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NOTES

THE WORLD OF WORKTaco Barn Goes Japanese (Text pages 336-337)

Tony likes the idea of having all his employees make suggestions about improving the restau-rant’s operation and discusses this with his former boss, Jerry. During their discussion Jerry describes his recent visit to Japan for a leadership conference. He tells Tony about a presentation on the Japanese philosophy called kaizen, which commits continuously to reinventing ways to improve a given operation. (Toyota was an example.) Tony thought about the concept and how he could use this as an exercise with his staff in the near future.

1. How did Kevin’s performance on the MBO project inspire Tony to consider kaizen?

Tony thought that if one of his employees wanted to help improve the work environment, then other employees would likely want to make suggestions as to how the operation could be improved.

2. If the employee suggestion box only collects gum wrappers, why should this exercise be any dif-ferent?

By giving employees a real voice, they are more likely to invest in solutions and suggestions for making the operation run more effectively. Chapter 12 has several examples of these concepts from TQM, continuous improvement, Kaizen, quality at the source, six sigma, and lean manufacturing in which companies and their employees come together to provide the best product and service they can de-liver to their customers.

3. What kind of ideas do you think Tony’s team will come up with?

Each employee has their own views and opinions about what they see as the strengths and weak-nesses of the operation. They will develop ideas based on their own perspectives and points of view. Based on this, Tony will find a wide range of ideas and suggestions from this exercise.

4. Would this exercise work at your company? Why or why not?

Great opportunity to ask students about specific jobs students they have had and make sugges-tions about new or better ways the company or department could have been run.

LECTURE OUTLINE LECTURE NOTES

I. OPERATIONS CONTROLA. An effective operating system involves

both design and control.B. Good operating control can cut costs.C. The basic control concepts can be applied

to three areas: costs, quality, or inventory.

POWERPOINT 12-1Chapter Title (Refers to text page 336)

POWERPOINT 12-2Learning Objectives (Refers to text page 337)

12.1

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II. CONTROLLING OPERATIONS COSTSLEARNING OBJECTIVE 1Understand the basic requirements for control-ling operating costs. (Text pages 338-339)

A. Operations managers are concerned with three types of costs: labor, materials, and overhead.

1. VARIABLE OVERHEAD EXPENSES are those that change in proportion to the level of production or service.

2. FIXED OVERHEAD EXPENSES are those that do not change with fluctua-tions in the level of production or ser-vice.

B. Monthly budgets help monitor the major cost areas.

1. The operations manager monitors and compares actual costs to budgeted costs.

2. Methods used include direct observa-tion, written reports, etc.

C. A cost control system can identify what costs are out of control.

1. Managers must investigate to deter-mine the reasons why.

2. Once the cause is determined, correc-tive action can be taken.

POWERPOINT 12-3Operations Control(Refers to text page 338 )

BONUS INTERNETEXERCISE 12-1Touring HersheyStudents can take an online tour of the Hershey chocolate factory. See complete exer-cise on page 12.Error: Refer-ence source not found of this manual.

TEXT FIGURE 12.1Budget Costs: the Basis for Cost Control (Text page 338)

POWERPOINT 12-4Controlling Operations Costs (Refers to text pages 338-339)

12.2 MANAGEMENT: A REAL WORLD APPROACH: Instructor’s Resource Manual

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III. QUALITY MANAGEMENTLEARNING OBJECTIVE 2Define quality from the perspective of an oper-ations manager. (Text page 339-341)

A. For the operations manager, QUALITY is determined in relation to the specifications or standards set in the design stages.

1. Quality can mean different things to the customer and to the operation manager.

a. The operations manager judges quality in relation to the specifica-tions set in the design stages.

b. The customer makes a judgment based on service, reliability, per-formance, etc.

c. The design quality refers to the in-herent value of the product in the marketplace.

2. The quality of the organization’s prod-uct affects several areas.

a. lost of business because of dam-ages to its reputation

b. liability for quality problems c. costs for scrap, rework, repair, re-

placement, etc. d. productivity related to quality 3. Customers are willing to pay for quality

only up to a point. 4. To create a total customer response

program, the organization must:a. develop a new attitude toward

customers b. reduce management layers c. link quality and information sys-

POWERPOINT 12-5Quality Management(Refers to text pages 339-341)

TEXT FIGURE 12.2The Dimensions of Design Quality (Text page 339)

TEXT REFERENCE Study Skills Box: Make Good Study Habits a Life Skill!The key to long-term success is the ability to consistently produce. (Box in text on page 340.) An additional exercise and discussion is available in this chapter on page 12.Er-ror: Reference source not foundError: Reference sourcenot foundError: Reference source not found.

CRITICAL THINKING EXERCISE 12-1Total Quality Management in Service OrganizationsWhat experiences have stu-dents had with unsatisfactory service? See complete exer-cise on page 12.Error: Refer-ence source not found of this manual.

LECTURE LINK 12-1Redefining Production

CHAPTER 12: Operations Control 12.3

LECTURE OUTLINE LECTURE NOTESCASE INCIDENT 12.1Production Problems (Text page 344)

Braddock Company, a sheet fabrication company, is experiencing post-production problems with its wheelbarrow trays. Further investigation leads to some ideas about where the problem lies. One of the machine operators, Shorty McCune, has recently been accused of drinking on the job and fired. McCune may have been involved with the selection of a new raw metal supplier because of an attractive price break. The operations manager, Hal McCarthy, has to sort out all the problems that have led to this production incident and find some solutions to correct the problems.

1. What do you think is causing Braddock’s problem?

The control systems are inadequate. and problems have resulted because of this. Companies that produce products need to establish an effective operating system: design and control. Once a system is designed and implemented, the day-to-day operations must be controlled. For the operation to be effi-cient, the system must be monitored, quality must be assured, inventories must be managed, and all these functions must be accomplished within cost constraints.

2. Why is the problem more pronounced on the construction model than on the homeowner model?

The construction model requires more prefabrication work compared to the homeowner model. The construction model is deeper, so the corners are sharper and more prone to creasing. Faulty con-struction materials will be more pronounced with the construction model.

3. How can Braddock eliminate its problem?

Braddock can take the quality assurance approach that emphasizes the prevention of defects and mistakes rather than finding and correcting them. The idea of “building in” quality as opposed to “in-specting it in” is the basic philosophy of quality assurance. This approach views quality as the responsi-bility of all employees rather than the exclusive domain of a quality control department. Furthermore, suppliers are treated as partners.

4. What systems or processes should Braddock put in place to make sure this doesn’t happen again?

To implement the operations control system, which is one of design first and control second, the operations controls generally relate to the areas of costs, quality, and inventories. Cost control looks at the organizations accounting and budgeting system and then monitors costs relating to labor, materials, and overhead. Quality control can be implemented by a variety of systems from quality assurance, TQM, ISO 9000. or ISO 1400. Finally inventory control can be monitored by implementing such pro-grams as just-in-time (JIT), to establishing inventory tracking systems.

F. REENGINEERING, also called business process engineering, is searching for and implementing radical change in business processes to achieve breakthroughs in costs, speed, productivity, and service.


LECTURE OUTLINE LECTURE NOTES 1. It involves a one-time concerted effort

to make major improvements in basic processes.

2. The organization basically starts with a clean slate and redesigns itself.

G. Other Quality Standards 1. ISO 9000 is a set of quality standards

created in 1987 by the International Organization for Standardization (ISO) for international business.

a. The U.S. representative is the American National Standards In-stitute (ANSI).

b. The ISO originally published five international standards.

c. ISO 9000:1994 was a revision that focuses on the design and opera-tions processes.

d. ISO 9000:2000 focuses more on continuous improvement and cus-tomer satisfaction.

e. Organizations in 154 countries have been certified in ISO 9000:2000.

2. ISO 14000 is as addition to the ISO 9000 to control the impact of an orga-nization’s activities and outputs on the environment.

a. The goal is to provide international environmental standards that are compatible.

b. ISO 14000 provides an interna-tional standard for environmental management systems and will ulti-mately include 20 separate stan-

POWERPOINT 12-8Other Quality Standards(Refers to text page 346-348)


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LECTURE OUTLINE LECTURE NOTESdards.

3. A ZERO-DEFECTS PROGRAM at-tempts to increase quality by increas-ing everyone’s impact on quality.

a. Cutting defects to zero would be cost ineffective.

b. The objective is rather to make ev-eryone aware of his or her poten-tial impact.

PROGRESS CHECK QUESTIONS (Text page 348)

5. Who are the quality gurus?6. Explain the term kaizen.7. What is ISO 14000?8. Explain the term zero defects.

H. The Malcolm Baldrige National Quality AwardLEARNING OBJECTIVE 5Explain the purpose of the Malcolm Baldrige Award. (Text page 349)

1. The MALCOLM BALDRIGE AWARD was established by Congress in 1987 to recognize U.S. companies’ achieve-ments in quality.

2. The award: a. promotes performance excellence b. publicizes successful performance

strategies c. recognizes the quality and perfor-

mance achievement of U.S. orga-nizations.

3. In 2005 NIST was authorized to ex-pand the Baldrige Award program to include nonprofit organizations.

4. The Criteria for Performance Excel-lence provides a general performance

BONUS INTERNETEXERCISE 12-2More on the Baldrige AwardsThis Internet exercise lets students further research the Malcolm Baldrige National Quality Awards. See com-plete exercise on page 12.Er-ror: Reference source not found of this manual.

POWERPOINT 12-9The Malcolm Baldrige National Quality Award(Refers to text page 349


LECTURE OUTLINE LECTURE NOTESexcellence model.

I. Types of Quality Control 1. PRODUCT QUALITY CONTROL (ac-

ceptance control) relates to inputs or outputs of the system.

a. Quality is evaluated based on an existing batch of products.

b. Using acceptance sampling proce-dures, some portion of a batch is inspected to ensure that the batch meets specifications.

c. An entire batch can be accepted or rejected based on the sample.

2. PROCESS QUALITY CONTROL con-cerns monitoring quality while the product or service is being produced.

a. Samples are taken from a process and compared to a standard.

b. The process continues if the sam-ple results are acceptable.

c. If the results are not acceptable, the process is halted.

3. ACCEPTANCE SAMPLING is a sta-tistical method of predicting the quality of a batch or a large group of products by inspecting a sample or group of samples.

a. A random sample is drawn, tested, and analyzed.

b. If a statistically significant number are defective, the entire batch is rejected.

c. Acceptance sampling involves risk.

POWERPOINT 12-10Types of Quality Control (Refers to text pages 349-351)


LECTURE OUTLINE LECTURE NOTESi. The producer’s risk is the risk

the producer takes of reject-ing a good batch.

ii. The consumer’s risk is the risk of accepting a bad batch.

d. The maximum acceptable risk is determined and a sampling plan is designed.

4. A PROCESS CONTROL CHART is a time-based graphic display that shows whether a machine or process is pro-ducing items that meet pre-established specifications.

a. A machine is “out of control” if a significant change is detected.

b. Mean charts (x-charts) monitor the mean or average value of some characteristic.

c. Range charts (R-charts) monitor the range of variability.

d. First the desired level is identified. e. Then the upper and lower control

limits are calculated.f. A small sample is taken from the

machineg. The results are plotted on the con-

trol chart.h. Using mean and range charts si-

multaneously improves control.PROGRESS CHECK QUESTIONS (Text page 351)

9. What was the purpose of the Malcolm Baldrige Na-tional Quality Improvement Act?

10. Explain the difference between product quality con-trol and process quality control.

11. What is acceptance sampling?

TEXT FIGURE 12.5Mean Chart (Text page 351)


LECTURE OUTLINE LECTURE NOTES12. What is the purpose of a process control chart?

CASE INCIDENT 12.2The Purchasing Department (Text page 352)

A large airline company is experiencing problems with proper inspection of incoming orders. They learned some expensive radar components were defective, but this was not discovered until after the warranty expired. A meeting conducted to discuss the current inspection procedures covered many issues, especially who would determine when it is proper to do immediate inspections and when it would require departmental inspections. A follow up meeting was planned to further discuss the situation.

1. Why is the inspection of received parts such a concern for the airline?

By the nature of their industry, the safe construction and operations of the airline companies are under the guidelines of the FAA. Therefore, it is vitally important to monitor the inventory supplies as required by all the airlines, no matter how big or small.

2. What do you think of the current system of inspection?

The problems are a result of a disorganized system. The resources are not in place for the neces-sary inspection process. Beyond this, how inventories should be properly inspected is unclear. This is costing the company additional expenses when warranties come into play and the incorrect items have been shipped but not detected as they should be.

3. Do you think the inspector is at fault? Explain.

The inspector is a byproduct of the disorganization and has become ineffective based on the dis-organized system. Clear lines of communication and responsibilities have not been established. The cur-rent system will remain ineffective until a plan is developed and instituted with all the departments that are affected by the inventory process.

4. What would you suggest should happen at the meeting next Friday?

The next meeting should focus on developing an inventory system, perhaps one like the ABC classification system. The ABC classification system manages inventories based on the total value of us-age per unit of time. For example, a small number of products or materials, group A, account for the greatest dollar value of inventory; group B accounts for a moderate amount of inventory; and group C accounts for a small amount of inventory. In this system, items in group A are monitored very closely; items in group B are monitored with some care; items in group C are checked occasionally.

IV. INVENTORY CONTROLA. INVENTORIES serve as a buffer between

different rates of flow associated with the operating system.

1. Classifications: a. Raw material inventories serve as

POWERPOINT 12-11Inventory Control(Refers to text page 353)


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LECTURE OUTLINE LECTURE NOTESa buffer between purchasing and production.

b. In-process inventories buffer the rates of flow among production processes.

c. Finished-goods inventories act as a buffer between the final stage of production and shipping.

2. Large inventories make purchasing, scheduling, and distribution easier.

3. But, carrying inventory involves other costs.

a. Examples: insurance, property taxes, storage costs, and spoilage.

b. There is also an opportunity cost of the money invested in the in-ventory.

4. Management must balance the holding costs against the costs of inadequate inventory.

B. JUST-IN-TIME (JIT) INVENTORY CONTROL is an inventory control system that schedules materials to arrive and leave as they are needed.LEARNING OBJECTIVE 6Explain the concept of just-in-time (JIT) in-ventory. (Text pages 353-358)

1. JIT, also known as zero inventory sys-tems, stockless systems, or kanban systems, was pioneered in Japan.

a. It is a philosophy for production that ensures the right items arrive and leave as they are needed.

b. Organizations make smaller and

TEXT REFERENCE Career Management Box: Create a Career Plan Improved habits and skill de-velopment provide the foun-dation for creating a career plan. (Box in text on page 353.) An additional exercise and discussion is available in this chapter on page 12.Er-ror: Reference source not foundError: Reference sourcenot foundError: Reference source not found.

POWERPOINT 12-12Just-in-Time Inventory Control (Refers to text pages 353-355)

TEXT FIGURE 12.6Benefits of JIT System(Text page 354)


LECTURE OUTLINE LECTURE NOTESmore frequent orders of raw mate-rials.

c. The basic goal is to eliminate waste.

2. JIT applies to inventories of incoming raw materials, subassemblies, and fi-nal products.

3. JIT is called a demand pull system be-cause items are produced or ordered only when they are needed.

4. It can take years to establish a JIT system.

5. Tom Peters feels that a company can push JIT forward in the distribution channel to include customers.

ETHICAL MANAGEMENT (Text page 355)

You have learned from your account manager that his company will raise prices on your pur-chase item because the competitor is experiencing production problems and would not be able to handle new orders. Your account manager suggests you place a large order to beat the expected 25% increase.

1. Would you place a large order? Why?

Placing an order indicates your acceptance of the rumored decision making of the company you purchase from. It would not be a good decision to show that you agree with this potentially unethical style of working with a supplier.

2. If XYZ’s competitor then announced a new version of its product that was much better than XYZ’s component, what would you do?

Making changes is not always recommended unless you have adequate reason to look at other options. Have you had good service from your current supplier? Is the new version of the product actu-ally a significant improvement? What are the costs and benefits? Not an easy decision.

3. Would you suspect that the area account manager had set you up? Why or why not?

The motivation of the account manager appears to be selfish and motivated by a short term gain he perceives he can make. The account manager has much to risk in communicating this information, es-pecially if the information turns out to be inaccurate.

4. What if the 25% price increase never came? What would you do then?

If the rumored 25% increase does not happen, this might be just another reason to suspect the


LECTURE OUTLINE LECTURE NOTESaccount manager’s information. This may be a red flag, and it might be a good time to look at other op-tions for suppliers or to look at how you can find a different account manager that could be more honest and trustworthy.

C. Tracking Inventory 1. Without computers, keeping accurate

inventory records was difficult. 2. Bar-Code Technology a. Today, most items are marked

with bar codes, patterns of bars and spaces that an electronic scanner recognizes.

b. Errors in inventory tracking are re-duced and inventory is automati-cally adjusted.

3. A physical inventory is still needed. a. A PHYSICAL INVENTORY in-

volves counting the number of units of inventory a company holds in stock.

b. Actual inventory often differs from inventory recorded, which can lead to shortages.

D. Independent versus Dependent Demand Items

1. INDEPENDENT DEMAND ITEMS are finished goods ready to be shipped out or sold.

2. DEPENDENT DEMAND ITEMS are subassembly or component parts used to make a finished product.

a. Their demand is based on the number of finished products being produced.

b. Forecasting demand becomes

POWERPOINT 12-13Tracking Inventory (Refers to text pages 355-356)

LECTURE LINK 12-4The New BarcodesThe UPC code found on all consumer products is getting an additional digit. See com-plete lecture link on page 12.Error: Reference source not found of this manual.

LECTURE LINK 12-3When the Supply Chain BreaksWhen the major supplier of rough surfboard blocks went out of business, surfboard makers scrambled to find an-other supplier. See complete lecture link on page 12.Error:Reference source not found of this manual.

POWERPOINT 12-14Independent versus Depen-


LECTURE OUTLINE LECTURE NOTEScritical.

E. ABC Classification Systems 1. The ABC CLASSIFICATION SYSTEM

manages inventories based on their total value.

a. Group A account for the greatest dollar value of inventory.

b. Group B account for a moderate amount.

c. Group C accounts for a small amount.

2. Appropriate control is based on the classification.

a. Group A items are monitored very closely; group B less closely.

b. Group C items are checked only occasionally.

3. However, a Group B may be critical to the operation.

4. The ABC system can be computerized and linked to ordering and stock con-trol.

F. Safety Stocks 1. SAFETY STOCKS are inventory main-

tained to accommodate unexpected changes in demand and supply and al-low for variations in delivery time.

2. The optimal size is based on the rela-tive costs of an out-of-stock item ver-sus the costs of carrying additional in-ventory.

G. The Order Quantity 1. Costs are reduced by purchasing ma-

terials in large batches.

dent Demand Items(Refers to text pages 356-357)

TEXT FIGURE 12.7ABC Inventory Classification (Text page 357)

POWERPOINT 12-15Safety Stocks (Refers to text pages 357-358)


LECTURE OUTLINE LECTURE NOTES 2. However, ordering costs must be bal-

anced against the inventory carrying cost.

a. Ordering costs are the cost of pre-paring the order, including ship-ping and set-up costs.

b. Carrying costs include storage costs, insurance, and opportunity costs.

3. The ECONOMIC ORDER QUANTITY (EOQ), the optimal number of units to order at one time, is the point at which ordering costs equal carrying costs.

4. It is difficult to accurately determine the carrying and ordering costs.

PROGRESS CHECK QUESTIONS (Text page 358)

13. What are the three categories of inventory classifica-tion?

14. Explain the difference between dependent and inde-pendent demand items.

15. Explain the ABC classification system for inventory management.

16. How do you calculate the economic order quantity (EOQ) when placing purchase orders for materials or products?

THE WORLD OF WORKKaizen Power – Handle with Care! (Text page 359)

Tony gathers his staff to conduct an “ideas” session on to how to improve the Taco Barn opera-tion. At the conclusion, nearly two thousand ideas are given. Now Tony has to decide how to begin an im-plementation process. The employees have developed a wide range of ideas for improving the operations, from serious to outrageous. Tony is a bit overwhelmed as to where to begin.

1. Is a list of “close to two thousand ideas” a successful outcome for Tony? Or has he created a monster here?

Tony has found out the power of Kaizen, a system of taking small steps to improve the work-place. It is based on the belief that the system should be customer driven and involve all employees


through systematic and open communication. This outcome shows him just how much his employees can become more involved in delivering their products and services, if asked.

2. What do you think the reaction of the employees would be if none of the ideas were implemented?

Employees will be very disappointed if none of the ideas are implemented. If Tony doesn’t fol-low through, they will begin to doubt his sincerity. It would have been better not to have asked for ideas than to have asked and not done anything. The shift in management style from boss directives to em-ployee sharing in the decision-making process is a dramatic difference. It is powerful and dangerous if the process is not managed correctly. Tony now has the responsibility to follow through on this new way of managing his restaurant.

3. If Tony encouraged his team to go as far out into left field as they wanted, how many of these new ideas are going to be practical? Why?

As the concept of Kaizen states, it is a system of taking small steps to improve the workplace. With this idea emphasized, Tony can corral all the creative thinking and put it in the right context for tak-ing the next steps with all the suggestions his employees have given him. Kaizen does not focus on ob-taining new and faster machines but rather improving the methods and procedures used in the existing op-eration.

4. Where do you think Tony should start first? Why?

Tony needs to have a follow up meeting, take the ideas that are valid and practical, and allow groups of employees to look at each idea. The ideas can then be ranked in priority. This will give the staff a sense of how the process will evolve and the next steps taken to improve the operation.


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