1

Lecture1

BSB 370Managing Quality and Operations

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Operations ManagementOperations Management

The management of systems or processes that create goods and/or provide services

Organization

Finance Operations Marketing

Figure 1.1

3

Value-AddedValue-Added

The difference between the cost of inputs and the value or price of outputs.

Inputs Land Labor Capital

Transformation/Conversion

process

Outputs Goods Services

Control

Feedback

FeedbackFeedback

Value added

Figure 1.2

4

Food ProcessorFood Processor

Inputs Processing Outputs

Raw Vegetables Cleaning Canned vegetables Metal Sheets Making cans

Water CuttingEnergy CookingLabor PackingBuilding LabelingEquipment

Table 1.2

5

Hospital ProcessHospital Process

Inputs Processing Outputs

Doctors, nurses Examination Healthy patientsHospital Surgery

Medical Supplies MonitoringEquipment MedicationLaboratories Therapy

Table 1.2

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Production of Goods vs. Delivery of ServicesProduction of Goods vs. Delivery of Services

Production of goods – tangible output Delivery of services – an act Service job categories

Government Wholesale/retail Financial services Healthcare Personal services Business services Education

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Manufacturing vs ServiceManufacturing vs Service

Characteristic Manufacturing ServiceOutput

Customer contact

Uniformity of input

Labor content

Uniformity of output

Measurement of productivity

Opportunity to correct quality problems

Tangible

Low

High

Low

High

Easy

High

Intangible

High

Low

High

Low

Difficult

LowHigh

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Operations Management includes: Forecasting Capacity planning Scheduling Managing inventories Assuring quality Deciding where to locate facilities And more . . .

The operations function Consists of all activities directly related to

producing goods or providing services

Scope of Operations ManagementScope of Operations Management

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Types of OperationsTypes of OperationsTable 1.4

Operations ExamplesGoods Producing Farming, mining, construction,

manufacturing, power generationStorage/Transportation Warehousing, trucking, mail

service, moving, taxis, buses,hotels, airlines

Exchange Retailing, wholesaling, banking,renting, leasing, library, loans

Entertainment Films, radio and television,concerts, recording

Communication Newspapers, radio and televisionnewscasts, telephone, satellites

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Responsibilities of Operations ManagementResponsibilities of Operations Management

Products & services

Planning– Capacity– Location–– Make or buy– Layout– Projects– Scheduling

Controlling/Improving– Inventory– Quality

Organizing– Process selection

Staffing– Hiring/laying off– Use of Overtime

Directing– Incentive plans– Issuance of work orders– Job assignments

– Costs– Productivity

Table 1.6

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Key Decisions of Operations ManagersKey Decisions of Operations Managers

WhatWhat resources/what amounts

WhenNeeded/scheduled/ordered

WhereWork to be done

HowDesigned

WhoTo do the work

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Decision MakingDecision Making

System Design Capacity Location Arrangement of departments Product and service planning Acquisition and placement of equipment

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Decision MakingDecision Making

System Operation Management of personnel Inventory planning and control Scheduling Project Management Quality assurance

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Decision MakingDecision Making

Models Quantitative approaches Analysis of trade-offs

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ModelsModels

A model is an abstraction of reality.

– Physical– Schematic– Mathematical

What are the pros and cons of models?

Tradeoffs

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A Simulation ModelA Simulation Model

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Models Are BeneficialModels Are Beneficial

Easy to use, less expensive Require users to organize Systematic approach to problem solving Increase understanding of the problem Enable “what if” questions: simulation models Specific objectives Power of mathematics Standardized format

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Quantitative ApproachesQuantitative Approaches

• Linear programming: optimal allocation of

resources

• Queuing Techniques: analyze waiting lines

• Inventory models: management of inventory

• Project models: planning, coordinating and

controlling large scale projects

• Statistical models: forecasting

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Product Mix ExampleProduct Mix Example

Type 1 Type 2

Profit per unit $60 $50

Assembly time per unit

4 hrs 10 hrs

Inspection time per unit

2 hrs 1 hr

Storage space per unit

3 cubic ft 3 cubic ft

Resource Amount available

Assembly time 100 hours

Inspection time 22 hours

Storage space 39 cubic feet

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Objective – profit maximizationMaximize 60X1 + 50X2

Subject toAssembly 4X1 + 10X2 <= 100 hours

Inspection 2X1 + 1X2 <= 22 hours

Storage 3X1 + 3X2 <= 39 cubic feet

X1, X2 >= 0

A Linear Programming ModelA Linear Programming Model

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Business Operations OverlapBusiness Operations Overlap

Operations

Finance

Figure 1.5

Marketing

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Businesses Compete Using OperationsBusinesses Compete Using Operations

Product and service design Cost Location Quality Quick response Flexibility Inventory management Supply chain management

CompetitivenessCompetitiveness How effectively an organization meets the wants and needs of customers relative to others that offer similar goods or services

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Analysis of Trade-offsAnalysis of Trade-offs

How many more jeans would Levi need to sell to justify the cost of additional robotic tailors?

Cost of additional robotic tailors vs Inventory Holding Cost

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Competitiveness, Strategy, and Competitiveness, Strategy, and ProductivityProductivity

Chapter 2Chapter 2

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ProductivityProductivity

Productivity A measure of the effective use of resources Usually expressed as the ratio of output to input

Productivity ratios are used for Planning workforce requirements Scheduling equipment Financial analysis

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ProductivityProductivity

Partial measures output/(single input)

Multi-factor measures output/(multiple inputs)

Total measure output/(total inputs)

Productivity = Outputs

Inputs

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Measures of ProductivityMeasures of ProductivityTable 2.4

Partial Output Output Output Output

measures Labor Machine Capital Energy

Multifactor Output Output

measures Labor + Machine Labor + Capital + Energy

Total Goods or Services Produced

measure All inputs used to produce them

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Units of output per kilowatt-hourDollar value of output per kilowatt-hour

Energy Productivity

Units of output per dollar inputDollar value of output per dollar input

Capital Productivity

Units of output per machine hourDollar value of output per machine hour

Machine Productivity

Units of output per labor hourUnits of output per shiftValue-added per labor hour

Labor Productivity

Examples of Partial Productivity Examples of Partial Productivity MeasuresMeasures

Table 2.5

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Productivity GrowthProductivity Growth

Current Period Productivity – Previous Period ProductivityPrevious Period Productivity

Productivity Growth =

30

In-class Example 1In-class Example 1

7040 Units Produced

Sold for $1.10/unit

Cost of labor of $1,000

Cost of materials: $520

Cost of overhead: $2000

What is the total productivity?

Ans. 2.20

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Example 1 SolutionExample 1 Solution

TP = OutputLabor + Materials + Overhead

TP = (7040 units)*($1.10)$1000 + $520 + $2000

TP =2.20

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In-class Example 2In-class Example 2 A company has introduced a process improvement that

reduces processing time for each unit, so that output is increased by 25% with less material, but one additional worker required.

Under the old process, five workers could produce 60 units per hour.

Labor costs are $12/hour. Material input was previously $16/unit. For the new process, material is now $10/unit. Overhead is charged at 1.6 times direct labor cost. Finished units sell for $31 each. What increase in productivity is associated with the

process improvement?

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Example 2 SolutionExample 2 Solution

667.11,116/hr

/hr860,1

1.6(5)(12)60(16)5(12)

60(31):Before

481.2hr/2.937hr/325,2

)12)(6(6.1)10(75)12(61)60(1.25)(3

:After

%83.48667.1

100x 1.667)-(2.481 increasety Productivi

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In-class Example 3In-class Example 3 Student tuition at a local southern CA state university is

$100 per semester credit hour. The state supplements school revenue by matching

student tuition dollar for dollar. Average class size for the typical 3-credit course is 50

students. Instructors compensation is $4000 per class. Materials cost $20 per student per class. Overhead costs are $25,000 per class. What is the multi-factor productivity for this course

process? If instructors work an average of 14 hours per week for 16

weeks for each 3-credit class of 50 students, determine the labor productivity.

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Example 3 SolutionExample 3 Solution Multi-factor productivity

Value of outputs = Value of inputs = $30,000

Labor = $4000 Material = $20x50 = $1000 Overhead = $25,000

Multi-factor productivity = = 1 Labor productivity

Instructor hours per class = 14x16 = 224 Labor productivity = output/input = $30,000/224 =

$133.93/hour

classhourcredit

portstatetuition

student

credits

class

students/000,30$)

sup100$100$)(

3)(

50(

classclass

/000,30$/000,30$

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Factors Affecting ProductivityFactors Affecting Productivity

Capital Quality

Technology Management

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Standardization Quality Use of Internet Computer viruses Searching for lost or misplaced items Scrap rates New workers Bottleneck operations

Other Factors Affecting ProductivityOther Factors Affecting Productivity

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Bottleneck OperationBottleneck OperationFigure 2.3

Machine #2Machine #2BottleneckOperation

BottleneckOperation

Machine #1Machine #1

Machine #3Machine #3

Machine #4Machine #4

10/hr

10/hr

10/hr

10/hr

30/hr

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Cost, Revenue, Profit Models&

Break-even AnalysisChapter 5

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Cost Classification CostVariable Costs: Standard miles per gallon Average fuel price per gallon Fuel and oil per mile $0.0689 Maintenance per mile $0.0360 Tires per mile $0.0141

Annual Fixed Costs: Insurance: $372 License & Registration $95

Mixed Costs: Depreciation Fixed portion per year $3,703 Variable portion per mile $0.04

References

20 miles/ gallon$1.34/ gallon

Cost Classification of Owning and Operating a Passenger Car

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Cost-Volume RelationshipCost-Volume Relationship

5,000 10,000 15,000 20,000

Variable costs ($0.1190/mile) $595 $1,190 $1,785 $2,380Mixed costs: Variable portion 200 400 600 800 Fixed portion 3,703 3,703 3,703 3,703Fixed costs: 467 467 467 467Total variable cost 795 1,590 2,385 3,180Total fixed cost 4,170 4,170 4,170 4,170

Total costs $4,965 $5,760 $6,555 $7,350Cost per mile $0.9930 $0.5760 $0.4370 $0.3675

Volume Index (miles)

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Cost-Volume RelationshipCost-Volume Relationship

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Cost-Volume RelationshipsCost-Volume Relationships A

mo

un

t ($

)

0Q (volume in units)

Total cost = VC + FC

Total variable cost (V

C)

Fixed cost (FC)

Figure 5.5a

Am

ou

nt

($)

Q (volume in units)0

Total r

evenue

Figure 5.5b

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Cost-Volume RelationshipsCost-Volume Relationships

Am

ou

nt

($)

Q (volume in units)0 BEP units

Profit

Total r

even

ue

Total cost

VCR

FCQBEP

Formula (5-8) of Course Text

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Example: Ponderosa Development Corp.Example: Ponderosa Development Corp. Ponderosa Development Corporation (PDC) is a small real

estate developer that builds only one style house. The selling price of the house is $115,000. Land for each house costs $55,000 and lumber, supplies, and

other materials run another $28,000 per house. Total labor costs are approximately $20,000 per house.

Ponderosa leases office space for $2,000 per month. The cost of supplies, utilities, and leased equipment runs another $3,000 per month.

The one salesperson of PDC is paid a commission of $2,000 on the sale of each house. PDC has seven permanent office employees whose monthly salaries are given on the next slide.

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Employee Monthly Salary

President $10,000

VP, Development 6,000

VP, Marketing 4,500

Project Manager 5,500

Controller 4,000

Office Manager 3,000

Receptionist 2,000

Example: Ponderosa Development Corp.Example: Ponderosa Development Corp.

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Identify all costs and denote the marginal cost and marginal revenue for each house.

Write the monthly cost function c (x), revenue function r (x), and profit function p (x).

What is the breakeven point for monthly sales of the houses?

What is the monthly profit if 12 houses per month are built and sold?

Determine the BEP for monthly sale of houses graphically.

Example: Ponderosa Development Corp.Example: Ponderosa Development Corp.

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Example: Ponderosa Development Corp.Example: Ponderosa Development Corp.

00

200200

400400

600600

800800

10001000

12001200

00 11 22 33 44 55 66 77 88 99 1010Number of Houses Sold (x)Number of Houses Sold (x)

Th

ousa

nds

of

Dolla

rsTh

ousa

nds

of

Dolla

rs

Break-Even Point = 4 HousesBreak-Even Point = 4 Houses

Total Cost Total Cost = = 40,000 + 40,000 + 105,000x105,000x

Total Total Revenue =Revenue = 115,000x115,000x

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Profit

TotalRevenue

TotalCost

VariableCost

FixedCost

QuantitySold

UnitCost

Price

Influence ChartInfluence Chart

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Example: Step Fixed CostsExample: Step Fixed Costs A manager has the option of purchasing 1, 2 or 3

machines Fixed costs and potential volumes are as follows:

Variable cost = $10/unit and revenue = $40/unit If the projected annual demand is between 580 and 630

units, how many machines should the manager purchase?

# of machines Total annual FC ($) Range of output

1 9600 0 – 300

2 15000 301 – 600

3 20000 601 – 900

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Break-Even Problem with Step Fixed CostsBreak-Even Problem with Step Fixed Costs

Quantity

FC + VC = TC

FC + VC = TC

FC + VC =

TC

Step fixed costs and variable costs.

1 machine

2 machines

3 machines

Figure 5.6 a & b combined

Total RevenueBEVs

Total Cost

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1. One product is involved2. Everything produced can be sold3. Variable cost per unit is the same regardless

of volume4. Fixed costs do not change with volume5. Revenue per unit constant with volume6. Revenue per unit exceeds variable cost per

unit

Assumptions of Cost-Volume AnalysisAssumptions of Cost-Volume Analysis