at the interface between two

successive stages• Customer order cycle (customer-retailer)• Replenishment cycle (retailer-distributor)• Manufacturing cycle (distributor-manufacturer)• Procurement cycle (manufacturer-supplier)• Cycle view clearly defines processes involved and the

owners of each process. Specifies the roles and responsibilities of each member and the desired outcome of each process.

Customer Order Cycle

• Involves all processes directly involved in receiving and filling the customer’s order

• Customer arrival• Customer order entry• Customer order fulfillment• Customer order receiving

Replenishment Cycle

• All processes involved in replenishing retailer inventories (retailer is now the customer)

• Retail order trigger• Retail order entry• Retail order fulfillment• Retail order receiving

Manufacturing Cycle

• All processes involved in replenishing distributor (or retailer) inventory

• Order arrival from the distributor, retailer, or customer

• Production scheduling• Manufacturing and shipping• Receiving at the distributor, retailer, or

customer

Procurement Cycle

• All processes necessary to ensure that materials are available for manufacturing to occur according to schedule

• Manufacturer orders components from suppliers to replenish component inventories

• However, component orders can be determined precisely from production schedules (different from retailer/distributor orders that are based on uncertain customer demand)

• Important that suppliers be linked to the manufacturer’s production schedule

Push/Pull View of Supply Chains

Procurement,Manufacturing andReplenishment cycles

Customer OrderCycle

CustomerOrder Arrives

PUSH PROCESSES PULL PROCESSES

Push/Pull View of Supply Chain Processes

• Supply chain processes fall into one of two categories depending on the timing of their execution relative to customer demand

• Pull: execution is initiated in response to a customer order (reactive)

• Push: execution is initiated in anticipation of customer orders (speculative)

• Push/pull boundary separates push processes from pull processes

Push/Pull View of Supply Chain Processes

• Useful in considering strategic decisions relating to supply chain design – more global view of how supply chain processes relate to customer orders

• Can combine the push/pull and cycle views– L.L. Bean (Figure 1.6)– Dell (Figure 1.7)

• The relative proportion of push and pull processes can have an impact on supply chain performance

Summary of Learning Objectives

• What are the cycle and push/pull views of a supply chain?

• How can supply chain macro processes be classified?

• What are the three key supply chain decision phases and what is the significance of each?

• What is the goal of a supply chain and what is the impact of supply chain decisions on the success of the firm?

Element Traditional management Supply chain management (1)Inventory management Independent efforts Joint reduction of channel approach

inventories (2)Total cost approach Minimize firm costs Channel-wide cost efficiencies (3)Time horizon Short term Long term (4)Amount of information Limited to needs of current As required for planning and sharing and monitoring transaction monitoring processes (5)Amount of coordination Single contact for the transaction Multiple contacts between levels in of multiple levels in the between channel pairs firms and levels of channel channel (6)Joint planning Transaction-based Ongoing (7)Compatibility of Not relevant Compatibility at least for key corporate philosophies relationships (8)Breadth of supplier base Large to increase competition Small to increase coordination

and spread risks (9)Channel leadership Not needed Needed for coordination focus (10)Amount of sharing risks Each on its own Risks and rewards shared over

rewards the long term (11)Speed of operations, “Warehouse” orientation “Distribution center” orientation information and (storage, safety stock) (inventory velocity) interconnecting inventory levels interrupted by barriers to flows; flows; JIT, quick response across

localized to channel pairs the channel

Achieving a strategic fit

• Strategic fit means that both the competitive and supply chain strategy must fit together.

• i.e. both the competitive and supply chain strategies have aligned goals.

• It refers to consistency between the customer priorities that the competitive strategy hopes of satisfy and the supply chain capabilities that the supply chain aims to build

How strategic fit is achieved

• Understanding the customer and supply chain uncertainty– The quantity of the product needed in each lot– The response time that customers are willing to tolerate– The variety of products needed– The service level required– The price of the product

• Understanding the supply chain capabilities

• Achieving strategic fit

Drivers of Supply Chain

• Facilities • Inventory• Transportation• Information• Sourcing• Pricing

Decision areas of SCM

• There are four major decision areas in 1) location, 2) production, 3) inventory, and 4) transportation (distribution), and

There are both strategic and operational elements in each of these decision areas

Facility Planning

Module IIISession 17

Facility Location

Location and Costs

Location decisions based on low cost require careful consideration

Once in place, location-related costs are fixed in place and difficult to reduce

Determining optimal facility location is a good investment

Location Decisions

Long-term decisions Decisions made infrequently Decision greatly affects both fixed and

variable costs Once committed to a location, many

resource and cost issues are difficult to change

Location Decisions

Country Decision Critical Success Factors

1. Political risks, government rules, attitudes, incentives

2. Cultural and economic issues3. Location of markets4. Labor talent, attitudes,

productivity, costs5. Availability of supplies,

communications, energy6. Exchange rates and currency

risksFigure 8.1

Location Decisions

Region/ Community

Decision

Critical Success Factors1. Corporate desires2. Attractiveness of region 3. Labor availability, costs, attitudes

towards unions4. Costs and availability of utilities5. Environmental regulations6. Government incentives and fiscal

policies7. Proximity to raw materials and

customers8. Land/construction costs

MN

WI

MI

IL IN OH

Figure 8.1

Location Decisions

Site Decision Critical Success Factors

1. Site size and cost2. Air, rail, highway, and

waterway systems3. Zoning restrictions4. Proximity of services/

supplies needed5. Environmental impact

issues

Figure 8.1

Factors That Affect Location Decisions

Labor productivity Wage rates are not the only cost Lower production may increase total cost

Labor cost per dayProduction (units per day)

= Cost per unit

Connecticut

= $1.17 per unit$70

60 units

Juarez

= $1.25 per unit$25

20 units


Exchange rates and currency risks Can have a significant impact on cost structure Rates change over time

Costs Tangible - easily measured costs such as

utilities, labor, materials, taxes Intangible - less easy to quantify and include

education, public transportation, community, quality-of-life


Exchange rates and currency risks Can have a significant impact on cost structure Rates change over time

Costs Tangible - easily measured costs such as

utilities, labor, materials, taxes Intangible - less easy to quantify and include

education, public transportation, community, quality-of-life

Location decisions based on costs alone

can create difficult ethical situations


Political risk, values, and culture National, state, local governments attitudes

toward private and intellectual property, zoning, pollution, employment stability may be in flux

Worker attitudes towards turnover, unions, absenteeism

Globally cultures have different attitudes towards punctuality, legal, and ethical issues


Proximity to markets Very important to services JIT systems or high transportation costs may

make it important to manufacturers Proximity to suppliers

Perishable goods, high transportation costs, bulky products

Factor-Rating Method

Popular because a wide variety of factors can be included in the analysis

Six steps in the method1. Develop a list of relevant factors called critical

success factors2. Assign a weight to each factor3. Develop a scale for each factor4. Score each location for each factor5. Multiply score by weights for each factor for each

location6. Recommend the location with the highest point

score

Factor-Rating Example

Critical ScoresSuccess (out of 100) Weighted ScoresFactor Weight France Denmark France Denmark

Labor availability and attitude .25 70 60 (.25)(70) = 17.5 (.25)(60) = 15.0People-to- car ratio .05 50 60 (.05)(50) = 2.5 (.05)(60) = 3.0Per capita income .10 85 80 (.10)(85) = 8.5 (.10)(80) = 8.0Tax structure .39 75 70 (.39)(75) = 29.3 (.39)(70) = 27.3Education and health .21 60 70 (.21)(60) = 12.6 (.21)(70) = 14.7Totals 1.00 70.4 68.0

Locational Break-Even Analysis

Method of cost-volume analysis used for industrial locations

Three steps in the method1. Determine fixed and variable costs for each

location2. Plot the cost for each location 3. Select location with lowest total cost for

expected production volume

Locational Break-Even Analysis Example

Three locations:

Akron $30,000 $75 $180,000Bowling Green $60,000 $45 $150,000Chicago $110,000 $25 $160,000

Fixed Variable TotalCity Cost Cost Cost

Total Cost = Fixed Cost + (Variable Cost x Volume)

Selling price = $120Expected volume = 2,000 units

Locational Break-Even Analysis Example

–$180,000 –

–$160,000 –$150,000 –

–$130,000 –

–$110,000 –

––

$80,000 ––

$60,000 –––

$30,000 ––

$10,000 ––

Annu

al c

ost

| | | | | | |

0 500 1,000 1,500 2,000 2,500 3,000Volume

Akron lowest

cost

Bowling Green lowest cost

Chicago lowest cost

Chicago cost curve

Akron co

st

curve

Bowling Green

cost curve

Center-of-Gravity Method

Finds location of distribution center that minimizes distribution costs

Considers Location of marketsVolume of goods shipped to those

markets Shipping cost (or distance)


Place existing locations on a coordinate gridGrid origin and scale is arbitrary Maintain relative distances

Calculate X and Y coordinates for ‘center of gravity’Assumes cost is directly proportional to

distance and volume shipped


x - coordinate =∑dixQi

∑Qi

i

i

∑diyQi

∑Qi

i

i

y - coordinate =

where dix = x-coordinate of location idiy = y-coordinate of location iQi = Quantity of goods moved to or from location i


North-South

East-West

120 –

90 –

60 –

30 –

–| | | | | |

30 60 90 120 150Arbitrary origin

Chicago (30, 120)New York (130, 130)

Pittsburgh (90, 110)

Atlanta (60, 40)

Figure 8.3


Number of ContainersStore Location Shipped per MonthChicago (30, 120) 2,000Pittsburgh (90, 110) 1,000New York (130, 130) 1,000Atlanta (60, 40) 2,000

x-coordinate =(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)

2000 + 1000 + 1000 + 2000= 66.7

y-coordinate =(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)

2000 + 1000 + 1000 + 2000= 93.3


North-South

East-West

120 –

90 –

60 –

30 –

–| | | | | |

30 60 90 120 150Arbitrary origin

Chicago (30, 120)New York (130, 130)

Pittsburgh (90, 110)

Atlanta (60, 40)

Center of gravity (66.7, 93.3)+

Assembly Chart

Documents for Production

Assembly drawing Assembly chart Route sheet Work order Engineering change notices (ECNs)

Assembly Drawing

Shows exploded view of product

Details relative locations to show how to assemble the product

Figure 5.11 (a)

Assembly Chart

1

2

3

4

5

6

7

8

9

10

11

R 209 Angle

R 207 Angle

Bolts w/nuts (2)

R 209 Angle

R 207 Angle

Bolt w/nut

R 404 Roller

Lock washer

Part number tag

Box w/packing material

Bolts w/nuts (2)

SA1

SA2

A1

A2

A3

A4

A5

Leftbracket

assembly

Rightbracket

assembly

Poka-yoke inspection

Figure 5.11 (b)

Identifies the point of production where components flow into subassemblies and ultimately into the final product

Route Sheet

Lists the operations and times required to produce a component

Setup OperationProcess Machine Operations Time Time/Unit

1 Auto Insert 2 Insert Component 1.5 .4 Set 56

2 Manual Insert Component .5 2.3 Insert 1 Set 12C

3 Wave Solder Solder all 1.5 4.1components to board

4 Test 4 Circuit integrity .25 .5test 4GY

Work Order

Instructions to produce a given quantity of a particular item, usually to a schedule

Work Order

Item Quantity Start Date Due Date

Production DeliveryDept Location

157C 125 5/2/08 5/4/08

F32 Dept K11

Engineering Change Notice (ECN)

A correction or modification to a product’s definition or documentationEngineering drawingsBill of material

Quite common with long product life cycles, long manufacturing lead times, or rapidly changing

technologies

Operation Process//open the pdf

Process Chart

Figure 7.9

Scrap estimation

• The market estimate specifies the annual volume to be produced for each product.

• To produce the required amount of product, the number of units scheduled through production must equal the market estimate plus a scrap estimate

• Let Pk represent the percentage of scrap produced on the kth operation

• Ok, the desired output of non defective product from operation k, and Ik the production input to operation k

• Ok = Ik – PkIk or Ok = Ik (1-Pk) or Ik = Ok / 1-Pk

• Thus the expected number of units to start into a production for a part having n operations is

estimatemarket O

)1)......(1)(1(

n

211

theisWhere

PPP

OI

n

n

Scrap estimation

Example

• A product has a market estimate of 97,000 components, and requires three processing steps (turning, milling and drilling) having scrap estimates of P1 = 0.04, P2=0.01, and P3- 0.03

• Ans: 105,219

Equipment fractions

• The quantity of equipment fraction required for an operation is called as the equipment fraction.

• The equipment fraction may be determined for an operation by dividing the total time required to perform the operations by the time available to complete the operation

Deterministic model

EHR

SQF

Where F = number of machines required per shiftS = standard time (minutes) per unit producedQ= number of units to be produced per shiftE= actual performance, expressed as a percentage of standard timeH = amount of time available per machineR = reliability of machine, expressed as percent of uptime

INPUT DATA AND ACTIVITIES

1. Flow Of Materials 2. Activity Relationship

3. String diagram

4. Space Requirement 5. Space Available

6. Space Relationship Diagram

7. Modifying considerations 8. Practical Limitations

9. Develop Layout

10. Evaluation

Systematic Layout Proceedure

1. Flows in a layout

a) Flujo en línea recta

b) Flujo en “U”

c) Flujo en serpentín

d) Flujo en “L”

d) Flujo circular ó en “O”

e) Flujo en “S”

69

2. REL chart – REL diagram

• From REL chart, we construct activity relationship diagram (REL diagram).

• The purpose is to depict spatially the relationships of the activities.

• The basic premise is that geographic proximity can be used to satisfy particular relationships.

• For example, when the activity relationships reflect the magnitudes of material flows, pairs of activities having the greatest pair wise flow are located next to each other.

• Similarly, pairs of activities having an A rating are located adjacently.

70

2. REL chart example

71

2. Activity relationship diagram

72

Relationship diagram process

73

Relationship diagram process

74

Designing a layout

• After the block layout is ready, estimate is made of the space requirements.

• This includes space required for machines, equipments, products.

• Estimation of human resources needed is made based on the number of machines operated and production rate.

• Then, space relationship diagrams are made.

• What is the average number of patients demanding treatment?

• What is 150% of average estimated demand?• What is the service level for the 150% average

demand?

Capacity Levels - Example 1

Mid point X Probability P(x) X*P(x)75 0.10 7.5125 0.20 25175 0.30 52.5225 0.20 45275 0.15 41.25325 0.05 16.25

187.5

a. The average number of patients demanding treatment is 188

b. For 150%, average demand capacity is (1.5)(188)=282 patient treatment capacity is required

c. A 95% service level would require a 300 patient treatment capacity

• An organization must install enough automatic processors to provide 800,000 good units per year. Processing time is 30 seconds. But the processors are only 80% efficient. How many automatic processors are required if the firm operates 2000 hours per year?


• Individual processor capacity = 3600 sec/hr30 sec / unit = 120 units/mac hour

Required capacity = 800,000 units/year(2000 hr/year)(0.8)500 units / hour

No. of processors required = 500 units/hour = 4.2 120 units/mach hr


79

Sample: Space relationship table

80

Example: Alternate block diagram

81

Example: Alternate block diagram

Dell Computer CompanyMass customization provides a competitive

advantage

Sell custom-built PCs directly to consumer Lean production processes and good product

design allow responsiveness Integrate the Web into every aspect of its business Focus research on software designed to make

installation and configuration of its PCs fast and simple

Process, Volume, and Variety

Process Focusprojects, job shops

(machine, print, carpentry)

Standard Register

Repetitive(autos, motorcycles)

Harley-Davidson

Product Focus(commercial baked goods, steel, glass)

Nucor Steel

High Varietyone or few units per run, high variety(allows customization)

Changes in Modulesmodest runs, standardized modules

Changes in Attributes (such as grade, quality, size, thickness, etc.) long runs only

Mass Customization(difficult to achieve, but

huge rewards)Dell Computer

Poor Strategy (Both fixed and variable

costs are high)

Low Volume

Repetitive Process

High Volume

VolumeFigure 7.1

Process Strategies

How to produce a product or provide a service that Meets or exceeds customer requirements Meets cost and managerial goals

Has long term effects on Efficiency and production flexibility Costs and quality

Process Strategies

Four basic strategies

Process focus Repetitive focus Product focus Mass customization

Within these basic strategies there are many ways they may be implemented

Process Focus Facilities are organized around specific activities

or processes General purpose equipment and skilled

personnel High degree of product flexibility Typically high costs and low equipment

utilization Product flows may vary considerably making

planning and scheduling a challenge

Process Focus

Many inputs

Many variety of outputs

Job Shop

Man

y de

part

men

ts a

nd

man

y ro

uting

s

Accounting

Process Flow Diagram

Information flowMaterial flow

Figure 7.2

COLLATING DEPT GLUING, BINDING, STAPLING, LABELING

POLYWRAP DEPT

SHIPPING

Customer

PRINTING DEPT

PREPRESS DEPTVendors

Receiving

Warehouse

Purchasing

Customer

Customer sales representative

Repetitive Focus

Facilities often organized as assembly lines Characterized by modules with parts and

assemblies made previously Modules may be combined for many

output options Less flexibility than process-focused

facilities but more efficient

Repetitive Focus

Raw materials

and module inputs

Modules combined for many output options

Few modules

Automobile Assembly Line

Process Flow Diagram

THE ASSEMBLY LINETESTING28 tests

Oil tank work cell

Shocks and forks

Handlebars

Fender work cell

Air cleaners

Fluids and mufflers

Fuel tank work cell

Wheel work cell

Roller testing

Incoming parts

From Milwaukee on a JIT arrival schedule

Engines and transmissions

Frame tube bending

Frame-building work cells

Frame machining

Hot-paint frame painting

Crating

Figure 7.3

Product Focus

Facilities are organized by product High volume but low variety of products Long, continuous production runs enable

efficient processes Typically high fixed cost but low variable

cost Generally less skilled labor

Product Focus

Few inputs

Output variations in size, shape,

and packaging

Continuous Work Flow

Product FocusNucor Steel Plant

Conti

nuou

s ca

ster

Continuous cast steel sheared into 24-ton slabs

Hot tunnel furnace - 300 ft

Hot mill for finishing, cooling, and coiling

D

E F

GHI

Scrap steel

Ladle of molten steelElectric furnace

A

BC

Mass Customization

The rapid, low-cost production of goods and service to satisfy increasingly unique customer desires

Combines the flexibility of a process focus with the efficiency of a product focus

Mass Customization

Vehicle models140 286Vehicle types 18 1,212Bicycle types 8 19Software titles 0 400,000Web sites 0 98,116,993Movie releases267 458New book titles40,530 77,446Houston TV channels 5 185Breakfast cereals160 340Items (SKUs) in 14,000 150,000 supermarketsLCD TVs 0 102

Number of ChoicesItem 1970s 21st Century

Table 7.1

Mass Customization

Mass Customization

Effective scheduling techniques

Rapid throughput techniques

Repetitive FocusFlexible peopleand equipment

Process-FocusedHigh variety, low volume

Low utilization (5% to 25%)General-purpose equipment

Product-FocusedLow variety, high volume

High utilization (70% to 90%)Specialized equipment

Figure 7.5

Modular techniquesSupportive

supply chains

Comparison of Processes

Process Focus

(Low volume, high variety)

Repetitive Focus

(Modular)

Product Focus

(High-volume, low-variety)

Mass Customization

(High-volume, high-variety)

Small quantity, large variety of products

Long runs, standardized product made from modules

Large quantity, small variety of products

Large quantity, large variety of products

General purpose equipment

Special equipment aids in use of assembly line

Special purpose equipment

Rapid changeover on flexible equipment

Table 7.2


Process Focus


Repetitive Focus

(Modular)

Product Focus


Mass Customization


Operators are broadly skilled

Employees are modestly trained

Operators are less broadly skilled

Flexible operators are trained for the necessary customization

Many job instructions as each job changes

Repetition reduces training and changes in job instructions

Few work orders and job instructions because jobs standardized

Custom orders require many job instructions

Table 7.2


Process Focus


Repetitive Focus

(Modular)

Product Focus


Mass Customization


Raw material inventories high

JIT procurement techniques used

Raw material inventories are low

Raw material inventories are low

Work-in-process is high

JIT inventory techniques used

Work-in-process inventory is low

Work-in-process inventory driven down by JIT, lean production

Table 7.2


Process Focus


Repetitive Focus

(Modular)

Product Focus


Mass Customization


Units move slowly through the plant

Movement is measured in hours and days

Swift movement of unit through the facility is typical

Goods move swiftly through the facility

Finished goods made to order

Finished goods made to frequent forecast

Finished goods made to forecast and stored

Finished goods often build-to-order (BTO)

Table 7.2


Process Focus


Repetitive Focus

(Modular)

Product Focus


Mass Customization


Scheduling is complex, trade-offs between inventory, availability, customer service

Scheduling based on building various models from a variety of modules to forecasts

Relatively simple scheduling, establishing output rate to meet forecasts

Sophisticated scheduling required to accommodate custom orders

Table 7.2


Process Focus


Repetitive Focus

(Modular)

Product Focus


Mass Customization


Fixed costs low, variable costs high

Fixed costs dependent on flexibility of the facility

Fixed costs high, variable costs low

Fixed costs high, variable costs must be low

Costing estimated before job, known only after the job

Costs usually known due to extensive experience

High fixed costs mean costs dependent on utilization of capacity

High fixed costs and dynamic variable costs make costing a challenge

Table 7.2

Crossover Charts

Fixed costs

Variable costs

$

High volume, low varietyProcess C

Fixed costs

Variable costs$

RepetitiveProcess B

Fixed costs

Variable costs$

Low volume, high varietyProcess A

Fixed cost Process A Fixed cost

Process BFixed cost Process C

Tota

l cos

t

Total cost

Total cost

V1(2,857) V2 (6,666)

400,000

300,000

200,000

Volume

$

Figure 7.6

Focused Processes

Focus brings efficiency Focus on depth of product line rather

than breadth Focus can be

Customers Products Service Technology

Changing Processes

Difficult and expensive May mean starting over Process strategy determines

transformation strategy for an extended period

Important to get it right

Process Analysis and Design Flow Diagrams - Shows the movement of

materials Time-Function Mapping - Shows flows and time

frame Value-Stream Mapping - Shows flows and time

and value added beyond the immediate organization

Process Charts - Uses symbols to show key activities

Service Blueprinting - focuses on customer/provider interaction

“Baseline” Time-Function Map

Customer

Sales

Production control

Plant A

Warehouse

Plant B

Transport Move

Receive product

Extrude

Wait

Move

Wait

Print

Wait

Order product

Process order

Wait

12 days 13 days 1 day 4 days 1 day 10 days 1 day 0 day 1 day

52 daysFigure 7.7

“Target” Time-Function Map

Customer

Sales

Production control

Plant

Warehouse

Transport Move

Receive product

Extrude

Wait

Print

Order product

Process order

Wait

1 day 2 days 1 day 1 day 1 day6 days

Figure 7.7

Value-Stream Mapping

Figure 7.8

Service Blueprint

Focuses on the customer and provider interaction

Defines three levels of interaction Each level has different management

issues Identifies potential failure points

Notify customer the car is ready

Customer departs

Customer pays bill

F

F

Service BlueprintPersonal Greeting Service Diagnosis Perform Service Friendly Close

Level#3

Level#1

Level#2

Figure 7.10

No

Notifycustomer

and recommendan alternative

provider

Customer arrives for service

Warm greeting and obtain service

request

F

Direct customer to waiting room

F

Perform required work

Prepare invoice

YesYes

F

F

Standard request

Determine specifics

No

Canservice be

done and does customer approve?

F F

Process Analysis Tools Flowcharts provide a view of the big

picture Time-function mapping adds rigor and a

time element Value-stream analysis extends to

customers and suppliers Process charts show detail Service blueprint focuses on customer

interaction

Service Factory Service Shop

Degree of CustomizationLow High

Deg

ree

of L

abor

Low

High

Mass Service Professional Service

Service Process Matrix

Commercial banking

Private banking

General-purpose law firms

Law clinicsSpecialized hospitals

Hospitals

Full-service stockbroker

Limited-service stockbroker

RetailingBoutiques

Warehouse and catalog stores

Fast-food restaurants

Fine-dining restaurants

Airlines

No-frills airlinesFigure 7.11

Service Process Matrix

Labor involvement is high Selection and training highly important Focus on human resources Personalized services

Mass Service and Professional Service

Service Factory and Service Shop Automation of standardized services Low labor intensity responds well to process

technology and scheduling Tight control required to maintain standards

Improving Service Productivity

Strategy Technique Example

Separation Structure service so customers must go where service is offered

Bank customers go to a manager to open a new account, to loan officers for loans, and to tellers for deposits

Self-service Self-service so customers examine, compare, and evaluate at their own pace

Supermarkets and department stores, Internet ordering

Table 7.3


Postponement Customizing at delivery

Customizing vans at delivery rather than at production

Focus Restricting the offerings

Limited-menu restaurant

Modules Modular selection of service, modular production

Investment and insurance selection, prepackaged food modules in restaurants


Table 7.3


Automation Separating services that may lend themselves to automation

Automatic teller machines

Scheduling Precise personnel scheduling

Scheduling ticket counter personnel at 15-minute intervals at airlines

Training Clarifying the service options, explaining how to avoid problems

Investment counselor, funeral directors, after-sale maintenance personnel


Table 7.3

Improving Service Processes

LayoutProduct exposure, customer education,

product enhancement Human Resources

Recruiting and training Impact of flexibility

Equipment and Technology

Often complex decisions Possible competitive advantage

Flexibility Stable processes

May allow enlarging the scope of the processes

Production Technology Machine technology Automatic identification

systems (AISs) Process control Vision system Robot Automated storage and retrieval systems (ASRSs) Automated guided vehicles (AGVs) Flexible manufacturing systems (FMSs) Computer-integrated manufacturing (CIM)

Machine Technology

Increased precision Increased productivity Increased flexibility Improved environmental impact Reduced changeover time Decreased size Reduced power requirements

Automatic Identification Systems (AISs)

Improved data acquisition Reduced data entry errors Increased speed Increased scope

of process automation

Example – Bar codes and RFID

Process Control

Increased process stability Increased process precision Real-time provision of information for

process evaluation Data available in many forms

Process Control Software

Vision Systems

Particular aid to inspection Consistently accurate Never bored Modest cost Superior to individuals performing the

same tasks

Robots

Perform monotonous or dangerous tasks Perform tasks requiring significant

strength or endurance Generally enhanced consistency and

accuracy

Automated Storage and Retrieval Systems (ASRSs)

Automated placement and withdrawal of parts and products

Reduced errors and labor Particularly useful in inventory and test

areas of manufacturing firms

Automated Guided Vehicle (AGVs)

Electronically guided and controlled carts Used for movement of products and/or

individuals

Flexible Manufacturing Systems (FMSs)

Computer controls both the workstation and the material handling equipment

Enhance flexibility and reduced waste Can economically produce low volume at high

quality Reduced changeover time and increased

utilization Stringent communication requirement between

components

Computer-Integrated Manufacturing (CIM)

Extension of flexible manufacturing systems Backwards to engineering and inventory control Forward into warehousing and shipping Can also include financial and customer service areas

Reducing the distinction between low-volume/high-variety, and high-volume/low-variety production

Computer-Integrated

Manufacturing (CIM)

Figure 7.12

Technology in ServicesService Industry Example

Financial Services

Debit cards, electronic funds transfer, ATMs, Internet stock trading

Education Electronic bulletin boards, on-line journals, WebCT and Blackboard

Utilities and government

Automated one-man garbage trucks, optical mail and bomb scanners, flood warning systems

Restaurants and foods

Wireless orders from waiters to kitchen, robot butchering, transponders on cars that track sales at drive-throughs

Communications Electronic publishing, interactive TV

Table 7.4

Technology in ServicesService Industry Example

Hotels Electronic check-in/check-out, electronic key/lock system

Wholesale/retail trade

ATM-like kiosks, point-of-sale (POS) terminals, e-commerce, electronic communication between store and supplier, bar coded data

Transportation Automatic toll booths, satellite-directed navigation systems

Health care Online patient-monitoring, online medical information systems, robotic surgery

Airlines Ticketless travel, scheduling, Internet purchases

Table 7.4

Process Redesign The fundamental rethinking of business

processes to bring about dramatic improvements in performance

Relies on reevaluating the purpose of the process and questioning both the purpose and the underlying assumptions

Requires reexamination of the basic process and its objectives

Focuses on activities that cross functional lines Any process is a candidate for redesign

Ethics and Environmentally Friendly Processes

Encourage recycling Efficient use of resources Reduction of waste by-products Use less harmful ingredients Use less energy

Reduce the negative impact on the environment

Quality Management

Introduction Session 31

137

Defining Quality

The totality of features and characteristics of a product or service

that bears on its ability to satisfy stated or implied needs

American Society for Quality

138

Different Views

User-based – better performance, more features

Manufacturing-based – conformance to standards, making it right the first time

Product-based – specific and measurable attributes of the product

139

Further Definitions

• “Quality is customer satisfaction”• "fitness for use” (the product should be suitable for

the intended purpose) and• "right first time" (mistakes should be eliminated).

• Unfolding the above definition, defining the word customer: A customer is anyone who is impacted by the product or process:– External customers– Internal customers

140

What is Product?

• A “product” is the output of any process. Three categories

• Goods• Software• Service

141

Customer Satisfaction

• Customer Satisfaction is achieved through two components– Product features and – Freedom from deficiencies

142

• Product features– Refers to the quality of design– The customer population can be segmented by

the level or “grade” of quality desired• Freedom from deficiencies

– It refers to quality of conformance– It is stated in different units, e.g. errors, defects,

failures


143

Product features Freedom from deficienciesPerformance Product free of defects and errors at delivery,

during usage, and during servicingReliability Sales, billing, and other business free of errorsDurabilityEase of useServiceabilityAestheticsAccuracyTimelinessPerceived qualityValueReputation


144

JURAN’S TRILOGY ANDQUALITY COSTS

Session 32

145

Universal Process of Managing QualityQuality Planning Quality control Quality ImprovementEstablish quality goals Choose control

subjectsProve the need

Identify customers Choose unit of measure

Identify projects

Discover customer needs Set goals Organize project teamsDevelop product features Create a sensor Diagnose the causesDevelop process features Measure actual

performanceProvide remedies, prove that remedies are effective

Establish process controls, transfer to operations

Interpret the difference

Deal with resistance to change

Take action on the difference

Control to hold the gains

146

• An emphasis on quality can be supportive by identifying and eliminating – the causes of errors and rework, – thereby reducing costs and – making more units of product available

Not over-emphasis or

misguided quality!

Freedom From Deficiencies

147

Freedom From Deficiencies

Lower Deficiencies

Cycle Time

Cost

WasteWarranty

148

Quality Costs

• Internal failure costs• External failure costs• Appraisal costs• Prevention costs

149

Internal failure costs

• These are costs associated with defects (errors, non-conformance, etc.) that are found prior to transfer of the product to the customer

150

• Scrap : the labour, material, and overhead on productive products that cannot be economically repaired

• Rework: the cost of correcting defectives to make them conform to specifications

• Failure analysis: cost of analysing nonconforming product to determine causes


151

• Scrap and rework supplies: costs of scrap and rework due to nonconforming product received from suppliers

• One hundred per cent sorting inspection: costs of finding defective units in product lots which contain unacceptably high levels of defectives

• Reinspection and retesting: costs of reinspection and retesting of products that have undergone rework or other revision


152

• Avoidable process losses: costs of losses that occur even with conforming product

• Downgrading : the difference between the normal selling price and the reduced produce due to quality reasons


153

External Failure Costs

These are costs associated with defects that are found after product is shipped to the customer.

• Warranty charges: Costs involved in replacing or making repairs to products that are still within the warranty period

• Complaint adjustment: costs of investigation and adjustment of justified complaints attributable to defective product or installation

• Returned material: cost associated with receipt and replacement

• Allowances: costs of concessions made to customers

154

Appraisal costs

These are costs incurred in determining the degree of conformance to quality requirements

• Incoming inspection and testing• In-process inspection and testing• Final inspection and testing• Product quality audits• Maintaining accuracy of testing equipments• Inspection and testing of equipment• Evaluation of stock

155

Prevention costsThese are costs incurred in keeping failure and

appraisal costs to a minimum• Quality planning : the activities that create overall

quality plan• New product review: cost of reliability engineering

and other quality related activities associated with the launching of new designs

• Process control: costs of in-process inspection and testing the status of the process

156

• Quality audits: costs of evaluating the execution of activities

• Supplier quality evaluation: costs of evaluating a supplier prior to supplier selection, auditing the activities during the contract

• Training: costs of preparing and conducting the training

157

Prevention costs

Quality CostsHead Amount %Cost of quality failuresDefective stock 3,276 0.37%Repairs to product 73,329 8.31Collect scrap 2,288 0.26Waste scrap 1,87,428 21.26Consumer adjustments 4,08,200 46.31Downgrading products 22,838 2.59Customer ill will Not countedCustomer policy adjustment Not counted

6,97,259 79.10%

158

Cost of appraisalIncoming inspection 32,655 2.68Inspection 1 32,582 3.70Inspection 2 25,200 2.86Spot-check inspection 65,910 7.37

1,47,347 16.61%Cost of PreventionLocal plant quality 7,848 0.89Control engineering, corporate quality

30,000 3.40

37,848 4.29%Grand Total 8,82,454 100.00%

159

Quality Costs

Optimum segment of quality cost model

160

Zone of improvement projectsFailure costs >70%

Zone of indifferenceFailure costs ~ 50%Emphasize is on Quality control

Zone of indifferenceFailure costs <40%Appraisal cost >50%

Gurus of QualityName ContributionShewart Control chart theory with control limits,

assignable and chance causes of variation and rational subgroups

Deming 14 point theory provides the management to improve quality, productivity and competitive position

Juran Juran’s Trilogy for managing quality – being carried out by quality planning, control and improvement

Feiganbaum Customer satisfaction, genuine management involvement, employee involvement, first-line supervision leadership, and company-wide quality control

161

Ishikawa Cause and effect diagram

Crosby “Quality is free”“doing it right the first time”

Taguchi Developed loss function concept that combines cost, target and variation in to one metric. Because the lost function is reactive, he developed the signal to noise ratio as a proactive equivalent

162

Gurus of Quality

STATISTICAL PROCESS CONTROL

163

Variability is inherent in every processNatural or common causes Special or assignable causes

Provides a statistical signal when assignable causes are present

Detect and eliminate assignable causes of variation

Statistical Process Control (SPC)

164

Variation

• Three categories of variation– Within piece variation– Piece to piece variation that occurs among pieces

produced at the same time– Time-to-time variation that occurs in product

produced at different times of the day

• Variation is present due to a combination of factors– Men– Material– Machine– Environment– Inspection

Variation

STATISTICAL PROCESS CONTROL

Session 35

167

Natural Variations

Also called common causes Affect virtually all production processes Expected amount of variation Output measures follow a probability

distribution For any distribution there is a measure of

central tendency and dispersion If the distribution of outputs falls within

acceptable limits, the process is said to be “in control”

168

Assignable Variations

Also called special causes of variation Generally this is some change in the process

Variations that can be traced to a specific reason The objective is to discover when assignable

causes are present Eliminate the bad causes Incorporate the good causes

169

Samples

To measure the process, we take samples and analyze the sample statistics following these steps

(a) Samples of the product, say five boxes of cereal taken off the filling machine line, vary from each other in weightFr

eque

ncy

Weight

#

## #

##

##

#

# # ## # ##

# # ## # ## # ##

Each of these represents one

sample of five boxes of cereal

170

Samples


(b) After enough samples are taken from a stable process, they form a pattern called a distribution

The solid line represents the

distribution

Freq

uenc

y

Weight171

Samples


(c) There are many types of distributions, including the normal (bell-shaped) distribution, but distributions do differ in terms of central tendency (mean), standard deviation or variance, and shape

Weight

Central tendency

Weight

Variation

Weight

Shape

Freq

uenc

y

172

Samples


(d) If only natural causes of variation are present, the output of a process forms a distribution that is stable over time and is predictable Weight

Time

Freq

uenc

y Prediction

173

Samples


(e) If assignable causes are present, the process output is not stable over time and is not predicable

WeightTime

Freq

uenc

y Prediction

????

???

???

???

???

???

174

Control Charts

Constructed from historical data, the purpose of control charts is to help distinguish between natural variations and variations due to assignable causes

175

Process Control

Frequency

(weight, length, speed, etc.)Size

Lower control limit Upper control limit

(a) In statistical control and capable of producing within control limits

(b) In statistical control but not capable of producing within control limits

(c) Out of control

176

Types of Data

Characteristics that can take any real value

May be in whole or in fractional numbers

Continuous random variables

Variables Attributes Defect-related

characteristics Classify products as

either good or bad or count defects

Categorical or discrete random variables

177

Central Limit Theorem

Regardless of the distribution of the population, the distribution of sample means drawn from the population will tend to follow a normal curve

1. The mean of the sampling distribution (x) will be the same as the population mean m

x = m

s nsx =

2. The standard deviation of the sampling distribution (sx) will equal the population standard deviation (s) divided by the square root of the sample size, n

178

Population and Sampling Distributions

Three population distributions

Beta

Normal

Uniform

Distribution of sample means

Standard deviation of the sample means

= sx =s

n

Mean of sample means = x

| | | | | | |

-3sx -2sx -1sx x +1sx +2sx +3sx

99.73% of all xfall within ± 3sx

95.45% fall within ± 2sx

179

Sampling Distribution

x = m(mean)

Sampling distribution of means

Process distribution of means

180

Control charts for Variables

X bar and R chart

181

Control Charts for Variables

For variables that have continuous dimensions Weight, speed, length,

strength, etc. x-charts are to control

the central tendency of the process R-charts are to control the dispersion of the

process These two charts must be used together

182

Variable control charts

• Quality characteristic– Should be measurable and can be expressed in

numbers• Subgroup size and Method

– A rational subgroup is one in which the variations within the group is only

– Within group variation is used to determine the control limits

– Variation between subgroups is used to evaluate long-term stability

Setting Chart Limits

For x-Charts when we know s

Upper control limit (UCL) = x + zsx

Lower control limit (LCL) = x - zsx

where x = mean of the sample means or a target value set for the processz = number of normal standard deviationssx = standard deviation of the sample means

= s/ ns = population standard deviationn = sample size

184

Setting Control Limits

Hour 1Sample Weight ofNumber Oat Flakes

1 172 133 164 185 176 167 158 179 16

Mean 16.1s = 1

Hour Mean Hour Mean1 16.1 7 15.22 16.8 8 16.43 15.5 9 16.34 16.5 10 14.85 16.5 11 14.26 16.4 12 17.3

n = 9

LCLx = x - zsx = 16 - 3(1/3) = 15 ozs

For 99.73% control limits, z = 3

UCLx = x + zsx = 16 + 3(1/3) = 17 ozs

185

17 = UCL

15 = LCL

16 = Mean

Control Chart for sample of 9 boxes

Sample number

| | | | | | | | | | | |1 2 3 4 5 6 7 8 9 10 11 12

Variation due to assignable

causes

Variation due to assignable

causes

Variation due to natural causes

Out of control

Out of control

186


For x-Charts when we don’t know s

Lower control limit (LCL) = x - A2R

Upper control limit (UCL) = x + A2R

where R = average range of the samplesA2 = control chart factor found in Table x = mean of the sample means

187


Control Chart Factors

Sample Size Mean Factor Upper Range Lower Range n A2 D4 D3

2 1.880 3.268 03 1.023 2.574 04 .729 2.282 05 .577 2.115 06 .483 2.004 07 .419 1.924 0.0768 .373 1.864 0.1369 .337 1.816 0.184

10 .308 1.777 0.22312 .266 1.716 0.284

188

Process average x = 12 ouncesAverage range R = .25Sample size n = 5

189



UCLx = x + A2R= 12 + (.577)(.25)= 12 + .144= 12.144 ounces


From previous

Table

190

UCLx = x + A2R= 12 + (.577)(.25)= 12 + .144= 12.144 ounces

LCLx = x - A2R= 12 - .144= 11.857 ounces


UCL = 12.144

Mean = 12

LCL = 11.857

191


R – Chart

Type of variables control chart Shows sample ranges over time

Difference between smallest and largest values in sample

Monitors process variability Independent from process mean

192

Setting Chart Limits

For R-Charts

Lower control limit (LCLR) = D3R

Upper control limit (UCLR) = D4R

whereR = average range of the samplesD3 and D4 = control chart factors from Table

193


UCLR = D4R= (2.115)(5.3)= 11.2 pounds

LCLR = D3R= (0)(5.3)= 0 pounds

Average range R = 5.3 poundsSample size n = 5From Table S6.1 D4 = 2.115, D3 = 0

UCL = 11.2

Mean = 5.3

LCL = 0

194

Mean and Range Charts

(a)These sampling distributions result in the charts below

(Sampling mean is shifting upward but range is consistent)

R-chart(R-chart does not detect change in mean)

UCL

LCL

x-chart(x-chart detects shift in central tendency)

UCL

LCL

195

Mean and Range Charts

R-chart(R-chart detects increase in dispersion)

UCL

LCL

(b)These sampling distributions result in the charts below

(Sampling mean is constant but dispersion is increasing)

x-chart(x-chart does not detect the increase in dispersion)

UCL

LCL

196

CONTROL CHARTS FOR ATTRIBUTES

Session 36

Construction of X and R charts

• When setting up X and R charts, first set the R chart

• Because the control limits on the X chart depend on the process variability

• Unless process variability is in control, there is no meaning in the control limits

198

Process capability

Ri is given as 8.1302

X = 37.64Sample Number is 25And sample size is 5• Hence R = 8.1302/25 = 0.32521• LCLR=R*D3= 0.32521*0=0

• UCLR = R*D4=0.3252*(2.114)• The process standard deviation may be estimated as • = R/d2 = 0.32521/2.326 = 0.1398

199

Specification Limits are: 1.50±0.50

• X (double bar) = 1.5056; UCL = 1.69325; LCL=1.31795• The process capability can be measured as, estimating the

fraction of non-conforming products produced as

200

00035.099980.0100015.0

)53648.3(1)61660.3(

1398.0

5056.100.21

1398.0

5056.100.1

}00.2{}00.1{

xPxPp

That is, 0.035% of the product will be outside of the specification

Process Capability

Steps In Creating Control Charts

1. Take samples from the population and compute the appropriate sample statistic

2. Use the sample statistic to calculate control limits and draw the control chart

3. Plot sample results on the control chart and determine the state of the process (in or out of control)

4. Investigate possible assignable causes and take any indicated actions

5. Continue sampling from the process and reset the control limits when necessary

201

Types of Attribute Charts

• Control chart for fraction non conforming – fraction of non-conforming or defective product produced (p chart)

• Control chart for non-conformities – is used to deal with the number of defects or nonconformities ( c chart)

• Control chart for non-conformities per unit –

(u chart )

The Control chart for fraction nonconforming

• The fraction non conforming is defined as the ratio of the number of non conforming items in a population to the total number of items in that population

• The statistics principles for fraction nonconforming is binomial distribution

• The sample fraction non conforming is defined as the ratio of the number of non conforming units in the sample D to the sample size n; that is

• The distribution of ˆ can be obtained from the binomial

n

Dp ˆ

n

pp

p

)1(

is variance theand

ismean the

2p

The Control chart for fraction nonconforming

P

Fraction non conforming control chart

n

pppLCL

pCL

n

pppUCL

)1(

)1(

Problem• Frozen orange juice concentrate is packed in 6-oz cardboard cans. These

cans are formed on a machine by spinning them from cardboard stock and attaching a metal bottom panel.

• By inspection of a can, we may determine whether, when filled it could possibly leak either on the side seam or around the bottom joint. Such a non conforming can has an improper seal on either the side seam or the bottom panel.

• Set up a control to improve the fraction of non conforming cans produced by this machine

• To establish the control chart, 30 samples of n=50 cans each were selected at ½ hour intervals over a 3-shift period in which the machine was in continuous operations.

• The data are shown in the table. • We construct a preliminary control chart to see whether the process was

in control when this data was collected.• Since the 30 samples contained

30

1347

i iD

Sample Number

Number of non-

conforming cans Di

Sample fraction non-conforming Pi

Sample Number

Number of non-

conforming cans Di


1 12 0.24 16 8 0.16

2 15 0.30 17 10 0.20

3 8 0.16 18 5 0.10

4 10 0.20 19 13 0.26

5 4 0.08 20 11 0.22

6 7 0.14 21 20 0.40

7 16 0.32 22 18 0.36

8 9 0.18 23 24 0.48

9 14 0.28 24 15 0.30

10 10 0.20 25 9 0.18

11 5 0.10 26 12 0.24

12 6 0.12 27 7 0.14

13 17 0.34 28 13 0.26

14 12 0.24 29 9 0.18

15 22 0.44 30 6 0.12

347 P(bar)=0.2313

2313.0)50)(30(

3471

mn

Dp

m

i i

)0596.0(32313.050

)7687.0(2313.02313.0

)1(

n

pppUCL

0524.0

2313.0

4102.0

LCL

CL

UCL

Solution

Sample Number

Number of non-conforming cans

Di

Sample fraction non-

conforming Pi

Sample Number

Number of non-

conforming cans Di

Sample fraction non-

conforming Pi

1 12 0.24 16 8 0.16

2 15 0.30 17 10 0.20

3 8 0.16 18 5 0.10

4 10 0.20 19 13 0.26

5 4 0.08 20 11 0.22

6 7 0.14 21 20 0.40

7 16 0.32 22 18 0.36

8 9 0.18 23 24 0.48

9 14 0.28 24 15 0.30

10 10 0.20 25 9 0.18

11 5 0.10 26 12 0.24

12 6 0.12 27 7 0.14

13 17 0.34 28 13 0.26

14 12 0.24 29 9 0.18

15 22 0.44 30 6 0.12

347 P(bar)=0.2313

Revised Center Line

• The new center line is calculated as

2150.0)50)(28(

3471

mn

Dp

m

i i

0407.050

)7850.0(2150.032150.0

3893.050

)7850.0(2150.032150.0

)1(

LCL

n

pppUCL

The process is under controlBut the fraction nonconforming is HIGH!

Sample Number

Number of non-

conforming cans Di


Sample Number

Number of non-conforming

cans Di

Sample fraction non-conforming

Pi

31 9 0.18 43 3 0.0632 6 0.12 44 6 0.1233 12 0.24 45 5 0.1034 5 0.10 46 4 0.0835 6 0.12 47 8 0.1636 4 0.08 48 5 0.1037 6 0.12 49 6 0.1238 3 0.06 50 7 0.1439 7 0.14 51 5 0.1040 6 0.12 52 6 0.1241 2 0.04 53 3 0.0642 4 0.08 54 5 0.10

133 P(bar)=0.1108

00224.050

)8892.0(1108.01108.0

2440.050

)8892.0(1108.01108.0

)1(

LCL

n

pppUCL

Revised Control Limits

A hypothesis test that the process fraction nonconforming in the current process differs from the fraction nonconforming of the previous process

H0: p1=p2

H1: p1>p2

The test statistic is

21

210

11)ˆ1(ˆ

ˆˆ

nnpp

ppZ

1669.0 12001400

)1108.0)(1200()2150.0)(1400(

ˆˆˆ

21

2211

nn

pnpnp

10.7

1200

1

1400

1)8331.0(1669.0

1108.02150.0

11)ˆ1(ˆ

ˆˆ

0

21

210

Z

nnpp

ppZ

Zo = 7.10 > Z0.05= 1.645So we reject the Null hypothesisHence, it is concluded that there is a significant decrease in the process fallout

CONTROL CHARTS FOR NON CONFORMITIES PER UNIT

Control charts for non conformities per unit

• The average number of non conformities per unit is– U(bar)=x/n

• X is a Poisson random variable

n

uuLCL

uCenterLinen

uuUCL

3

3

U bar represents the observed average number of non conformities per unit in a preliminary set of data

Problem

• A personal computer manufacturer wishes to establish a control chart for nonconformities per unit on the final assembly line in 20 samples or 5 computers each are shown in the table

Sample No. i

Sample size, n Total number of Non conformities, xi

Average number of Non conformities per

unit, ui=xi/n

1 5 10 2.02 5 12 2.43 5 8 1.64 5 14 2.85 5 10 2.06 5 16 3.27 5 11 2.28 5 7 1.49 5 10 2.0

10 5 15 3.011 5 9 1.812 5 5 1.013 5 7 1.414 5 11 2.215 5 12 2.416 5 6 1.217 5 8 1.618 5 10 2.019 5 7 1.420 5 5 1.0

193 38.6

93.1

20/6.38

20

20

1

i

iuu

07.05

93.1393.13

93.1

79.35

93.1393.13

n

uuLCL

uCenterLine

n

uuUCL

Calculation of Control Limits

1 4 7 10 13 16 190

0.5

1

1.5

2

2.5

3

3.5

4

Average number of Non conformi-ties per unit, ui=xi/n

UCL

Center Line LCLLinear (LCL)

Construction of the u Control Chart

CONTROL CHART FOR ATTRIBUTES

221

Procedures with Variable Sample SizeRoll No.

No. of Square meters

Total no. of

nonconformities

Number of inspection units in roll, n

No. of non conformities per inspection unit ui

1 500 14 10.0 1.402 400 12 8.0 1.503 650 20 13.0 1.544 500 11 10.0 1.105 475 7 9.5 0.746 500 10 10.0 1.007 600 21 12.0 1.758 525 16 10.5 1.529 600 19 12.0 1.5810 625 23 12.5 1.84

153 107.50

20

1

153/107.5

1.42

i

i

uu

n

Roll No.

ni No. of non conformities per inspection unit ui

1 10.0 1.40 2.55 0.292 8.0 1.50 2.68 0.163 13.0 1.54 2.41 0.434 10.0 1.10 2.55 0.295 9.5 0.74 2.58 0.266 10.0 1.00 2.55 0.297 12.0 1.75 2.45 0.398 10.5 1.52 2.52 0.329 12.0 1.58 2.45 0.39

10 12.5 1.84 2.43 0.41

n

uuUCL 3

n

uuLCL 3

Calculation of Upper and Lower Control Limits

1 2 3 4 5 6 7 8 9 100

0.5

1

1.5

2

2.5

3

No. of non con-formities per inspection unit

UCL

LCL

Center Line

Construction of the u Control Chart

Choice between Attributes and Variable Control Charts

• Attributes control charts– Several quality characteristics can be considered

jointly and the unit classified as nonconforming if it fails to meet the specification on any one characteristic

– Expensive and time consuming measurements can be avoided

225

Variable control charts• Provides more useful information about process

performance• Specific information about the process mean

and variability can be obtained• They often provide leading indicators of

impending trouble• The attribute charts will react only after the

process has changed!226

Choice between Attributes and Variable control charts

Manufacturing Execution Systems

Session 30

Manufacturing Execution System

• Operations scheduling is at the heart of what is currently referred to as Manufacturing Execution systems (MES)

• An MES is an information system that schedules, dispatches, tracks, monitors and controls production on the factory floor

Work Center

• It is an area in a business in which productive resources are organized and work is completed

• A work center may be a single machine, a group of machines, or an area where a particular type of work is done

• These work centers are grouped according to function in a– job-shop environment; or – by product in a flow, assembly line; or– group technology cell configuration

• Scheduling involves determining the order for running the jobs, and also assigning a machine for each job

• Scheduling systems can use either infinite or finite loading

• Scheduling systems are distinguished in how they consider the capacity, in determining the schedule

• Another distinguishing feature is whether the schedule is generated forward or backward in time

Scheduling

Infinite and Finite Loading

• Infinite loading – when work is assigned to a work center simply based on what is needed over time. No consideration is given directly regarding the capacity, except for a rough cut capacity check

• Finite loading: Schedules in detail each resource using the setup time and run time required for each order. Theoretically, all schedules are feasible.

Forward and Backward Scheduling

• Forward Scheduling: refers the method in which the system takes an order and then schedules each operation that must be completed forward in time

• Backward scheduling: Starts from some date in the future (possibly due date) and schedules the required operations in reverse sequence

• MRP system is an example of an infinite, backward scheduling system

Machine/Labour limited

• Processes are referred to as either machine limited or labour limited

• Machine Limited: Equipment is the critical resources to be scheduled

• Labour Limited: People are the key resource to schedule

Type Product Typical scheduling approachContinuous process

Chemicals, steel, wires and cables, liquids, canned goods

Finite forward scheduling of the process; machine limited

High-volume manufacturing

Automobiles, telephones, fasteners, textiles, motors, household fixtures

Finite forward scheduling of the line; machine limited; parts are pulled to the line using just-in-time system

Mid-volume manufacturing

Industrial Parts, High-end consumer products

Infinite forward scheduling of the line; labour limited and machine limited as well; parts are pulled to the line using just-in-time system

Low-volume job shops

Custom or prototype equipment, specialized instruments, low-volume industrial products

Infinite, forward scheduling of jobs: usually labour limited, but certain functions may be machine limited MRP schedule determine priorities

Job sequencing

• The process of determining the job order on some machine or in some work center is known as sequencing

• Priority rules are the rules used in obtaining a sequence

Measures of schedule performance

• Meeting due dates of customers or downstream operations

• Minimizing the flow times• Minimizing work-in-process inventory• Minimizing idle time of machines or workers

Example – Single machine scheduling

• A firm received five orders. Specific scheduling data are provided in the table. There is only one machine. The firm must decide the sequence for the five orders. The evaluation criteria is minimum flow time. Use FCFS and SPT priority rule to decide the sequence

Job (in order of arrival)

Processing time (days)

Due date (days hence)

A 3 5

B 4 6

C 2 7

D 6 9

E 1 2

First Come First Served (FCFS) Rule

Job sequence Processing time (days)

Due date(days hence)

Flow time (days)

A 3 5 0+3 = 3

B 4 6 3 + 4=7

C 2 7 7+2=9

D 6 9 9+6=15

E 1 2 15+1=16

TOTAL FLOW TIME = 3+7+9+15+16=50 DAYSMEAN FLOW TIME = 50/5 = 10 DAYS

Comparing the due date of each job, with its flow time, we observe that only job A will be on timeJobs B, C, D and E will be late by 1, 2,6 and 14 days respectivelyOn average, a job will be late by (0+1+2+6+14)/5=4.6 days

Shortest Processing Time (SPT Rule)

Job sequence Processing time (days)

Due date(days hence)

Flow time (days)

E 1 2 0+1 = 1

C 2 7 1 +2 =3

A 3 5 3 + 3=6

B 4 6 6+4 = 10

D 6 9 10+6=16

TOTAL FLOW TIME = 1+3+6+10+16 =36 DAYSMEAN FLOW TIME = 36/5 = 7.2 DAYS

SPT results in a lower average flow time than FCFS rule, in addition, Job C and E will be ready before the due date, and job A is late by only one day.On average a job will be late by (0+0+1+4+7)/5=2.4 days

Scheduling n jobs on two machines

• Referred to as Johnson’s rule• Objective is to minimize the flow time from the

beginning of the first job until the finish of the last• It consists of the following steps:

– List the operation time for each job on both the machines– Select the shortest operation time– If the shortest time is for the first machine, do the job first, if

it is for the second machine, do the job last. In case of a tie, do the job on the first machine

– Repeat the above two steps for each remaining job until the schedule is complete

Job Operation time on machine 1 Operation time on machine 2

A 3 2

B 6 8

C 5 6

D 7 4

1 2 3 4

A

Step 2 and 3: Select the shortest operationJob A is shortest on Machine 2Hence job A is assigned first and scheduled lastOnce assigned it is not available further

Ist Assignment

Scheduling n jobs on two machines - Example

Job Operation time on machine 1 Operation time on machine 2

A 3 2

B 6 8

C 5 6

D 7 4

Step 4: Select the shortest operation among the remaining jobsJob D is shortest and again on Machine 2Hence job D is assigned second to lastOnce assigned it is not available further

1 2 3 4

D A


• Step 4: Job C is shortest on machine 1, among the remaining jobs, hence performed first

• The remaining job is B, with the shortest operation time in machine 1

1 2 3 4

C D A

1 2 3 4C B D A

All the jobs are sequenced . The flow time is 25 days


Machine 1 Job C Job B Job D Job A Idle but available for other work

Machine 2 Idle Job C Job B Job D Job A

0 5 11 19 25Cumulative time in days


Production Activity Control (PAC)

• Also referred as shop-floor control• A system for utilizing data from the shop floor

as well as data processing files to maintain and communicate status information on shop orders and work centers

Functions

• The major functions of PAC are:– Assigning priority of each shop order– Maintaining work-in-process quantity information– Providing actual output data for capacity control

purpose– Providing quantity by location by shop order for

WIP inventory and accounting purpose– Measuring efficiency, utilization, and productivity

of manpower and machine

Gantt Charts

• Smaller job shops and individual departments of large ones employ the Gantt chart to help plan and tract jobs

• It is a type of bar chart that plot tasks against time

Gantt chart representation

Job Monday Tuesday Wed Thurs Fri

A

B

C

D

Tools of PAC

1. The daily dispatch list – which jobs are to be run, there priority and how long each will take

2. Various status and exception reports – includinga. Anticipated delay report made out by the shop plannerb. Scrap reportsc. Rework reportsd. Performance summary reports – giving the number and

percentages of orders completed on schedule, lateness of unfilled orders, volume of output, and so on

e. Shortage list

3. An input/output control report – to monitor the workload capacity relationship for each workstation

Input output control

• It is a major feature of a manufacturing planning and control system

• Its major percept is that the planned work input to a work center should never exceed the planned work output

• When the input exceeds the output, back logs builds at the work center, which in turn increases the lead time estimates for jobs upstream.

• When jobs pile up at the work center, congestion occurs, processing becomes inefficient and the flow of work to downstream work centers becomes sporadic

Input output control report

Work ending 505 512 519 526Planned input 210 210 210 210

Actual input 110 150 140 130

Cumulative deviation

- 100 - 160 - 230 -310

Planned output 210 210 210 210

Actual output 140 120 160 120

Cumulative deviation

- 70 - 160 - 210 -300

• Looking first at the output part of the report, output is far below plan

• It would seem that the serious capacity problem exists for this work center.

• However, a look at the input part of the plan, makes it the serious capacity problem exists at an upstream work center, feeding this work center

• The control process would entail finding the cause of the upstream problems and adjusting capacity and inputs accordingly.


• The basic solution is simple• Either increase capacity at the bottleneck

station or reduce the input to it (input reduction at bottleneck work center)


255

Product Design

Process of Product Design Session 23

256

Organizing for Product Development

Historically – distinct departmentsDuties and responsibilities are definedDifficult to foster forward thinking

A ChampionProduct manager drives the product through

the product development system and related organizations

257

Product Design & Process Selection

Product design – the process of defining all of the companies product characteristics – Product design must support product manufacturability

(the ease with which a product can be made)– Product design defines a product’s characteristics of:

• appearance, • materials, • dimensions,

• tolerances, and• performance

standards.

Process Selection – the development of the process necessary to produce the designed product.

258

Team approachCross functional – representatives from all

disciplines or functionsProduct development teams, design for

manufacturability teams, value engineering teams

Japanese “whole organization” approachNo organizational divisions

Organizing for Product Development

Concurrent Engineering

259

260

The Product Design Process

Idea development: all products begin with an idea whether from:– customers, – competitors or– suppliers

Reverse engineering: buying a competitor’s product

261

Step 1 - Idea Development - Someone thinks of a need and a product/service design to satisfy it: customers, marketing, engineering, competitors, benchmarking, reverse engineering

Step 2 - Product Screening - Every business needs a formal/structured evaluation process: fit with facility and labor skills, size of market, contribution margin, break-even analysis, return on sales

Step 3 – Preliminary Design and Testing - Technical specifications are developed, prototypes built, testing starts

Step 4 – Final Design - Final design based on test results, facility, equipment, material, & labor skills defined, suppliers identified


262

• Idea developments selection affects– Product quality– Product cost– Customer satisfaction– Overall manufacturability – the ease with which

the product can be made


263

Research-Development-Engineering

RESEARCH(Idea Generation)

DEVELOPMENT(Product Screening

& Testing)

PRODUCT ENGINEERING(Final Design )

MANUFACTURING ENGINEERING

(Product Manufacture )

PLANT ENGINEERING

(Product continuity)

Phase 0 : Planning

Phase 1: Concept development

Phase 2: System level design

Phase 3: Detail Design

Phase 4: Testing and refinement

Phase 5: Production Rampup

Marketing

DesignConsider Product platform and architectureAssess new technologies

Investigate feasibility of product conceptsDevelop industrial design conceptsBuild and test experimental prototypes

Generate alternative product architecturesDefine major subsystems and interfacesRefine industrial design

Define part geometryChoose materialsAssign tolerancesCompete industrial design documentation

Reliability testingLife testingPerformance testingObtain regulatory approvalsImplement design changes

Evaluate early production outputs

Manufacturing

Other functions

265

Product Decisions

• Preliminary Design• Detailed Design

– Functional Design– Form Design– Production Design

266

Preliminary Design

• Transition from concept to reality• Prototypes are developed• Prototypes are tested for performance

characteristics • The process of finding the best design is called

optimization

267

DETAILED DESIGN

1. Functional Design– Market quality level– Materials Selection– Reliability– Maintainability

2. Form Design– Packaging

3. Production Design– Product Simplification– Product Diversification– Standardization– Modularity– Value Analysis

268

1. Functional Design

• Concerned with how the product works ( its performance)

• Management must be concerned with the relationships among market quality level, reliability and cost in deciding the technical specifications

269

1 a. Market Quality Level

• Is related to the market segments the product will serve

• High, moderate or low quality markets• The market quality will determine the material

selection, reliability and thereby the cost• There is a point of diminishing returns where

costs increased beyond a value

270

1 b. Materials Selection

• For a given market quality level• The quality and reliability of the materials

should meet specifications as prescribed by the standards

271

1 c. Reliability

• The life of a product is dependent on its design, the manufacturing quality, the conditions under which it is used

• Reliability refers to a product performing its intended function for a specified period of time (consistency of operation) under given conditions satisfactorily (without failure)

• It is expressed as a number that indicates as a measure of probability

• 0.90 reliability means, that a component will function as intended 90% of the times

272

1 d. Maintainability

• Refers to the ability of a product or system to stay in operating condition with a reasonable amount of effort

• It is expressed as a number that indicates the probability, that when specified maintenance is taken, a failed device will be restored to operable condition in a specified downtime

• Maintainability relates to maintenance costs, frequency of repair, service and operational costs

273

• Average availability = MTBF MTBF + MTTR

MRBF = Operating time / number of failuresMTTR = nonoperating time / number of failures

MTBF = Mean time between failures, or how long on the average the product operates before it fails

MTTR = mean time to repair, or how long on the average it takes to correct a failure

1 d. Maintainability

274

FORM DESIGN

• Relates to the physical appearance or shape of the product

• It is important for consumer goods

275

2 a. Packaging

• Package may be a box, can, bag, tube etc• Packaging is the use of containers, wrapping

materials, decorations and labelling to protect, promote, secure, preserve to increase the utility of the product

276

3. PRODUCTION DESIGN

• Product design take care of function, form and producibility.

• The producibility aspect is looked in to during the production design

277

3 a. Product Simplification

• Determination of optimum number of variety• Too much variety raises costs, too less retard

sales• Elimination of marginal product lines, types

and models• Simplification will reduce design complexity,

and the range of purchased products

278

• Opposite to simplification• Increased product lines and modes• Horizontal diversification• Vertical diversification• Lateral diversification

3 b. Product Diversification

279

Product Design

Design for ManufacturabilitySession 24

280

• To gain uniformity in the characteristics of a product such as shape, size, colour, quantity and performance

• Uniformity in work methods, equipment, machine parts, procedures and processes

• Permits interchangeability of parts and simplifies maintainability of the product

• Inventory is less

3 c. Standardization

281

3 d. Modular Design

Products designed in easily segmented components

Adds flexibility to both production and marketing

Improved ability to satisfy customer requirements

282

• Modularity develops building blocks• The modularity designs, develops and produce

parts in multitude of ways

3 d. Modularity

283

3 e. Value Analysis

Focuses on design improvement during production

Seeks improvements leading either to a better product or a product which can be produced more economically

284

Cost Reduction of a Bracket via Value Engineering

285

Issues for Product Development

Computer-aided design (CAD) Computer-aided manufacturing (CAM) Virtual reality technology Environmentally friendly design

286

Robust Design

Product is designed so that small variations in production or assembly do not adversely affect the product

Typically results in lower cost and higher quality

287

Using computers to design products and prepare engineering documentation

Shorter development cycles, improved accuracy, lower cost

Information and designs can be deployed worldwide

Computer Aided Design (CAD)

288

Computer-Aided Manufacturing (CAM)

Utilizing specialized computers and program to control manufacturing equipment

Often driven by the CAD system (CAD/CAM)

289

1. Product quality2. Shorter design time3. Production cost reductions4. Database availability5. New range of capabilities

Benefits of CAD/CAM

290

Virtual Reality Technology

Computer technology used to develop an interactive, 3-D model of a product from the basic CAD data

Allows people to ‘see’ the finished design before a physical model is built

Very effective in large-scale designs such as plant layout

291

Time-Based Competition

Product life cycles are becoming shorter and the rate of technological change is increasing

Developing new products faster can result in a competitive advantage

292

Product-by-Value Analysis

Lists products in descending order of their individual dollar contribution to the firm

Lists the total annual dollar contribution of the product

Helps management evaluate alternative strategies

293

Product-by-Value Analysis

Individual Contribution ($)

Total Annual Contribution ($)

Love Seat $102 $36,720

Arm Chair $87 $51,765

Foot Stool $12 $6,240

Recliner $136 $51,000

A Furniture Factory

294

Documents for Production

Engineering drawing Bill of Material Assembly drawing Assembly chart Route sheet Work order Engineering change notices (ECNs)

295

Engineering Drawings

296

Bills of Material

BOM for Panel Weldment

NUMBER DESCRIPTION QTY

A 60-71 PANEL WELDM’T 1

A 60-7 LOWER ROLLER ASSM. 1R 60-17 ROLLER 1R 60-428 PIN 1P 60-2 LOCKNUT 1

A 60-72 GUIDE ASSM. REAR 1R 60-57-1 SUPPORT ANGLE 1A 60-4 ROLLER ASSM. 102-50-1150 BOLT 1

A 60-73 GUIDE ASSM. FRONT 1A 60-74 SUPPORT WELDM’T 1R 60-99 WEAR PLATE 102-50-1150 BOLT 1

297

Assembly Drawing

Shows exploded view of product

Details relative locations to show how to assemble the product

Assembly Chart

1

2

3

4

5

6

7

8

9

10

11

R 209 Angle

R 207 Angle

Bolts w/nuts (2)

R 209 Angle

R 207 Angle

Bolt w/nut

R 404 Roller

Lock washer

Part number tag

Box w/packing material

Bolts w/nuts (2)

SA1

SA2

A1

A2

A3

A4

A5

Leftbracket

assembly

Rightbracket

assembly

Poka-yoke inspection

Identifies the point of production where components flow into subassemblies and ultimately into the final product

298

299

Route Sheet

Lists the operations and times required to produce a component

Setup OperationProcess Machine Operations Time Time/Unit

1 Auto Insert 2 Insert Component 1.5 .4 Set 56

2 Manual Insert Component .5 2.3 Insert 1 Set 12C

3 Wave Solder Solder all 1.5 4.1components to board

4 Test 4 Circuit integrity .25 .5test 4GY

300

Work Order

Instructions to produce a given quantity of a particular item, usually to a schedule

Work Order

Item Quantity Start Date Due Date

Production DeliveryDept Location

157C 125 5/2/08 5/4/08

F32 Dept K11

301

Engineering Change Notice (ECN)

A correction or modification to a product’s definition or documentationEngineering drawingsBill of material

Quite common with long product life cycles, long manufacturing lead times, or rapidly changing

technologies

302

Transition to Production

Responsibility must also transition as the product moves through its life cycle Line management takes over from design

Three common approaches to managing transition Project managers Product development teams Integrate product development and manufacturing

organizations

Introduction

• Product decisions determine what will be produced• Process decisions establish how the product will be

produced• Process decisions are concerned with the

transformation of inputs to outputs• The basic factors that affect the selection of a process

are:– The required volume or quantity of the product– The desired quality of the product– The equipment that is available or can be obtained

s303

304

Process Strategies

How to produce a product or provide a service that Meets or exceeds customer requirements Meets cost and managerial goals

Has long term effects on Efficiency and production flexibility Costs and quality

305

Four basic strategies

Process focus Repetitive focus Product focus Mass customization

Within these basic strategies there are many ways they may be implemented

Process Selection Strategies

306

Process Selection

• Product design considerations must include the process

• Intermittent processes:– Processes used to produce a variety of products

with different processing requirements in lower volumes. (such as healthcare facility)

• Repetitive processes:– Processes used to produce one or a few

standardized products in high volume. (such as a cafeteria, or car wash)

307

Product-Process Grid

308

Process Types

• Process types can be:– Project process – make a one-at-a-time product

exactly to customer specifications– Batch process – small quantities of product in

groups or batches based on customer orders or specifications

– Line process – large quantities of a standard product

– Continuous process – very high volumes of a fully standard product

• Process types exist on a continuum

309

Process Selection

One of a kind

Custom Off-the shelf

Commodity

Special Project

Intermittent

Continuous

PRODUCT

PRO

CESS

310

• Impact of Competitive Priorities: Intermittent operations are typically less competitive on cost than repetitive operations.

Linking Product Design & Process Selection

• Organizational Decisions appropriate for different types of operations

311

Linking Product Design & Process Selection: Summary

312

Flowchart for Different Product Strategies at Pizzaria

313

Process Decisions-Vertical Integration & Make or Buy

• A firm’s Make-or-Buy choices should be based on the following considerations:– Strategic impact– Available capacity– Expertise– Quality considerations– Speed– Cost (fixed cost + variable cost)make = Cost (fixed cost +

Variable cost)buy

314

Example 1Item A Item B Item C

Quantity needed 4000 700 12000Total material cost

Rs.600 Rs.10,000 Rs.9000

Total direct labour hours

200 1500 2000

Lowest supplier bid (price per unit)

Rs.0.80 Rs.50.00 Rs.2.00

Should you make or buy the following components?The direct labour cost is estimated as Rs.8.00 per hourThe fixed overhead rate per direct labour hour is Rs.6.00 .The fixed overhead continues even if there is no production

315

Item A

• Total cost to buy = (Rs.0.80 x 4000) =Rs.3200• Total cost to make =Rs.600+(Rs.8.00)200+

(Rs.6.00)200 =Rs.3400• Variable cost to make• = Rs.600+(Rs.8.00)200=Rs.2200• If unused capacity is available it is desirable to

make the item, since the variable cost is much less than the buy price

316

Item B

• Total cost to buy = (Rs.50 x 700) =Rs.35,000• Total cost to make =Rs.10,000+(Rs.8.00)1500+

(Rs.6.00)1500 =Rs.31,000• Variable cost to make• = Rs.10,000+(Rs.8.00)1500 = 22,000

Make alternative is cheaper than buying

317

Item C

• Total cost to buy = (Rs.2 x 12000) =Rs.24,000• Total cost to make =Rs.9,000+(Rs.8.00)2000+

(Rs.6.00)2000 =Rs.37,000• Variable cost to make• = Rs.9,000+(Rs.8.00)2000=Rs.25,000

Buy alternative is cheaper than making

318

Process Performance Metrics

Process performance metrics – defined: Measurement of different process characteristics that tell us how a process is performing– Determining if a process is functioning properly is

required– Determination requires measuring performance

319

Process Performance Metrics

320

Metrics Example: At Zelle’s Dry Cleaning, it takes an average of 3 ½ hours to dry clean & press a shirt, with value-added time estimated at 110 min. Workers are paid for a 7-hour workday but work 5 ½ hr/day, accounting for breaks and lunch. Zelle’s completes 25 shirts per day, while the industry standard is 28 for a comparable facility.

Process Velocity = (Throughput Time)/(Value-added time)= (210 minutes/shirt)/(110 minutes/shirt) = 1.90

Labor Utilization = (Time in Use)/(Time Available)= (5 ½ hr)/(7 hr) = .786 or 78.6%

Efficiency = (Actual Output)/(Standard Output)

= (25 shirts/day)/(28 shirts/day) = .89 or 89%

321

Throughput Time

A basic process performance metric is throughput time.

A lower throughput time means that more products can move through the system.

One goal of process improvement is to reduce throughput time.

322

Changing Processes

Difficult and expensive May mean starting over Process strategy determines

transformation strategy for an extended period

Important to get it right

323

Crossover Charts

Fixed costs

Variable costs

$

High volume, low varietyProcess C

Fixed costs

Variable costs$

RepetitiveProcess B

Fixed costs

Variable costs$

Low volume, high varietyProcess A

Fixed cost Process A Fixed cost

Process BFixed cost Process C

Tota

l cos

t

Total cost

Total cost

V1(2,857) V2 (6,666)

400,000

300,000

200,000

Volume

$

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