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184 Cards in this Set

  • Front
  • Back

Operations Management (OM)

The science and art of ensuring that goods and services are created and delivered successfully to customers

3 Issues at the core of

operations management




OM Activities: Planning and Budgeting

Representing the plastic card production area in all meetings, developing annual budgets and staffing plans, and watching technology that might affect the production of plastic credit cards

OM Activities: Inventory Management

Overseeing the management of inventory for items such as plastic bank cards, inserts such as advertisements, envelopes, postage, and credit card rules and disclosure inserts.

OM Activities: Scheduling and Capacity

Daily-annual scheduling of all resources (equipment, people, inventory) necessary to issue new credit cards and reissue cards that are up for renewal, replacing old or damaged cards, and ones that are stolen.

OM Activities: Quality

Embossing the card with accurate customer information and quickly getting the card in the hands of the customer


Physical product that you can see, touch, or possibly consume

Durable Good

A product that typically lasts at least three years

Non-Durable Good

Is perishable and generally lasts for less than three years


Any primary or complementary activity that does not directly produce a physical product

Similarities between Goods and Services

1) Goods and Services provide value and satisfaction to customers who purchase and use them

2) They both can be standardized or customized to individual wants and needs

3) A process creates and delivers each good or service, and therefore, OM is a critical skill.

Differences between Goods and Services

1.Goods are tangible while services are intangible.

2.Customers participate in many service processes, activities, and transactions. 3.The demand for services is more difficult to predict than the demand for goods.4.Services cannot be stored as physical inventory.5.Service management skills are paramount to a successful service encounter.6.Service facilities typically need to be in close proximity to the customer.7.Patents do not protect services.

Service Management

Integrates marketing, human resources, and operations functions to plan, create, and deliver goods and services, and their associated service encounters

Service Encounter

An interaction between the customer and the service provider

Moments of Truth

(In service encounters)- any episodes, transactions, or experiences in which a customer comes into contact with any aspect of the delivery system, however remote, and thereby has an opportunity to form an impression

Customer Benefit Package (CBP)

A clearly defined set of tangible (goods-content) and intangible (service-content) features that the customer recognizes, pays for, uses, or experiences

A combination of goods and services configured in a certain way to provide value to customers-Consists of Primary goods/services & peripheral goods& services


A sequence of activities that is intended to create a certain result

Value Creation Processes

Focused on producing or delivering an organizations primary goods or services, such as filling and shipping a customer's order, assembling a dishwasher, or providing a home mortgage.

Support Processes

Purchasing materials and supplies used in manufacturing, managing inventory, installation, health benefits, technology acquisition, day care on-site services, and research and development

General management processes

Accounting and information systems, human resource management, and marketing


Refers to an organization’s ability to strategically address current business needs and successfully develop along-term strategy that embraces opportunities and manages risk for all products, systems, supply chains, and processes to preserve resources for future generations.

Environmental Sustainability

is an organization’s commitment to the long-term quality of our environment.

Social sustainability

•is an organization’s commitment to maintain healthy communities and a society that improves the quality of life.

Economic sustainability

•is an organization’s commitment to address current business needs and economic vitality, and to have the agility and strategic management to prepare successfully for future business, markets, and operating environments.

Current Challenges in OM

Technology- Globalization- Changing customer expectations, changing job designs, quality, global manufacturing


is the capability of a manufacturing or service resource such as a facility, process, workstation, or piece of equipment to accomplish its purpose over a specified time period.

Capacity can be viewed in one of two ways:

1.As the maximum rate of output per unit of time, or2.As units of resource availability.(test question)

Economies of scale

are achieved when the average unit cost of a good or service decreases as the capacity and/or volume of throughput increases.

Unit Cost Decreases

Volume Increases

Diseconomies of scale

occur when the average unit cost of the good or service begins to increase as the capacity and/or volume of throughput increases.

Unit Cost Increases

Volume Decreases

focused factory

is a way to achieve economies of scale without extensive investments in facilities and capacity by focusing on a narrow range of goods or services, target market segments, and/or dedicated processes to maximize efficiency and effectiveness.

Safety capacity (Capacity cushion)

is an amount of capacity reserved for unanticipated events, such as demand surges,materials shortages, and equipment breakdowns

Complementary goods and services

can be produced or delivered using the same resources available to the firm, but whose seasonal demand patterns are out of phase with each other

Balance seasonal demand cycles and therefore use the excess capacity available

Capacity expansion strategies require determining the following about capacity changes:




Long-Term Capacity Strategies

1.One large capacity increase

2.Small capacity increases that match average demand

3.Small capacity increases that lead demand .

4.Small capacity increases that lag demand

Adjusting Short-Term Capacity Levels

Add or share Equipment

Sell unused Capacity

Change labor capacity and schedules

Change Labor skills mix

Shift work to slack periods

Short- Term :Shift and Stimulate Demand

Vary the price of goods or services

Provide Customers with information

Advertising and promotion

Add peripheral goods and/or services

Provide reservations-•a promise to provide a good or service at some future time and place. Examples: hotels, airlines,surgeries

revenue management system (RMS)

•consists of dynamic methods to forecast demand, allocate perishable assets across marketsegments, decide when to overbook and by how much, and determine what price to charge different customer (price) classes.

EX:Managing overbooking in airlines, hotels, and cruise lines (yield management)

Theory of Constraints (TOC)

is a set of principles that focuses on increasing total process throughput by maximizing the utilization of all bottleneck work activities and workstations.


amount of money generated per time period through actual sales.


anything that limits an organization from moving toward or achieving its goal.

physical constraint

•associated with the capacity of a resource (e.g., machine, employee).

bottleneck work activity

•is one that effectively limits capacity of the entire process.

non-bottleneck work activity

•is one in which idle capacity exists.

nonphysical constraint

•is environmental or organizational (e.g., low product demand or an inefficient management policy or procedure).

Resource Management

Deals with the planning, execution, and control of all the resources that are used to produce goods or provide services in a value chain.

Objectives of Resource Management

1.Maximize profits and customer satisfaction,

2.Minimize costs, or

3.Maximize benefits to stakeholders.

Aggregate planning

is the development of a long-term output and resource plan in aggregate units of measure.


is the process of translating aggregate plans into short-term operational plans that provide the basis for weekly and daily schedules and detailed resource requirements.


refers to moving work from one workstation to another, assigning people to tasks, setting priorities for jobs, scheduling equipment, and controlling processes.

Aggregate Planning Options

•Demand management

•Production-rate changes

•Workforce changes

•Inventory smoothing

•Facilities,equipment, and transportation

level production strategy

•plans for the same production rate in each time period.

chase demand strategy

• sets the production rate equal to the demand in each time period.

master production schedule (MPS)

•is a statement of how many finished items are to be produced and when they are to be produced.

Materials Requirements Planning (MRP)

is a forward-looking, demand-based approach for planning the production of manufactured goods and ordering materials and components to minimize unnecessary inventories and reduce costs.

Dependent demand

•is demand that is directly related to the demand of other SKUs and can be calculated without needing to be forecasted.

bill of labor (BOL)

is a hierarchical record analogous to a BOM that defines labor inputs necessary to create a good or service.

End items

•are finished goods scheduled in the MPS or FAS that must be forecasted.

parent item

is manufactured from one or more components


•are any item (raw materials, manufactured parts, purchased parts) other than an end item that goes into a higher-level parent item(s).


•always has at least one immediate parent and also has at least one immediate component.

MRP explosion

•is the process of using the logic of dependent demand to calculate the quantity and timing of orders for all subassemblies and components that go into and support the production of finished goods.

Time buckets

•are the time period size used in the MRP explosion process and usually are one week in length.

Gross requirements (GR)

•are the total demand for an item derived from all of its parents.

Scheduled or planned receipts (S/PR) are orders that are due or planned to be delivered.

Planned order receipt (PORec)

•specifiesthe quantity and time an order is to be received.

Planned order release (PORel)

•specifiesthe planned quantity and time an order is to be released to the factory or asupplier.

Projected on-hand inventory (POH

isthe expected amount of inventory on-hand at the beginning of the time periodconsidering on-hand inventory from the previous period plus scheduled

Lot sizing

isthe process of determining the appropriate amount and timing of ordering toreduce costs

Three common lot-sizing methods for MRP:

1.Lot-for-lot (LFL)

2.Fixed order quantity (FOQ)

3.Periodic order quantity (POQ)

lot-for-lot (LFL).

Anordering schedule that covers the gross requirements for each week

fixedorder quantity rule (FOQ)

usesa fixed order size for every order or production run.

periodicorder quantity (POQ)

ordersa quantity equal to the gross requirement quantity in one or more predeterminedtime periods minus the projected on-hand quantity of the previous time period.

CapacityRequirements Planning (CRP)

isthe process of determining the amount of labor and machine resources requiredto accomplish the tasks of production on a more detailed level, taking intoaccount all component parts and end items in the materials plan.

Operations Strategy

Operationsmust have a strategy that allows it to supply the needs of the marketplace andprovide fast on-time delivery

• Engineer-to-order• Make-to-order• Assemble-to-order• Make-to-stock

Custom, or make-to-order, goods and services

•aregenerally produced and delivered as one-of-a-kind or in small quantities, andare designed to meet specific customers’specifications.
Examplesinclude ships, weddings, certain jewelry, estate plans, buildings, and surgery

Option,or assemble-to-order, goods and services

•areconfigurations of standard parts, subassemblies, or services that can beselected by customers from a limited set.

-Examplesare Dell computers, Subway sandwiches, machine tools, and travel agentservices.

Standard, or make-to-stock, goods and services

aremade according to a fixed design, and the customer has no options from which tochoose.

-Examplesare appliances, shoes, sporting goods, credit cards, online Web-based courses,and bus service.


arelarge-scale, customized initiatives that consist of many smaller tasks andactivities that must be coordinated and completed to finish on time and withinbudget. -Characteristics: One-of-a-kind, large scale, complex, resources brought to site; widevariation in specs and tasks.-Examples: Legal defense preparation, construction, customer jewelry, consulting,and software development.

Job shop processes

•are organized around particulartypes of general-purpose equipment that are flexible and capable of customizingwork for individual customers.

-Characteristics: Significant setup and/or changeover time, batching, low to moderatevolume, many routes, many different products, high work-force skills, andcustomized to customer’sspecs.Examples: Many small manufacturing companies are set up as job shops, as arehospitals, legal services, and some restaurants

Flow shop processes

areorganized around a fixed sequence of activities and process steps, such as anassembly line, to produce a limited variety of similar goods or services

-Characteristics: Little or no setup time, dedicated to small range of goods or servicesthat are similar, similar sequence of process steps, moderate to high volume. -Examples: Assembly lines that produce automobiles and appliances, production ofinsurance policies and checking account statements, and hospital laboratorywork.

continuous flow process

•createshighly standardized goods or services, usually around the clock in very highvolumes

-Characteristics: Very high volumes in a fixed processing sequence, high investment insystem, 24-hour/7-day continuous operation, automated, dedicated to a small range ofgoods or services. -Examples: Chemical, gasoline, paint, toy, steel factories; electronic fundstransfer, credit card authorizations, and automated car wash.

Aproductlife cycle

isa characterization of product growth, maturity, and decline over time.

4 Phases of Product life Cycle

-Introduction-Growth-Maturity-Declineand turnaround


•is a model that describes the alignment of process choice with thecharacteristics of the manufacturedgood.


•isa unique route through a service system. Pathways can be customer- or provider-driven,depending on the level of control that the service firm wants to ensure.

service encounter activity sequence

•consistsof all the process steps and associated service encounters necessary tocomplete a service transaction and fulfill customer’swants and needs.

Customer-routed services

•are those that offer customersbroad freedom to select the pathways that are best suited for their immediateneeds and wants from many possible pathways through the service deliverysystem.

-Examplesinclude searching the Internet, museums, health clubs, and amusementparks.

Provider-routed services

constraincustomers to follow a very small number of possible and predefined pathwaysthrough the service system

-Examplesare a newspaper dispenser and logging on to a secure online bank account.


•a specific unit of work required tocreate an output.


agroup of tasks (sometimes called a workstation) needed to create and deliver anintermediate or final output


•a group of activities.

Value chain

•a network of processes.

process map (flowchart)

•describesthe sequence of all process activities and tasks necessary to create anddeliver a desired output or outcome.

-Processmaps document how work either is, or should be, accomplished, and how thetransformation process creates value.

process boundary

•isthe beginning or end of a process.

-Makesit easier to obtain management support, assign process ownership, and identifywhere performance measures should be taken.

ProcessDesign Methodolog/ Steps

1.Definethe purpose and objectives of the process.

2.Createa detailed process or value stream map that describes how the process iscurrently performed.

3.Evaluatealternative process designs.

4.Identifyand define appropriate performance measures for the process. 5.Selectthe appropriate equipment and technology.

6.Developan implementation plan to introduce the new or revised process design.

value stream

refersto all value-added activities involved in designing, producing, and deliveringgoods and services to customers.

valuestream map (VSM)

•showsthe process flows in a manner similar to an ordinary process map; however, thedifference lies in that value stream maps highlight value-added versusnon-value-added activities and include costs associated with work activitiesfor both value- and non-value-added activities.

Examples of Non-value-added activities

•Transferringmaterials between two nonadjacent workstations •Overproducing•Waitingfor service or work to do •Notdoing work correctly the first time•Requiringmultiple approvals for a low cost electronic transaction

Strategies for Process Analysis and Improvement

•Increasing revenue byimproving process efficiency in creating goods and services and delivery of thecustomer benefit package.•Increasing agility byimproving flexibility and response to changes in demand and customerexpectations. •Increasing product and/or servicequality byreducing defects, mistakes, failures, or service upsets.•Decreasing costs throughbetter technology or elimination of non-value-added activities.•Decreasing process flow time byreducing waiting time or speeding up movement through the process and valuechain.•Decreasing the carbon footprint ofthe task, activity, process and/or value chain.

Questionsto ask for process analysis:

Are the steps in the process arranged in logical sequence?•Do all steps add value? Can somesteps be eliminated and should others be added in order to improve quality oroperational performance? Can some becombined? Should some be reordered?•Are capacities of each step in balance; that is, do bottlenecks existfor which customers will incur excessive waiting time?Whatskills, equipment, and tools are required at each step of the process? Should some steps be automated?

More Questions to ask for process Analysis & Improvement

•Atwhich points in the system (sometimes called process fail points) might errorsoccur that would result in customer dissatisfaction, and how might these errorsbe corrected?•Atwhich point or points in the process should performance be measured? What are appropriate measures?•Whereinteraction with the customer occurs, what procedures, behaviors, andguidelines should employees follow that will present a positive image?•Whatis the impact of the process on sustainability? Can we quantify the carbon footprint of the current process?


•“the fundamental rethinking andradical redesign of business processes to achieve dramatic improvements incritical, contemporary measures of performance, such as cost, quality, service,and speed.”


thefraction of time a workstation or individual is busy over the long run.

Utilization(U) =

Resources Used/Resources Available


Utilization (U) = Demand Rate/ (Service rate x # of servers)


Theaverage number of entities completed per unit time— theoutput rate


thework activity that effectively limits throughput of the entire process.

–Identifying and breaking processbottlenecks is an important part of process design and improvement, and willincrease the speed of the process, reduce waiting and work-in-processinventory, and use resources more efficiently.

Flow time, or cycle time,

•theaverage time it takes to complete one cycle of a process.

Little’s Law

asimple formula that explains the relationship among flow time (T ), throughput (R ), and work-in-process (WIP ).

WIP =R × T

WIP= Throughput X Flow Time


Describes the internal demand forparts based on the demand of the finalproduct in which the parts are used. Subassemblies, components, & raw materials are examples of dependent demand items

Independent Demand

Thedemand for final products & has a demand pattern affected by trends, seasonal patterns, & general market conditions.

The primary functions of inventoryare to

–Buffer fromuncertainty in the marketplace –Decouple dependencies in the supply chain (e.g.,safety stock)

Fourbroad categories of inventories:

–Raw materials- unprocessed purchase inputs–Work-in-process (WIP)- partially processed materials not yetready for sales–Finished goods- products ready for shipment–Maintenance, repair &operating (MRO)-materials used in production (e.g., cleaners and brooms)


–Direct costs- directly traceable to unit produced(e.g., labor)–Indirect costs- cannot be traced directly to the unitproduced (e.g., overhead)–Fixed costs- independent of the output quantity (e.g,buildings, equipment, and plant security)–Variable costs- vary with output level (e.g., materials)–Order costs- direct variable costs for making anorder. In manufacturing, setupcosts are related to machine setups –Holding or carrying costs- incurred for holding inventory instorage

Inventory Carrying Costs


Costof Capital

–Opportunity costassociated with investing in inventory, or any asset, over other investmentchoices.•Hurdle rate- minimum rate of return for any investment–Generallythe largest component of ICC

StorageSpace Cost

–Variablecosts of moving product in and out of storage•Handling•Rent•Staff•Equipment

–Logisticsdevelops a cost formula for storage•Publicspace mostly variable•Privatespace may be primarily a fixedcost

InventoryCarrying Costs: Service

•InventoryService Cost–Insuranceand taxeson stored goods.–Variesaccording to the value of the goods.

•InventoryRisk Cost–Factorsbeyond the control of the firm.•Obsolescence–Fashion(think lady’s dresses)–Perishable(fruits and vegetables)•Damage•Theft•Employeepilferage

Calculatingthe Cost of Carrying Inventory

•Step 1- Identify the value of the item stored in inventory–Saythe average costof an inkjet printer = $100

•Step 2– Measureeach individual ICC component as a percentage of product value.

•Step 3 – Multiple overall ICC, as a percentageof product value, by the value of the product

Inventory Investment

InventoryInvestment–Firms should diligently measure inventoryinvestment to ensure that it does not adversely affect competitiveness.Measures include:§Absolutevalue of inventory (found on balance sheet)§Inventory turnoveror turnover ratio- howmany times inventory “turns”in an accounting period. More is betterbecause its faster!

Inventory Turnover Ratio

COGS/ AVG. Inventory (Cost)

ABCInventory Control System

Determineswhich inventories should be counted and managed more closely than others

–A itemsare given the highest priority with larger safety stocks. A items, whichaccount for approximately 20% of the total items, are about 80% of the totalinventory cost –Band C items account for the other 80% of total items and only 20% of costs. TheB itemsrequire closer management since they are relatively more expensive (per unit),require more effort to purchase/make, and may be more prone to obsolescence

–C itemshave the lowest value and hence lowest priority

TheSquare Root Law (SQL)

-Usedto reduce inventory at multiple locations.

-Aslocations increase, inventory also increases, but not in the same ratio as thegrowth in facilities.

-Thesquare root law states that total safety stock can be approximated bymultiplying the total inventory by the square root of the number of futurefacilities divided by the current number of facilities.

TheSquare Root Law(equation)

X2= (X1) * Square root of->(n2/n1) Where: ln1= number of existing facilitiesln2= number of future facilitieslX1 = total inventory in existing facilitieslX2= total inventory in future facilities

The Economic Order Quantity (EOQ)Model –

A quantitative decision model basedon the trade-off between annual inventory holding costs and annual order costs

The EOQ model seeks to determine an optimalorder quantity, where the sum of the annual order cost and the annual inventoryholding cost is minimized

Order Cost

•thedirect variable cost associated with placing an order.

Holding Cost or carrying cost

•the cost incurred for holding inventory in storage.

Assumptionsof the EOQ Model

–Demandmust be known and constant–Deliverytime is known and constant–Replenishmentis instantaneous–Priceis constant–Holdingcost is known and constant–Orderingcost is known and constant–Stock-outsare not allowed

The QuantityDiscount Model or price-break model

–Relaxesthe constant price assumption by allowing purchase quantity discounts

–Considersthe tradeoff between purchasing in large quantity to take advantage of theprice discount and issuing fewer orders, against holding higher inventory

–Dueto the step-wise shape of the total inventory cost curve, the optimal orderquantity lies on either one of the feasibleEOQs or at the pricebreak point.

Economic Manufacturing Quantity Modelor Production Order Quantity Model

–Relaxesthe instantaneous replenishmentassumption by allowing usage during production or partial delivery.

–TheEMQ model is especially appropriate for a manufacturing environment withsimultaneous manufacture and consumption.

–Inventorybuilds up gradually during the production period rather than at once as in theEOQ model.

Reorder Point (ROP)

–Thelowest inventory level at which a new order must be placed to avoid a stockout.–Demandand delivery lead time are never certain and require safety stock.

Models used under uncertainty with ROP

–StatisticalROP with Probabilistic Demand and ConstantLead Time –TheStatistical ROP with Constant Demand and ProbabilisticLead Time–TheStatistical ROP when Demand and Lead Time are bothProbabilistic

FixedOrder Interval Approach or the Periodic Review

•Involvesordering at fixed intervals and varying Q depending upon the remaining stock atthe time the order is placed.•Lessmonitoring than the basic mode•Takesadvantage of transportation savings from ordering multiple items at the sametime

RadioFrequency Identification (RFID)

Successorto the barcode for tracking individual unit of goods. RFID does not require direct line of sight toread a tag and information on the tag is updatable.

RFID & automating the SC

–MaterialsManagement – goods automatically counted and logged as they enter the supplywarehouse

–Manufacturing– assembly instructions encoded on RFID tag provide information to computercontrolled assembly devices

–DistributionCenter – shipment leaving DC automatically updates ERP to trigger areplenishment order and notify customer for delivery tracking

–RetailStore – no check out lines as scanners link RFID tagged goods in shopping cartwith buyers credit card


•refers to the assignment of start andcompletion times to particular jobs, people, or equipment.

Examples: scheduling restaurant employees,airline crews and planes, sports teams, factory jobs


•refers to determining the order in whichjobs or tasks are processed.

Examples: emergency room patients,automobile models on an assembly line, outgoing flights on runways

Scheduling Applications andApproaches

Scheduling applies to all aspectsof the value chain, from planning and releasing orders in a factory,determining work shifts for employees, and making deliveries to customers.Tools:•Spreadsheets•Software packages•Web-based tools

Staff scheduling

Attempts to match availablepersonnel with the needs of the organization by:1.Accuratelyforecasting demand and translating it into the quantity and timing of work tobe done.2.Determiningthe staffing required to perform the work by time period.3.Determiningthe personnel available and the full- and part-time mix.4.Matchingcapacity to demand requirements and developing a work schedule that maximizesservice and minimizes costs.


Canbe viewed as a reservation for service time and capacity.


1.Determine the appointment timeinterval.2.Determine the length of eachworkday and time off-duty.

3.Decide how to handle overbooking.

4.Develop customer appointment rulesthat maximize customer satisfaction.


isrequired when several activities must be processed using a common resource.Sequencingcriteria:

1.Process-focused performancecriteria (flowtime and makespan)

2.Customer-focused due date criteria (latenessand tardiness)

3.Cost-based criteria

Flow Time

isrequired when several activities must be processed using a common resource.Sequencingcriteria:1.Process-focused performancecriteria (flowtime and makespan)2.Customer-focused due date criteria (latenessand tardiness)3.Cost-based criteria


isthe time needed to process a given set of jobs.

M = C -S [14.2]
where M = makespan of a group of jobs C = completion time of last jobin the group S = start time of first jobin the group


is the difference between thecompletion time and the due date (either positive or negative)


•isthe amount of time by which the completion time exceeds the due date.

•ShortestProcessing Time (SPT)

SPT sequencing maximizes resourceutilization and minimizes average flow time and work-in-process inventory.

•EarliestDue Date (EDD)

minimizes the maximum job tardinessand lateness.

Priority rules when new jobs arriveintermittently

•First come-first served (FCFS).•Fewest number of operations remaining (FNO).•Least work remaining (LWR) – the sum ofall processing times for operations not yet performed.•Least amount of work at the next processqueue (LWNQ) – amount of work awaiting the next process in a job’ssequence.

Single-ResourceSequencing Problem

•Process a set of jobs on a singleprocessor.

SPT sequencing finds a minimalaverage flow time sequence.

FCFS rule works well whenprocessing times are relatively equal.

EDD rule minimizes the maximum jobtardiness and lateness.

ScheduleMonitoring and Control

•Scheduleprogress must be monitored on a continuing basis. Reschedules are a normal part of scheduling.

•Ganttcharts areuseful tools for monitoring schedules. This helps to track jobs that arebehind, on, or ahead of schedule.

Changing Customer ServiceRequirements

–Logisticalrequirements of customers are changing in numerous ways.

–Somecustomers have intensified their demands for more efficient and more effectivelogistics services.

–Othersare seeking relationships with suppliers who can take logistical capabilitiesand performance to new, unprecedented levels.

–Thetypes of customers served may also evolve over time.

Shifting Locations of Customerand/or Supply Markets

–U.S.population shifts

–Serviceand cost requirements resulting from a move to JIT-based manufacturing

–Continuingsearches for lower-cost manufacturing

–Growingeconomic importance of China and the Asia-Pacific

–Sourcingof raw materials from offshore suppliers

Change in Corporate Ownership

–Mergers,acquisitions, and divestitures are changing the landscape and providingopportunities to integrate and improve logistics activities.

•Cost Pressures

–Removingcosts from key processes is a major priority for firms today.Lowlabor rates have driven internationalism of production and increased theimportance of logistics

•Competitive Capabilities

To remain competitive or establisha competitive advantage, firms should examine facility locations

Major Locational Determinants


–Transportationservices and infrastructure–Proximityto markets and customers

–Qualityof life

–Taxesand industrial development incentives–Suppliernetworks

–Landcosts and utilities


Current Trends Governing SiteSelection

–Positioning of inventories located at“market-facing” logistics facilities.–General trend toward “disintermediation”of many wholesaler-distributor operations, greater use of “customer direct”delivery.

–Growing use of and need for strategicallylocated “cross-docking”.

–Due diligence for location and siteselection decisions is placing great emphasis on access to major airportsand/or ocean ports for import and export shipments.

–Greater use of providers ofthird-party-logistics services.

Modeling Approaches

•OptimizationModels –Precisemathematical procedures that are guaranteed to find the “best,” or optimum,solution.–Optimizationapproaches essentially select an optimal course of action from a number offeasible alternatives.

•SimulationModels–Simulation– “the process of designing a model of a real system and conducting experimentswith it for the purpose of understanding system behavior or evaluating variousstrategies within the limits imposed by a set of criteria governing systemoperation.


–Heuristicmodels are able to accommodate broad problem definitions, but they do notprovide an optimum solution.

–Theuse of a heuristic approach can help to reduce a problem to a manageable sizeand search automatically through various alternatives in an attempt to find abetter solution.

–Toreduce the number of location alternatives, the decision maker shouldincorporate into the heuristic program site characteristics considered to beoptimal.

TheGrid Technique: Advantages

Thegrid technique’s strengths are in its simplicity and its ability to provide astarting point for location analysis.

○Thegrid technique also provides a starting point for making a location decision.

The grid Technique: Limitations

○It isa static approach, and the solution is optimum for only one point in time.

○Thetechnique assumes linear transportation rates, whereas actual transportationrates increase with distance but less than proportionally.

Thetechnique does not consider the topographic conditions


•CommercialZone is a specific blanket area, the transportation definition of a particularcity or town.

•ForeignTrade Zone (FTZ) is a geographic area into which importers can enter a productand hold it without paying duties—and only paying duties or customs when is itshipped into U.S. customs territory.

•TransitPrivilege permits the shipper to stop a shipment in transit and to perform somefunction that physically changes the product’s characteristic.


refersto the specific arrangement of physical facilities. Facility-layout studies are necessarywhenever:

1.a new facility is constructed,

2.there is a significant change indemand or throughput volume,

3.a new good or service is introducedto the customer benefit package, or 4.different processes, equipment,and/or technology are installed.

Purposes of layout studies are to

•minimize delays in materialshandling and customer movement. •maintain flexibility. •use labor and space effectively.•promote high employee morale andcustomer satisfaction.•provide for good housekeeping andmaintenance.•enhance sales as appropriate inmanufacturing and service facilities.


an arrangement based on thesequence of operations that are performed during the manufacturing of a good ordelivery of a service.

•Examples: Winemaking industry, credit card processing,Subway sandwich shops, paper manufacturers, insurance policy processing, andautomobile assembly lines.

ProductLayout PROS & CONS

•Advantages: Lower work-in-process inventories,shorter processing times, less material handling, lower labor skills, andsimple planning and control systems.

•Disadvantages: A breakdown at one workstation can cause theentire process to shut down; a change in product design or the introduction ofnew products may require major changes in the layout, limiting flexibility.


•consistsof a functional grouping of equipment or activities that do similar work.

•Examples: Legal offices, shoe manufacturing, jet engineturbine blades, and hospitals use a process layout.

ProcessLayout PROS & CONS

•Advantages: A lower investment in equipment,the diversity of jobs inherent in a process layout can lead to increased workersatisfaction.

•Disadvantages: High movement and transportationcosts, more complicated planning and control systems, longer total processingtime, higher in-process inventory or waiting time, and higher worker-skillrequirements.


•the design is not according to the functional characteristics of equipment, butrather by self-contained groups of equipment (called cells), needed forproducing a particular set of goods or services.•Examples: Legal services suchas labor law, bankruptcy, divorce; medical specialties such as maternity,oncology, surgery.

CellularLayout PROS & CONS

•Advantages: Reduced materials-handling requirements,quicker response to quality problems, more efficient use of floor space, moreworker responsibility increasing morale.

•Disadvantages: Duplicationof equipment among cells, greater worker skills requirements.


•consolidatesthe resources necessary to manufacture a good or deliver a service, such aspeople, materials, and equipment, in one physical location.

•Examples: The production of large items such as heavymachine tools, airplanes, buildings, locomotives, and ships. Service-providing examples include majorhardware and software installations, sporting events, and concerts.

Fixed-position layout PROS & CONS

•Advantages: Work remains stationary, reducingmovement.

•Disadvantages: High level of planning and controlrequired.

Facility Layout in ServiceOrganizations

Service organizations use product,process, cellular, and fixed-position layouts to organize different types ofwork

•ProcessLayout—Servicesthat need the ability to provide a wide variety of services to customers withdiffering requirements usually use a process layout.

•ProductLayout—Serviceorganizations that provide highly standardized services tend to use productlayouts.


•occurswhen a work center completes a unit but cannot release it because thein-process storage at the next stage is full. The worker must remain idle until storagespace becomes available.


•occurswhenever one stage completes work and no units from the previous stage are awaiting processing.


•aproduct layout dedicated to combining the components of a good or service thathas been created previously.

-Examples: Automobile assembly, Subway sandwich shops,insurance policy processing

Assembly line balancing

•is atechnique to group tasks among workstations so that each workstation has—inthe ideal case—the same amount of work.

Assembly-Line BalancingRequiredinformation:

1.Theset of tasks to be performed and the time required to perform each task.

2. The precedence relations amongthe tasks—that is, the sequence in whichtasks must be performed.

3. The desired output rate orforecast of demand for the assembly line.

Cycle time

is the interval between successiveoutputs coming off the assembly line.

•Inthe previous example, with one workstation, the cycle time is 1 minute; thatis, one completed assembly is produced every minute.

•Iftwo workstations are used, the cycle time is 0.5 minute/unit.

•Ifthree workstations are used, the cycle time is still 0.5 minute/unit, becausetask A is the bottleneck, or slowest operation. The line can produce only one assembly every 0.5 minute.

Cycle Time equation


•A= available time to produce the output. •Theoutput (R) is normally the demand forecast in units, adjusted for on-handinventory if appropriate, or orders released to the factory. •BothA and R must have the same time units of measure (hour, day, week, month, andso on).

Safetyand the work environment:

-Thejob should be designed so that it will be highly unlikely that a worker caninjure himself or herself. -Theworker must be educated in the proper use of equipment and the methods designedfor performing the job. -Thesurrounding environment must be conducive to safety.


•isconcerned with improving productivity and safety by designing workplaces,equipment, instruments, computers, workstations, and so on that take intoaccount the physical capabilities of people.


•is the set of tasks an individualperforms.

Job design

involvesdetermining the specific job tasks and responsibilities, the work environment,and the methods by which the tasks will be carried out to meet the goals ofoperations.

Job enlargement

•the horizontal expansion of the jobto give the worker more variety—although not necessarily more responsibility.

Job enrichment

•is vertical expansion of job dutiesto give the worker more responsibility.


•Naturalwork teams,which perform entire jobs, rather than specialized, assembly-line work••Virtualteams, inwhich members communicate by computer, take turns as leaders, and join andleave the team as necessary••Self-managedteams (SMTs),which are empowered work teams that also assume many traditional managementresponsibilities