Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc.

OPIM 3104: Lecture #1OPIM 3104: Lecture #1

Introduction to OMIntroduction to OM

Instructor: Jose M. CruzInstructor: Jose M. Cruz

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OPIM 3104 Operations ManagementOPIM 3104 Operations Management

Instructor: Jose M. CruzInstructor: Jose M. Cruz Office:Office: Phone: Phone: E-mail: E-mail: Jose.Cruz@business.uconn.edu Web: Web: http://users.business.uconn.edu/jcruz/opim3104.htmlhttp://users.business.uconn.edu/jcruz/opim3104.html

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How to get help?How to get help?

Read syllabusRead syllabus Go to course web pageGo to course web page Attend office hoursAttend office hours Send e-mailSend e-mail Phone call during office hoursPhone call during office hours

Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 44

Textbook & Software RequirementsTextbook & Software Requirements

Russell & TaylorRussell & Taylor Operations managementOperations management John Wiley, Sixth Edition, 2009John Wiley, Sixth Edition, 2009

Excel OM add-inExcel OM add-in MS Excel Solver Add-in (from MS Office)MS Excel Solver Add-in (from MS Office)

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ObjectivesObjectives

Learn about OM:Learn about OM: How OM activities are performedHow OM activities are performed How goods and services are producedHow goods and services are produced What operations managers doWhat operations managers do How OM affects costs in any organizationHow OM affects costs in any organization

Develop qualitative and quantitative Develop qualitative and quantitative decision-making skills in operationsdecision-making skills in operations

Learn basic OM Excel toolsLearn basic OM Excel tools

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Xerox VideoXerox Video

CompetitionCompetition Re-EngineeringRe-Engineering Product DesignProduct Design Quality ManagementQuality Management Relationship with SuppliersRelationship with Suppliers BenchmarkingBenchmarking Cost AnalysisCost Analysis Just in Time ManufacturingJust in Time Manufacturing

Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc.Beni AsllaniBeni Asllani

University of Tennessee at ChattanoogaUniversity of Tennessee at Chattanooga

Operations and CompetitivenessOperations and Competitiveness

Operations Management - 6th EditionOperations Management - 6th Edition

Chapter 1 Chapter 1

Roberta Russell & Bernard W. Taylor, IIIRoberta Russell & Bernard W. Taylor, III

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What Do Operations What Do Operations Managers Do?Managers Do?

What is Operations?What is Operations? a function or system that transforms inputs into outputs of a function or system that transforms inputs into outputs of

greater valuegreater value What is a Transformation Process?What is a Transformation Process?

a series of activities along a a series of activities along a value chain value chain extending from extending from supplier to customersupplier to customer

activities that do not add value are superfluous and activities that do not add value are superfluous and should be eliminatedshould be eliminated

What is Operations Management?What is Operations Management? design, operation, and improvement of productive design, operation, and improvement of productive

systemssystems

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Physical: Physical: as in manufacturing operationsas in manufacturing operations Locational: Locational: as in transportation operationsas in transportation operations Exchange: Exchange: as in retail operationsas in retail operations Physiological: Physiological: as in health careas in health care Psychological: Psychological: as in entertainmentas in entertainment Informational: Informational: as in communicationas in communication

Transformation ProcessTransformation Process

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INPUT •Material•Machines•Labor•Management•Capital

TRANSFORMATIONPROCESS

OUTPUT •Goods•Services

FeedbackFeedback

Operations as a Operations as a Transformation ProcessTransformation Process

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Operations FunctionOperations Function

OperationsOperations MarketingMarketing Finance and Finance and

AccountingAccounting Human Human

ResourcesResources Outside Outside

SuppliersSuppliers

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How is Operations Relevant to my How is Operations Relevant to my Major?Major?

AccountingAccounting

Information Information TechnologyTechnology

ManagementManagement

““As an auditor you must As an auditor you must understand the fundamentals of understand the fundamentals of operations management.”operations management.”

““IT is a tool, and there’s no better IT is a tool, and there’s no better place to apply it than in operations.” place to apply it than in operations.”

““We use so many things you learn We use so many things you learn in an operations class—scheduling, in an operations class—scheduling, lean production, theory of lean production, theory of constraints, and tons of quality constraints, and tons of quality tools.”tools.”

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How is Operations Relevant to my How is Operations Relevant to my Major?Major?

EconomicsEconomics

MarketingMarketing

FinanceFinance

““It’s all about processes. I live It’s all about processes. I live by flowcharts and Pareto by flowcharts and Pareto analysis.”analysis.”

““How can you do a good job How can you do a good job marketing a product if you’re marketing a product if you’re unsure of its quality or delivery unsure of its quality or delivery status?”status?”

““Most of our capital budgeting Most of our capital budgeting requests are from operations, requests are from operations, and most of our cost savings, and most of our cost savings, too.”too.”

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Issues and Trends in Issues and Trends in OperationsOperations

Global Markets, Global Sourcing, and Global Markets, Global Sourcing, and Global OperationsGlobal Operations

Virtual CompaniesVirtual Companies Greater Choice, More IndividualismGreater Choice, More Individualism Emphasis on ServiceEmphasis on Service Speed and FlexibilitySpeed and Flexibility

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Issues and Trends in Issues and Trends in Operations (cont.)Operations (cont.)

Supply ChainsSupply Chains Collaborative CommerceCollaborative Commerce Technological AdvancesTechnological Advances Knowledge and Ability to LearnKnowledge and Ability to Learn Environmental and Social Environmental and Social

ResponsibilitiesResponsibilities

Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc.Beni AsllaniBeni Asllani

University of Tennessee at ChattanoogaUniversity of Tennessee at Chattanooga

Operations Management - 6th EditionOperations Management - 6th Edition

Chapter 1 SupplementChapter 1 Supplement

Roberta Russell & Bernard W. Taylor, III

Operational Decision-Making Tools: Operational Decision-Making Tools: Decision AnalysisDecision Analysis

Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 1717

OutlineOutline

Decision AnalysisDecision Analysis Decision Making without Probabilities Decision Making without Probabilities Decision Analysis with ExcelDecision Analysis with Excel Decision Making with ProbabilitiesDecision Making with Probabilities Expected Value of Perfect InformationExpected Value of Perfect Information

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Decision AnalysisDecision Analysis

Quantitative MethodsQuantitative Methods A set of tools for operations managerA set of tools for operations manager

Decision AnalysisDecision Analysis A set of quantitative decision-making A set of quantitative decision-making

techniques for decision situations in which techniques for decision situations in which uncertainty existsuncertainty exists

Example of an uncertain situationExample of an uncertain situation demand for a product may vary between 0 and 200 demand for a product may vary between 0 and 200

units, depending on the state of marketunits, depending on the state of market

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Decision Making Decision Making Without ProbabilitiesWithout Probabilities

States of NatureStates of Nature Events that may occur in the futureEvents that may occur in the future Examples of states of nature:Examples of states of nature:

high or low demand for a producthigh or low demand for a product good or bad economic conditionsgood or bad economic conditions

Decision Making Under RiskDecision Making Under Risk probabilities can be assigned to the occurrence of probabilities can be assigned to the occurrence of

states of nature in the futurestates of nature in the future Decision Making Under UncertaintyDecision Making Under Uncertainty

probabilities can NOT be assigned to the probabilities can NOT be assigned to the occurrence of states of nature in the futureoccurrence of states of nature in the future

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Payoff: Payoff: outcome of a decisionoutcome of a decision

States Of NatureStates Of Nature

DecisionDecision aa bb

11 Payoff 1aPayoff 1a Payoff 1bPayoff 1b

22 Payoff 2aPayoff 2a Payoff 2bPayoff 2b

Payoff TablePayoff Table

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Decision Making Criteria Under Decision Making Criteria Under UncertaintyUncertainty

MaximaxMaximax Choose decision with the maximum of the Choose decision with the maximum of the

maximum payoffsmaximum payoffs

MaximinMaximin Choose decision with the maximum of the Choose decision with the maximum of the

minimum payoffsminimum payoffs

Minimax RegretMinimax Regret Choose decision with the minimum of the Choose decision with the minimum of the

maximum regrets for each alternativemaximum regrets for each alternative

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Decision Making Criteria Under Decision Making Criteria Under Uncertainty (cont.)Uncertainty (cont.)

Hurwicz Hurwicz Choose decision in which decision payoffs are Choose decision in which decision payoffs are

weighted by a coefficient of optimism, alphaweighted by a coefficient of optimism, alpha Coefficient of optimism is a measure of a Coefficient of optimism is a measure of a

decision maker’s optimism from decision maker’s optimism from 00 (completely (completely pessimistic) to pessimistic) to 11 (completely optimistic) (completely optimistic)

Equal Likelihood (La Place)Equal Likelihood (La Place) Choose decision in which each state of nature is Choose decision in which each state of nature is

weighted equallyweighted equally

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Southern Textile Southern Textile CompanyCompany

STATES OF NATURESTATES OF NATURE

Good ForeignGood Foreign Poor ForeignPoor Foreign

DECISIONDECISION Competitive ConditionsCompetitive Conditions Competitive ConditionsCompetitive Conditions

ExpandExpand $ 800,000$ 800,000 $ 500,000$ 500,000Maintain status quoMaintain status quo 1,300,0001,300,000 -150,000-150,000Sell nowSell now 320,000320,000 320,000320,000

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Maximax Solution Maximax Solution

STATES OF NATURESTATES OF NATURE

Good ForeignGood Foreign Poor ForeignPoor Foreign

DECISIONDECISION Competitive ConditionsCompetitive Conditions Competitive ConditionsCompetitive Conditions

ExpandExpand $ 800,000$ 800,000 $ 500,000$ 500,000Maintain status quoMaintain status quo 1,300,0001,300,000 -150,000-150,000Sell nowSell now 320,000320,000 320,000320,000

Expand: $800,000Status quo: 1,300,000 MaximumSell: 320,000

Decision: Maintain status quo

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Maximin Solution Maximin Solution

STATES OF NATURESTATES OF NATURE

Good ForeignGood Foreign Poor ForeignPoor Foreign

DECISIONDECISION Competitive ConditionsCompetitive Conditions Competitive ConditionsCompetitive Conditions

ExpandExpand $ 800,000$ 800,000 $ 500,000$ 500,000Maintain status quoMaintain status quo 1,300,0001,300,000 -150,000-150,000Sell nowSell now 320,000320,000 320,000320,000

Expand: $500,000 Maximum

Status quo: -150,000Sell: 320,000

Decision: Expand

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Minimax Regret SolutionMinimax Regret SolutionGood Foreign Poor ForeignCompetitive Conditions Competitive Conditions

$1,300,000 - 800,000 = 500,000 $500,000 - 500,000 = 01,300,000 - 1,300,000 = 0 500,000 - (-150,000)= 650,0001,300,000 - 320,000 = 980,000 500,000 - 320,000= 180,000

Expand: $500,000 MinimumStatus quo: 650,000Sell: 980,000

Decision: Expand

Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 2727

Hurwicz CriteriaHurwicz Criteria

STATES OF NATURESTATES OF NATURE

Good ForeignGood Foreign Poor ForeignPoor Foreign

DECISIONDECISION Competitive ConditionsCompetitive Conditions Competitive ConditionsCompetitive Conditions

ExpandExpand $ 800,000$ 800,000 $ 500,000$ 500,000Maintain status quoMaintain status quo 1,300,0001,300,000 -150,000-150,000Sell nowSell now 320,000320,000 320,000320,000

= 0.3 1 - = 0.7

Expand: $800,000(0.3) + 500,000(0.7) = $590,000 MaximumStatus quo: 1,300,000(0.3) -150,000(0.7) = 285,000Sell: 320,000(0.3) + 320,000(0.7) = 320,000

Decision: Expand

Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 2828

Equal Likelihood CriteriaEqual Likelihood Criteria

STATES OF NATURESTATES OF NATURE

Good ForeignGood Foreign Poor ForeignPoor Foreign

DECISIONDECISION Competitive ConditionsCompetitive Conditions Competitive ConditionsCompetitive Conditions

ExpandExpand $ 800,000$ 800,000 $ 500,000$ 500,000Maintain status quoMaintain status quo 1,300,0001,300,000 -150,000-150,000Sell nowSell now 320,000320,000 320,000320,000

Two states of nature each weighted 0.50Expand: $800,000(0.5) + 500,000(0.5) = $650,000 MaximumStatus quo: 1,300,000(0.5) -150,000(0.5) = 575,000Sell: 320,000(0.5) + 320,000(0.5) = 320,000

Decision: Expand

Copyright 2006 John Wiley & Sons, Inc.Copyright 2006 John Wiley & Sons, Inc. 2929

Decision Making with Decision Making with ProbabilitiesProbabilities

Risk involves assigning probabilities to Risk involves assigning probabilities to states of naturestates of nature

Expected valueExpected value a weighted average of decision outcomes in a weighted average of decision outcomes in

which each future state of nature is which each future state of nature is assigned a probability of occurrence assigned a probability of occurrence

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Expected ValueExpected Value

EV (EV (xx) = ) = pp((xxii))xxiinn

i i =1=1

xxii = outcome = outcome ii

pp((xxii)) = probability of outcome = probability of outcome ii

wherewhere

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Decision Making with Decision Making with Probabilities: ExampleProbabilities: Example

STATES OF NATURESTATES OF NATURE

Good ForeignGood Foreign Poor ForeignPoor Foreign

DECISIONDECISION Competitive ConditionsCompetitive Conditions Competitive ConditionsCompetitive Conditions

ExpandExpand $ 800,000$ 800,000 $ 500,000$ 500,000Maintain status quoMaintain status quo 1,300,0001,300,000 -150,000-150,000Sell nowSell now 320,000320,000 320,000320,000

p(good) = 0.70 p(poor) = 0.30EV(expand): $800,000(0.7) + 500,000(0.3) = $710,000 EV(status quo): 1,300,000(0.7) -150,000(0.3) = 865,000 Maximum EV(sell): 320,000(0.7) + 320,000(0.3) = 320,000

Decision: Status quo

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Decision Making with Decision Making with Probabilities: ExcelProbabilities: Excel

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Expected Value of Expected Value of Perfect InformationPerfect Information

EVPIEVPI maximum value of perfect information to maximum value of perfect information to

the decision makerthe decision maker

Maximum amount that an investor Maximum amount that an investor would pay to purchase perfect would pay to purchase perfect informationinformation

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EVPI ExampleEVPI Example

Good conditions will exist Good conditions will exist 70%70% of the time of the time choose maintain status quo with payoff of choose maintain status quo with payoff of $1,300,000$1,300,000

Poor conditions will exist Poor conditions will exist 30%30% of the time of the time choose expand with payoff of choose expand with payoff of $500,000$500,000

Expected value given perfect informationExpected value given perfect information= $1,300,000 (0.70) + 500,000 (0.30)= $1,300,000 (0.70) + 500,000 (0.30)= $1,060,000= $1,060,000

Recall that expected value without perfect Recall that expected value without perfect information was $865,000 (maintain status quo)information was $865,000 (maintain status quo)

EEVPIVPI== $1,060,000 - 865,000 = $195,000$1,060,000 - 865,000 = $195,000