Operations Final 1 (3/12 PP)
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Value added activity
Any activity that a customer is willing to pay for.
Ex. Customer service, quick service @ Dor Stop Diner.
Capacity of a system is dependent on:
- 1. Level of resources deployed
- 2. Effectiveness of the resources (Capital and Labor)
If throughput is less than capacity
Bottleneck is external
If throughput is about equal to capacity
bottleneck is internal
To increase theoretical capacity (5)
- 1. Increase the number of resource units
- 2. Increase the size of the resource units
- 3. Increase the time of operation
- 4. Subcontract or outsource
- 5. Increase the rate of activities
Three catagories of inventory based on where it is in the process:
- 1. Input Inventory - inventory waiting to be processed
- 2. In Process Inventory - Inventory being processed (WIP, In-transit inventory)
- 3. Output inventory - Processed units that have not yet exited the process boundaries.
raw materials + components (manufactoring), customers (service)
work being processed (manufactoring), customer being served (service)
finished goods (manufactoring), none if customer leaves process (service)
Average Total Inventory =
Average input + in process + output inventory (every flow unit must spend time in each of these buckets)
Total Average Flow Time =
Average Time spent in input + in process + output inventories.
Theoretical Inventory -
Minimum amount of inventory to maintain process.
Inventory builds if input exceepds output and declines if output exceeds input.
Starved input inventory
Lost production (STOP THE LINE)
Starved output inventory
Stock-outs, lost sales
Fixed order costs
Costs that apply to every order independent of order size (not impacted by economies of scale).
- - Administrative ordering costs
- - Transporting materials
- - Receiving and inspection
Fixed Setup Costs
Time and materials needed to s et up the process (clean, calibrate, etc.)
Companies will batch production to address fixed set up costs.
3 types of batching
1. Production Batch - make a lot of vanilla before switching to chocolate
2. Transportation Batch - make enough to accomodate transportation needs
3. Procurement Batch - make enough to receive volume discounts from supplier.
The average build ups and downs of inventory from batch process.
It is more economical to produce fewer, larger batches to spread fixed costs over more units which leads to these build ups and downs
Level production vs. Chase Demand Inventory
Level prod better if capacity changes are expensive.
Change Demand better if inventories are expensive to carry.
Aggregate Production Planning
Finding right balance of level production strategy and chase demand strategy
Level production strategy
Maintain constant processing rate and build inventory in times of low demand and deplete during peak demand (toy building all year for Christmas demand)
Chase Demand Strategy
Produce quantities to exactly match demand. Fluctuations in demand directly affect processing.
More items mean more inventory
Think Coke products (sizes, types, low calorie vs high, etc.)
When demand shifts to new product and firm has high WIP and output inventory to get rid of, firm can (2):
- 1. Empty process by scrapping WIP and liquidating current output inventory - then introduce new product
- 2. Finish processing and delay new product
Liquidation used to remove goods from sales channel and inventory from:
Discontinued, overstocked, short dated or damaged goods
Liquidation - need to:
- 1. Remove product from customer warehouses
- 2. Remove product from DCs
- 3. Minimize financial loss on product.
- 1. All inventory has value
- 2. Retailers don't care about brand protection - they just want to sell the goods.
3. Manufactorers care about brand protection (brand diminishes depending on where it is sold (flea market vs store)
Fixed order costs can be reduced through:
- - Administrative costs of creating order
- - Technology - electronic purchase orders
- - Internet Ordering
- - Mode of transportation (rail vs plane)
Time lag between order being place and arrival of replenishment inventory
Continuious Reveiew Policy
When a reorder is automatically triggered when inventory reaches a specified level (to account for time lag)
Periodic Review Policy
When inventory is reviewed at a fixed time interval and orders are placed at that time
Negotiating stable pricing will reduce:
Ways to reduce capacity waste to increase capacity (4)
- 1. Eliminate non value add activities
- 2. Avoid defects and re-work
- 3. Reduce set up loss
- 4. Move work to nonbottleneck resources.
Why do firms carry inventory (4)
- 1. Economies of scale (transportation, purchasing)
- 2. Production/Capacity smoothing (level production strategy)
- 3. Stock out protection
- 4. Speculative stock
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