1 lecture 1 bsb 370 managing quality and operations
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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
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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
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Food ProcessorFood Processor
Inputs Processing Outputs
Raw Vegetables Cleaning Canned vegetables Metal Sheets Making cans
Water CuttingEnergy CookingLabor PackingBuilding LabelingEquipment
Table 1.2
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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 =
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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