A company produces metal containers with standard equipment. In August, the company produced 1200 containers. Three employees worked each 5 days during the month of August, 8 hours a day.

What is their productivity with the standard equipment?

Output = 1,200

Input (Hr) = 120

Productivity = 10 containers an hour

The company decided to switch to an automatic

machine. In September, they produced 1100 containers. Two employees worked each 5 days during the month of September, 8 hours a day.

What is their productivity with the automatic machine?

Output = 1,100

Input = 80

Productivity = 13.75 containers an hour

What was the percentage increase in productivity, due to the automatic machine?

13.75/10= 3.75 x 100= 37.5%

Single-factor productivity:

output/material or energy

Ex.

1,000 burgers

100 kg of meat

Single-factor productivity 1,000/100 = 10 burgers per kg

Multifactor productivity:

output/ labour+material+energy+capital+miscellaneous

Ex.

1,000 burgers

200 hours

100 kg of meat

$20 per hour

$10 per kg

1000/ 200x20 + 100x10

1000/ $4,000 + $1,000

1000/ $5,000

Multifactor = 0.2 burger

Productivity Question (Handout)

A US Manufacturing Company operating a subsidiary in a LDC (Less Developed Country), shows the following results:

LDC

Sales (Units)

100,000

20,000

Labour (Hours)

20,000

15,000

Raw Materials ($)

20,000

2,000

Capital equipment ($)

60,000

5,000

Calculate single factor productivity figures, for the parent and subsidiary of the following (Insert the figures in the blank rows of the above table):

Labour: US=5 units LDC= 1.33 units

Raw material US = 5 units LDC= 10 units

Capital US = 1.67 units LDC= 4 units

Explain the possible reasons for the difference in the productivity figures.

B. Compute multi factor labour + capital productivity figure for US and for LDC. Use as labour rates per hour, $10/H and $1/H in the US and in the LDC, respectively. Insert the figures in the bottom blank row of the above table.

US = 100,000/ 20,000 x 10 + 60,000

US = 0.38 units/$

LDC = 20,000/ 15,000 x 1 + 5,000

LDC = 1 unit/$

How can we improve productivity:

Increasing the amount of capital, or technology available to each worker
Improving the education and skills of the workers
Organize businesses more smartly, using logic, common sense, simple solutions, new technology and innovation.

Productivity and the service sector:

Prices of goods increase at a much lower rate than prices of services. (Some even go down)
TV sets, computers and furniture went down in the last ten years.
Higher education, commercial bank services, repair, and health services went up

Typically labour intensive
Frequently focused on unique individual attributes or desires
Often an intellectual task performed by professionals
Often difficult to mechanize and automate
Often difficult to evaluate for quality

Efficiency

Doing the Thing Right. (“To Manage”)

At the lowest cost, at the shortest time, at the highest quality, etc.

Effectiveness

Doing the Right Thing. (“To Lead”)

Doing the real important thing that adds value.

(more important to be effective than efficient)

Value = Quality/Price

Chapter 2:

Strategy: what the company wants to accomplish

Mission: where are you going?

Organization purpose for existing

Factors affecting mission:

Customers
Environment
Values
Profitability
Public image

Goals: where are you going specifically

Main strategies of competitive advantages:

Differentiation
Cost leadership
Quick response

Differentiation competing: uniqueness that impacts customer’s perception of value

Ex. starbucks (quality coffee), disney (magic kingdom experience)

The 10 operation management decisions:

1. Design

2. Quality

3. Process/Capacity,

4. Location,

5. Layout,

6. HR

7. Supply Chain,

8. Inventory

9. Short Term Scheduling,

10. Maintenance

Cost competing: provide the maximum value perceived by a customer ex. Walmart

Response competing:

Flexibility
Reliability
Timeliness
Ex. UPS, Canada Post

Operations manager and strategy - 3 steps:

Develop a strategy that fits and supports the strategy of the whole company
Establish organizational structure, systems, methods, procedures
Recruit the right people and implement the strategy

Chapter 4:

Two types of forecasting:

Quantitative
Qualitative

Advantages of forecasting:

Basis for long-term planning
Used for financial budgeting
Used for sales planning
Input for production planning

Disadvantages of forecasting:

It’s not 100% accurate
It costs a lot of money
Collection of information should be done correctly
Proper information is not always available

Deviation = difference

Mean absolute deviation (MAD): total average of the deviation of the forecasted data (the lower the average the better)

Weighted moving average: giving different weights to better forecast

Ex. W1 = 0.7, W2 = 0.3 8 x 0.7 + 10 x 0.3 = 8.6 two-month weighted average

When the weights are given as integers (full numbers), such as 3, 2, 1, each weight should be divided by their total. EG by 6.

Exponential smoothing method:

Ft = Ft-1 +(alpha) (At-1 - Ft-1)

Larger values emphasize recent levels of demand and result in forecasts more responsive to changes
Smaller values result in more stable forecasts

Qualitative forecasting methods:

Grass roots
Market survey
Jury of executives
Historical ananlogy
Delphi method

Delphi method:

Choose experts to participate
Through a questionnaire obtain forecasts from all participants
Summerize the results and redistribute them to the participants along with new questions
Summarize again, refining forecasts and conditions, and again develop new questions
Repeat Step 4 if necessary. Distribute the final results to all participants

Forecasting the service sector:

Barber-shop-
- high demand/low demand, men/women:

Down-town restaurant
- high demand/low demand in days of the week, during weekend, during special events,

Fast-food restaurants
- Demand changes every 15 minutes

Speciality retail stores (flower shops, etc.)
- Valentine Day,

Forecast of drinks for a baseball game
- Factors that determine demand: Tickets sold, seasonal tickets, weather, performance of local team, strength of opponent team,

Chapter 11:

Supply-chain management:

Planning, organizing, directing, & controlling flows of Goods, Services, Information, Money

We have more companies today in supply chains as companies aim to what they do best

Make/Buy Considerations:

Making:

Maintain core competencies
Lower production cost
Unsuitable suppliers
Assure adequate supply
Obtain a unique item
Protect proprietary design or quality

Buying:

Not a core competency
Lower acquisition and inventory cost
Inadequate capacity or technical resources
Ensure flexibility
Item is protected by patent or trade secret
Quantity is too small to make
Supplier has excellent quality

Purchase requisition: an internal document (could be electronic), from an internal department to the purchasing department, asking for a good or service to be purchased

Purchase order (PO): A document (could be electronic), from the Purchasing Department to an outside supplier, asking for a good or a service.

RFQ: Request for Quotation. This is a document sent by the Purchasing Department to suppliers asking them to provide a price and other conditions for their goods or services.

RFP: Request For Proposal. Similar to RFQ.

IFB: Invitation For Bid. Similar to RFQ.

Purchasing techniques (for cost reduction):

Invoiceless purchasing
Paperless
Stockless purchasing
Standardization (same model)
Outsourcing
Postponement (keep product as generic as possible)
Bullwhip effect (change in demand becomes more pronounced as it moves from the retail to the wholesaler level and ultimately to manufacturing level)

Bullwhip effect:

Many suppliers:

Short-term
Delivery to receiving dock
Infrequent, large lots

Few suppliers:

Delivery to the point of use
Long-term, stable
Partnership
Low prices (large orders)
Most companies work with 1 or 2 suppliers

Consortiums: consists of two or more independent organizations that join together, for the purpose of combing their individual requirements and getting the best price

RFID: is a “smart tag” (Label) that functions as a microchip and receiver

Downstream = towards consumer

Upstream = towards manufacturer

Outsourcing: Procuring from external suppliers service or products the firms used to service or products the firms used to provide for itself provide for itself

Types of outsourcing:

Purchasing
Logistics
R&D
Operations
Service management
Human resources
Finance/accounting
Customer relations
Sales/marketing
Training
Legal processes

Risks in outsourcing:

As many as half of all outsourcing agreements fail because of inappropriate planning and analysis
Erratic power grids, government difficulties, inexperienced managers, and unmotivated labour can create problems

Advantages of outsourcing:

Cost savings
Gaining outside experience
Improving operations and service
Focusing on core competencies
Gaining outside technologies

Disadvantages of outsourcing:

Increased transportation costs
Loss of control
Creating future competition
Negative impact on employees

Chapter 12:

Reasons to have inventory:

Save on transportation
To take advantage of quantity discounts
To hedge against inflation

Types of inventory:

Raw material
Work-in-progress
Finished goods

Disadvantages of inventory:

Hides production problem
Higher costs
Difficult to control

ABC analysis:

Divides on-hand inventory into 3 classes
- A-class
- B-class
- C-class
The basis is usually the annual $ volume
- $ volume = Annual demand x Unit cost

Inventory-sales ratio: average cost of inventory/cost of monthly sales

The lower the figure the better

Inventory turns: cost of yearly sales/average cost of inventory

Class Exercise- Comparison of Inventory and Sales figures

Few figures from the financial report of Company ABC are the following:

Sales /Month = $1000

Cost of Sales per Month = $600

Average Inventory = $3000

Calculate:

Inventory-Sales Ratio: 3,000/600 = 5

Inventory Turns: 7,200/3,000 = 2.4

Year-end counting:

All items are counted at the end of the financial year

Cycle counting:

Physically counting total inventory on a regular basis

Advantages of cycle counting:

Eliminates shutdown and interruption of production necessary for annual physical inventories
Eliminates annual inventory adjustments
Provides trained personnel to audit the accuracy of inventory

Inventory costs:

Holding costs: holding inventory over time
Ordering costs: costs of placing order and receiving goods

Holding costs:

Insurance
Obsolescence
Interest
Extra staffing
Pilferage (stealing)
Damage
Warehousing

Ordering costs:

Forms
Order processing
Transport

AVERAGE INVENTORY = QUANTITY/2

Economic order quantity models (how much to order?):

Example 3:

Sharp Inc., would like to reduce its inventory cost by determining the optimal number of hypodermic needles to obtain per order.

The annual demand is 1,000 units; the setup or ordering cost is $10 per order; the holding cost per unit per year is $0.5

Calculate the EOQ for the hypodermic needles.

Q= 2x1,000x10/0.5

Q= square root: 40,000

Q= 200 units

Orders per year = 1,000/200 = 5 orders

Total holding cost = 200/2 x 0.5 = $50 (divide by 2 for average inventory)

Total order cost = 10 x 5 = $50

Total cost = 50 + 50 = $100

#12- Inventory Management- Class Exercise

Part A: Woodbox Inc. buys 5000 boxes per year. The cost of a box is $800 and the annual holding cost is 15% of the cost. Admin/paper/communication and other costs, required to execute an order are $50 per order.

How many boxes (Q=?) should Woodbox order at a time?

Q = 2x5,000x50/120

Q = square root: 4,166

Q = 65

Hint:

D = Total annual demand

S = Order or setup cost =

H = Annual storage cost in $/unit =

How many times per year should the company order? 5,000/65 = 77

What is the demand of wood boxes per day (There are 250 working days/year)? 5,000/250 = 20

If the lead time for boxes from the supplier is 3 day, what is the re-order point? 20 x 3 = 60

Calculate the following:

Holding cost for the whole year: 65/2 x 120 = 3,900

Ordering cost for the whole year: 50 x 77 = 3,850

Total inventory cost for the whole year 3,900 + 3,850 = $7,750

Stock-out: any demand over the average demand

#12- Inventory Management- Class Exercise- Part B

Uncertainty of Demand Based on the information in Slide 30, answer the following questions:

1) If you use a re-order point of 120 units, what is your probability for a stockout? 0.06 +0.01+ 0.24 + 0.38 = 69%

2) If you use a re-order point of 140 units, what is your probability for a stockout?

0.06 +0.01= 7%

Possible outcomes from a stockout:

Customers wait
Back orders
Lost sales
Lost customers

Stock-out Exercise

When a stock-out occurs there are 4 common types of costs (depending on the length of time of the stock-out and the type of the product). According to the Financial Department, the cost for a short waiting of a customer is $10. When there are: backorder, lost sales, lost customer, the costs are: $50, $100, $500 respectively.

Figures calculated by the Marketing Department for the last year show the following: