IE 3265 Production & Operations Management

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IE 3265 Production Operations Management

• R. R. Lindeke, Ph.D.
• Spring 2006
• Lecture Set 1

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Pre-Quiz Terms

• Simplex
• JIT
• CMS
• Kanban
• EUAC
• NPW
• MRP
• ATCF/BTCF

• MARR
• SMED
• Poka-Yoka
• Exponential Smoothing
• Winters Method
• APR
• Bullwhip Effect
• Functional Silo

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Pre-Quiz Terms, cont

• IRR
• ROI
• EOQ
• Push Control
• Pull Control
• 6-sigma
• Johnsons Rule
• Bottleneck

• Queing
• Markov Chain
• Transportation Model
• Duality
• Complementary Slackness
• Breakeven Analysis

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Career Goals?

• Manufacturing?
• Services Industry?
• Management of Operations
• And Then Where?

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Topic Areas in Operations Management

• Forecasting
• Aggregate Planning
• Inventory Control Deterministic Environments
• Inventory Control Stochastic Environments
• Supply Chain Management
• Production Control Systems MRP and JIT
• Operations Scheduling
• Project Scheduling
• Facilities Planning
• Quality and Assurance
• Maintenance and Reliability

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Marketing
Operations
Finance
Functional Areas of the Firm
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Strategic Time Horizons

• 1. Long Term Decisions
• Locating and Sizing New Facilities
• Finding New Markets for Products
• Mission Statement meeting quality objectives
• 2. Intermediate Term Decisions
• Forecasting Product Demand
• Determining Manpower Needs
• Setting Channels of Distribution
• Equipment Purchases and Maintenance

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Strategic Time Horizons Short Term

• 3. Short Term Decisions
• Purchasing
• Shift Scheduling
• Inventory Control

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The Elements of Strategy

• Time Horizon
• Short Term
• Intermediate
• Long Term
• Evaluation
• Cost
• Quality
• Profitability
• Customer satisfaction

• Focus
• Process Technology
• Market Issues
• Volume
• Quality Tasks
• Consistency
• Professionalism
• Proliferation
• Changes in the task
• Explicit goals

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History of POM

• Major Thrust of the Industrial Revolution
  1850-1890.
• Factories tended to be small. Boss had total
  control. Little regard for workers safety or
  workers rights.
• Production Manager Position. 1890-1920.
• Frederick Taylor champions the idea of
  scientific management.
• As complexity grows specializations take hold
• Inventory Control Manager
• Purchasing Manager
• Scheduling Supervisor
• Quality Control Manager etc.

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Global Competition

• Global competition is heating up to an
  unprecedented degree. It appears that several
  factors favor the success of some industries in
  some countries, For example
• Germany printing presses, luxury cars, chemicals
• Switzerland pharmaceuticals, chocolate
• Sweden heavy trucks, mining equipment
• United States personal computers, software,
  entertainment
• Japan automobiles, consumer electronics

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Porters Thesis

• Management guru Michael Porter, has developed a
  theory to explain the determinants of national
  competitive advantage, including
• Factor Conditions (Land, Labor,Capital, etc.)
• Demand Conditions (local marketplace may be more
  sophisticated/demanding than world marketplace)
• Related and Supporting Industries
• Firm Strategy, structure, rivalry
• (e.g. Germans are strong technically, Italian
  family structure, Japanese management methods)

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Time-Based Competition

• Time-based competitors focus on the entire
  value-delivery system.
• They attempt to transform an entire organization
  into one focused control of the total time
  required to deliver a product or service.
• Their goal is not to devise the best way to
  perform a task, but to either eliminate the task
  altogether or perform it in parallel with other
  tasks so that over-all system response time is
  reduced.

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Time-Based Competition

• Focus on the bigger picture, continued
• Becoming a time-based competitor requires making
  revolutionary changes in the ways that processes
  are organized (Blackburn 1991).
• Being not only the first to market but the first
  to volume production as well gives a firm a
  decided advantage. See Table on p. 22 of text
  looking into DRAM products.

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How Do Firms Differentiate Themselves from
Competitors?

• Low Cost Leaders
• WalMart and Costco in Retailing
• Korean automakers (Hyundai, Kia, etc.)
• e-machines in personal computers
• High Quality (and price) Leaders. Ex
• Mercedes Benz automobiles
• Rolex Watches
• Some firms do both (Chevrolet and Cadillac at
  GM)

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Business Process Re-engineering

• The process of taking a cold hard look at the way
  that things are done
• Classic Example IBM Credit Corporation. The
  process had been broken down to a series of
  multiple steps, each having substantial delays
• Approval required from 6 days to 2 weeks.
• Hammer and Champy, 1993

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Business Process Re-engineering

• The process was re-engineered so that a single
  specialist would handle a request from beginning
  to end.
• The result was that turnaround time was slashed
  to an average of 4 hours!

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Along What Other Dimensions Do Firms Compete?

• Delivery Speed, Delivery Reliability
• Federal Express, United Parcel Service
• Flexibility
• Toyota provides many models to various market
  groups
• Service
• Nordstrom bases its reputation on providing a
  high quality of service to customers

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Just-In-Time or LEAN Manufacturing

• LEAN Mfg. is a production control system that
  grew out of Toyotas kanban system.
• It is a philosophy of production control that
  attempts to reduce inventories to an absolute
  minimum and eliminate waste in any of its forms.
• It has become pretty much a standard way of
  thinking in many industries (especially
  automotive.)

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I Hate to say it BUT!

• We still are driven by profitability
• The ideas of Competitiveness and LEAN Mfg. need
  to be balanced against Quality results in
  Production
• We find (in a Capitalist economy) that these
  competing(?) demands often can increase
  profitability if we let the factory move toward
  them
• not first to volume production the first to
  rational volume production is key!

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An example from Engineering Economy Machine
Replacement analysis After Tax Basis

• Current Equipment The Defender (purchased a few
  years ago before Company started rational Quality
  Management system and JIT system)
• Design Capacity 310 molds/hr (620 parts/hr)
• Part Tolerance ?0.030 across parting line
• Average Quality 2.9 defectives
• Average Maintenance 12000/yr

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Machine Replacement analysis After Tax Basis

• When purchased, average Lot Size was 7500 molds
  and pattern change took 45 minutes
• Currently, production lot size has fallen to 375
  molds (and without significant investment)
  pattern change is still 45 minutes
• Indicates 375/310 1.25 hr/pattern run or 375
  molds every 2 hours (with pattern change time)
• Real Production rate is 188 molds/hr (375
  parts/hr)! (the horrors of JIT!)

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Machine Replacement analysis After Tax Basis

• Quality/Maintenance Downtime consume 1
  hour/shift
• The plant operates two 10 hour shifts (20 planned
  hours)
• but with downtime actual productive time is 18
  productive hours/day on this machine
• Good Castings/day 375.97118 6555
  (1,645,300/251day-year)
• Scrap Castings/day 375.02918 195
  (48945/251day-year)

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Quality Costs Are Like Icebergs! Sometimes Only
10 Are Visible The Rest Sink The Ship!

• Visible Costs
• Scrap
• Rework
• Warranty Claims
• Hidden Costs
• Eng/Mgt Time
• Downtime
• Increased Inventory
• Decreased Capacity
• Customer Dissatisfaction
• Lose of Market Share

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Machine Replacement analysis After Tax Basis

• Quality Cost Issues
• Eng/Mgt time 20400
• 8 hr/wk51wks/yr_at_50/hr
• Inspect time 63750
• 50hr/wk 51wk/yr_at_25/hr
• Warranty Claims 85_at_200 17000
• Goodwill Costs 8000
• Total These Costs 109150

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Machine Replacement analysis After Tax Basis

• Product Issues
• Prod Costs (labor/matl/etc.) 7.00
• Avg. Sale Price 8.00
• NOTE in most JIT (LEAN) systems cost must drop 5
  to 10 annually to customer!!!!
• Annual Income Defender (Rev Costs)
• Costs
• Pr. Cost (All Castings) Qual. Costs Maint.
  Costs7(1645300 48945) 109150 12000
  11,980,865
• Revenue
• Price Good Parts 81645300 13,162,400
• Income 13,162,400 - 11,980,865 1,181,535

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Machine Replacement analysis After Tax Basis

• Challenger Equipment
• Design Capacity 235 molds/hr (470 parts/hr)
• Part Tolerance 0.010 across parting line
• Average Quality 0.5 defectives
• Average Maintenance 8500/yr
• This machine has built-in quick change pattern
  technology so change is about 5 minutes (0.083
  hours)
• 750 parts takes (1.6 hrs 0.083hr) 1.68 hrs on
  this unit
• This machine has an effect production rate of
  445 parts/hour

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Machine Replacement analysis After Tax Basis

• Company does Preventative Maintenance so this
  machine works 20 hr/day
• Good Castings 44520.995 88552512,222,730
  /yr
• Scrap Castings 44520.005 44251 11170/yr
• Quality Costs
• Eng/Mgt time NONE!
• Insp. Time (spot Check) 5hr/wk51 6375
• Warranty Costs 5/yr_at_125 625
• Goodwill Costs NONE!
• Total Q. Costs 7000

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Machine Replacement analysis After Tax Basis

• Product Issues
• Production Costs 7.10
• Avg Selling Price 8.15(higher due to
  improved tolerances but will have to achieve
  continuing 5 10 reduction annually)
• Annual Income Challenger (Rev Costs)
• Costs
• Pr. Cost (All Castings) Qual. Costs Maint.
  Costs7.1(2222730 11170) 7000 8000
  15,875,690
• Revenue
• Price Good Parts 8.152222730 18,115,250
• Income 18,115,250 - 15,875,690 2,239,560

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Machine Replacement analysis Depreciation Issues

• Defender (7yr MACRS asset now 3 yrs old)
• Initial Cost 1.5 Million
• Present Mkt. Value 650,000
• Pr. Book Value (1.25M (.143 .245
  .175)1.25M) 546,250
• Salvage Value (5 yrs) 220,000
• Challenger (7yr MACRS asset)
• Initial Cost 1 Million
• Salvage Value (5 yrs) 425,000

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Machine Replacement analysis After Tax Basis
Depreciation Schedule
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Machine Replacement analysis After Tax Basis
38 C. Tax rate, 12 MARR
Potential Cap. Gain not taken by keeping Defender
Long Term Cap. Gain -- Taken
Saving in Income Tax Burden for not getting Cap.
Gain of Selling Defender at gt Bk Value
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Machine Replacement analysis After Tax Basis
38 C. Tax rate, 12 MARR
Long Term Cap. Gain Taken since salvage value
(425K) exceeds Bk. Value (223K)
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Defender Followup

• Youre the Engineer think about what to do?
• Q 1 (homework) How much can this company spend
  to add Quick-Change technology to existing
  machine?
• Q2 (homework) Just by Fixing Quality Issues,
  could the defender be kept? Show why or why not.