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OPERATIONS MANAGEMENT

F i f t h E d i t i o n

Jay Heizer Jesse H. Jones Professor of Business Administration Texas Lutheran University

Barry Render Charles Harwood Professor of Operations Management Crummer Graduate School of Business Rollins College

I Prentice Hall i 1

I Upper Saddle River, New Jersey 07458

A OUT THE AUTHORS vi FOREWORD BY PHILIP E. CROSBY ix PREFACE xxi

1. Operations and Productivity 1 Global Company Profile: Whirlpool 2 What Is Operations Management? 4 The Heritage of Operations Management 4 Why Study OM? 6 What Operations Managers Do 7

How This Book Is Organized 8 Organizing to Produce Goods and Services 8 Where Are the OM Jobs? 10 Exciting New Trends in Operations Management 11 Operations in the Service Sector 12

Differences between Goods and Services 12 Growth of Services 14 Service Pay 16

The Productivity Challenge 16 Productivity Measurement 17 Productivity Variables 19 Productivity and the Service Sector 22

The Challenge of Social Responsibility 23 Summary 24 Key Terms 24 Solved Problems 24 Discussion Questions 25 Critical Thinking Exercise 26 Problems 26 Case Study: National Air Express 28 Bibliography 29 Internet Resources 29

2. Operations Strategy for Competitive Advantage 31 Global Company Profile: Komatsu 32 Identifying Missions and Strategies 34

Mission 34 Strategy 36

Achieving Competitive Advantage Through Operations 36

Competing on Differentiation 36 Competing on Cost 37 Competing on Response 37

Ten Decisions of OM 39 Issues in Operations Strategy 42

Research 42 Preconditions 43 Dynamics 43

Strategy Development and Implementation 44

Identify Critical Success Factors 45 Build and Staffthe Organization 47 Summary 47 Key Terms 47 Solved Problem 48 Discussion Questions 48 Critical Thinking Exercise 48 Problems 49 Case Study: Minit-Lube, Inc. 49 Case Study: Global Strategy at Motorola 50 Video Case 1: Strategy at Regal Marine 51 Internet Case Study 51 Bibliography 51 Internet Resources 52

3. Operations in a Global Environment 53 Global Company Profile: Boeing 54 Defining Global Operations 57

Globalization ofProduction 59 Why Global Operations Are Important 59

xii C O N T E N T S

Achieving Global Operations 62 Global Product Design 62 Global Process Design and Technology 63 Global Facility Location Analysis 63 Impact ofCulture and Ethics 66

Global Issues in Service Operations 67 Managing Global Service Operations 68 Summary 68 Key Terms 69 * Using POMfor Windows for Location Analysis 69 Using Excel OM to Solve Location Problems 69 Discussion Questions 70 Critical Thinking Exercise 71 Problems 71 Case Study: Ford and Mazda Share the Driver's Seat 73 Bibliography 74 Internet Resources 74

PART TWO DESIGNING OPERATIONS

4. Managing Quality 75 Global Company Profile: Motorola 76 Quality and Strategy 78 Defining Quality 79

Other Implications of Quality 80 International Quality Standards 80

Japan's Industrial Standard 80 Europe'slSO 9000 Standard 81 Environmental Management Standard 82 U.S. Standards 82

Total Quality Management 82 Continuous Improvement 83 Employee Empowerment 83 Benchmarking 84 Just-in-Time (JIT) 85 Knowledge ofTQM Tools 86

Tools ofTQM 86 Quality Function Deployment (QFD) 86 Taguchi Technique 89 Pareto Charts 90 Process Charts 91 Cause-and-Effect Diagram 92 Statistical Process Control (SPC) 92

The Role of Inspection 93 When and Where to Inspect 95

Source Inspection 96 Service Industry Inspection 96 Inspection of Attributes vs. Variables 96

Total Quality Management in Services 97 Summary 99 Key Terms 99 Discussion Questions 100 Critical Thinking Exercise 100 Problems 100 Case Study: Westover Electrical, Inc. 102 Case Study: Quality Cleaners 104 Video Case 2: Quality at the Ritz-Carlton Hotel Company 105 * Internet Case Study 106 Bibliography 106 Internet Resources 106

Supplement 4: Statistical Process Control 107 Statistical Process Control (SPC) 108

Control Charts for Variables 110 The Central Limit Theorem 111 Setting Mean Chart Limits (x-Charts) 113 Setting Range Chart Limits (R-Charts) 115 Using Mean and Range Charts 115 Control Charts for Attributes 117 Process Capability 121

Acceptance Sampling 123 Operating Characteristic Curve 123 Average Outgoing Quality 125 Summary 126 Key Terms 126 Using POM for Windows 126 Using Excel OM for SPC 127 Solved Problems 128 * Discussion Questions 130 Problems 130 Data Base Application 133 Case Study: Bayfield Mud Company 135 Case Study: SPC at the Gazette 136 Internet Case Study 137 Bibliography 137 Internet Resources 138

5. Forecasting 139 Global Company Profile: Tupperware Corporation 140 What Is Forecasting? 142

Forecasting Time Horizons 142 The Influence of Product Life Cycle 143

Types of Forecasts 143 The Strategie Importance of Forecasting 143

Human Resources 144 Capacity 144 Supply-Chain Management 144

C O N T E N T S X l l l

Seven Steps in the Forecasting System 144 Forecasting Approaches 145

Overview of Qualitative Methods 145 Overview of Quantitative Methods 146

Time-Series Forecasting 147 Decomposition of a Time Series 147 Naive Approach 148 Moving Averages 148 Exponential Smoothing 151 Exponential Smoothing with Trend Adjustment 155 Trend Projections 158 Seasonal Variations in Data 161

Causal Forecasting Methods: Regression and Correlation Analysis 163

Using Regression Analysis to Forecast 163 Standard Error ofthe Estimate 165 Correlation Coefficients for Regression Lines 167 Multiple-Regression Analysis 168

Monitoring and Controlling Forecasts 170 Adaptive Smoothing 172 Focus Forecasting 172 The Computer' s Role in Forecasting 172

Forecasting in the Service Sector 172 Summary 173 Key Terms 174 Using POM for Windows in Forecasting 174 Using Excel Spreadsheets in Forecasting 174 Solved Problems 177 - Discussion Questions 179 Critical Thinking Exercise 179 Problems 179 Data Base Application 187 Case Study: North-South Airline 188 Case Study: Akron Zoological Park 189 * Internet Case Study 189 Bibliography 190 Internet Resources 190

6. Design of Goods and Services 191 Global Company Profile: Regal Marine 192 Goods and Services Selection 194

Product Strtegy Options 194 Generation ofNew Product Opportunities 195 Product Life Cycles 196 Life Cycle and Strafe gy 198 Environmental^ Friendly Products 199

Product Development 200 Product Development System 200

Organizing for Product Development 201 Manufacturability and Value Engineering 202

Issues for Product Development 203 Robust Design 204 Time-Based Competition 204 Modular Design 204 Computer-Aided Design (CAD) 205 Value Analysis 206 Product-by-Value Analysis 206

Defining the Product 207 Make-or-Buy Decisions 209 Group Technology 209

Documents for Production 210 Service Design 211

Documents for Services 213 Application of Decision Trees to Product Design 215 Transition to Production 217

Summary 217 Key Terms 217 Solved Problems 218 Discussion Questions 218 Critical Thinking Exercise 218 Problems 218 Case Study: De Mar's Product Strategy 221 Case Study: GE's Rotary Compressor 222 Video Case 3: Product Design at Regal Marine 223 Bibliography 224 Internet Resources 224

7. Process Strategy and Capacity Planning 225 Global Company Profile: Nucor 226 Three Process Strategies 228

Process Focus 229 Repetitive Focus 230 Product Focus 232 Comparison of Process Choices 233

Process Analysis and Design 235 Flow Diagrams 236 Process Charts 236 Time-Function Mapping 237 Work-Flow Analysis 237

Process Reengineering 239 Moving toward Lean Production 239

Service Process Strategy 241 Service-Sector Considerations 241 Customer Interaction and Process Strategy 242

xiv C O N T E N T S

More Opportunities to Improve Service Processes 243

Selection of Equipment and Technology 244 Environmental Issues 245 Capacity 246

Defining Capacity 246 Forecasting Capacity Requirements 247 Applying Decision Trees to Capacity Decisions 249 Managing Demand 250

Break-Even Analysis 251 Single-Product Case 254 Multiproduct Case 255

Strategy-Driven Investments 257 Investment, Variable Cost, and Cash Flow 257 Net Present Value 258 Summary 261 Key Terms 261 Using Excel OMfor Break-Even Analysis 262 Solved Problems 263 Discussion Questions 263 Critical Thinking Exercise 264 Problems 264 Case Study: Matthew Yachts, Inc. 268 Video Case 4: Process Strtegy at Wheeled Coach 269 Bibliography 270 Internet Resources 270

Supplement 7: State-of-the-Art Technology in Operations 271 Design Technology 272

Computer-Aided Design (CAD) 273 Standard for the Exchange ofProduct Data (STEP) 273 Computer-Aided Manufacturing (CAM) 274 Virtual Reality Technology 274

Production Technology 275 Numerical Control 275 Process Control 275 Vision Systems 276 Robots 276 Automated Storage and Retrieval System (ASRS) 277 Automated Guided Vehicle (AGV) 278 Flexible Manufacturing System (FMS) 278 Computer-Integrated Manufacturing (CIM) 279

Technology in Services 280 Information Sciences in Operations 281

Transaction Processing 281 Management Information System (MIS) 282 The Internet 282 Artificial Intelligence 283

Managing Technology in a Global Environment 284

Summary 286 Key Terms 286 Discussion Questions 286 Problems 287 Case Study: Rochester Manufacturing Corporation 287 Bibliography 288 Internet Resources 288

8. Location Strategies 289 Global Company Profile: Federal Express 290 The Strategie Importance of Location 292 Factors That Affect Location Decisions 293

Labor Productivity 294 Exchange Rates 296 Costs 296 Attitudes 296 Proximity to Markets 297 Proximity to Suppliers 297

Methods of Evaluating Location Alternatives 298

The Factor-Rating Method 298 Locational Break-Even Analysis 300 Center-of-Gravity Method 301 Transportation Model 303

Service Location Strategy 304 How Hotel Chains Select Sites 305 The Telemarketing and Internet Industries 306 Geographie Information Systems 306 Summary 307 Key Terms 308 Using POM for Windows 308 Using Excel OM to Solve Location Problems 308 Solved Problems 309 Discussion Questions 311 Critical Thinking Exercise 311 Problems 312 Data Base Application 315 Case Study: Southern Recreational Vehicle Company 317 Internet Case Study 318 Bibliography 318 Internet Resources 318

9. Layout Strategy 319 Global Company Profile: Pittsburgh International Airport 320 The Strategie Importance of Layout Decisions 322

C O N T E N T S XV

Types of Layout 322 Fixed-Position Layout 323 Process-Oriented Layout 325

Expert Systems in Layout 331 Work Cells 331 The Focused Work Center and the Focused Factory 333

Office Layout 334 Retail Layout 336 Warehousing and Storage Layouts 337

Cross-Docking 338 Random Stocking 338 Customizing 339

Repetitive and Product-Oriented Layout 339 Assembly-Line Balancing 341 Summary 345 Key Terms 345 Using POM for Windows for Layout Design 346 Solved Problems 348 Discussion Questions 351 Critical Thinking Exercise 352 Problems 352 Data Base Application 358 Case Study: Des Moines National Bank 358 Case Study: State Automobile License Renewals 360 Video Case 5: Facility Layout at Wheeled Coach 361 Internet Case Studies 362 Bibliography 362 Internet Resources 362

10. Human Resources and Job Design 363 Global Company Profile: Lucent Technologies 364 Human Resource Strategy for Competitive Advantage 366

Constraints on Human Resource Strategy 366 Labor Planning 367

Employment-Stability Policies 367 Work Schedules 368 Job Classification and Work Rules 369

Job Design 369 Labor Specialization 369 Job Expansion 370 Psychological Components of Job Design 371 Self-Directed Teams 372 Motivation and Incentive Systems 374 Ergonomics and Work Methods 375

The Visual Workplace 381

Labor Standards 383 Summary 383 Key Terms 383 Solved Problems 384 Discussion Questions 386 Critical Thinking Exercise 386 Problems 386 Case Study: The Fleet That Wanders 387 Case Study: Lincoln Electric's Incentive Pay System 388 Bibliography 389 Internet Resources 389

Supplement 10: Work Measurement 391 Labor Standards and Work Measurement 392 Historical Experience 393 Time Studies 393 Predetermined Time Standards 398 Work Sampling 400

Summary 403 Key Terms 403 Solved Problems 403 Discussion Questions 406 * Problems 406 Case Study: Telephone Operator Standards at AT&T 411 Bibliography 412 Internet Resources 412

PART THREE MANAGING OPERATIONS

11. Supply-Chain Management 413 Global Company Profile: Volkswagen 414 The Strategie Importance of the Supply Chain 416

Global Supply-Chain Issues 417 Purchasing 418

Manufacturing Environments 419 Service Environments 419 Make-or-Buy Decisions 419

Supply-Chain Strategies 420 Many Suppliers 420 Few Suppliers 421 Vertical Integration 422 Keiretsu Networks 423 Virtual Companies 423

Vendor Selection 425 Vendor Evaluation 425 Vendor Development 426 Negotiations 426

xvi C O N T E N T S

Managing the Supply Chain 427 Materials Management 429

Distribution Systems 430 Benchmarking Supply-Chain Management 431

Summary 431 Key Terms 432 Discussion Questions 432 Critical Thinking Exercise 432 Problems 432 Case Study: Factory Enterprises, Inc. 433 Case Study: Thomas Manufacturing Company 434 * Video Case 6: Supply Chain Management at Regal Marine 435 Internet Case Studies 436 Bibliography 436 Internet Resources 436

12. Inventory Management 437 Global Company Profile: Harley-Davidson 438 Functions of Inventory 440

Types of Inventory 440 Inventory Management 441

ABC Analysis 441 Record Accuracy 443 Cycle Counting 444 Control of Service Inventories 444

Inventory Models 446 Independent versus Dependent Demand 446 Holding, Ordering, and Setup Costs 446

Inventory Models for Independent Demand 447

The Basic Economic Order Quantity (EOQ) Model 447 Minimizing Costs 447 Reorder Points 453 Production Order Quantity Model 454 Quantity Discount Models 457

Probabilistic Models with Constant Lead Time 460 Fixed-Period Systems 464

Summary 465 Key Terms 466 Using POM for Windows to Solve Inventory Problems 466 Using Excel OMfor Inventory 466 Solved Problems 469 * Discussion Questions 471 Critical Thinking Exercise 471 Problems 471 Case Study: Sturdivant Sound Systems 476 Case Study: LaPlace Power and Light 476 Video Case 7: Inventory Control at Wheeled Coach 477 Internet Case Studies 477 ' Bibliography 478 Internet Resources 478

Supplement 12: Just-in-Time Systems 479 Just-in-Time Philosophy 480 Suppliers481

Goals ofJIT Partnerships 483 Concerns of Suppliers 484

JIT Layout 485 Distance Reduction 485 Increased Flexibility 486 Impact on Employees 486 Reduced Space and Inventory 486

Inventory 486 Reduce Variability 487 Reduce Inventory 487 Reduce Lot Sizes 488 Reduce Setup Costs 489

Scheduling 490 Level Material-Use Schedules 490 Kanban 490

Quality 493 Employee Empowerment 493 JIT in Services 494

Summary 495 Key Terms 495 Solved Problems 495 Discussion Questions 496 Problems 496 Case Study: Electronic Systems, Inc. 498 Bibliography 499 Internet Resources 499

13. Aggregate Scheduling 501 Global Company Profile: Anheuser-Busch 502 The Planning Process 504 The Nature of Aggregate Scheduling 505 Aggregate Planning Strategies 507

Capacity Options 508 Demand Options 509 Mixing Options to Develop a Plan 510

Methods for Aggregate Scheduling 511 Graphical and Charting Methods 511 Mathematical Approaches to Planning 516 Comparison of Aggregate Planning Methods 518

Aggregate Scheduling in Services 518 Restaurants 519 Miscellaneous Services 520

C O N T E N T S X V I I

National Chains ofSmall Service Firms 520 Airline Industry 520 Hospitals 521 Summary 522 Key Terms 522 Using POM for Windows for Aggregate Planning 522 Using Excel OM for Aggregate Planning 523 Solved Problems 525 Discussion Questions 527 Critical Thinking Exercise 527 Problems 527 Data Base Application 532 Case Study: Southwestern State College 532 Internet Case Study 533 Bibliography 534 Internet Resources 534

14. Material Requirements Planning (MRP) 535 Global Company Profile: Collins Industries 536 Dependent Inventory Model Requirements 538

Master Production Schedule 539 Bills of Material 541 Accurate Inventory Records 544 Purchase Orders Outstanding 545 Lead Times for Each Component 545

MRP Structure 545 MRP Management 550

MRP Dynamics 550 MRP and JIT 550

Lot-Sizing Techniques 551 Extensions of MRP 555

Closed-Loop MRP 555 Capacity Planning 556 Material Requirements Planning II (MRP II) 557 Enterprise Resource Planning (ERP) 558

MRP in Services 560 Distribution Resource Planning (DRP) 561

DRP Structure 562 Allocation 562 Summary 562 Key Terms 563 Using POM for Windows to Solve MRP Problems 563 Solved Problems 565 Discussion Questions 568 ' Critical Thinking Exercise 568 Problems 568 Data Base Application 573 Case Study: Service, Inc. 574 Case Study: Ruch Manufacturing 574 Video Case 8: MRP at Wheeled Coach 575 Bibliography 576 Internet Resources 576

15. Short-Term Scheduling 577 Global Company Profile: Delta Airlines 578 The Strategie Importance of Short Term Scheduling 580 Scheduling Issues 580

Forward and Backward Scheduling 582 Scheduling Criteria 582

Scheduling Process-Focused Work Centers 583 Loading Jobs in Work Centers 584

Input-Output Control 584 Gantt Charts 585 Assignment Method 587

Sequencing Jobs in Work Centers 590 Priority Rulesfor Dispatching Jobs 590 Critical Ratio 594 Sequencing N Jobs on Two Machines: Johnson s Rule 594

Limitations of Rule-Based Dispatching Systems 596 Finite Scheduling 596 Theory of Constraints 597

Bottleneck Work Centers 598 Repetitive Manufacturing 599 Scheduling for Services 601

Scheduling Nurses with Cyclical Scheduling 602 Summary 603 Key Terms 604 Using POM for Windows to Solve Scheduling Problems 604 Using Excel OM for Short-Term Scheduling 605 Solved Problems 607 Discussion Questions 611 Critical Thinking Exercise 611 Problems 611 Data Base Application 616 Case Study: Old Oregon Wood Store 617 Bibliography 619 Internet Resources 619

16. Project Management 621 Global Company Profile: Bechtel 622 The Strategie Importance of Project Management 624 Project Planning 625

The Project Manager 625 Work Breakdown Structure 626

Project Scheduling 627 Project Controlling 629

xviii C O N T E N T S

Project Management Techniques: PERT and CPM 629

The Framework ofPERT and CPM 629 Activities, Events, and Networks 630 Dummy Activities and Events 632 PERT and Activity Time Estimates 633 Critical Path Analysis 634 The Probability of Project Completion 638 Case Study ofPERT: Schwre Foundry 639

Cost-Time Trade-Offs and Project Crashing 643 Applying Project Scheduling to Service Firnis 645 A Critique of PERT and CPM 646

Summary 647 Key Terms 648 Using POMfor Windows for Project Scheduling 648 ' Solved Problems 648 Discussion Questions 652 Critical Thinking Exercise 653 Problems 653 Data Base Application 659 Case Study: Shale Oil Company 660 Internet Case Studies 661 Bibliography 661 Internet Resources 662

17. Maintenance and Reliability 663 Global Company Profile: NASA 664 The Strategie Importance of Maintenance and Reliability 666 Reliability 667

Improving Individual Components 667 Providing Redundancy 670

Maintenance 671 Implementing Preventive Maintenance 671

Increasing Repair Capabilities 675 Total Productive Maintenance 675

Techniques for Establishing Maintenance Policies 676

Summary 676 Key Terms 677 Using POMfor Windows to Solve Reliability Problems 677 Solved Problems 677 Discussion Questions 678 Critical Thinking Exercise 678 Problems 679 Case Study: Worldwide Chemical Company 681 Internet Case Studies 682 Bibliography 682 Internet Resources 682

PART FOUR QUANTITATIVE MODULES

A. Decision-Making Tools 683 The Decision Process in Operations 684 Fundamentals of Decision Making 685 Decision Tables 686

Decision Making under Risk 686 Expected Value ofPerfect Information (EVPI) 688

Decision Trees 689 A More Complex Decision Tree 690 Summary 692 Key Terms 693 Using POM for Windows to Solve Decision Table and Tree Problems 693 Using Excel OM for Decision Models 694 Solved Problems 695 Discussion Questions 696 Problems 696 Case Study: Nigel Smythe's Heart Bypass Operation 700 Internet Case Studies 701 Bibliography 701

B. Linear Programming 703 Requirements of a Linear Programming Problem 705 Formulating Linear Programming Problems 706

Shader Electronics Example 706 Graphical Solution to a Linear Programming Problem 707

Graphical Representation of Constraints 707 Iso-Profit Eine Solution Method 708 Corner-Point Solution Method 711

Sensitivity Analysis 713 Solving Minimization Problems 714 Linear Programming Applications 716

Production-Mix Example 717 Diet Problem Example 718 Production Scheduling Example 718 Labor Scheduling Example 720

The Simplex Method of LP 722 Summary 722 Key Terms 723 Using POM for Windows to Solve LP Problems 723 Using Excel Spreadsheets to Solve LP

C O N T E N T S XIX

Problems 724 Solved Problems 725 Discussion Questions 728 Problems 729 Data Base Application 735 Case Study: Golding Landscaping and Plauts, Inc. 736 Internet Case Studies 737 Bibliography 737

C. Transportation Models 739 Transportation Modeling 740 Developing an Initial Solution: The Northwest-Corner Rule 742 The Stepping-Stone Method 743 Special Issues in Modeling 748

Demand Not Equal to Supply 748 Degeneracy 748

Summary 750 Key Terms 750 Using POM for Windows to Solve Transportation Problems 750 Using Excel OM to Solve Transportation Problems 751 Solved Problems 752 Discussion Questions 755 Problems 755 Data Base Application 760 Case Study: Andrew-Carter, Inc. 761 Internet Case Studies 762 Bibliography 762

D. Waiting-Line Models 763 Queuing Costs 765 Characteristics of a Waiting-Line System 765

Arrival Characteristics 766 Waiting-Line Characteristics 767 Service Facility Characteristics 767 Measuring the Queue''s Performance 770

The Variety of Queuing Models 770 Model A: Single-Channel Queuing Model with Poisson Arrivals and Exponential Service Times 771 Model B: Multiple-Channel Queuing Model 774 Model C: Constant Service Time Model 776 Model D: Limited Population Model 777

Other Queuing Approaches 780 Summary 781 Key Terms 781 Using POM for Windows for Queuing 782 Using Excel OMfor Queuing 782 Solved Problems 783 Discussion Questions 786 Problems 786 Case Study: New England Castings 790 Case Study: The Winter Park Hotel 792 Internet Case Study 793 Bibliography 793

E. Learning Curves 795 Learning Curves in Services and Manufacturing 797 Applying the Learning Curve 798

Arithmetic Approach 799 Logarithmic Approach 799 Learning-Curve Coefficient Approach 800

Strategie Implications of Learning Curves 802

Summary 803 Key Term 803 Using POM for Windows for Learning Curves 803 Using Excel OMfor Learning Curves 804 Solved Problems 805 Discussion Questions 806 Problems 806 Case Study: SMT's Negotiation with IBM 809 Bibliography 810

F. Simulation 811 Whatls Simulation? 813 Advantages and Disadvantages of Simulation 813 Monte Carlo Simulation 815 Simulation of a Queuing Problem 818 Simulation and Inventory Analysis 820 The Role of Computers in Simulation 823

Summary 824 Key Terms 824 Using POM for Windows for Simulation 825 Simulation with Excel Spreadsheets 825 Solved Problems 827 Discussion Questions 828 Problems 829 Case Study: Alabama Airlines 836 Internet Case Studies 837 Bibliography 837

APPENDIX I Normal Curve Areas and How to Use the Normal Distribution A2 APPENDIX II Poisson Distribution Values A5 APPENDIX III Values of e~x for Use in the Poisson Distribution A7 APPENDIX IV Table of Random Numbers A8 APPENDIX V Using POM for Windows and Excel OM A9 APPENDIX VI Solutions to Even-Numbered Problems A10

Name Index II General Index 17