OPERATION MANAGEMENT - UTS

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 📌 TOPICS OVERVIEW 📌
MATERI UTS MATERI UAS

1 - Intro 1 - Supply Chain Management

2 - Quality Management 2 - Sales & Operation Planning
3 - Product Design 3 - Resource Planning
4 - Service Design 4 - Lean System
5 - Process Design & Facilities 5 - Project Management
6 - Forecasting
7 - Inventory Management

2
 1 - INTRODUCTION

A function or system that transforms inputs into outputs of

OPERATIONS greater value, is often defined as a Transformation Process.

OPERATIONS
Design, Operation, and Improvement of productive systems
MANAGEMENT

TRANSFORMATION A series of activities along a value chain extending from

PROCESS supplier to customer

A series of activities from supplier to customer that add

VALUE CHAIN value to a product or service

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 1 - INTRODUCTION

THE OPERATIONS FUNCTION

1. Organizing work
2. Selecting processes
3. Arranging layouts
4. Locating facilities
5. Designing jobs
6. Measuring performance
7. Controlling quality
8. Scheduling work
9. Managing inventory
10. Planning production

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 1 - INTRODUCTION

OPERATIONS AS A TRANSFORMATION PROCESS

INPUT TRANSFORMATION OUTPUT

Material, Machines, Labor, PROCESS Goods & services
Management, Capital

Feedback & requirements

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 1 - INTRODUCTION

PRODUCTIVITY
Ratio of output (sales made, products produced, customers served, meals delivered, or calls
answered) to input (labor hours, investment in equipment, material usage, or square footage)

Single Factor Productivity

Multifactor Productivity

Total Factor Productivity

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 1 - INTRODUCTION (EXERCISES)

PRODUCTIVITY EXERCISE
A company that processes fruits and vegetables is able to produce
400 canned peaches in one-half hour with four workers.

What is labor productivity?

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 1 - INTRODUCTION (EXERCISES)

PRODUCTIVITY EXERCISE
A company that processes fruits and vegetables is able to produce
400 canned peaches in one-half hour with four workers.

What is labor productivity?

Productivity = Output/Labor Input

Productivity = 400/(0.5x4) = 200 canned peaches per labor hour

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 1 - INTRODUCTION (EXERCISES)

PRODUCTIVITY EXERCISE
A wrapping-paper company produced 2,000 rolls of paper one day.
Labor cost per day was $160, material cost was $50, and overhead
was $320.

Determine the multifactor productivity!

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 1 - INTRODUCTION (EXERCISES)

PRODUCTIVITY EXERCISE
A wrapping-paper company produced 2,000 rolls of paper one day.
Labor cost per day was $160, material cost was $50, and overhead
was $320.

Determine the multifactor productivity!

Multifactor Productivity = Output/All Input

Multifactor Productivity = 2,000/(160+50+320)
Multifactor Productivity = 2,000/530 = 3.77 rolls per dollar input

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 1 - INTRODUCTION (EXERCISES)

PRODUCTIVITY EXERCISE
Compute the multifactor productivity measure for an eight-hour day
in which the usable output was 300 units, produced by 3 workers who
used 600 pounds of materials. Workers have an hourly wage of $20
and material cost is $1 per pound. It’s also known that the overhead is
1.5 times labor cost

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 1 - INTRODUCTION (EXERCISES)

PRODUCTIVITY EXERCISE
Compute the multifactor productivity measure for an eight-hour day
in which the usable output was 300 units, produced by 3 workers who
used 600 pounds of materials. Workers have an hourly wage of $20
and material cost is $1 per pound. It’s also known that the overhead is
1.5 times labor cost

Multifactor Productivity = Output/All Input

Multifactor Productivity = 300/(3*8*20 + 600*1 + (3*8*20)*1.5)
Multifactor Productivity = 300/(480+600+720)
Multifactor Productivity = 0.17 units per dollar input

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 1 - INTRODUCTION (EXERCISES)

PRODUCTIVITY EXERCISE
Osborne Industries is compiling the monthly productivity report for its
board of directors. The average labor rate is $15 an hour, and the
average machine usage rate is $10 an hour.

From the following data, calculate:

(a) labor productivity,
(b) machine productivity,
(c) the multifactor productivity of
output per dollars spent on labor,
machine, materials, and energy.

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 1 - INTRODUCTION (EXERCISES)

PRODUCTIVITY EXERCISE
Osborne Industries is compiling the monthly productivity report for its
board of directors. The average labor rate is $15 an hour, and the
average machine usage rate is $10 an hour.

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 1 - INTRODUCTION

POSITIONING THE FIRM

Being productive (Lion Air, Air Asia)

COST Waste elimination, examination of cost structure, lean production

Being fast (Mcd, Dell, Zara)

SPEED Fast moves, fast adaptation, tight linkages, immediate response

Being right (Ritz Carlton)

QUALITY Minimize defect rate / conforming to design specifications

Being able to change (Subway, JCO, Sour Sally)

FLEXIBILITY Ability to adjust to changes in product mix, prod. volume or design

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 1 - INTRODUCTION (EXERCISES)

1. The Bureau of Labor Statistics collects input and output data from
various countries for comparison purposes. Labor hours are the
standard measure of input. Calculate the output per hour from the
following data. Which country is most productive?

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 1 - INTRODUCTION (EXERCISES)

1. The Bureau of Labor Statistics collects input and output data from
various countries for comparison purposes. Labor hours are the
standard measure of input. Calculate the output per hour from the
following data. Which country is most productive?

U.S is the most productive country!

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 1 - INTRODUCTION (EXERCISES)

2. Posey Ceramics makes ceramic vases for a chain of department

stores. The output and cost figures over the past four weeks are
shown here. Labor costs $10 an hour, and materials are $4 a pound.
Calculate the:
(a) labor productivity (in $)
(b) material productivity (in $)
(c) multifactor productivity for
each week.

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 1 - INTRODUCTION (EXERCISES)

2. Posey Ceramics makes ceramic vases for a chain of department

stores. The output and cost figures over the past four weeks are
shown here. Labor costs $10 an hour, and materials are $4 a pound.

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 📌 TOPICS OVERVIEW 📌
MATERI UTS MATERI UAS

1 - Intro 1 - Supply Chain Management

2 - Quality Management 2 - Sales & Operation Planning
3 - Product Design 3 - Resource Planning
4 - Service Design 4 - Lean System
5 - Process Design & Facilities 5 - Project Management
6 - Forecasting
7 - Inventory Management

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 2 - QUALITY MANAGEMENT

QUALITY FROM TWO PERSPECTIVES

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 2 - QUALITY MANAGEMENT

MANUFACTURED PRODUCTS DIMENSIONS OF QUALITY

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 2 - QUALITY MANAGEMENT

SERVICE DIMENSIONS OF QUALITY

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 2 - QUALITY MANAGEMENT

QUALITY MANAGEMENT SYSTEM (QMS)

system to achieve customer satisfaction that complements other company
systems

W. E. DEMING
THE DEMING WHEEL
Most Famous Quality Guru
(PDCA CYCLE)

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 2 - QUALITY MANAGEMENT

TOTAL QUALITY MANAGEMENT (TQM) PRINCIPLES

TQM is customer-oriented, leadership, strategic planning, employee responsibility,
continuous improvement, cooperation, statistical methods, training and education

1. Quality can and must be managed

2. The customer defines quality
3. Management must be involved and provide leadership
4. Continuous quality improvements is “the” strategic goal
5. Quality improvement is the responsibility of every
employee
6. Quality problems are found in processes
7. The quality standard is “no defects”
8. Quality must be measured

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 2 - QUALITY MANAGEMENT

7 TOTAL QUALITY MANAGEMENT (TQM) TOOLS

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 2 - QUALITY MANAGEMENT

ROLE OF EMPLOYEES IN QUALITY MANAGEMENT

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 2 - QUALITY MANAGEMENT

PROCESS IMPROVEMENT TEAM

● Also called Quality Improvement Teams (QIT)

● Focus attention on business processes rather than
separate company functions
● Includes members from the interrelated
departments
● Important to understand the process the team is
addressing
● Process flowcharts are key tools

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 2 - QUALITY MANAGEMENT

COST OF QUALITY

Cost of Achieving Cost of

Good Quality Poor Quality

PREVENTION INTERNAL
COSTS FAILURE COSTS

APPRAISAL EXTERNAL
COSTS FAILURE COSTS

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 2 - QUALITY MANAGEMENT

COST OF QUALITY

● Quality planning costs: costs of developing & implementing the

Cost of Achieving quality management program.
● Product-design costs: costs of designing products with quality
Good Quality characteristics.
● Process costs: costs expended to make sure the productive process
PREVENTION conforms to quality specifications.
● Training costs: costs of developing & putting on quality training
COSTS programs for employees & management.
● Information costs: costs of acquiring & maintaining (typically on
computers) data related to quality, the development & analysis of
APPRAISAL reports on quality performance.
COSTS

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 2 - QUALITY MANAGEMENT

COST OF QUALITY

Cost of Achieving
Good Quality

PREVENTION
COSTS ● Inspection and testing: costs of testing and inspecting materials,
parts, and the product at various stages and at the end of the process.
● Test equipment costs: costs of maintaining equipment used in testing
APPRAISAL the quality characteristics of products
● Operator costs: costs of the time spent by operators to gather data
COSTS for testing product quality, to make equipment adjustments to
maintain quality, and to stop work to assess quality

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 2 - QUALITY MANAGEMENT

COST OF QUALITY

● Scrap costs: costs of poor-quality products that must be discarded,

including labor, material, & indirect costs
● Rework costs: costs of fixing defective products to conform to quality Cost of
specifications Poor Quality
● Process failure costs: costs of determining why the production
process is producing poor-quality products
● Process downtime costs: costs of shutting down the productive INTERNAL
process to fix the problem. FAILURE COSTS
● Price-downgrading costs: costs of discounting poor-quality
products—that is, selling products as “seconds.”
EXTERNAL
FAILURE COSTS

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 2 - QUALITY MANAGEMENT

COST OF QUALITY

Cost of
Poor Quality
● Customer complaint costs: costs of investigating & satisfactorily
responding to a customer complaint resulting from a poor-quality product. INTERNAL
● Product return costs: costs of handling & replacing poor-quality products FAILURE COSTS
returned by the customer.
● Warranty claims costs: costs of complying with product warranties
● Product liability costs: litigation costs resulting from product liability and EXTERNAL
customer injury
● Lost sales costs: costs incurred because customers are dissatisfied with FAILURE COSTS
poor-quality products & do not make additional purchases.

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 2 - QUALITY MANAGEMENT

COST OF QUALITY
The cost of quality is the difference between the price of nonconformance & conformance.

Cost of Doing Things Wrong

20-35% of revenue

Cost of Doing Things Right

3-4% of revenue

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 2 - QUALITY MANAGEMENT

THE EFFECT OF QUALITY MANAGEMENT ON PRODUCTIVITY

PRODUCT Product yield is a measure of output used

YIELD as an indicator of productivity.

Yield = (total input)(% good units) + (total input)(1-%good units)(%

reworked)
or
Y=(I)(%G)+(I)(1-%G)(%R)

I = initial quantity started in production

%G = percentage of good units produced
%R = percentage of defective units that are successfully reworked

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 2 - QUALITY MANAGEMENT (EXERCISES)

1. H&S Motor Company starts production for a particular type of motor

with a steel motor housing. The production process begins with 100
motors each day. The percentage of good motors produced each day
averages 80% and the percentage of poor-quality motors that can be
reworked is 50%. The company wants to know the daily product yield and
the effect on productivity if the daily percentage of good-quality motors is
increased to 90%.

Y = (I)(%G)+(I)(1-%G)(%R)
Y = 100(.80) + 100(1-.80)(.50) = 90 motors A 10% increase in quality
products results in a 5.5%
Increase quality to 90% good increase in productivity output.

Y =100(.90) + 100(1-.90)(.50) = 95 motors

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 2 - QUALITY MANAGEMENT

PRODUCT MANUFACTURING COST

Kd = direct manufacturing cost per unit

I = input
Kr = rework cost per unit
R = reworked units
Y = yield

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 2 - QUALITY MANAGEMENT (EXERCISES)

2. H&S Motor Company has a direct manufacturing cost per unit of $30 & inferior quality
motors can be reworked for $12 per unit. 100 motors are produced daily, 80% (on average)
are of good quality and 20% are defective. Of the defective motors, half can be reworked to
yield good-quality products. Through its quality management program, the company has
discovered a problem in its production process that, when corrected (at a minimum cost), will
increase the good-quality products to 90%. How does improvement in product quality affect
the direct cost per unit?

Original manufacturing cost / motor Manufacturing cost with quality

improvement

A 10% increase in quality products results in a decrease of $2.46 per unit,

or 7.1%, in direct manufacturing cost per unit

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 2 - QUALITY MANAGEMENT

QUALITY-PRODUCTIVITY RATIO
a productivity index that includes productivity and quality costs.

QPR

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 2 - QUALITY MANAGEMENT (EXERCISES)

3. H&S Motor Company produces small motors at a processing cost of $30 per unit. Defective motors
can be reworked at a cost of $12 each. The company produces 100 motors per day and averages
80% good-quality motors, resulting in 20% defects, 50% of which can be reworked prior to shipping
to customers. The company wants to examine the effects of:
(1) increasing the production rate to 200 motors per day;
(2) reducing the processing cost to $26 and the rework cost to $10;
(3) increasing, through quality improvement, the product yield of good-quality products to 95%;
(4) the combination of 2 and 3.
QPR for base case
QPR

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 2 - QUALITY MANAGEMENT (EXERCISES)

3. H&S Motor Company produces small motors at a processing cost of $30 per unit. Defective motors
can be reworked at a cost of $12 each. The company produces 100 motors per day and averages
80% good-quality motors, resulting in 20% defects, 50% of which can be reworked prior to shipping
to customers. The company wants to examine the effects of:
(1) increasing the production rate to 200 motors per day;
(2) reducing the processing cost to $26 and the rework cost to $10;
(3) increasing, through quality improvement, the product yield of good-quality products to 95%;
(4) the combination of 2 and 3.

QPR

Increasing production capacity alone has no effect on QPR Cost decreases caused the QPR to increase

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 2 - QUALITY MANAGEMENT (EXERCISES)

3. H&S Motor Company produces small motors at a processing cost of $30 per unit. Defective motors
can be reworked at a cost of $12 each. The company produces 100 motors per day and averages
80% good-quality motors, resulting in 20% defects, 50% of which can be reworked prior to shipping
to customers. The company wants to examine the effects of:
(1) increasing the production rate to 200 motors per day;
(2) reducing the processing cost to $26 and the rework cost to $10;
(3) increasing, through quality improvement, the product yield of good-quality products to 95%;
(4) the combination of 2 and 3.

QPR

QPR increases as product quality improves Largest increase in the QPR results from decreasing costs
& increasing product quality

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 2 - QUALITY MANAGEMENT

ISO 9000
International Organization for Standardization (ISO) gives international quality standards through
certifying suppliers making sure they meet internationally accepted standards for quality management

ISO 9000:2008
● Quality Management Systems—Fundamentals and Vocabulary
● defines fundamental terms and definitions used in ISO 9000 family
ISO 9001:2008
● Quality Management Systems—Requirements
● standard to assess ability to achieve customer satisfaction
ISO 9004:2008
● Quality Management Systems—Guidelines for Performance Improvements
● guidance to a company for continual improvement of its quality-management system

Many overseas companies will not do business with a supplier unless it has ISO 9000 certification

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 2 - QUALITY MANAGEMENT (EXERCISES)

4. A manufacturing company has a weekly product input of 1700 units. The

average percentage of good-quality products is 83%. Of the poor-quality products,
60% can be reworked and sold as good-quality products. Determine the weekly
product yield and the product yield if the good-product quality is increased to
92%.

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 2 - QUALITY MANAGEMENT (EXERCISES)

4. A manufacturing company has a weekly product input of 1700 units. The

average percentage of good-quality products is 83%. Of the poor-quality products,
60% can be reworked and sold as good-quality products. Determine the weekly
product yield and the product yield if the good-product quality is increased to
92%.

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 📌 TOPICS OVERVIEW 📌
MATERI UTS MATERI UAS

1 - Intro 1 - Supply Chain Management

2 - Quality Management 2 - Sales & Operation Planning
3 - Product Design 3 - Resource Planning
4 - Service Design 4 - Lean System
5 - Process Design & Facilities 5 - Project Management
6 - Forecasting
7 - Inventory Management

46
 3 - PRODUCT DESIGN

QUALITY
RAPID DESIGN QUALITY DESIGN FOR
DESIGN PROCESS FUNCTION
PROTOTYPING REVIEWS ENVIRONMENT
DEPLOYMENT

47
 3 - PRODUCT DESIGN

An effective design process:

● Matches product or service characteristics
with customer requirements,
● Ensures that customer requirements are
met in the simplest & least costly manner
● Reduces the time required to design a new
product or service,
● Minimizes the revisions necessary to make
a design workable.

QUALITY
RAPID DESIGN QUALITY DESIGN FOR
DESIGN PROCESS FUNCTION
PROTOTYPING REVIEWS ENVIRONMENT
DEPLOYMENT

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 3 - PRODUCT DESIGN

Rapid Prototyping
an iterative process which involves testing & revising a preliminary design model

1. Build a prototype
● Form design: how product will look?
● Functional design: how product will perform? 3 Performance Characteristics:
● Production design: how the product will be made? 1. Reliability
2. Maintainability
2. Test prototype 3. Usability
3. Revise design

4. Retest

QUALITY
RAPID DESIGN QUALITY DESIGN FOR
DESIGN PROCESS FUNCTION
PROTOTYPING REVIEWS ENVIRONMENT
DEPLOYMENT

49
 3 - PRODUCT DESIGN

Reliability
probability that a product will perform its intended function for a specified period of time.

SERIES - Rs = (R1)(R2)...(Rn)

Rs of 0.81 < component reliabilities of 0.90, meaning

that increase in number of serial components will
deteriorate system reliability.

Simple designs with fewer components = more

where Rn is the reliability of the nth component
reliable

QUALITY
RAPID DESIGN QUALITY DESIGN FOR
DESIGN PROCESS FUNCTION
PROTOTYPING REVIEWS ENVIRONMENT
DEPLOYMENT

50
 3 - PRODUCT DESIGN

Reliability
probability that a product will perform its intended function for a specified period of time.

PARALLEL - Rs =R1 +(1-R1)(R2)

R1 = reliability of the original component

R2 = reliability of the backup component

Failure of some components in a system is very critical,

ex brakes on a car. So, backup component is needed.
Backup component increases system reliability

QUALITY
RAPID DESIGN QUALITY DESIGN FOR
DESIGN PROCESS FUNCTION
PROTOTYPING REVIEWS ENVIRONMENT
DEPLOYMENT

51
 3 - PRODUCT DESIGN (EXERCISES)

1. Determine the reliability of the system of components shown below.

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 3 - PRODUCT DESIGN (EXERCISES)

1. Determine the reliability of the system of components shown below.

First, reduce the system to a series of three components,

Then calculate the reliability of the series. Rs = 0.98 x 0.99 x 0.98 = 0.951

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 3 - PRODUCT DESIGN

Reliability
probability that a product will perform its intended function for a specified period of time.

MTBF - mean time between failures

#of failures in a period

MTBF = 1/failure rate Failure Rate = ---------------------------------------
length of operation period (hours)

Ex: If your laptop battery fails 4x in 20 hours of operation

Failure rate would be 4/20 = 0.20
MTBF = 1/0.20 = 5 hours

QUALITY
RAPID DESIGN QUALITY DESIGN FOR
DESIGN PROCESS FUNCTION
PROTOTYPING REVIEWS ENVIRONMENT
DEPLOYMENT

54
 3 - PRODUCT DESIGN

Reliability
probability that a product will perform its intended function for a specified period of time.

Ways to improve reliability:

● simplifying product design
● improving the reliability of individual components
● adding redundant components.
● making products easier to assemble
● have users who are trained in proper use

QUALITY
RAPID DESIGN QUALITY DESIGN FOR
DESIGN PROCESS FUNCTION
PROTOTYPING REVIEWS ENVIRONMENT
DEPLOYMENT

55
 3 - PRODUCT DESIGN

Maintainability
the ease and/or cost with which a product or service is maintained or repaired.

System Availability (SA)

Products can be easier to maintain when assembled in
modules (komputer dirakit, kalo rusak bisa ganti per part)

Maintainability includes:
● specifying regular maintenance schedules
MTBF = Mean Time Before Failure
● proper planning for availability of critical replacement parts MTTR = Mean Time To Repair

QUALITY
RAPID DESIGN QUALITY DESIGN FOR
DESIGN PROCESS FUNCTION
PROTOTYPING REVIEWS ENVIRONMENT
DEPLOYMENT

56
 3 - PRODUCT DESIGN (EXERCISES)

2. Amy Russell must choose a service provider for her company’s

e-commerce site. Other factors being equal, she will base her decision
on server availability. Given the following server performance data,
which provider should she choose?

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 3 - PRODUCT DESIGN (EXERCISES)

2. Amy Russell must choose a service provider for her company’s

e-commerce site. Other factors being equal, she will base her decision
on server availability. Given the following server performance data,
which provider should she choose?

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 3 - PRODUCT DESIGN

Usability
what makes a product or service easy to use and a good fit for its targeted customer

● ease of learning
● ease of use
● ease of remembering how to use
● frequency and severity of errors
● user satisfaction with experience

QUALITY
RAPID DESIGN QUALITY DESIGN FOR
DESIGN PROCESS FUNCTION
PROTOTYPING REVIEWS ENVIRONMENT
DEPLOYMENT

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 3 - PRODUCT DESIGN

Production Design
how products will be made

1. Simplification

2. Standardization

3. Modular design

4. Design for Manufacture (DFM)

QUALITY
RAPID DESIGN QUALITY DESIGN FOR
DESIGN PROCESS FUNCTION
PROTOTYPING REVIEWS ENVIRONMENT
DEPLOYMENT

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 3 - PRODUCT DESIGN

Design Quality Reviews

formal procedures to analyze possible failures & rigorously assessing value of every part & component

Failure Mode & Effects Analysis Fault Tree Analysis Value Analysis
(FMEA) (FTA) (VA)
a systematic method of analyzing a visual method for analyzing the a procedure for eliminating
product failures interrelationships among failures. unnecessary features and functions

QUALITY
RAPID DESIGN QUALITY DESIGN FOR
DESIGN PROCESS FUNCTION
PROTOTYPING REVIEWS ENVIRONMENT
DEPLOYMENT

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 3 - PRODUCT DESIGN

Design Quality Reviews

formal procedures to analyze possible failures & rigorously assessing value of every part & component

Failure Mode & Effects Analysis

(FMEA)
a systematic method of analyzing
product failures

QUALITY
RAPID DESIGN QUALITY DESIGN FOR
DESIGN PROCESS FUNCTION
PROTOTYPING REVIEWS ENVIRONMENT
DEPLOYMENT

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 3 - PRODUCT DESIGN

Design Quality Reviews

formal procedures to analyze possible failures & rigorously assessing value of every part & component

Fault Tree Analysis

(FTA)
a visual method for analyzing the
interrelationships among failures.

QUALITY
RAPID DESIGN QUALITY DESIGN FOR
DESIGN PROCESS FUNCTION
PROTOTYPING REVIEWS ENVIRONMENT
DEPLOYMENT

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 3 - PRODUCT DESIGN

Design Quality Reviews

formal procedures to analyze possible failures & rigorously assessing value of every part & component

● Define essential functions of an item

Value Analysis ● Determine the value of the functions
(VA)
● Determine the cost of providing the functions
a procedure for eliminating ● Compute Value/Cost ratio
unnecessary features and functions ● Design team works to increase the ratio

QUALITY
RAPID DESIGN QUALITY DESIGN FOR
DESIGN PROCESS FUNCTION
PROTOTYPING REVIEWS ENVIRONMENT
DEPLOYMENT

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 3 - PRODUCT DESIGN

Design for Environment

designing a product from material that can be recycled or easily repaired rather than discarded

● designing a product from material that can be recycled

● design from recycled material
● design for ease of repair
● minimize packaging
● minimize material and energy used during
manufacture, consumption & disposal

Extended Producer Responsibility (EPR)

companies are held responsible for their product
even after its useful life

QUALITY
RAPID DESIGN QUALITY DESIGN FOR
DESIGN PROCESS FUNCTION
PROTOTYPING REVIEWS ENVIRONMENT
DEPLOYMENT

65
 📌 TOPICS OVERVIEW 📌
MATERI UTS MATERI UAS

1 - Intro 1 - Supply Chain Management

2 - Quality Management 2 - Sales & Operation Planning
3 - Product Design 3 - Resource Planning
4 - Service Design 4 - Lean System
5 - Process Design & Facilities 5 - Project Management
6 - Forecasting
7 - Inventory Management

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 4 - SERVICE DESIGN

SEPARATION OF SERVICE AND MANUFACTURING

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 4 - SERVICE DESIGN

CHARACTERISTICS OF SERVICE COMPANY

Consumed more
Intangible Perishable often than
product

Decentralized
Output is Service delivery
Geographically
variable is inseparable
Dispersed

Higher
Customer Easily emulated
Contact

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 4 - SERVICE DESIGN

SERVICE DESIGN PROCESS

‘SERVICE CONCEPT’
target market and customer experience

‘SERVICE PACKAGE’
physical items, sensual benefits, and
psychological benefits

“SERVICE SPECIFICATION’
performance specifications, design specifications,
delivery specifications

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 4 - SERVICE DESIGN

SERVICE PROCESS MATRIX

Electricity

Retail
Store

Lecturer

Doctor

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 4 - SERVICE DESIGN

DIFFERENCES IN DESIGN FOR

HIGH OR LOW CONTACT WITH CUSTOMER

Facility Location

Facility Layout

Quality Control

8 Design Decision Capacity

Worker Skills

Scheduling

Service Process

Service Package

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 4 - SERVICE DESIGN

Design Decision High-Contact Service Low-Contact Service

Facility location Convenient to customer Near labor or transportation source

Must look presentable, accommodate customer

Facility layout Designed for efficiency
needs, and facilitate interaction with customer
More variable since customer is involved in
process; customer expectations and perceptions Measured against established standards; testing
Quality control
of quality may differ; customer present when and rework possible to correct defects
defects occur
Excess capacity required to handle peaks in
Capacity Planned for average demand
demand
Must be able to interact well with customers and
Worker skills Technical skills
use judgment in decision making
Scheduling Must accommodate customer schedule Customer concerned only with completion date
Mostly front-room activities; service may change Mostly back-room activities; planned and
Service process
during delivery in response to customer executed with minimal interference
Varies with customer; includes environment as well
Service package Fixed, less extensive
as actual service

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 4 - SERVICE DESIGN

TOOLS FOR SERVICE DESIGN

SERVICE BLUEPRINTING

FRONT AND BACK OFFICE

TOOLS
SERVICESCAPES

QUANTITATIVE

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 4 - SERVICE DESIGN

SERVICE BLUEPRINTING

Activities that influence

customers to seek a service

Point where a customer and

service provider interact

Point that separates front and

back office activities

Point where service provider

interacts with support personnel

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 4 - SERVICE DESIGN

FRONT AND BACK OFFICE

‘TYPICAL OF FRONT OFFICE’

- Courtesy
- Transparency
- Responsiveness
- Usability
- Fun

‘TYPICAL OF BACK OFFICE’

- Efficiency
- Productivity
- Standardization
- Scalability

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 4 - SERVICE DESIGN

SERVICESCAPES

ELEMENT OF
SERVICESCAPE

- space and function

- ambient conditions
- signs, symbols, and
artifacts

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 4 - SERVICE DESIGN

QUANTITATIVE TECHNIQUES: WAITING LINE ANALYSIS

most common & powerful tool to improve service process

How do we reduce waiting line time?

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 4 - SERVICE DESIGN

WAITING LINE ANALYSIS: ELEMENTS

Calling Population

Arrival Rate

Service Times
Single
Servers
Multiple
Waiting Line (Queue)

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 4 - SERVICE DESIGN

WAITING LINE ANALYSIS: MEASURES

Notation Operating Characteristic

L Average number of customers in the system (waiting & being served)
Lq Average number of customers in the waiting line
W Average time a customer spends in the system (waiting & being served)
Wq Average time a customer spends waiting in line
P0 Probability of no (i.e., zero) customers in the system
Pn Probability of n customers in the system
ρ Utilization rate; the proportion of time the system is in use

79
 4 - SERVICE DESIGN

WAITING LINE ANALYSIS: COST RELATIONSHIPS

Higher Service Cost (Improving quality of service)

Lower Waiting Cost (Reducing loss of customers)

80
 4 - SERVICE DESIGN

REDUCING WAITING TIME: PSYCHOLOGY OF WAITING

Used when it’s not possible to reduce waiting time

Other methods:
- Magazines
- Television
- Mirror
- Newspaper
- Impulsive purchase by
making a display of
candy, snacks near
cashier
Some GIMMICKS to get rid of
boredom during waiting in line

81
 4 - SERVICE DESIGN

BASIC SINGLE-SERVER MODEL: FORMULAS (1)

‘Probability that no customers ‘Average number of

‘ASSUMPTIONS’ are in queuing system’ customers in queuing system’
- First-come, first-served
queue discipline
- Infinite queue length
- Infinite calling population

‘Probability of n customers in ‘Average number of

‘COMPUTATIONS’
- λ = mean arrival rate
queuing system’ customers in waiting line’
(jml org dtg/jam)
- μ = mean service rate
(jml org yg dilayani/jam)
- n = # of customers in line

82
 4 - SERVICE DESIGN

BASIC SINGLE-SERVER MODEL: FORMULAS (2)

‘Average time customer ‘Probability that server is

‘ASSUMPTIONS’ spends in system’ busy and a customer has to
- First-come, first-served wait (utilization factor)’
queue discipline
- Infinite queue length
- Infinite calling population

‘Average time customer ‘Probability that server is idle

‘COMPUTATIONS’
- λ = mean arrival rate
spends waiting in line’ and customer can be served’
(jml org dtg/jam)
- μ = mean service rate
(jml org yg dilayani/jam)
- n = # of customers in line

83
 4 - SERVICE DESIGN (EXERCISE)

1. The new-accounts officer at the Citizens Northern Savings Bank enrolls all new customers in
checking accounts. During the three-week period in August encompassing the beginning of the
new school year at State University, the bank opens a lot of new accounts for students.
The bank estimates that the arrival rate during this period will be Poisson distributed with an
average of four customers per hour. The service time is exponentially distributed with an average
of 12 minutes per customer to set up a new account. The bank wants to determine:
A. Probability that there is no customers in the system
B. The average of customers in the queuing system
C. The average of customers in the waiting line
D. The average length of customers in the queuing system
E. The average length of customers spend waiting
F. The probability of the server to be busy (customers have to wait)
G. If the current person is sufficient to handle the increased traffic or not

84
 4 - SERVICE DESIGN (EXERCISE)

1. The new-accounts officer at the Citizens Northern Savings Bank enrolls all new customers in
checking accounts. During the three-week period in August encompassing the beginning of the
new school year at State University, the bank opens a lot of new accounts for students.
The bank estimates that the arrival rate during this period will be Poisson distributed with an
average of four customers per hour. The service time is exponentially distributed with an average
of 12 minutes per customer to set up a new account. The bank wants to determine:
A. Probability that there is no customers in the system

85
 4 - SERVICE DESIGN (EXERCISE)

1. The new-accounts officer at the Citizens Northern Savings Bank enrolls all new customers in
checking accounts. During the three-week period in August encompassing the beginning of the
new school year at State University, the bank opens a lot of new accounts for students.
The bank estimates that the arrival rate during this period will be Poisson distributed with an
average of four customers per hour. The service time is exponentially distributed with an average
of 12 minutes per customer to set up a new account. The bank wants to determine:
B. The average of customers in the queuing system

86
 4 - SERVICE DESIGN (EXERCISE)

1. The new-accounts officer at the Citizens Northern Savings Bank enrolls all new customers in
checking accounts. During the three-week period in August encompassing the beginning of the
new school year at State University, the bank opens a lot of new accounts for students.
The bank estimates that the arrival rate during this period will be Poisson distributed with an
average of four customers per hour. The service time is exponentially distributed with an average
of 12 minutes per customer to set up a new account. The bank wants to determine:
C. The average of customers in the waiting line

87
 4 - SERVICE DESIGN (EXERCISE)

1. The new-accounts officer at the Citizens Northern Savings Bank enrolls all new customers in
checking accounts. During the three-week period in August encompassing the beginning of the
new school year at State University, the bank opens a lot of new accounts for students.
The bank estimates that the arrival rate during this period will be Poisson distributed with an
average of four customers per hour. The service time is exponentially distributed with an average
of 12 minutes per customer to set up a new account. The bank wants to determine:
D. The average length of customers in the queuing system

88
 4 - SERVICE DESIGN (EXERCISE)

1. The new-accounts officer at the Citizens Northern Savings Bank enrolls all new customers in
checking accounts. During the three-week period in August encompassing the beginning of the
new school year at State University, the bank opens a lot of new accounts for students.
The bank estimates that the arrival rate during this period will be Poisson distributed with an
average of four customers per hour. The service time is exponentially distributed with an average
of 12 minutes per customer to set up a new account. The bank wants to determine:
E. The average length of customers spend waiting

89
 4 - SERVICE DESIGN (EXERCISE)

1. The new-accounts officer at the Citizens Northern Savings Bank enrolls all new customers in
checking accounts. During the three-week period in August encompassing the beginning of the
new school year at State University, the bank opens a lot of new accounts for students.
The bank estimates that the arrival rate during this period will be Poisson distributed with an
average of four customers per hour. The service time is exponentially distributed with an average
of 12 minutes per customer to set up a new account. The bank wants to determine:
F. The probability of the server to be busy (customers have to wait)

90
 4 - SERVICE DESIGN (EXERCISE)

1. The new-accounts officer at the Citizens Northern Savings Bank enrolls all new customers in
checking accounts. During the three-week period in August encompassing the beginning of the
new school year at State University, the bank opens a lot of new accounts for students.
The bank estimates that the arrival rate during this period will be Poisson distributed with an
average of four customers per hour. The service time is exponentially distributed with an average
of 12 minutes per customer to set up a new account. The bank wants to determine:
G. If the current person is sufficient to handle the increased traffic or not

The average waiting time of 48 minutes and the average time in the system of 1 hour are excessive.
The bank needs to add an extra employee during the busy period

91
 4 - SERVICE DESIGN

ADVANCED SINGLE-SERVER MODEL

92
 4 - SERVICE DESIGN

SINGLE-SERVER FINITE QUEUE

93
 4 - SERVICE DESIGN

SINGLE-SERVER FINITE CALLING POPULATION

94
 4 - SERVICE DESIGN (EXERCISE)

3. For each of the following queuing systems, indicate if it is a single- or

multiple-server model, the queue discipline, and if its calling population is
infinite or finite:
a. Hair salon
b. Bank
c. Laundromat
d. Doctor’s office
e. Adviser’s office
f. Airport runway
g. Service station
h. Copy center
i. Team trainer
j. Mainframe computer

95
 4 - SERVICE DESIGN (EXERCISE)
3.

- Hair salon: multiple-server; first-come, first- served or appointment; calling population can
be finite (appointments only) or infinite (off- the-street business.
- Bank: multiple-server; first-come, first-served; infinite calling population
- Laundromat: multiple-server; first-come, first- served; infinite calling population
- Doctor’s office: single- (or multiple-) server; appointment (usually); finite calling population
- Advisor’s office: single-server; first-come, first-served or appointment; finite calling
population
- Airport runway: single-server; first-come, first- served; finite calling population
- Service station: multiple-server; first-come, first-served; infinite calling population
- Copy center: single- or multiple-server; first- come, first-served; infinite calling population
- Team trainer: single-server; first-come, first- served or appointment; finite calling
population
- Mainframe computer: multiple-server; first- come, first-served (or priority level); infinite
calling population

96
 📌 TOPICS OVERVIEW 📌
MATERI UTS MATERI UAS

1 - Intro 1 - Supply Chain Management

2 - Quality Management 2 - Sales & Operation Planning
3 - Product Design 3 - Resource Planning
4 - Service Design 4 - Lean System
5 - Process Design & Facilities 5 - Project Management
6 - Forecasting
7 - Inventory Management

97
 5 - PROCESS DESIGN & FACILITIES

PROCESS STRATEGY
an organization’s overall approach for physically producing goods and services

Vertical Capital Process Customer

Integration Intensity Flexibility Involvement
Memproduksi Menggunakan mix Easily adjusted to Involving customers
inputnya sendiri input (both labors & demand, technology, in production
capital) products or services, process
and resource
availability

98
 5 - PROCESS DESIGN & FACILITIES

SHOULD WE USE OUTSOURCING?

Cost • Is it cheaper to make or buy the item?

Capacity • Does the company have the capacity?

Quality • Easier to control quality in your own factory

Speed • Shipping time can reduce savings

Reliability • Quality and timing are reliability measures

Expertise • Protect proprietary information

99
5 - PROCESS DESIGN & FACILITIES

PRODUCT PROCESS MATRIX

100
 5 - PROCESS DESIGN & FACILITIES

Project Batch Production Mass Production Continuous Production

Type of product Unique Made-to-order (customized) Made-to-stock (standardized) Commodity

Type of customer One-at-a-time Few individual customers Mass market Mass market

Product demand Infrequent Fluctuates Stable Very stable

Demand volume Very low Low to medium High Very high

No. of different products Infinite variety Many, varied Few Very few

Production system Long-term project Discrete, job shops Repetitive, assembly lines Continuous, process industries

Equipment Varied General-purpose Special-purpose Highly automated

Primary type of work Specialized contracts Fabrication Assembly Mixing, treating, refining

Worker skills Experts, craftspersons Wide range of skills Limited range of skills Equipment monitors
Advantages Custom work, latest Flexibility, quality Efficiency, speed, low cost Highly efficiency, large capacity,
technology ease of control
Disadvantages Nonrepetitive, small Costly, slow, difficult to manage Capital investment, lack of Difficult to change, far-reaching
customer base, responsiveness errors, limited variety
expensive

Examples Construction, Machine shops, print shops, Automobiles, televisions, Paint, chemicals, foodstuffs
shipbuilding, spacecraft bakeries, education computers, fast food

101
 5 - PROCESS DESIGN & FACILITIES

PROCESS SELECTION WITH BREAK-EVEN ANALYSIS

‘TOTAL REVENUE’
= Volume x Price
= vp TR = TC To calculate
BEP (Q):
‘TOTAL COST’ vp = cf + vcv
= Fixed Cost + Total Variable Cost
= cf + vcv vp − vcv = cf
v(p − cv) = cf
‘PROFIT’
= Total Revenue - Total Cost
= vp - (cf + vcv)

102
 5 - PROCESS DESIGN & FACILITIES

BREAK-EVEN ANALYSIS - MULTIPLE PROCESSES

Should we choose supplier A or B?

Process A = Process B
$2,000 + $50v = $10,000 + $30v
$20v = $8,000
v = 400 units
Below or equal to 400, choose A
Above or equal to 400, choose B

103
 5 - PROCESS DESIGN & FACILITIES

1. Texloy Manufacturing Company must select a

process for its new product, TX2, from among three
different alternatives. The following cost data have
been gathered below. For what volume of demand
would each process be desirable?

104
 5 - PROCESS DESIGN & FACILITIES

1. Texloy Manufacturing Company must select a

process for its new product, TX2, from among three
different alternatives. The following cost data have
been gathered below. For what volume of demand
would each process be desirable?

105
 5 - PROCESS DESIGN & FACILITIES

1. Texloy Manufacturing Company must select a

process for its new product, TX2, from among three
different alternatives. The following cost data have
been gathered below. For what volume of demand
would each process be desirable?

106
 5 - PROCESS DESIGN & FACILITIES

1. Texloy Manufacturing Company must select a

process for its new product, TX2, from among three
different alternatives. The following cost data have
been gathered below. For what volume of demand
would each process be desirable?

-If demand is less than or equal

to 10,000, choose the process A.
-If demand is greater than
10,000 but less than 30,000,
choose process B.
-If demand is greater than
30,000 units, choose process C.

107
5 - PROCESS DESIGN & FACILITIES

FLOWCHART

108
 5 - PROCESS DESIGN & FACILITIES

CAPACITY PLANNING

Capacity is expanded in Capacity is increased after

anticipation of demand an increase in demand has
growth (Aggressive been documented.
strategy) (Conservative strategy)

Capacity is expanded to
coincide with average
expected demand.
(Moderate strategy)

109
 5 - PROCESS DESIGN & FACILITIES

ECONOMIES AND DISECONOMIES OF SCALE

GOOD CONDITIONS

When:

MC < AC, it means

Economies of Scale

MC > AC, it means

Diseconomies of Scale

110
 5 - PROCESS DESIGN & FACILITIES

FACILITY LAYOUT
a visual method for analyzing the interrelationships among failures.

● Minimize movement & material handling costs

● Utilize space & labor efficiently
● Eliminate bottlenecks
● Facilitate communication & interaction
● Reduce manufacturing cycle time & CS time
● Eliminate wasted or redundant movement
● Incorporate safety and security measures
● Promote product & service quality
● Encourage proper maintenance activities
● Provide a visual control of activities
● Provide flexibility to adapt to changing conditions
● Increase capacity

111
 5 - PROCESS DESIGN & FACILITIES

BASIC LAYOUTS

Product Layout Process Layout

Assembly lines, arrange activities in a line A group similar activities together according to
according to the sequence of operations for a the process or function they perform.
particular product or service. (functional layout).

Process layouts are flexible

Product layouts are efficient

112
 5 - PROCESS DESIGN & FACILITIES

DESIGNING PROCESS LAYOUT: BLOCK DIAGRAM

tries to minimize non-adjacent loads

113
 5 - PROCESS DESIGN & FACILITIES

DESIGNING PROCESS LAYOUT: RELATIONSHIP DIAGRAM

114
 5 - PROCESS DESIGN & FACILITIES

DESIGNING PRODUCT LAYOUT: LINE BALANCING

the process of equalizing the amount of work at each workstation

jobs, broken down into their smallest indivisible

WORK ELEMENTS
portions, performed by max 1 worker at 1 station

any area along the assembly line that requires at

WORK STATIONS
least one worker or one machine

If each workstation on the assembly line takes the same amount of time to perform the
work elements that have been assigned, then products will move successively from
workstation to workstation with no need for a product to wait or a worker to be idle.

115
 5 - PROCESS DESIGN & FACILITIES

DESIGNING PRODUCT LAYOUT: LINE BALANCING

the process of equalizing the amount of work at each workstation

PRECEDENCE physical restrictions on the order in which operations

REQUIREMENTS are performed

116
 5 - PROCESS DESIGN & FACILITIES

DESIGNING PRODUCT LAYOUT: LINE BALANCING

the process of equalizing the amount of work at each workstation

maximum amount of time a product is allowed to

CYCLE TIME
spend at each workstation
Ex: suppose a company wanted to produce 120 units in an 8-hour day.
The cycle time necessary to achieve the production quota is..

117
 5 - PROCESS DESIGN & FACILITIES

DESIGNING PRODUCT LAYOUT: LINE BALANCING

the process of equalizing the amount of work at each workstation

100% line efficiency means no idle time at all in each workstation

LINE EFFICIENCY Balance delay: total idle time of the line (1-efficiency)

118
 5 - PROCESS DESIGN & FACILITIES (EXERCISES)

Real Fruit Snack Strips are made from a mixture of dried fruit,
food coloring, preservatives, and glucose. The mixture is
pressed out into a thin sheet, imprinted with various shapes,
rolled, and packaged. The precedence and time requirements
for each step in the assembly process are given below. To
meet demand, Real Fruit needs to produce 6000 fruit strips
every 40-hour week. Design an assembly line with the fewest
number of workstations that will achieve the production quota
without violating precedence constraints.

119
 5 - PROCESS DESIGN & FACILITIES (EXERCISES)

Real Fruit Snack Strips are made from a mixture of dried fruit,
food coloring, preservatives, and glucose. The mixture is
pressed out into a thin sheet, imprinted with various shapes,
rolled, and packaged. The precedence and time requirements
for each step in the assembly process are given below. To
meet demand, Real Fruit needs to produce 6000 fruit strips
every 40-hour week. Design an assembly line with the fewest
number of workstations that will achieve the production quota
without violating precedence constraints.
STEP 1: Draw the precedence diagram!

120
 5 - PROCESS DESIGN & FACILITIES (EXERCISES)

Real Fruit Snack Strips are made from a mixture of dried fruit,
food coloring, preservatives, and glucose. The mixture is
pressed out into a thin sheet, imprinted with various shapes,
rolled, and packaged. The precedence and time requirements
for each step in the assembly process are given below. To
meet demand, Real Fruit needs to produce 6000 fruit strips
every 40-hour week. Design an assembly line with the fewest
number of workstations that will achieve the production quota
without violating precedence constraints.
STEP 2: Find ‘cycle time’ & amount of ‘workstations’!

121
 5 - PROCESS DESIGN & FACILITIES (EXERCISES)

Real Fruit Snack Strips are made from a mixture of dried fruit,
food coloring, preservatives, and glucose. The mixture is
pressed out into a thin sheet, imprinted with various shapes,
rolled, and packaged. The precedence and time requirements
for each step in the assembly process are given below. To
meet demand, Real Fruit needs to produce 6000 fruit strips
every 40-hour week. Design an assembly line with the fewest
number of workstations that will achieve the production quota
without violating precedence constraints. STEP 3: Group the station!

122
 5 - PROCESS DESIGN & FACILITIES (EXERCISES)

Real Fruit Snack Strips are made from a mixture of dried fruit,
food coloring, preservatives, and glucose. The mixture is
pressed out into a thin sheet, imprinted with various shapes,
rolled, and packaged. The precedence and time requirements
for each step in the assembly process are given below. To
meet demand, Real Fruit needs to produce 6000 fruit strips
every 40-hour week. Design an assembly line with the fewest
number of workstations that will achieve the production quota
without violating precedence constraints. STEP 4: Assess Effectiveness!

123
 📌 TOPICS OVERVIEW 📌
MATERI UTS MATERI UAS

1 - Intro 1 - Supply Chain Management

2 - Quality Management 2 - Sales & Operation Planning
3 - Product Design 3 - Resource Planning
4 - Service Design 4 - Lean System
5 - Process Design & Facilities 5 - Project Management
6 - Forecasting
7 - Inventory Management

124
 6 - FORECASTING

Forecasting demand will help:

1. Supply Chain Management: Determine how much

product to make to meet forecasted customer’s need

2. Quality Management: Service & product quality, e.g.

on time delivery, no product defect

125
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Components of forecasting demand:

1. Time Frame: short term, long term

2. Demand Behavior: Service & product quality, e.g. on

time delivery, no product defect

126
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forms of forecast
movement

127
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecasting Method 1: Moving Average

(Forecast)

128
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecasting Method 1: Moving Average

129
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecasting Method 1: Moving Average

130
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecasting Method 1B: Weighted Moving Average

131
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecasting Method 1B: Weighted Moving Average

The Heartland Produce Company wants to compute a
three-month weighted moving average with a weight
of 50% for the October data, a weight of 33% for the
September data, and a weight of 17% for the August
data. These weights reflect the company’s desire to
have the most recent data influence the forecast most
strongly.

132
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecasting Method 2: Exponential Smoothing

133
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecasting Method 2: Exponential Smoothing

The HiTech company has accumulated the demand data shown in the accompanying table for
repair and service calls for the past 12 months, from which it wants to consider exponential
smoothing forecasts using smoothing constants (∝) equal to 0.30 and 0.50.

134
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecasting Method 2: Exponential Smoothing

The HiTech company has accumulated the demand data shown in the accompanying table for
repair and service calls for the past 12 months, from which it wants to consider exponential
smoothing forecasts using smoothing constants (∝) equal to 0.30 and 0.50.

*F1 is assumed the

same with actual
demand D1 since we
do not have any
forecasting data for
the 1st month

135
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecasting Method 2: Exponential Smoothing

The HiTech company has accumulated the demand data shown in the accompanying table for
repair and service calls for the past 12 months, from which it wants to consider exponential
smoothing forecasts using smoothing constants (∝) equal to 0.30 and 0.50.

*F1 is assumed the same with actual

demand D1 since we do not have any
forecasting data for the 1st month

136
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecasting Method 3A: Linear Trend Line (Regression)

137
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecasting Method 3A: Linear Trend Line (Regression)

138
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecasting Method 3A: Linear Trend Line (Regression)

rata-rata X (period)

rata-rata Y (demand)

139
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecasting Method 3A: Linear Trend Line (Regression)

Calculate forecast for 13th period:

y = 35.2 + 1.72x

140
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecasting Method 3B: Seasonal Adjustment

Forecast quarterly demand for 2017 with seasonal
adjustment!

141
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecasting Method 3B: Seasonal Adjustment

Forecast quarterly demand for 2017 with seasonal 1. Calculate seasonal factors
adjustment!

2. Calculate forecasted sales for 2017

(using linear model)

142
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecasting Method 3B: Seasonal Adjustment

Forecast quarterly demand for 2017 with seasonal 2. Calculate forecasted sales for 2017
adjustment! (using linear model)

Sales forecast 2017

3. Calculate each quarter’s forecast for 2017
(Seasonal factor x Sales forecast 2017)
4

143
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Forecast Error

Mean Absolute Deviation Mean Absolute Percentage Deviation

144
7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Computing MAD
*n = 11 because we can
only compute (Dt-Ft) in
period 2 to 12

145
7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Computing MAPD

146
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Cumulative Error & Average Error

147
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Multiple Regression (2 or more independent var.)

148
 7 - INVENTORY
6 - FORECASTING
MANAGEMENT

Multiple Regression (2 or more independent var.)

If the athletic department expects

the team to win 7 games and plans
to spend $60,000 on promotion and
advertising, the forecasted
attendance is:

149
 6 - FORECASTING (EXERCISES)

1. A seasonal index for a monthly series is about to be calculated on the basis

of three years' accumulation of data. The three previous July values were 110,
135, and 130.

The average over all months is 160. The approximate seasonal index for July is
...

150
 6 - FORECASTING (EXERCISES)

1. A seasonal index for a monthly series is about to be calculated on the basis

of three years' accumulation of data. The three previous July values were 110,
135, and 130.

The average over all months is 160. The approximate seasonal index for July is
...

(110 + 135 + 130)/3 = 125

125/160 = 0.781

151
 6 - FORECASTING (EXERCISES)

2. An innovative restaurateur owns and operates a dozen "Ultimate Low-Carb"

restaurants in northern Arkansas. His signature item is a cheese-encrusted
beef medallion wrapped in lettuce.

Sales (X, in millions of dollars) is related to Profits (Y, in hundreds of thousands

of dollars) by the regression equation Y = 8.21 + 0.76 X.
What is your forecast of profit for a store with sales of $40 million? $50 million?

152
 6 - FORECASTING (EXERCISES)

2. An innovative restaurateur owns and operates a dozen "Ultimate Low-Carb"

restaurants in northern Arkansas. His signature item is a cheese-encrusted
beef medallion wrapped in lettuce.

Sales (X, in millions of dollars) is related to Profits (Y, in hundreds of thousands

of dollars) by the regression equation Y = 8.21 + 0.76 X.
What is your forecast of profit for a store with sales of $40 million? $50 million?

$40 million in sales: 40 x 0.76 = 30.4; 30.4 + 8.21 = 38.61, or $3,861,000 in profit
$50 million in sales: 46.21 or $4,621,000.

153
6 - FORECASTING (EXERCISES)

3. Arnold Tofu owns and operates a chain of 12 vegetable

protein "hamburger" restaurants in northern Louisiana. Sales
figures and profits for the stores are in the table below. Sales
are given in millions of dollars; profits are in hundreds of
thousands of dollars.
a. Calculate a regression line for the data.
b. What is your forecast of profit for a store with sales of
$24 million? $30 million?

154
6 - FORECASTING (EXERCISES)

3. Arnold Tofu owns and operates a chain of 12 vegetable

protein "hamburger" restaurants in northern Louisiana. Sales
figures and profits for the stores are in the table below. Sales
are given in millions of dollars; profits are in hundreds of
thousands of dollars.
a. Calculate a regression line for the data.
Y = 5.936 + 1.421 X (Y = profit, X = sales).
a. What is your forecast of profit for a store with sales
of $24 million? $30 million?
$24 million in sales → profit 40.04 or $4,004,000
$30 million in sales → profit 48.566 or $4,856,600

155
 📌 TOPICS OVERVIEW 📌
MATERI UTS MATERI UAS

1 - Intro 1 - Supply Chain Management

2 - Quality Management 2 - Sales & Operation Planning
3 - Product Design 3 - Resource Planning
4 - Service Design 4 - Lean System
5 - Process Design & Facilities 5 - Project Management
6 - Forecasting
7 - Inventory Management

156
 7 - INVENTORY MANAGEMENT

Inventory Management:

1. Goal: Minimize total cost & fulfill orders

2. Inventory types: raw materials, work-in-progress,

finished goods

157
 7 - INVENTORY MANAGEMENT

HOW MANY UNITS SHOULD WE STOCK?

Carrying costs: Ordering costs:

a. Facility storage (rent, depreciation, cost to fill up inventory
power, etc)
b. Material handling (equipment) Shortage cost:
c. Record keeping cost when demand can’t be met
d. Borrowing to purchase inventory
(interest on loans, taxes, insurance)
e. Product deterioration, spoilage,
breakage, etc

158
7 - RECEIVABLE7AND
- INVENTORY
INVENTORY
MANAGEMENT
MANAGEMENT (EXERCISES)

The ABC Classification System

ABC Inventory Analysis

A = Expensive inventory (few quantity with

high value) has to be monitored closely.

B = Moderate value inventory

C = Basic inventory (high quantity with low

value) can be ordered in large quantity
and kept on hand.

159
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- INVENTORY
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Inventory Management 1 - Economic Order Quantity (EOQ)

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Inventory Management 1 - Economic Order Quantity (EOQ)

Co = Ordering Cost
Cc = Carrying Cost
Q = Order quantity
D = annual demand

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Inventory Management 1 - Economic Order Quantity (EOQ)

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Inventory Management 1 - Economic Order Quantity (EOQ)

The Goods Store stocks shoes in its warehouse and sells it online on its Web site. The
company wants to determine the optimal order size and total inventory cost for shoes,
given an estimated annual demand of 10,000 pairs of shoes, an annual carrying cost of
$0.75 per pair, and an ordering cost of $150 per order. They would also like to know the
number of orders that will be made annually and the time between orders (the order
cycle).

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INVENTORY
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Inventory Management 1 - Economic Order Quantity (EOQ)

The Goods Store stocks shoes in its warehouse and sells it online on its Web site. The
company wants to determine the optimal order size and total inventory cost for
shoes, given an estimated annual demand of 10,000 pairs of shoes, an annual carrying
cost of $0.75 per pair, and an ordering cost of $150 per order. They would also like to
know the number of orders that will be made annually and the time between orders
(the order cycle).

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INVENTORY
MANAGEMENT
MANAGEMENT (EXERCISES)

Inventory Management 1 - Economic Order Quantity (EOQ)

The Goods Store stocks shoes in its warehouse and sells it online on its Web site. The
company wants to determine the optimal order size and total inventory cost for shoes,
given an estimated annual demand of 10,000 pairs of shoes, an annual carrying cost of
$0.75 per pair, and an ordering cost of $150 per order. They would also like to know the
number of orders that will be made annually and
the time between orders (the order cycle).

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Inventory Management 2 - Production Quantity Model (PQM)

*Filling up inventory gradually (not just once at a time),

example: manufacturing companies.

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Inventory Management 2 - Production Quantity Model (PQM)

*Filling up inventory gradually (not just once at a time),

example: manufacturing companies.

d = demand per day

p = production per day

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Inventory Management 2 - Production Quantity Model (PQM)

Assume that the ePaint Store has its own manufacturing facility in which it produces
Ironcoat paint. The ordering cost, Co, is the cost of setting up the production process to
make paint. Co = $150. Carrying cost Cc = $0.75 per gallon and D = 10,000 gallons per year.
The manufacturing facility operates the same days the store is open (i.e., 311 days) and
produces 150 gallons of paint per day.
Determine the optimal order size, total inventory cost, the length of time to receive an
order, the number of orders per year, and the maximum inventory level.

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INVENTORY
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Inventory Management 2 - Production Quantity Model (PQM)

Assume that the ePaint Store has its own manufacturing facility in which it produces
Ironcoat paint. The ordering cost, Co, is the cost of setting up the production process to
make paint. Co = $150. Carrying cost Cc = $0.75 per gallon and D = 10,000 gallons per year.
The manufacturing facility operates the same days the store is open (i.e., 311 days) and
produces 150 gallons of paint per day.
Determine the optimal order size, total inventory cost, the length of time to receive an
order, the number of orders per year, and the maximum inventory level.

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INVENTORY
MANAGEMENT
MANAGEMENT (EXERCISES)

Inventory Management 2 - Production Quantity Model (PQM)

Assume that the ePaint Store has its own manufacturing facility in which it produces
Ironcoat paint. The ordering cost, Co, is the cost of setting up the production process to
make paint. Co = $150. Carrying cost Cc = $0.75 per gallon and D = 10,000 gallons per year.
The manufacturing facility operates the same days the store is open (i.e., 311 days) and
produces 150 gallons of paint per day.
Determine the optimal order size, total inventory cost, the length of time to receive an
order, the number of orders per year, and the maximum inventory level.

170
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INVENTORY
MANAGEMENT
MANAGEMENT (EXERCISES)

Inventory Management 2 - Production Quantity Model (PQM)

Assume that the ePaint Store has its own manufacturing facility in which it produces
Ironcoat paint. The ordering cost, Co, is the cost of setting up the production process to
make paint. Co = $150. Carrying cost Cc = $0.75 per gallon and D = 10,000 gallons per year.
The manufacturing facility operates the same days the store is open (i.e., 311 days) and
produces 150 gallons of paint per day.
Determine the optimal order size, total inventory cost, the length of time to receive an
order, the number of orders per year, and the maximum inventory level.

171
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- INVENTORY
INVENTORY
MANAGEMENT
MANAGEMENT (EXERCISES)

Inventory Management 2 - Production Quantity Model (PQM)

Assume that the ePaint Store has its own manufacturing facility in which it produces
Ironcoat paint. The ordering cost, Co, is the cost of setting up the production process to
make paint. Co = $150. Carrying cost Cc = $0.75 per gallon and D = 10,000 gallons per year.
The manufacturing facility operates the same days the store is open (i.e., 311 days) and
produces 150 gallons of paint per day.
Determine the optimal order size, total inventory cost, the length of time to receive an
order, the number of orders per year, and the maximum inventory level.

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INVENTORY
MANAGEMENT
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Inventory Management 3 - Quantity Discount

As PD changes, new Total Inventory Cost is:

P = price per unit

D = annual demand
*Companies give discount per unit when customers
order more quantity

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Inventory Management 3 - Quantity Discount

Up Tech a TV manufacturer, wants to reduce a large Compare the total cost of taking the
stock of televisions. It has offered a local chain of discount with EOQ scenario,
stores a quantity discount pricing schedule, as choose the lowest TC!
follows:

The annual carrying cost for the stores for a TV is

$190, the ordering cost is $2,500, and annual P = price per unit
demand for this particular model TV is estimated to D = annual demand

be 200 units.
The chain wants to determine if it should take
advantage of this discount or order the basic EOQ
order size.

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Inventory Management 3 - Quantity Discount

Up Tech a TV manufacturer, wants to reduce a large 1. EOQ Scenario

stock of televisions. It has offered a local chain of
stores a quantity discount pricing schedule, as
follows:

The annual carrying cost for the stores for a TV is

$190, the ordering cost is $2,500, and annual
demand for this particular model TV is estimated to
be 200 units.
The chain wants to determine if it should take
advantage of this discount or order the basic EOQ
order size.

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INVENTORY
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Inventory Management 3 - Quantity Discount

Up Tech a TV manufacturer, wants to reduce a large 2. Taking Discount Scenario

stock of televisions. It has offered a local chain of
stores a quantity discount pricing schedule, as
follows:

The annual carrying cost for the stores for a TV is

$190, the ordering cost is $2,500, and annual
demand for this particular model TV is estimated to
be 200 units.
The chain wants to determine if it should take
Decision: take the discount!
advantage of this discount or order the basic EOQ
order size. (Order 90 units with $900 price / unit)

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INVENTORY
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Inventory Management 4 - Reorder Point

R = Reorder Point

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Inventory Management 4 - Reorder Point

Ex: ePaint Store is open 311 days per year. If annual demand is 10,000 gallons of
Iron-Paint and the lead time to receive an order is 10 days, determine the reorder
point for paint.

R = Reorder Point

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Inventory Management 5 - Demand Not Constant

R = Reorder Point

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Inventory Management 5 - Demand Not Constant

R = Reorder Point

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MANAGEMENT (EXERCISES)

Inventory Management 5 - Demand Not Constant

Ex: ePaint Internet Store, we will assume that daily demand for
Iron-Paint is normally distributed with an average daily
demand of 30 gallons and a standard deviation of 5 gallons of
paint per day.
The lead time for receiving a new order of paint is 10 days.
Determine the reorder point and safety stock if the store wants
a service level of 95%—that is, the probability of a stockout is
5%.

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INVENTORY
MANAGEMENT
MANAGEMENT (EXERCISES)

Inventory Management 5 - Demand Not Constant

Ex: ePaint Internet Store, we will assume that daily demand for
Iron-Paint is normally distributed with an average daily
demand of 30 gallons and a standard deviation of 5 gallons of
paint per day.
The lead time for receiving a new order of paint is 10 days.
Determine the reorder point and safety stock if the store
wants a service level of 95%—that is, the probability of a
stockout is 5%.

Service level 95%, Z = 1.65

(check in z table)

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INVENTORY
MANAGEMENT
MANAGEMENT (EXERCISES)

Inventory Management 5 - Demand Not Constant

Ex: ePaint Internet Store, we will assume that daily demand for
Iron-Paint is normally distributed with an average daily
demand of 30 gallons and a standard deviation of 5 gallons of
paint per day.
The lead time for receiving a new order of paint is 10 days.
Determine the reorder point and safety stock if the store
wants a service level of 95%—that is, the probability of a
stockout is 5%.

Service level 95%, Z = 1.65

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1. Montegut Manufacturing produces a product for which the annual demand is 10,000
units. Production averages 100 per day, while demand is 40 per day. Holding costs are
$2.00 per unit per year; set-up costs $200.00.
If they wish to produce this product in economic batches, what size batch should be
used? What is the maximum inventory level? How many order cycles are there per year?
How much does management of this good in inventory cost the firm each year?

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1. Montegut Manufacturing produces a product for which the annual demand is 10,000
units. Production averages 100 per day, while demand is 40 per day. Holding costs are
$2.00 per unit per year; set-up costs $200.00.
If they wish to produce this product in economic batches, what size batch should be
used? What is the maximum inventory level? How many order cycles are there per
year? How much does management of this good in inventory cost the firm each
year?

Holding Cost = Carrying Cost Set Up Cost = Ordering Cost

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2. Thomas' Bike Shop stocks a high volume item that has a normally distributed demand
during the reorder period. The average daily demand is 70 units, the lead time is 4 days,
and the standard deviation of demand during the reorder period is 15.

a. How much safety stock provides a 95% service level to Thomas?

b. What should the reorder point be?

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2. Thomas' Bike Shop stocks a high volume item that has a normally distributed demand
during the reorder period. The average daily demand is 70 units, the lead time is 4 days,
and the standard deviation of demand during the reorder period is 15.

a. How much safety stock provides a 95% service level to Thomas?

b. What should the reorder point be?

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3. The soft goods department of a large department store sells 175 units per month of a
certain large bath towel. The unit cost of a towel to the store is $2.50 and the cost of
placing an order has been estimated to be $12.00. The store uses an inventory carrying
charge of 27% per year.

Determine the optimal order quantity, order frequency, and the annual cost of inventory
management. If, through automation of the purchasing process, the ordering cost can be
cut to $4.00, what will be the new economic order quantity, order frequency, and annual
inventory management cost? Explain these results.

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3. The soft goods department of a large department store sells 175 units per month of a
certain large bath towel. The unit cost of a towel to the store is $2.50 and the cost of
placing an order has been estimated to be $12.00. The store uses an inventory carrying
charge of 27% per year.
Determine the optimal order quantity, order frequency, and the annual cost of
inventory management. If, through automation of the purchasing process, the ordering
cost can be cut to $4.00, what will be the new economic order quantity, order frequency,
and annual inventory management cost? Explain these results.
Co = Ordering Cost
Cc = Carrying Cost
Q = Order quantity
D = annual demand

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3. The soft goods department of a large department store sells 175 units per month of a
certain large bath towel. The unit cost of a towel to the store is $2.50 and the cost of
placing an order has been estimated to be $12.00. The store uses an inventory carrying
charge of 27% per year.
Determine the optimal order quantity, order frequency, and the annual cost of
inventory management. If, through automation of the purchasing process, the ordering
cost can be cut to $4.00, what will be the new economic order quantity, order
frequency, and annual inventory management cost? Explain these results.

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