ANSWERS TO CHAPTER 12 HW

Exercise 12-3

1. Throughput time = Process time + Inspection time + Move time +

Queue time
= 2.7 days + 0.3 days + 1.0 days + 5.0 days
= 9.0 days

2. Only process time is value-added time; therefore, the manufacturing cycle

efficiency (MCE) is:
Value-added time 2.7 days
MCE = = = 0.30
Throughput time 9.0 days

3. If the MCE is 30%, then 30% of the throughput time was spent in value-added
activities. Consequently, the other 70% of the throughput time was spent in non-
value-added activities.

4. Delivery cycle time = Wait time + Throughput time

= 14.0 days + 9.0 days
= 23.0 days

5. If all queue time is eliminated, then the throughput time drops to only 4 days
(2.7 + 0.3 + 1.0). The MCE becomes:
Value-added time 2.7 days
MCE = = = 0.675
Throughput time 4.0 days
Thus, the MCE increases to 67.5%. This exercise shows quite dramatically how
lean production can improve the efficiency of operations and reduce throughput
time.

Exercise 12-5

1. Utilization rate = Actual run time ÷ Machine time available

Utilization rate = 4,900 minutes ÷ 7,000 minutes
Utilization rate = 0.70

2. Efficiency rate = Actual run rate ÷ Ideal run rate

Efficiency rate = 3.8 units per minute ÷ 4 units per minute
Efficiency rate = 0.95
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3. Quality rate = Defect-free output ÷ Total output
Quality rate = 15,827 units ÷ 18,620 units
Quality rate = 0.85

4. OEE = Utilization rate × Efficiency rate × Quality rate

OEE = 0.70 × 0.95 × 0.85
OEE = 0.565 (rounded)

Exercise 12-8

1. The total cost of quality last year and this year is computed as follows:

Last Year This Year

Prevention costs .......................... $ 357,000 $ 650,000
Appraisal costs ............................ 445,000 545,000
Internal failure costs .................... 790,000 500,000
External failure costs .................... 1,100,000 680,000
Total cost of quality ...................... $2,692,000 $2,375,000

2. The appropriate percentages (rounded) are computed as follows:

Last Year Percent

Prevention costs ................................ $ 357,000 13.3%
Appraisal costs .................................. 445,000 16.5%
Internal failure costs .......................... 790,000 29.3%
External failure costs .......................... 1,100,000 40.9%
Total cost of quality ............................ $2,692,000 100.0%

3. The appropriate percentages (rounded) are computed as follows:

This Year Percent

Prevention costs ................................ $ 650,000 27.4%
Appraisal costs .................................. 545,000 22.9%
Internal failure costs .......................... 500,000 21.1%
External failure costs .......................... 680,000 28.6%
Total cost of quality ............................ $2,375,000 100.0%

4. Performance is trending in a favorable direction. The total cost of quality has

decreased by $317,000. The company invested an additional $393,000 in
prevention and appraisal activities [($650,000 + $545,000) – ($357,000 +
$445,000)]. This enabled a $710,000 reduction in internal and external failure
costs [($790,000 + $1,100,000) – ($500,000 + $680,000)].

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Exercise 12-9

1a. The labels for all four companies are as follows:

Company A Company B Company C Company D

Learning & Growth
Average years of Percent of Number of process Average training
tenure per employee “outstanding” improvement hours per
(+) interview suggestions per employee (+)
candidates that employee (+)
accepted our job
offer (+)
Internal Business Process
Number of new Number of Pounds of waste Manufacturing
products designed patents produced (–) cycle efficiency (+)
(+) approved (+)
Customer
Market share Customer Percent of Percent of
percentage (+) perception of customers that customers that
our product strongly agree with strongly agree with
leadership (+) the statement the statement "My
"Your company is order was
committed to delivered on time."
environmental (+)
stewardship." (+)
Financial
Sales from products Patent protected Percent of revenue Net operating
less than three years sales (+) from eco-conscious income growth
old (+) products (+) rate (+)

1b. The if-then hypothesis statements are as follows:

Company A
1. If we increase the average tenure per employee, then it will increase the
number of new products designed.
2. If we increase the number of new products designed, then it increase our
market share percentage.
3. If we increase our market share percentage, then it will increase sales from
products less than three years old.
Company B
1. If we increase the percent of “outstanding” interview candidates that
accepted our job offer, then it will increase the number of patents approved.
2. If we increase the number of patents approved, then it will increase our
customer perception of our product leadership.

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3. If we increase the customer perception of our product leadership, then it will
increase patent protected sales.
Company C
1. If we increase the number of process improvement suggestions per
employee, then it will decrease the pounds of waste produced.
2. If we decrease the pounds of waste produced, then it will increase the
percent of customers that strongly agree with the statement "Your company
is committed to environmental stewardship."
3. If we increase the percent of customers that strongly agree with the
statement "Your company is committed to environmental stewardship.," then
it will increase the percent of revenue from eco-conscious products.
Company D
1. If we increase the average training hours per employee, it will increase
manufacturing cycle efficiency.
2. If we increase manufacturing cycle efficiency, then it will increase the percent
of customers that strongly agree with the statement "My order was delivered
on time."
3. If we increase the percent of customers that strongly agree with the
statement "My order was delivered on time.," then it will increase the net
operating income growth rate.

2. Company A: The focus on new product design suggests an emphasis on product

innovation and a product leadership customer value proposition.

Company B: The focus on patent approval, patent protected sales, and an

interest in the customers’ perception of product leadership clearly indicates a
product leadership customer value proposition.

Company C: Some students may suggest that the emphasis on reducing pounds
of waste produced suggests an operational excellence customer value
proposition, while others may suggest that trying to grow sales of eco-conscious
products speaks, first and foremost, to innovative, environmentally-conscious
products; hence, a product leadership customer value proposition. There are no
absolute right answers, rather the goal is to encourage students to engage in
justifiable thought processes.

Company D: The focus on time and efficiency suggests an operational excellence

customer value proposition.

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Exercise 12-4

1.

Financial Weekly profit +

Weekly sales +
Customer
Customer Customer
satisfaction with + satisfaction with +
service menu choices

Internal
Business Dining area Average time
Processes cleanliness + to prepare an –
order

Average time Number of

to take an – menu items +
order

Learning
and Percentage of Percentage of
Growth dining room staff
kitchen staff
completing + completing +
reimbursed reimbursed
hospitality cooking course
course

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2. The hypotheses underlying the balanced scorecard are indicated by the arrows in
the diagram. Reading from the bottom of the balanced scorecard, the hypotheses
are:
o If the percentage of dining room staff that complete the reimbursed
hospitality course increases, then the average time to take an order will
decrease.
o If the percentage of dining room staff that complete the reimbursed
hospitality course increases, then dining room cleanliness will improve.
o If the percentage of kitchen staff that complete the reimbursed cooking
course increases, then the average time to prepare an order will decrease.
o If the percentage of kitchen staff that complete the reimbursed cooking
course increases, then the number of menu items will increase.
o If the dining room cleanliness improves, then customer satisfaction with
service will increase.
o If the average time to take an order decreases, then customer satisfaction
with service will increase.
o If the average time to prepare an order decreases, then customer satisfaction
with service will increase.
o If the number of menu items increases, then customer satisfaction with menu
choices will increase.
o If customer satisfaction with service increases, weekly sales will increase.
o If customer satisfaction with menu choices increases, weekly sales will
increase.
o If sales increase, weekly profits for the Lodge will increase.
Each of these hypotheses can be questioned. For example, the items added to
the menu may not appeal to customers. So even if the number of menu items
increases, customer satisfaction with the menu choices may not increase. The
fact that each of the hypotheses can be questioned does not, however, invalidate
the balanced scorecard. If the scorecard is used correctly, management will be
able to identify which, if any, of the hypotheses are incorrect. [See below.]

3. Management will be able to tell if a hypothesis is false if an improvement in a

performance measure at the bottom of an arrow does not, in fact, lead to
improvement in the performance measure at the tip of the arrow. For example, if
the number of menu items is increased, but customer satisfaction with the menu
choices does not increase, management will immediately know that something
was wrong with that particular hypothesis.

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Problem 12-12

1a. Utilization rate = Actual run time ÷ Machine time available

Utilization rate = 6,600 minutes ÷ 11,000 minutes
Utilization rate = 0.60

1b. Efficiency rate = Actual run rate ÷ Ideal run rate

Efficiency rate = 5.1 units per minute ÷ 6 units per minute
Efficiency rate = 0.85

1c. Quality rate = Defect-free output ÷ Total output

Quality rate = 23,562 units ÷ 33,660 units
Quality rate = 0.70

1d. OEE = Utilization rate × Efficiency rate × Quality rate

OEE = 0.60 × 0.85 × 0.70
OEE = 0.357

The answers to 2a through 2c are:

2a. Utilization loss = 26,400 units

2b. Efficiency loss = 5,940 units
2c. Quality loss = 10,098 units

The supporting calculations are as follows:

Maximum possible output (11,000 × 6) (a) ..................... 66,000

Utilization loss [(11,000 – 6,600) × 6] ............................ 26,400
Efficiency loss [(6 – 5.1) × 6,600] .................................. 5,940
Quality loss (33,660 – 23,562) ....................................... 10,098 42,438
Defect-free output (b) ................................................... 23,562
Overall equipment effectiveness (b) ÷ (a) ....................... 0.357

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Problem 12-15

1. a., b., and c.

Month
1 2 3 4
Throughput time in days:
Process time ........................................... 2.1 2.0 1.9 1.8
Inspection time ....................................... 0.8 0.7 0.7 0.7
Move time .............................................. 0.3 0.4 0.4 0.5
Queue time during production ................. 2.8 4.4 6.0 7.0
Total throughput time .............................. 6.0 7.5 9.0 10.0
Manufacturing cycle efficiency (MCE):
Process time ÷ Throughput time .............. 35.0% 26.7% 21.1% 18.0%
Delivery cycle time in days:
Wait time to start of production ............... 9.0 11.5 12.0 14.0
Throughput time ..................................... 6.0 7.5 9.0 10.0
Total delivery cycle time .......................... 15.0 19.0 21.0 24.0

2. a. Areas where the company is improving:

Quality control. The number of defects has decreased by over 50% (from 185
to 91) in the last four months. Moreover, both warranty claims and customer
complaints are down sharply. In short, overall quality appears to have
significantly improved.
Material control. The purchase order lead time is only half (now 4 days from 8
days) of what it was four months ago, which indicates that purchases are
arriving in less time. This trend may be a result of the company’s move
toward JIT purchasing.
Process Time. The process time has decreased by 14% from 2.1 days to 1.8
days over the last four months.
b. Areas of deterioration:
Material control. Scrap as a percentage of total cost has tripled (from 1% to
3%) over the last four months.
Machine performance. Machine downtime has doubled (from 3% to 6%) over
the last four months. This may be a result of the greater setup time, or it may
just reflect efforts to get the new equipment operating properly. Also note that
use of the machines as a percentage of availability is declining rapidly.
Delivery performance. All delivery performance measures are moving in the
wrong direction. Throughput time and delivery cycle time are both increasing,
and the manufacturing cycle efficiency is decreasing.
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3. a. and b.
Month
5 6
Throughput time in days:
Process time ..................................................... 1.8 1.8
Inspection time ................................................ 0.7 0.0
Move time ........................................................ 0.5 0.5
Queue time during production ........................... 0.0 0.0
Total throughput time ....................................... 3.0 2.3
Manufacturing cycle efficiency (MCE):
Process time ÷ Throughput time ....................... 60.0% 78.3%

As non-value-added activities are eliminated, the manufacturing cycle efficiency

improves. The goal, of course, is to have an efficiency of 100%. This is achieved
when all non-value-added activities have been eliminated and process time
equals throughput time.

Problem 12-19

1. Florex Company
Quality Cost Report
Last Year This Year
Amount
Amount Percent (in Percent
(in thousands) of Sales thousands) of Sales
Prevention costs:
Quality engineering ................ $ 420 0.56 $ 570 0.76
Systems development............. 480 0.64 750 1.00
Statistical process control ....... 0 0.00 180 0.24
Total prevention costs ............... 900 1.20 1,500 2.00
Appraisal costs
Inspection ............................. 750 1.00 900 1.20
Product testing....................... 810 1.08 1,200 1.60
Supplies used in testing .......... 30 0.04 60 0.08
Depreciation of testing
equipment .......................... 210 0.28 240 0.32
Total appraisal costs ............... 1,800 2.40 2,400 3.20

Internal failure costs:

Net cost of scrap .................... 630 0.84 1,125 1.50
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 Rework labor ......................... 1,050 1.40 1,500 2.00
Disposal of defective
products ............................. 720 0.96 975 1.30
Total internal failure costs.......... 2,400 3.20 3,600 4.80

External failure costs:

Cost of field servicing ............. 1,200 1.60 900 1.20
Warranty repairs .................... 3,600 4.80 1,050 1.40
Product recalls ....................... 2,100 2.80 750 1.00
Total external failure costs ......... 6,900 9.20 2,700 3.60

Total quality cost....................... $12,000 16.00 $10,200 13.60

2. The overall impact of the company’s increased emphasis on quality over the past
year has been positive in that total quality costs have decreased from 16% of
sales to 13.6% of sales. Despite this improvement, the company still has a poor
distribution of quality costs. The bulk of the quality costs in both years is
traceable to internal and external failure, rather than to prevention and appraisal.
Although the distribution of these costs is poor, the trend this year is toward
more prevention and appraisal as the company has given more emphasis on
quality.
Probably due to the increased spending on prevention and appraisal activities
during the past year, internal failure costs have increased by one half, going from
$2.4 million to $3.6 million. The reason internal failure costs have gone up is
that, through increased appraisal activity, defects are being caught and corrected
before products are shipped to customers. Thus, the company is incurring more
cost for scrap, rework, and so forth, but it is saving huge amounts in field
servicing, warranty repairs, and product recalls. External failure costs have fallen
sharply, decreasing from $6.9 million last year to just $2.7 million this year.
If the company continues its emphasis on prevention and appraisal—and
particularly on prevention—its total quality costs should continue to decrease in
future years. Although internal failure costs are increasing for the moment, these
costs should decrease in time as better quality is designed into products.
Appraisal costs should also decrease as the need for inspection, testing, and so
forth decreases as a result of better engineering and tighter process control.

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