Production and operations management systems

Manufacturing and Industrial Engineering

The evolving field of production and operations management (P/OM)

is reflected in this P/OM text. Proper management of the supply chain

beginning with acquisition and ending with distribution involves

coordination with finance and marketing. We must, therefore, emphasize

the systems approach and apply it to the full-scope of services as well

as manufacturing. With this goal, the book, Production and Operations

Management Systems covers the major spectrum of decision-making

functions from product development to the final delivery of the product to

the customer. The book, based on analytical models, makes extensive use

of Excel software. International aspects of P/OM are integrated throughout

the text.

Key Features

• Provides a concise format for a complete P/OM undergraduate

course

• Can be used for graduate programs by using included advanced

topical coverage

• Highlights the P/OM interface with marketing and finance

• Appendix delves into the systems aspects of breakeven analysis

and the transportation method

• Reader’s Choice presents a concise and relevant list of easily

available supplemental articles

PowerPoint slides, test bank with solutions, and review questions and

problems fully worked out with appropriate Excel worksheets as well as

specially developed macro-based Excel worksheets are available upon

qualifying course adoption.

ISBN: 978-1-4665-0733-3

9 781466 507333

90000

Production and Operations

Management Systems

Sushil Gupta and Martin Starr

Gupta

Starr

Production and Operations

Management Systems

6000 Broken Sound Parkway, NW

Suite 300, Boca Raton, FL 33487

711 Third Avenue

New York, NY 10017

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K14666

K14666 cvr mech.indd 1 12/18/13 9:06 AM

Production and Operations

Management Systems

Production and Operations

Management Systems

Sushil Gupta and Martin Starr

CRC Press

Taylor & Francis Group

6000 Broken Sound Parkway NW, Suite 300

Boca Raton, FL 33487-2742

© 2014 by Taylor & Francis Group, LLC

CRC Press is an imprint of Taylor & Francis Group, an Informa business

No claim to original U.S. Government works

Version Date: 20131206

International Standard Book Number-13: 978-1-4665-0734-0 (eBook - PDF)

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DEDICATION

We would be remiss if we did not thank our spouses, Lalita Gupta and Polly Starr,

for putting up with intense working days and nights of writing and

communicating by email and phone—all dedicated to bringing the book field of

production and operations management (P/OM) into the twenty-first century.

vii

Contents

Preface..........................................................................................................xix

Epilogue ....................................................................................................xxvii

Acknowledgments......................................................................................xxix

Authors.......................................................................................................xxxi

1 Introduction to Production and Operations Management ....................1

1.1 The Systems Viewpoint......................................................................3

1.2 Strategic Thinking.............................................................................4

1.3 Explaining P/OM..............................................................................4

1.4 Use of Models by P/OM....................................................................5

1.5 The Systems Approach.......................................................................5

1.5.1 Using the Systematic–Constructive Approach......................7

1.5.2 Why Is the Systems Approach Required?..............................8

1.5.3 Defining the System .............................................................8

1.5.4 Structure of the Systems Approach .....................................10

1.5.5 Examples of the Systems Approach.....................................10

1.5.6 Designing the Product Line Using the

Systems Approach ..........................................................11

1.6 Information Systems for Manufacturing and Services .....................12

1.7 Defining Operations........................................................................13

1.7.1 Manufacturing Operations.................................................13

1.7.2 Service Operations..............................................................14

1.7.3 Similarities and Differences between Services

and Manufacturing.............................................................16

1.8 Working Definitions of Production and Operations........................18

1.9 Contrasting Production Management and Operations

Management....................................................................................19

1.10 P/OM—The Hub of the Business Model.........................................20

1.11 Transformation Process ...................................................................20

1.12 Costs and Revenues Associated with Input–Output (I/O) Models..... 22

1.12.1 Inputs Associated with Variable (or Direct) Costs...............23

viii  ◾  Contents

1.12.2 Transformations Associated with

Fixed (or Indirect) Costs..................................................23

1.12.3 Outputs Associated with Revenues and Profits...................24

1.13 P/OM Input–Output Profit Model..................................................25

1.14 Productivity—A Major P/OM Issue................................................26

1.15 The Stages of P/OM Development...................................................27

1.16 Organizational Positions and Career Opportunities in P/OM.........30

1.16.1 Career Success and Types of Processes................................30

1.16.2 Operations Management Career Paths ...............................33

1.16.3 Global Aspects of Career Paths.......................................... 34

1.16.4 Manager of Production or Operations:

Manufacturing or Services..................................................35

1.16.5 Inventory Manager, Materials Manager, or Purchasing

Agent (and Supply Chain Manager) ...................................36

1.16.6 Director of Quality.............................................................36

1.16.7 Project Manager/Consultant (Internal or External)............37

Summary ...................................................................................................37

Review Questions.......................................................................................38

Problems....................................................................................................39

P/OM History Archive ............................................................................. 40

Archival Articles.............................................................................. 40

Readings and References ............................................................................41

Source of Video Clips on Manufacturing .................................................. 42

Alliance for Innovative Manufacturing (AIM): How Everyday

Things Are Made. .............................................................. 42

2 Strategy, Productivity, and History......................................................43

2.1 The Systems Viewpoint................................................................... 46

2.2 Strategic Thinking...........................................................................47

2.3 Measurement of Productivity ..........................................................48

2.3.1 Labor Productivity..............................................................50

2.3.2 Capital Productivity ...........................................................51

2.3.3 Multifactor Productivity.....................................................52

2.3.3.1 Trends in Multifactor (MFP) Productivity .........52

2.3.4 Operational Measures of the Organization’s

Productivity........................................................................54

2.4 System-Wide Issues Impacting Productivity ....................................55

2.4.1 Global Issues.......................................................................56

2.4.2 Bureaucracy, Flexibility, and Productivity...........................58

2.4.3 Size of Firms and Flexibility ...............................................59

2.4.4 Price–Demand Elasticity and Productivity.........................59

2.4.5 Elasticity of Quality and Productivity ................................61

2.4.6 Economies of Scale and the Division of Labor....................62

Contents  ◾  ix

2.5 History of Improvements of P/OM Transformations.......................63

2.5.1 Artisans, Apprentices, and Trainees—The Beginning.........63

2.5.2 Interchangeable Parts (IP)—P/OM’s First Step ..................65

2.5.3 Scientific Management (SM)—P/OM’s

Second Step ....................................................................... 66

2.5.4 Sequenced Assembly (SA)—P/OM’s Third Step .................67

2.5.5 Statistical Quality Control—P/OM’s Fourth Step..............68

2.5.6 Lean Production Systems—P/OM’s Fifth Step...................68

2.5.7 Mass Customization with CAD, CAM, and Flexible

Production System—P/OM’s Sixth Step.............................69

2.5.8 Global Competition: Year 2010 Plus—P/OM’s

Seventh Step.......................................................................72

Summary ...................................................................................................73

Review Questions.......................................................................................74

Problems....................................................................................................75

Readings and References............................................................................76

3 Workload Assessment (Forecasting).....................................................79

3.1 Introduction ....................................................................................81

3.2 Time Series and Extrapolation.........................................................82

3.3 Forecasting Methods for Time-Series Analysis ................................85

3.3.1 Moving Average..................................................................86

3.3.2 Weighted Moving Average..................................................88

3.3.3 Exponential Smoothing......................................................89

3.3.4 Forecasting with a Seasonal Cycle.......................................92

3.3.5 Trend Analysis....................................................................96

3.4 Regression Analysis .........................................................................98

3.5 Coefficients of Correlation and Determination................................99

3.6 Forecasting Errors..........................................................................101

3.7 The Delphi Method.......................................................................102

3.8 Pooling Information and Multiple Forecasts..................................103

3.9 Product Life-Cycle Stages and Forecasting ....................................103

3.9.1 Introduction and Growth of the New Product

(Goods and Services) ........................................................104

3.9.2 Maturation and Decline of the New Product

(Goods and Services) ........................................................104

3.9.3 Demand Prediction in Life-Cycle Stages ..........................105

3.9.4 Protection of Established (Mature) Products

(Goods and Services) ........................................................106

Summary .................................................................................................107

Review Questions.....................................................................................108

Problems..................................................................................................108

Readings and References.......................................................................... 114

x  ◾  Contents

4 Capacity Management and Aggregate Production Planning .............117

4.1 Definitions of Capacity.................................................................. 119

4.2 Introduction to Aggregate Production Planning............................122

4.3 Example 1: Aggregate Production Planning...................................123

4.3.1 Production Plans ..............................................................124

4.3.2 Production Capacity.........................................................129

4.4 Example 2: Aggregate Manufacturer’s Production Planning..........131

4.4.1 Costs in AP ......................................................................133

4.4.2 Production Capacity.........................................................134

4.4.3 Production Plans ..............................................................136

4.4.3.1 Level Plan.........................................................136

4.4.3.2 Chase Plan........................................................138

4.4.3.3 Mixed or Hybrid Plan ......................................138

4.4.3.4 Overtime in a Chase Plan with Level

Production and Overtime.................................140

4.4.4 Selection of a Production Plan..........................................144

4.4.5 Beginning Conditions ......................................................144

4.5 Example 3: Aggregate Production Planning in a Service

Industry..................................................................................... 145

4.5.1 Costs in AP for the Blood-Testing Laboratory ..................147

4.5.2 Production Capacity.........................................................149

4.5.3 Production Plans ..............................................................150

4.5.3.1 Level Plan.........................................................150

Summary .................................................................................................153

Review Questions.....................................................................................154

Problems.................................................................................................. 155

Readings and References..........................................................................159

5 Inventory Management ......................................................................161

5.1 Introduction ..................................................................................163

5.2 Types of Inventory Situations ........................................................166

5.2.1 Static versus Dynamic ......................................................167

5.2.2 Type of Demand Distribution—Certainty, Risk,

and Uncertainty ...............................................................168

5.2.3 Stability of Demand Distribution—Fixed or Varying.......170

5.2.4 Demand Continuity—Smoothly Continuous or

Lumpy .........................................................................170

5.2.5 Lead-Time Distributions—Fixed or Varying ....................170

5.2.6 Dependent or Independent Demand ................................171

5.3 Inventory-Related Costs ................................................................171

5.3.1 Costs of Ordering.............................................................171

5.3.2 Costs of Setups and Changeovers .....................................171

5.3.3 Costs of Carrying Inventory .............................................172

Contents  ◾  xi

5.3.4 Costs of Discounts............................................................173

5.3.5 Out-of-Stock Costs...........................................................173

5.3.6 Costs of Running the Inventory System ........................... 174

5.3.7 Additional Inventory Policy Costs....................................175

5.4 EOQ Model ..................................................................................175

5.4.1 Annual Ordering Cost......................................................176

5.4.2 Annual Inventory Holding Cost.......................................176

5.4.3 Annual Item Cost.............................................................178

5.4.4 Annual Total Cost............................................................178

5.4.5 Annual Total Variable Cost ..............................................178

5.4.6 Example for Cost Calculations .........................................178

5.4.7 EOQ Formula ..................................................................180

5.5 EPQ Model ...................................................................................181

5.6 ABC Classification ........................................................................182

5.6.1 Material Criticality...........................................................183

5.6.2 Annual Dollar Volume of Materials..................................184

5.7 Quantity Discount Model .............................................................187

5.8 Lead Times....................................................................................189

5.9 Order Point Policies.......................................................................191

5.10 Perpetual (Fixed Quantity) Inventory Systems ..............................192

5.10.1 Reorder Point and Safety (Buffer) Stock ...........................193

5.10.2 Operating the Perpetual Inventory System .......................194

5.10.3 Two-Bin Perpetual (Fixed Quantity) Inventory

Control System.................................................................195

5.11 Periodic Review (Fixed Time) Inventory Systems ..........................196

5.11.1 Safety (Buffer) Stock in Periodic (Fixed Time)

Inventory Systems.............................................................197

Summary .................................................................................................198

Review Questions.....................................................................................198

Problems................................................................................................. 200

Readings and References..........................................................................202

6 Scheduling..........................................................................................205

6.1 Introduction ..................................................................................207

6.1.1 Loading ............................................................................209

6.1.2 Sequencing Operations.....................................................210

6.1.3 Scheduling Example.........................................................210

6.2 Classification of Scheduling Problems ...........................................214

6.2.1 Sequence of Machines ......................................................214

6.2.2 Number of Machines........................................................214

6.2.3 Processing Times.............................................................. 215

6.2.4 Job Arrival Times ............................................................. 215

6.2.5 Objective Functions.......................................................... 215

xii  ◾  Contents

6.3 Two Machines Flow-Shop Problem ............................................... 215

6.3.1 Johnson’s Rule..................................................................216

6.3.2 Finding Make-Span......................................................... 220

6.3.3 Multiple Sequences.......................................................... 220

6.3.4 Breaking Ties ...................................................................221

6.4 Single-Machine Scheduling ...........................................................224

6.4.1 Objective Functions..........................................................224

6.4.2 Scheduling Rules..............................................................225

6.4.3 Example............................................................................225

6.4.3.1 FCFS Rule....................................................... 226

6.4.3.2 Calculation of Objective Functions ..................227

6.4.3.3 SPT Rule..........................................................227

6.4.3.4 EDD Rule....................................................... 228

6.4.3.5 More on FCFS or First-In, First-Out

Sequence Rule ................................................. 228

6.5 Dynamic Scheduling Problems......................................................230

6.5.1 Example............................................................................230

6.5.2 Objective Functions for Dynamic Problems.....................231

Summary .................................................................................................232

Review Questions.....................................................................................232

Problems..................................................................................................233

Readings and References..........................................................................237

7 Project Management...........................................................................239

7.1 Introduction ..................................................................................241

7.2 Managing Projects.........................................................................243

7.3 Good Project Managers Are Leaders............................................. 244

7.4 Basic Rules for Managing Projects.................................................245

7.5 Project Management Origins........................................................ 246

7.6 Project Network ............................................................................247

7.6.1 Project Network Example ................................................248

7.7 Critical Path and Project Duration................................................249

7.8 Early Start and Early Finish Times................................................250

7.9 Late Start and Late Finish Times...................................................251

7.10 Slack Time.....................................................................................252

7.11 Reducing Project Duration—Crashing Activities..........................254

7.12 Cost Analysis.................................................................................255

7.12.1 Example............................................................................255

7.12.2 Cost of Crashing an Activity ............................................256

7.12.3 Reducing Project Duration...............................................256

7.12.4 Fixed Costs.......................................................................259

7.13 Crashing Multiple Paths............................................................... 260

Contents  ◾  xiii

7.14 Probabilistic Projects .....................................................................261

7.14.1 Probabilistic Projects Example..........................................262

7.15 Resource Management ................................................................. 264

Summary .................................................................................................265

Review Questions.................................................................................... 266

Problems..................................................................................................267

Readings and References..........................................................................270

8 Quality Management .........................................................................273

8.1 Introduction ..................................................................................275

8.2 How Much Quality.......................................................................276

8.3 Dimensions of Quality ..................................................................278

8.3.1 Models of Quality ............................................................279

8.3.1.1 Failure—Critical to Quality Evaluation ...........281

8.3.1.2 Warranty Policies..............................................282

8.3.1.3 The Service Function—Repairability................282

8.3.1.4 Functional Human Factors...............................282

8.3.1.5 Nonfunctional Quality Factors—Aesthetics

and Timing ......................................................283

8.3.1.6 The Variety Dimension.................................... 284

8.4 The Costs of Quality .....................................................................285

8.4.1 The Cost of Prevention .....................................................285

8.4.2 The Cost of Appraisal (Inspection) ...................................287

8.4.3 The Cost of Failure...........................................................288

8.4.4 The Total Cost of Quality.................................................289

8.5 QC Methodology ..........................................................................289

8.5.1 Data Check Sheets (DCSs)...............................................290

8.5.2 Bar Charts........................................................................290

8.5.3 Histograms.......................................................................291

8.5.4 Pareto Analysis .................................................................292

8.5.5 Cause and Effect Charts (Ishikawa aka the Fishbone) ......293

8.5.5.1 Example: A Good Cup of Coffee......................294

8.6 Control Charts for Statistical Process Control...............................297

8.6.1 Inspection by Variables versus Attributes..........................297

8.6.2 Causes of Process Variation ..............................................298

8.6.2.1 Chance Causes .................................................299

8.6.2.2 Assignable Causes.............................................299

8.6.3 What Are QC Charts?......................................................299

8.6.3.1 Analysis of Statistical Runs.............................. 300

8.6.3.2 Example: Control Charts for a

Manufacturing Process.....................................301

8.6.4 Stable Process ...................................................................302

8.6.5 Selecting a Manufacturing Process ...................................302

xiv  ◾  Contents

8.7 Control Charts for Variables: x-Bar Charts................................... 304

8.7.1 Example: Control Charts for a Manufacturing

Process............................................................................. 306

8.7.2 Discussion of UCL and LCL for BCTF........................... 308

8.8 Control Charts for Variables: R-Charts ........................................ 308

8.9 Control Charts for Attributes: p-Charts ........................................309

8.10 Control Charts for Attributes: c-Charts.........................................312

8.11 Acceptance Sampling.....................................................................314

8.11.1 Single Sampling Plans ......................................................316

8.11.1.1 Operating Characteristic Curves ......................316

8.11.2 Multiple-Sampling Plans ..................................................318

8.12 International Quality Standards....................................................319

8.13 Industrial Recognition of Quality .................................................321

8.13.1 The Malcolm Baldrige National Quality Award ...............321

Summary .................................................................................................321

Review Questions.....................................................................................322

Problems..................................................................................................323

Readings and References..........................................................................326

9 Supply Chain Management................................................................331

9.1 Introduction ..................................................................................333

9.2 Acquisition Chain Management....................................................336

9.3 The Purchasing Function...............................................................339

9.3.1 Purchasing Agents........................................................... 340

9.3.2 The Ethics of Purchasing ................................................. 342

9.4 Receiving, Inspection, and Storage............................................... 342

9.5 Requiring Bids before Purchase.................................................... 343

9.6 Certification of Suppliers.............................................................. 346

9.7 Global Sourcing............................................................................ 348

9.8 Distribution Chain Management ..................................................349

9.9 e-Business......................................................................................352

9.9.1 e-Business System Design .................................................352

9.9.2 Competition, Conflict, Collaboration, and

Coordination (C4) ............................................................353

9.9.3 Radio Frequency Identification.........................................353

9.9.3.1 Business Value of RFID....................................354

9.9.3.2 Adoption and Implementation of RFID...........355

9.10 Logistics ........................................................................................355

9.10.1 Transportation Cost .........................................................356

9.11 Forecasting and Inventory Decisions in Supply Chain...................357

9.11.1 Contingency Planning for Supply Chain Capacity

Crises................................................................................358