Operations Management Introduction

Assignment 1
Section A - Objective questions True/ False
1. Operations, marketing, and finance function independently of each other in most

organizations.
2. Goods producing organizations are not involved in service activities.

3. Service operations require additional inventory because of the unpredictability of consumer

demand
4. The operations manager has primary responsibility for making operations system design

decisions, such as system capacity and location of facilities.

5. Most people encounter operations only in profit-making organizations

6. Many operations management decisions can be described as tradeoffs

7. The responsibilities of the operations manager are: (multiple choice questions)

a. planning, organizing, staffing, procuring, and reviewing

b. planning, organizing, staffing, directing, and controlling
c. forecasting, designing, planning, organizing, and controlling
d. forecasting, designing, operating, procuring, and reviewing
e. designing and operating
8. Which of the following is not a characteristic of service operations?

a. intangible output
b. high customer contact
c. high labor content
d. easy measurement of productivity
e. low uniformity of output
9. Operations and sales are the two line functions in businesses.

a. strategic
b. tactical
c. support
d. value-adding
e. line
10. Which is not a significant difference between manufacturing and service operations?
a. cost per unit

b. uniformity of output
c. labor content of jobs
d. customer contact
e. measurement of productivity

Section B
1. List five difference and five similarities between production and services operations.
Manufacturing and service are often similar in terms of what is done but different in terms of how it is
done.
Major differences between production and services are

1. Production of goods results in a tangible output, such as an automobile, a clock radio, a

golf ball, a

refrigeratoranything that we can see or touch. It may take place in a factory, but can occur elsewhere.
Service, on the other hand, generally implies an act. A physicians examination, TV and auto repair, lawn
care, and projecting a film in a theatre are examples of services.
2. By its nature, service involves a much higher degree of customer contact than manufacturing. The
performance of a service often occurs at the point of consumption. For example, repairing a leaky roof
must take place where the roof is, and surgery requires the presence of the patient. On the other hand,
manufacturing allows a separation between production and consumption, so that manufacturing may
occur away from the consumer. This permits a fair degree of latitude in selecting work methods, assigning
jobs, scheduling work, and exercising control over operations.
3. Service operations are subject to greater variability of inputs than typical manufacturing operations.
Each patient, each lawn, and each auto repair presents a specific problem that often must be diagnosed
before it can be remedied. Manufacturing operations often have the ability to carefully control the amount
of variability of inputs.
4. Quality assurance is more challenging in services when production and consumption occur at the same
time. In manufacturing, errors can be corrected before the customer receives the output.
5. Services often require a higher labour content whereas manufacturing can be more capital-intensive
(i.e., mechanized)
6. Measurement of productivity (i.e., output per unit time) is more straightforward in manufacturing due
to the high degree of uniformity of most manufactured items. In service operations, variations in demand
intensity and in requirements from job to job make productivity measurement considerably more difficult.
Major similarities between production and services are

1. Most service organizations typically sell goods that complement their services. For example, a lawncare firm usually sells goods such as weed killers, fertilizers, and grass seed.
2. Both face issues of cost control. Manufacturing operations must find suppliers of raw materials at the
lowest cost and highest quality possible. Likewise, service operations' indirect cost of providing services
must be kept low so that the organization can provide competitive prices to customers and still turn a
profit.
3. Both face the issue of forecasting demand for products and services and staying competitive in the
marketplace.
4. Both production and service operations are links of a specific supply chain.
5. Like products are designed in manufacturing organizations services are also designed as blue prints of
service designs.
2. Describe each of these systems; craft production, mass production and lean production
Craft Production
In craft production goods are produced by highly skilled craftsmen using simple, flexible tools produced
goods according to customer specifications in small shops. Under this system, it is common for one
person to be responsible for making a product, such as a horse-drawn wagon or a piece of furniture, from
start to finish. Since the products are made by skilled craftsmen with custom-fitted parts in craft
production, production is slow and costly. And when parts fail, the replacements also need to be custom
made, which is also slow and costly. Another shortcoming in craft production is that production costs will
not decrease as volume increases; there are no economies of scale. In craft production each small
company will have its own set of standards.
Mass production
Mass production is a system of production in which large volumes of standardized goods are produced by
low-skilled or semiskilled workers using specialized equipment. The key concept of mass production is
based on inter-changeable parts and division labour.

Lean production
Lean production systems use much less of certain resources than mass production systems use less space,
less inventory, and fewer workers to produce a comparable amount of output. Lean production systems
use a highly skilled workforce and flexible equipment. In effect, they incorporate advantages of both mass
production (high volume, low unit cost) and craft production (variety and flexibility). And quality is
higher than in mass production. Lean production is a broad approach to just-in-time

3. Read the emirates Air lines annual report 2013 2014 and identify the challenges in Air line operations
management.

4. Why do people do things that are unethical?

There are three basic theories that explain what motivates managers to misconduct / behave unethically;
a). The personality trait theory,
b). Agency theory, and
c). Psychological contracts theory

According to trait theory, individual behavior is the result of inherited or acquired traits. Trait theorists
subscribe to the premise that certain traits will be disposed to react to a given situation in a certain way.

Agency theory has been developed from economic assumptions of self-interest behavior and utility
maximization with consideration of the situations that influence employees behavior. Agency theory
suggests that the employer as the principal wants to obtain maximum performance from the employee
as the agent. Therefore, agency theory assumes that agents will behave opportunistically if given the
chance. For example, employees will always shirk or misrepresent their capabilities if they can get away
with doing so.

Psychological contract theory is the idiosyncratic set of reciprocal expectations held by employees
concerning their obligations and their entitlements. For example, the employee will work for an employer
with the expectation that they will receive something in return. Unlike agency theory, psychological
contract theory considers trust in the organization by assuming that employees are honest and ethical.
Misconduct occurs in an organization when the psychological contract is violated with perceptions of
injustice or unfair treatment in the workplace. In other words, honest and ethical employees may commit
acts of misconduct when they feel that they work in an unjust environment and that their trust has been
violated.

Other considerable reasons are;

In some cases where assets are of low cost or little commercial value, the manager may feel that it is
alright to take some assets for personal use. The manager may justify the wrongdoing by reasoning that
such misconduct is small scale dishonesty that does no harm to the company as a whole.

At managerial position, the employee feels some degree of pressure to meet job expectations, such as
meeting sales targets, performing correct budget expenditures, conducting activities on time. These
pressures may lead to unethical conduct by an employee, whereby he/she has chosen to commit an act of
misconduct in order to fulfill the job requirement.

Facility Location and Layout

Assignment 2
Section A - Objective questions True/ False

1. Location decisions are basically one-time decisions usually made by new organizations

2. The first step in developing location alternatives is identifying important factors.

The first step is deciding on the criteria for evaluating the alternatives.
3. For service organizations, the dominant factors in location analysis usually are market-related

4. Retail businesses generally prefer locations that are not near other retailers, as this reduces

their competition.
Retailers prefer to locate near customers, which means they often locate near one another
5. The center of gravity method is a location planning technique that determines a composite

score from weighted factor evaluation.

Factor scoring determines a composite score from weighted factor evaluation.
6. The center of gravity method is useful in location planning for the location of a distribution

center.
7. Nearness to raw materials would be most important to a

a. grocery store
b. tax preparation service
c. manufacturing company
d. post office
e. hospital
8. Which statement best characterizes a typical search for location alternatives?

a. identify the best location choice

b. minimize cost consequences
c. maximize associated profits
d. locate near markets
e. identify acceptable locations
9. Which of the following is the last step in the procedure for making location decisions?
a. determine the evaluation criteria
b. identify important factors
c. develop location alternatives

d. evaluate alternatives and make a selection

e. request input regarding alternatives
10. The center of gravity method is used to Minimize travel time, distance and costs

a. Normalize.
b. Eliminate
c. Average
d. Minimize
e. Document

Section B
1. The administration at State University wants to construct a new student athletic, shopping, and dining
complex on campus. The university planning office is considering possible sites around the campus.
They have studied a number of factors related to the location of the complex and they have scored the
most important ones for each site as follows

Score (0 to 100)
Location

Weight

Site 1

Site 2

Site 3

Site 4

1. Auto traffic flow

0.25

70

75

84

68

2. Student/dorm concentration

0.20

65

91

85

96

3. Parking availability

0.15

100

83

90

92

4. Utilities

0.15

87

96

80

85

5. Proximity to local merchants

0.10

69

85

80

95

6. Drainage

0.10

50

68

92

77

7. Aesthetic considerations

0.05

86

100

95

80

Determine the best site using the factor rating method.

Score (0 to 100)

Score (0 to 100)

Score (0 to 100)

Score (0 to 100)

Location

Weight

Site 1

WS

Site 2

WS

Site 3

WS

Site 4

WS

1. Auto traffic flow

0.25

70.00

17.50

75.00

18.75

84.00

21.00

68.00

17.00

2. Student/dorm concentration

0.20

65.00

13.00

91.00

18.20

85.00

17.00

96.00

19.20

3. Parking availability

0.15

100.00

15.00

83.00

12.45

90.00

13.50

92.00

13.80

4. Utilities

0.15

87.00

13.05

96.00

14.40

80.00

12.00

85.00

12.75

5. Proximity to local

0.10

69.00

6.90

85.00

8.50

80.00

8.00

95.00

9.50

6. Drainage

0.10

50.00

5.00

68.00

6.80

92.00

9.20

77.00

7.70

7. Aesthetic considerations

0.05

86.00

4.30

100.00

5.00

95.00

4.75

80.00

4.00

merchants

74.75

84.10

85.45

83.95

WS = Weighted Score

Select Site 3
2. Masafi Water wants to build a new distribution center in Al Quoz area. The center needs to be in the
vicinity of uncongested Al Barsha area and Al Qussais. The coordinates of these three sites and number of
20liter water bottles delivery per day are as follows

Using the center-of-gravity method to determine the possible locations for the central warehouse

xiWi

i=1

X=

(14 X 17,000) + ( 20 X 12,000 ) + ( 30 X 9,000)

=

17,000 + 12,000 + 9,000

i=1

Wi
=

748,000
38,000

= 19.68

yiWi
i=1

y=

(30 X 17,000) + ( 8 X 12,000 ) + ( 14 X 9,000)

=

17,000 + 12,000 + 9,000

i=1

Wi
732,000
38,000

(30,14)

30
(20,8)

20
KM

= 19.26

+ (19,19) Center of gravity

15

(14,30)

10
5

10

15

20
KM

25

30

3. What are the objectives of the facility layout ?

The basic objective of a facility layout is to facilitate a smooth flow of work and to create an ideal
relationship between raw material, equipment, manpower and final product movement at minimal cost
under safe environment. An efficient and effective facility layout can cover following objectives:
To avoid bottlenecks
To minimize material handling cost
To eliminate unnecessary movements of workers and material
To promote safety of plant as well as its workers
To facilitate extension or change in the layout to accommodate new product line or technology upgradation
To increase production capacity of the organization
To minimize production time or customer service time

ii).Distinguish between a process and product layout and give an example of each
The layout features departments or other functional groupings in which similar kinds of activities are
performed. A manufacturing example of a process layout is the machine shop, which has separate
departments for milling, grinding, drilling and so on. Items that require those operations are frequently
moved in lots or batches to the department. Process layouts are quite common in service environments.
For example, hospitals, banks, auto repair shop, airlines, public library etc. such as hospitals have
departments that specially handle, surgery, maternity, psychiatry, etc. In process layout the equipment is
arranged by type of process rather than by processing sequence. This is also known as functional layout
because the layout is designed to perform a set of functions on variety of jobs. Material handling is
inefficient and unit handling costs are generally higher than in product layout.

Product layouts are used to achieve a smooth and rapid flow of large volumes of goods or customers
through a system. The work is divided into a series of standardized tasks, permitting specialization of
equipment and division of labor. For example if a portion of a manufacturing operation requires the
sequence of cutting, sanding, and painting, the appropriate pieces of equipment would be arranged in the
same sequence in a line. This line is referred as production line or assembly line. Because items move
quickly from operation to operation, the amount of work-in-progress is often minimal.

iii).What are the advantages and disadvantages of cellular layout?

Advantages of cellular layout

Higher machine utilization

Smoother flow lines and shorter travel distances are expected than for process layout

Offers benefits of both product and process type of layout because it is a compromise between the
two

Encourages consideration of general purpose equipment

Disadvantages of Cellular layout

Greater labor skills are required

Flow balance is required in each cell

Has some of the disadvantages of product and process type of layout; it is a compromise between the
two

iv). Mark the following statements as true or false

a). Pineapple processing and canning plant needs process layout (T)

b). In a factory material is being moved by forklift from one station to the other to finish a product. That
is product layout (F)
c). Ship building requires both product and process layouts (F)
d). The process of equalizing the amount of workload at each work station is called line balancing (T)
e). The objective of the process layout is to minimize the nonadjacent loads.(T)

4. Use the load summary chart below to arrange departments 1 through 9 on a 3 x 3 grid so that nonadjacent loads are minimized.

Dept.

--

50

100

25

60

40

--

80

10

65

--

55

10

45

--

75

15

60

--

25

25

150

40

40
50

--

10

--

65

--

140

175

--

65

145
90

160

90

110

75

5
75

35
100

100

60

100

65

50

240

75

115

Departments to and from

Load

1-1

1-2

50+40

90

1-3

100+10

110

1-4

25+10

35

1-5

60+15

75

1-6

0+0

1-7

0+0

1-8

65+10

75

2-3

80+65

145

2-4

2-5

2-6

150+25

175

2-7

40+25

65

2-8

2-9

3-4

55+45

100

3-5

3-6

40+50

90

3-7

3-8

4-5

75+0

75

4-6

4-7

4-8

50+65

115

4-9

100+140

240

5-6

5-7

60+100

160

5-8

5-9

5. Draw and label a precedence diagram from the following assembly information
Work Element

Predecessor

Time (min)

c, e, f

Set up an assembly line that will be capable of producing 120 units in a 10 hour day. Calculate the
theoretical minimum number of work stations and the efficiency of the line

Cd = Desired cycle time

Cd =

Production time available

Desired units of out put
10 hours x 60 minutes /hr
120 units

Flow time = 4+2+1+1+5+3+4 = 20 mints

No of stations = 20/5 = 4

600
120

= 5 minutes

Station

Time

Eligible Will fit

Remaining
1
2

3
4

5
1
5
3
2
5
5
2

a
b,c
b
d,e
e,f
e,f
f
g

A
b, c
B
D
E
F
-

Assign
Task
Time
a(4)
c(1)
b(2)
d(1)
e(0.3)
e(5)
f(3)

Revised

Idle

Time

Time

Remaining
1
0
3
2
2
0
2

2
-

Idle time =

Since the time required to complete the last activity is more than the remaining time, we cant produce
120 in 10 hours. Therefore plan for less number of units in the given time. We can try for 100 units in 10
hours
Cd =

Production time available

Desired units of out put
10 hours x 60 minutes /hr
100 units

600
100

= 6 minutes

Cd = Desired cycle time

Flow time = 20 mins. Nmin = 20/6 = 3.33 = 4 mints.

Station

1
2
3
4

Time
Eligible
Remaining
6
2
6
5
6
3
6

a
b,c
c,d,e
c,e,f
c,f
c
g

Will fit

Assign
Task Time

a
b, c
c,d,e
e
f
c
g
-

a(4)
b(2)
d(1)
e(5)
f(3)
c(1)
g(4)

Revised
Time
Remaining
2
0
5
0
3
2
2

Idle
Time

Idle time =

Percentage idle time = 4/4x6 = 0.166 =16.67% ; Efficiency = 100 16.67 =83.33%

2
2

6. Using the information in the following grid, determine if the department locations shown are
appropriate. If not modify the assignments so that the conditions are satisfied

Rel
A
E
I
O
U
X

Dept
1
3,8
6

Dept
2
7
6,8

Dept.
3
5,6,8

Dept. 4
5,8

3,5

2,7

Dept.
6
8

Dept. 7
7
8

7
5

Dept.
5
7,8

Dept.
8

A link
1-3
1-8
2-7
3-5
3-6
3-8
4-5
4-8
5-7
5-8
6-8

X Links
1-2
1-7
2-4

Q.No.7. Given the following load summary chart, design a layout on a 2 x 3 grid that will minimize
nonadjacent loads

Load Summary Chart

From / To

50

25

20

100

30

10

75

40

60

Q.No.8
The noodle fast food restaurant chain uses a distribution center to prepare the food ingredients it
provides its individual restaurants. The company is attempting to determine the location for new
distribution center that will service five restaurants. The grid map coordinates of the five restaurants
and the number of trucks loads transported annually to reach each restaurant is as follows

Restaurant

Coordinate X

Coordinate Y

Truck loads

120

300

25

210

190

24

24

380

35

280

170

40

400

200

38

Determine the least cost location using the center of gravity

y
120
210
24
280
400

w
300
190
380
170
200

25
24
35
40
38
162

3000
5040
840
11200
15200
35280

x
y

7500
4560
13300
6800
7600
39760

217.7778
245.4321

Product and Service design

Assignment 4
Section A - Objective questions True/ False
1. A House of Quality' is achieved when no department in a single location has more than 15%

rejects - The house of quality is a means of integrating the voice of the customer into the product
or service development process.
2. One of the main advantages of standardization is that it increases the potential variety of

products. - Standardization reduces the variety of products

3. A disadvantage of standardization is the possibility of standardizing designs too early, which

may make it difficult to modify in the future

4. Robust design describes a product that will perform satisfactorily so long as it is used in a

very narrow range of conditions. - Robust designs perform satisfactorily across a wide range of
conditions.
5. Modular design increases costs of purchasing and controlling inventory compared to non-

modular. Modular designs make inventory management easier and cheaper.

6. Reliability refers to the ability of a product to perform its intended function under normal

conditions. 7. A service blueprint is quite similar to an architectural drawing - A service blueprint shows the

basic customer and service actions involved in a service operation.

8. "Concurrent engineering" means that at least two engineers are involved in product design at

the same time. - Concurrent engineering means that engineers, marketing, manufacturing and
purchasing personnel often are jointly involved in the product design.
9. Product liability means that a manufacturer is liable for any injuries and damages caused by a

faulty product because of poor workmanship or design.

10. Re-manufacturing refers to removing some of the components of old products and reusing
them in new products.

Section B
1. Mention the factors that cause organizations to redesign their products or services?
The main reasons that initiate design or redesign are market opportunities and threats. The factors that
give rise to market opportunity and threat can be on or more changes ;
a). Political, liability or legal (e.g., government changes, safety issues, new regulations)
b). Economic (e.g., low demand, excessive warranty claims, the need to reduce costs)
c). Social and demographic (e.g., aging population, population shift)
d). Technological (e.g., processes, in product components, rate of change of technology )
e). Cost or availability (e.g., of raw materials, components, labor, water energy)

2. Explain briefly about the following terms and techniques

a).Feasibility
Feasibility is a review criterion of operational plan. The determination as to whether the assigned tasks
could be accomplished by using available resources. Feasibility analysis entails market analysis
(demand), economic analysis (development cost and production cost, profit potential), and technical
analysis (capacity requirement, availability and skills needed). It also answers the question, does it fit with
the mission?

b).Reliability
Reliability is the probability that a given part or product will perform its intended function for a specified
length of time under normal conditions of use. Maintainability refers to the ease and/or cost with which a
product is maintained or repaired. Maintainability and reliability are closely related. For example, if a
product is cheap to manufacture and priced so low that customers throw it away when it fails (such as
calculators, telephones, and watches), maintainability may be a moot issue. Similarly, if a product is so
reliable that it rarely breaks down, then ease of repair many not be important. On the other hand, it may
be less costly to make a product easy to maintain than to increase its reliability. And for some products,
both reliability and maintainability are very important (e.g., office machines, computers).

c). Value Analysis

Value analysis refers to an examination of the function of parts and material in an effort to reduce the cost
or improve the performance of a product. Typical questions that would be asked as part of the analysis
include; could a cheaper part or material be used? Is the function necessary? Can the function of two or
more parts or components be performed by a single part or lower cost? Can a part be simplifies? Could
standard parts be substituted for nonstandard parts?

d). Failure Mode and Effect Analysis (FMEA)

Failure Mode and Effects Analysis (FMEA) is a systematic approach to analyzing the causes and effects
of product failures. It begins with listing the functions of the product and each of its parts. Failure modes
are then defined and ranked in order of their seriousness and likelihood of failure. Each failure is
addressed one by one, causes are hypothesized, and design changes are made to reduce the chance of
failure. The objective of FMEA is to anticipate failures and design them out of the system.

e). Fault Tree Analysis

Fault tree analysis (FTA) is similar to FMEA except that it emphasizes the interrelationship between
failures, and presents the analysis more graphically. Value analysis (also known as value engineering)
was developed by General Electric in 1947 to eliminate unnecessary features and functions in product
designs. It has re-emerged as an excellent technique for use by multifunctional design teams.

f). System Availability

Availability of a system is the percentage of time the system is operational. Availability of a system is
obtained as

System Availability is calculated by modeling the system as an interconnection of parts in series and
parallel. The following rules are used to decide if components should be placed in series or parallel:
a). If failure of a part leads to the combination becoming inoperable, the two parts are considered to be
operating in series
b).If failure of a part leads to the other part taking over the operations of the failed part, the two parts are
considered to be operating in parallel.
Availability in Series
The combined availability is shown by the equation below:
A=PxQ
The implications of the above equation are that the combined availability of two components in series is
always lower than the availability of its individual components. Consider the system in the figure above.
Part P and Q are connected in series.

Availability in Parallel,
In this system, two parts are considered to be operating in parallel if the combination is considered failed
when both parts fail. The combined system is operational if either is available. From this it follows that
the combined availability is 1 - (both parts are unavailable). The combined availability is shown by the
equation below:
A = 1-(1-P )2

g). MTBF, MTTR, MTTF

Mean time between failures (MTBF) is the predicted elapsed time between inherent failures of a system
during operation MTBF can be calculated as the arithmetic mean (average) time between failures of a
system.
Mean Time to Repair (MTTR) is a basic measure of the maintainability of repairable items. It represents
the average time required to repair a failed component or device. Expressed mathematically, it is the total
corrective maintenance time divided by the total number of corrective maintenance actions during a given
period of time.
MTTF: Mean time to failure describes the expected time to failure for a non-repairable system.

3. What is mass customization?

Mass customization is a strategy of producing standardized goods or services. Standardization enables
companies to produce high volumes of relatively low-cost products, albeit products with little variety.
Customers on the other hand, typically prefer more variety. Mass customization addresses this issue by
incorporating some degree of customization in the final product or service. Most common tactics of mass
customization are; a). Delayed differentiation and b). Modular design.

Delayed differentiation is a postponement tactic, in this approach goods, almost finished form are held in
inventory

until customer orders are received, at which time customized features are incorporated

according to customer request.

Modular design is a form of standardization. Modules represent groupings of component parts into
subassemblies, usually to the point where the individual parts lose their separate identity. Modular design
enables producers to quickly assemble products with modules to achieve a customized configuration for
an individual customer, avoid the long customer wait that would occur if individual parts had to be
assembled. One familiar example is computers, which have modular parts that can be replaced if they
become defective.

4. Explain what Quality Function Deployment (QFD) is and how can it be useful?
Quality Function Deployment (QFD) is a structured process that translates the voice of the customer to
technical requirements at every stage of design and manufacture. QFD forces management to spend more
time defining the new product changes and examining the ramifications of those changes. More time
spent in the early stages of design means less time is required later to revise the design and make it work.

5. How three Rs (Reduce, Reuse and Recycle) are related to sustainability?

Product and service design is a focal point in the quest for sustainability. Key aspects include cradle to
grave assessment, end of life programs, reduction of cost and material used, reuse of parts of returned
products and recycling.

Reduce approach examines the functions of parts and material in an effort to reduce the cost and improve
the performance of product. Typical questions that would be asked as part of the analysis include; could a
cheaper part or material be used? Is the function necessary? Can the function of two or more parts or
components be performed by a single part or lower cost? Can a part be simplifies? Could standard parts
be substituted for nonstandard parts?

Reuse approach attempts to refurbishing of used products by replacing worn-out or defective components,
and reselling the products. Reusing the parts helps reducing the landfills and depletion of natural
resources such as raw material and fuel.

Recycling means recovering materials for future use. This applies not only to manufacturing but also to
material used during production, such as lubricants and solvents. Reclaimed metal or plastic parts may be
melted down and used to make different products.

Inventory Management
Assignment 5
Section A - Objective questions True/ False

1. A retail store that carries twice the inventory as its competitor will provide twice the customer

service level.
There is a limit to how high service level can go; if the competitor's service level is 90%, the
retailer can't double that.
2. To provide satisfactory levels of customer service while keeping inventory costs within

reasonable bounds, two fundamental decisions must be made about inventory: the timing and
size of orders.
3. The A-B-C approach involves classifying inventory items by unit cost, with expensive items

classified as A' items and low cost items classified as C' items.
A-B-C approach classifies inventory according to some measure of importance.
4. EOQ inventory models are basically concerned with the timing of orders.

EOQ models are concerned with the size of orders.

5. In the quantity discount model, if holding costs are given as a percentage of unit price, a

graph of the total cost curves will have the same EOQ for each curve.
Total cost curves will differ across the price levels.
6. In EOQ model the ordering cost and carrying costs are same at the economical point

7. The two basic issues in inventory are how much to order and when to order.

8. Which of the following is not one of the assumptions of the basic EOQ model?

a. Annual demand requirements are known and constant.

b. Lead time does not vary.
c. Each order is received in a single delivery.
d. Quantity discounts are available.
e. All of the above are necessary assumptions.
9. In a supermarket, a vendor's restocking the shelves every Monday morning is an example of:
a. safety stock replenishment
b. economic order quantities
c. reorder points
d. fixed order interval
e. blanket ordering

10. Dairy items, fresh fruit and newspapers are items that:

a. do not require safety stocks

b. cannot be ordered in large quantities
c. are subject to deterioration and spoilage
d. require that prices be lowered every two days
e. have minimal holding costs

Section B
Q.1
a).What are the primary reasons for holding inventory
Inventories serve a number of functions. Among the most important are the following
a). To meet anticipated customer demand
b). To smooth production requirement
c). To decouple operations
d). To protect against stock outs
e). To take advantage of order cycle
f). To hedge against price increase
h). To permit operations
i). To take advantage of quantity discounts
b). briefly describe each cost associated with inventory
Four basic costs are associated with inventories: purchase, holding, transaction (ordering) and shortage
costs.
Purchase cost: Purchase cost is the amount paid to a vendor or supplier to buy the inventory, it is
typically the largest of all the inventory costs.

Holding or carrying costs: Holding or carrying costs relate to physically having items in storage. Costs
include interest, insurance, taxes, depreciation, obsolescence, deterioration, spoilage, pilferage, breakage,
tracking, picking and warehousing cost (rent, security, lighting, heating or cooling etc). They also include
opportunity costs associated with having funds that could be used elsewhere tied up in inventory. This is
the variable portion of these costs that is pertinent.

Ordering costs: Ordering costs are the costs of ordering and receiving inventory. They are the costs that
vary with the actual placement of an order. Besides shipping costs, they include determining how much is
needed, preparing invoices, inspecting goods upon arrival for quality and quantity and moving the goods

to temporary storage. Ordering costs are generally expressed as a fixed dollar amount per order,
regardless of order size. When firms produce its own inventory instead of ordering it from a supplier,
machine set-up costs (e.g. preparing equipment for the job by adjusting the machine, changing cutting
tools) are analogous to ordering costs, that is they are expressed as fixed charges per production run,
regardless of the size of the run.

Shortage costs: Shortage costs result when demand exceeds the supply of inventory on hand. These costs
can include the opportunity cost of not making a sale, loss of customer goodwill, late charges, back order
costs and similar costs. The cost of lost production or downtime is considered as shortage cost. Shortage
costs are sometimes difficult to measure, and they may be subjectively estimated.

c). List the major assumptions of EOQ model

1. The firm knows with certainty how much items of particular inventories will be used or demanded for
within a specific period of time.
2. The use of inventories or sales made by the firm remains constant or unchanged throughout the period.
3. The moment inventories reach to the zero level, the order of the replenishment of inventory is placed
without delay.
4. A cycle begins with receipt of an order quantity Q units, which are withdrawn at a constant rate over
time.
5. Both the usage rate and lead-time do not vary

2. Al Jareer Stationary Company purchases upholstery from Al Khaleej Textiles. The company uses
45,000 yards of material per year to make sofa. The cost per order for the company is AED 1,500, the cost
of holding 1 yard of material in inventory is AED 0.70 per year. Determine the optimal number of yards
of material sofa world should order, the minimum total inventory cost, the optimal number of orders per
year and the optimal time between orders

D 45,000

Co $1,500
Cc $0.70

2 1500 45, 000

2Co D

Cc
0.70

13,887.3 yd

TC

Co D CcQ

Q
2

0.70 13,887.3 1500 45, 000

2

13,887.3

$9,721.11

Number of orders

D 45, 000

3.24 per year

Q 13,887.3

Time between orders

365
112.6 days
3.24

3. Caesers bakery makes cupcakes. The bakery operates five days a Week, 52 weeks a year, can produce
at the rate of 116 cakes per day. The set up cost for production run of one lot of cakes is AED 700. The
cost of holding cakes in storage is AED 9 per cake per year. The annual demand for cupcakes is 6,000
cakes. Determine the following;
a). Optimal production run quantity Q
b). Total annual inventory cost
c). Optimal number of production runs per year
d). Optimal cycle time (time between run starts)
e). Run length in working days

D 6,000
d 23.08 / day
p 116 / day

Co $700
Cc $9

a). Optimal production run quantity Q

a.

2 700 6, 000
2Co D

d
23.08
5 1
Cc 1

116
p

1,079.41
b). Total annual inventory cost
b.

TC

Co D CcQ d

1
Q
2
p

700 6, 000 9 1, 079.4

1079.4

$7,782.84
c). Optimal number of production runs per year
c.

D
6, 000

5.96 runs = 5.56 run

Q 1079.41

d). Optimal cycle time (time between run starts)

d.

260
46.67 working days
5.96

e). Run length in working days

23.08
1

116

e.

Q 1079.41

9.31 working days

p
116

4. Zulekha hospital orders syringes from a hospital supply firm. The hospital expects to use 38,000
syringes per year. The order cost to deliver the syringes is AED 790. The annual carrying cost is AED
1.85 per syringe because of security and theft. The supplying company offers the following quantity
discount pricing schedule. Determine the order size for the hospital

Quantity
0 9,999
10,000 -19,999
20,000 - 29,999
30,000 - 39,999
40,000 49,999
50,000 +

Price
$3.40
$3.20
$3.00
$2.80
$2.60
$ 2.40

Economic Order Quantity =

2 Co D

2 (790 x 38,000)

QO =

=
Cc

1.85

5,697

Total ordering cost for economic order quantity = Tc

TC

CO D
Q

790 x 38,000
=

5,697

5,269.45

AED 139,739.17

CC QO
+ PD
2
1.85 x 5,697
2
5,269.72

+ 3.40 x 38,000

+ 129,200

(Total cost for Economic order quantity)

Total cost for order quantity 10,000 +

790 x 38,000
10,000
3,002
AED

1.85 x 10,000
2
9,250

+ 3.20 x 38,000

+ 121,600

133,852

Total cost for order quantity 30,000 +

790 x 38,000
30,000
1,000.66

1.85 x 30,000
2
27,750

+ 2.80 x 38,000

+ 106,400

AED 134,650.6

Order 10,000 syringes per order to take advantage of cost discount

Capacity planning
Assignment 6
Section A - Objective questions True/ False
1. The term capacity refers to the maximum quantity an operating unit can process over a given

period of time.
2. Capacity decisions are usually one-time decisions; once they have been made, we know the

limits of our operations. A number of factors can either increase or reduce a unit's capacity over
time.
3. Stating capacity in dollar amounts generally results in a consistent measure of capacity
regardless of the actual units of measure. The dollar value of a unit's output can change even
though that unit's capacity hasn't..
4. If the unit cost to buy something is less than the variable cost to make it, the decision to make
or buy is based solely on the fixed costs. Cost is not the only consideration that enters into the
"make or buy" decision.
5. Increasing productivity and also quality will result in increased capacity.

Effective capacity can be increased over time by these and similar factors.
6. Utilization is defined as the ratio of effective capacity to design capacity

Utilization is the ratio of output to design capacity.

7. Outsourcing some production is a means of _________ a capacity constraint.

Outsourcing some production reduces the burden placed on the constraint

a. Identifying
b. Modifying
c. Supporting
d. Overcoming
e. Repeating
8. A basic question in capacity planning is:
Type, quantity and timing are the essential elements of the capacity decision.
a. what kind is needed

b. how much is needed

c. when is it needed
d. all of the above
e. none of the above
9. Which of the following is the case where capacity is measured in terms of inputs?
Hospitals, theaters and restaurants measure capacity in terms of customers, which are inputs to
service processes.

a. hospital
b. theater
c. restaurant
d. all of the above
e. none of the above
10. Utilization is defined as the ratio of: Utilization measures the usage of design capacity.
a. actual output to effective capacity
b. actual output to design capacity
c. design capacity to effective capacity
d. effective capacity to actual output
e. design capacity to actual output

Section B
1 Given the following information, what would efficiency be?
Effective capacity = 80 units per day
Design capacity = 100 units per day
Utilization = 48%
A. 20%
B. 35%
C. 48%
D. 60%
E. 80%

If utilization is 48%, then actual output must have been 48 units.

Efficiencey =

Actual out put

Effective capacity

48
80

= 0.60 = 60%

2. Discuss various strategies of adjusting the capacity of an organization?

Some of the common strategies for adjusting the capacity of manufacturing organizations are;
a). Maintain a level workforce (Level strategy)
b). Maintain a steady output rate (Chase demand strategy)

c). Match demand period by period

d). Use a combination of decision variables

Under level capacity strategy, variations in demand are met by using some combination of inventories,
overtime workers, subcontracting, and back orders while maintaining a steady rate of out-put. Matching
demand implies a chase demand strategy. In chase demand strategy the planned output for any period
would be equal to expected demand for the period. To maintain a constant level of output and still satisfy
varying demand, an organization resorts to some combination of subcontracting, backlogging, and use of
inventories to absorb fluctuations.

Though level workforce is appealing, workforce changes through hiring and firing can have a major
impact on the lives and morale of employees and can be disruptive for managers. Moreover changes in
workforce size can be very costly, and there is always the risk that there will not be a sufficient pool of
workers with the appropriate skills when needed. To maintain a constant level of output organizations can
adopt a combination of subcontracting, backlogging, and use of inventories to absorb fluctuations.
Subcontracting requires an investment in evaluating sources of supply as well as possible increased costs,
less control over output, and quality considerations. Backorders can lead to lost sales, increased record
keeping and lower levels of customer service. Allowing inventories to absorb fluctuations can entail
substantial costs by having money tied up in inventories, having to maintain large storage facilities, and
incurring other cots related inventories.

Choosing a right strategy depends on; company policy, flexibility and costs.

3. In what ways the aggregate planning of the Service industry is different from manufacturing?
The major differences between aggregate planning of service industry and manufacturing industry are;
a). Demand for service can be difficult to predict.
The volume of demand for services is often quite variable. In some situations, customers may need
prompt service (e.g. police, fire, medical emergency) while in others, they may simply want prompt
Service and may be willing to go elsewhere if their wants are not met. Consequently, service providers
must pay careful attention to planned capacity levels.

b). Capacity availability can be difficult to predict.

Process requirements for services can sometimes be quite variable, for example what would be the
capacity of a bank teller? Bank tellers called upon to handle a wide variety of transactions and requests
for information, making it difficult to establish a suitable measure of their capacity.
c). Labor flexibility can be an advantage in services
Labor often comprises a significant portion of services compared to manufacturing. In case of both the
manufacturing and service industry, use of part-time workers can be an important option. In self-service
systems, the (customer) labor automatically adjusted to changes in demand.

d).Services occur when they are rendered

Unlike manufacturing output, most services cant be inventoried. Services such as finance planning, tax
consulting and oil changes cant be stockpiled. This removes the option of building up inventories during
a slow period in anticipation of future demand. Moreover services capacity that goes unused is essential
waste. Because service capacity is perishable ( e.g. an empty seat on an airplane flight cant be saved for
use on another flight), aggregate planners need to take that into account when deciding how much to
match supply and demand.

4. Given the following cost and quarterly sales forecasts, determine whether
(a) Level Production or (b) Chase demand would be more economical to meet the demand for sports shoe

QUARTER
Spring
Summer
Fall
Winter

SALES FORECAST (Nos.)

60,000
30,000
100,000
120,000

Hiring cost
= $100 per worker
Firing cost
= $500 per worker
Inventory carrying cost = $0.50 per pair per quarter
Regular production cost per pair
= $2.00
Production per employee = 1,000 Pcs per quarter
Beginning work force = 100 workers

Level production = 60,000 + 30,000 + 100,000 + 120,000 / 4 = 77,500

Inventory carrying cost = 0.50 $
Regular production cost = 2.00 $

Hiring cost = 100 per worker

Firing cost = 500 per worker

Quarter

Sales forecast

Production plan

Inventory

Spring

60,000

77,500

17,500

Summer

30,000

77,500

65,000

Fall

100,000

77,500

42,500

Winter

120,000

77,500

310,000

125,000

Cost of level production strategy is

(310,000 x 2.00) + (125,000 x 0,50) =

$ 682,500

Out-put worker 1000 units

Beginning workforce = 100
Quarter

Sales forecast

Production plan Workers needed

Workers hired Workers fired

Spring

60,000

60,000

60.000/1000 = 60

40

Summer

30,000

30,000

30,000/1000 = 30

30

Fall

100,000

100,000

100,000/1000 = 100

70

Winter

120,000

120,000

120,000/1000 = 120

50

Cost of chase demand strategy is

(310,000 x 2.00) + (120 x100) + (70 x 500) = 620,000 + 12,000 + 35,000 = 667,000

5. Blue Star Hotel, over books two rooms a night. Room rents run $ 100 a night and costs $30 to maintain
it. Bumped customers are sent to a nearby hotel for $80 a night. What is the cost of overbooking? What is
the cost of under booking ? Given the following distribution of non -show should Blue star continue its
policy?

No-Shows
0
1
2
3
4

Probability
0.30
0.20
0.10
0.30
0.10

Cu = 100-30 = 70 ( cost of underestimating demand)

Co = 80
( cost of over estimating demand)

P(n < x)

P N X 70 / 70 80 0.467

Hotel should over book only one extra room instead of two.