Operations Management Exam 2

Determinants of Service Quality

1. Reliability

2. Responsiveness

3. Competence

4. Access

5. Courtesy

6. Communication

7. Credibility 

8. Security

9. Understanding/knowing the customer

10. Tangibles 

Inspection: appraisal cost

• Involves examining items to see if an item is good or defective 

• Detect a defective product 

• Does not correct deficiencies in process or product  

• It is expensive 

Pareto Chart 

• A graph to identify and plot problems or defects in descending order of frequency  

• 80/20 rule: 80% of a project's impact may come from 20% of the tasks 

• Vital few from trivial many 

Six Sigma

• Statistical definition of a process that is 99.9997% capable, 3.4 defects per million opportunities (DPMO) 

• A program designed to reduce defects, lower costs, save time, and improve customer satisfaction 

• A comprehensive system for achieving and sustaining business success 

• Uses stats to understand variation- goal is to reduce it 

Costs of Quality (4 costs)

1. Prevention costs (in units) outputs/inputs 

2. Appraisal costs DOES NOT CHANGE LEVEL OF QUALITY 

3. Internal failure costs  

4. External failure costs (Potentially most costly) 

Implications of Quality

1. Company reputation 

2. Product liability 

3. Global implications 

Defect 

does not render product unfit (e.g., new car with dent/scratch, shirt missing button)

Defective  

means product is unfit (e.g., new car will not run/start, shirt missing sleeve) 

Different views of Quality

1. User based: better performance, more features, meeting the user’s purpose 

2. Company/Mfg based: conformance to standards, making it right the first time (operation’s focus) 

3. Product based: specific and measurable attributes of the product 

Management’s goal

• build a total quality management system that identifies and satisfies customer needs 

• HOWEVER – realize that customer needs to evolve. Therefore, quality is dynamic. 

Product-By-Value Analysis 

• Lists products in descending order of their individual dollar contribution 

• Lists the total annual dollar contribution of the product 

• Helps management evaluate alternative strategies or serves as motivation for NPD 

New Product Development: Quality Function Deployment (QFD) 

• A process that: relationship matrix product design  

• Using the voice of the customer for product aspects 

• Determines what will satisfy the customer (i.e., customer wants) 

• Translates those customer desires into the target design 

Time-based competition 

Three common approaches to managing transition 

• Project managers  

• Product development teams 

• Integrate product development and manufacturing organizations 

Sustainability and Life Cycle Assessment (LCA) 

Sustainability means meeting the needs of the present without compromising the ability of future generations to meet their needs 

Robust design 

• Product is designed so that small variations in production or assembly do not adversely affect the product 

• Typically results in lower cost and higher quality 

Manufacturability and Value Engineering 

Activities that help improve a product’s design, production, maintainability, and use. Safety and sustainability 

Concurrent Engineering 

Simultaneous performance of the various stages of product development 

HR Perspective - Product Development Teams 

• Cross functional – representatives from all disciplines or functions 

• Product development teams, design for manufacturability teams, value engineering Teams 

• Saves time, addresses problems before progressing, and results in better design  

• Product development teams are charged with moving from market requirements for a product to achieving product success 

•  Market requirements to product success 

•  Cross functional composition often involving vendors 

• Open and highly participative environment 

New Product – overall process 

1. Understand the opportunity 

2. Develop the concept 

3. Implement the concept 

Product Life Cycle Notes 

• Introduction: Stable-refining product 

• Growth: meet demand and capture- portfolio proliferation of variants (the uncontrolled expansion of a company's product line, creating numerous versions of a product) 

• Maturity: Max profits-rationalize portfolio to gain efficiency  

• Decline: Loss of profit-cost minimization / reduction 

Product Strategies

1. Differentiation- Unique 

2. Low Cost- values= features/cost 

3. Rapid Response-quickness 

NPD 

• Goals are to repeat process  

• Perception/ reality from operations into marketing promoting expectations 

Dynamic demand patterns 

use higher α values or smaller n values to emphasize recent experience 

Stable demand patterns 

use lower α values or larger n values to emphasize historical experience 

Forecasting Methods

• Quantitative Methods are more accurate

• Qualitative are more costly for (long term) forecasts 

• Quantitate methods are more efficient (shorter term) for forecasting 

4 components found in Time-Series

1. Trend: Several years duration 

2. Seasonal: Occurs within a single year (i.e., <1yr) 

3. Cyclical: Multiple years duration (i.e., >1yr)   

4. Random  

Forecast Types – 3 types

1. Economic forecasts - address business cycle (inflation rate, money supply, housing)  

2. Technological forecasts - predict the rate of technological progress (impacts the development of  new products)  

3. Demand forecasts - predict sales of existing products and services  

Time-Series Forecasting

• Based on only past value non other variable  

• Set of evenly spaced numerical data  

• Obtained by observing the response variable at regular time periods   

• Forecast based only on past values, no other variables important (i.e., historical demand data)  

Forecasting Time Horizons - 3 Ranges  

1. Short-range forecast day to day- operations 

2. Medium-range forecast- Tactical balance of supply and demand 

3. Long-range forecast long term goals strategic 

Supply-Chain Management  

• Good supplier relations, advantages in product innovation, cost, and speed to market Human Resources- Hiring, training, laying off workers  

1. Growth stage of company is focused on Capacity 

2. Decline stage focus on decreasing capacity  

If Supply > Demand → there is more product available than people want to buy. 

• Prices and sales usually decrease because businesses have excess inventory and must lower prices to attract buyers. 

• Costs may increase if the surplus causes storage or waste, but revenue typically drops. 

Areas Needing to be Forecasted (for our purposes):  

1. Demand  

2. Supply  

3. Price  

Why is Forecasting Needed?  

• Increase customer satisfaction  

• Reduce stockouts  

• Effective and improved scheduling  

• Reduce inventory/safety stock  

• Reduce risk of obsolescence  

• Improve shipping management  

• Improve management of pricing and promotion  

Forecasting  

• a prediction of future events used for planning  

• Forecasts are critical inputs to business plans, annual plans, and budgets  

• Finance, human resources, marketing, operations, and supply chain managers need  forecasts to plan output levels, purchases of services and materials, workforce and  output schedules, inventories, and long-term capacities  

If Demand > Supply → there are more buyers than available products. 

• Prices and sales increase, because scarcity drives up demand and allows sellers to charge more. 

• Costs might also increase if companies try to produce more to meet demand. 

Realities of Forecasting

• Forecasts are seldom perfect or correct; unpredictable outside factors may impact  the forecast  

• Most techniques assume an underlying stability in the system  

• Product family and aggregated forecasts are more accurate than individual forecasts  product forecasts  

Forecasting in Services

• Presents unusual challenges  

• Special need for short term records  

• Needs differ greatly as function of industry and product  

• Holidays and other calendar events  

• Unusual events 

Short-range forecast day to day- operations 

• ≤1 year, generally 3 months or less (i.e., quarter)  

•  Purchasing, job scheduling, workforce levels, job assignments, production levels  

Medium-range forecast- Tactical balance of supply and demand 

• 3 months to 3 years  

• New piece of equipment  

• Employees well trained and used 

• Sales and production planning, budgeting 

Long-range forecast long term goals strategic

• >3 years  

• New product planning, facility location, R&D  

Trend: Several years duration

• Persistent, overall upward or downward pattern  

• Changes due to population, technology, age, culture, etc.  

• Typically several years in duration  

Seasonal: Occurs within a single year (i.e., <1yr) 

• Regular pattern of up and down fluctuations  

• Due to weather, customs, etc. 

Cyclical: Multiple years duration (i.e., >1yr)  

• Repeating up and down movements  

• Affected by business cycle, political, and economic factors  

• Often causal or associative relationships  

Random: Short duration and nonrepeating 

• Erratic, unsystematic, ‘residual’ fluctuations  

• Due to random variation or unforeseen events  

Qualitative Methods

• When situation is vague & little to no data exist

  • e.g., new products, new technologies

• Subjective: involves intuition & experience

• Qualitative are more costly for (long term) forecasts 

Qualitative Jury of Executive Opinion

• Small group of experts/managers estimate demand together

• Combines managerial experience + statistical models

• Quick, but risk of groupthink

Qualitative Delphi Method

• Iterative group process → continues until consensus

• 3 participant types:

  1. Decision makers

  2. Staff

  3. Respondents

Qualitative Sales Force Composite

• Salespeople project their own sales

• Combined at district/national levels

• Sales reps know customer wants

• May be overly optimistic

Qualitative Market Survey

• Ask customers about purchasing plans

• Useful for demand & product design/planning

• What consumers say vs. what they do may differ

• May be overly optimistic

Quantitative Methods

• When situation is stable & historical data exist

  • e.g., existing products, current technology

• Objective: involves mathematical techniques

• Quantitate methods are more efficient (shorter term) for forecasting 

Naïve Approach

• Next period’s demand = last period’s demand

• e.g., Jan sales = 68 → Feb sales = 68

• Cost-effective, efficient, good starting point

Moving Averages (MA)

• Series of arithmetic means

• Used if little/no trend

• Used for smoothing data

• Gives overall impression of data over time

Exponential Smoothing

• Used when some trend might exist

• Older data weighted less

• Combines experience & intuition

Trend Projection

• Fits a trend line to historical data

• Projects into medium/long term

• Uses least squares technique for linear trends

Linear Regression

Uses independent variable changes to predict dependent variable changes

Managing Demand 

• Management has options for changing demand patterns to promote process efficiency and stability 

1. Complementary products 

2. Promotional pricing 

3. Prescheduled Appointments 

4. Reservations 

5. Revenue Management 

6. Backlogs 

7. Backorders and Stockouts 

Decison Tree Formulas

1. Annual Contribution= Annual volume * Contribution/ Unit 

2. Cost=Total cost (FC+(VC* rate) (* percentage of probability))- Lowest option 

3. Profit= (sales )(price-cost) * (percentage of probability)- Highest Option 

Prevention costs (in units) outputs/inputs

• reducing the potential for defects 

• e.g., employee training, poka-yoke (foolproof system), product design, 

Appraisal costs DOES NOT CHANGE LEVEL OF QUALITY

• evaluating products, parts, and services 

• e.g., testing and inspection 

Internal failure costs  

• producing defective parts or service before delivery 

• caught internally with 2 possible dispositions – scrap (TRASH) or rework (Add materials and researchers) 

• resources consumed to make defective unit/service 

External failure costs (Potentially most costly) 

• defects discovered after delivery 

• customer(s) aware and involved 

•  highest costs resulting from: warranty claim/work 

•  criticizing company harming its reputation 

• informing others of poor experience 

• potential future lawsuit/liability 

• loss of future business of original customer and customer’s circle of influence 

Weighted Moving Average

• Each historical demand in the average can have its own weight 

•  Note: sum of the weights equals 1.0 or 100%)  

• Used when some trend might be present  

• Older data usually less important  

• Weights based on experience and intuition  

• The average is obtained by multiplying the weight of each period by the actual demand for that period, and then adding the products together: