PRODUCTIONS AND OPERATIONS MANAGEMENT

OPERATIONS AND SUPPLY MANAGEMENT

The set of processes that are needed to transform INPUT to OUTPUT that meet the customers
needs.
We could use this function to describe the model:
Q=Q(X,A)

OPERATIONS
The processes, activities that contribute to transform INPUT into valuable OUTPUT.
For the Hotel (booking management, organization of cleaning and sanitation of rooms)

SUPPLY
The movement of input to the firms and the movement of output from the firms to the market.
For the Hotel (organization of product supply and sanitation services, organization and
implementation of customers pick-up services from airports, management of check-in and check-
out services).

The study of a firm’s operations can uncover ways to reduce costs, because operations and supply
management are considerable sources of competitive advantages.
For instance, low cost airline companies are able to reduce the turnaround time (Ryanair takes as
little as 25 minutes for the whole process for a short-haul flight; they managed to reduce
drammatically the time revoving the seatback pockets from their aircraft).

EFFICIENCY
To do something at the lowest possible cost.

EFFECTIVENESS
To do something for generating the maximum value for a company.

There’s a TRADE-OFF between efficency and effectiveness: increasing one suppose reducing the
other.

VALUE= Quality/Price
It rises when:
-a company enhances its quality without modifying its price.
-a company keeps constant its quality but reduces its price.
-a company is able to increase both of them, so that the increment in the former is higher.

SUPPLY CHAIN TRANSFORMATION PROCESS

The ways by which inputs are transformed into valuable outputs.
Include physical (as in manifacturing), location (as in transportation), exchange (as in retailing),
storage (as in warehouse).
Operations and supply management deals with the design and development of the range of
trasformation processes occurring through a firm’s supply chain.

Sourcing processes → logistic → Manifacturing and Service processes → logistic→ Distribution

processes
GOODS AND SERVICES
Goods have physical dimension, are generally produced in facilities, can be produced with a
very low degrees of variations in their characteristics, can be stored and can be designed to
meet specific needs.

Conversely, services are intangible, require an interaction with the customer, are
heterogeneous, perishable and evaluated as a package of features.

More and more, products delivered by firms are combination of goods and services.
Profits marging in pure manifacturing industries has decreased by an intense competition.
Differentation leads companies to combine goods and services in attempt to rise profits.

Topic 2 - COMPANY MISSION AND STRATEGY

Mission statement: defines the aim to be pursued by a company. It should identify who are the
company’s stakeholders, define how the company’s activities create value for them, and contain a
statement of the company’s core purpose.

Stakeholders: agents interested in the company’s activities because they can be affected by
them.

Firm’s strategy: makes up a set of plans, actions, and policies aimed to accomplish a company’s
mission.
In each functional area, strategies are also defined to accomplish
supporting missions. In doing so, these strategies will contribute to
the realization of the company’s mission.
Business strategies can be based on three components
(dimensions):
 Operation effectiveness: efficiency, cost minimization
 Customer management: limits estabilished with the firm’s customers.
 Product or service innovation: creation of new products, processes and services to meet
clients’ needs.

Operation and supply strategy

Defines plans and policies for using firms’ resources to best support their long-term competitive
strategy.
Competitive dimensions:
1. Cost or price: minimize costs or set a lower price than competitors’.
2. Quality: identify all the attributes that matter to customers.
3. Delivery speed.
4. Delivery reliability.
5. Handling changes in demand.
6. Flexibility and new product introduction speed.
7. Other criteria (Technical liaison and support. Meeting a launch date. Supplier after sale support.
 Other dimensions:  Customization available.  Product mix options.  Environmental
considerations.)

Trade-offs in the strategy design

Concept of trade-offs. Companies cannot excel simultaneously on all competitive dimensions.
Consequently, management has to decide which competitive dimensions are critical to the firm’s
success and then concentrate the resources of the firm on these particular dimensions.

Nonetheless, some companies overcome these trade-offs developing ambidextrous operations

designs.

Links between marketing and operations

-Order winner: Dimensions and characteristics that differentiate the products and services of one
firm from those delivered by another. These dimensions include price, quality, and reliability of a
product, among others.
-Order qualifier: Dimensions and characteristics of a firm’s products that permit them to be
considered as possible candidate for purchase.
Them both can change over time.

Fitting operational activities to strategies: a firm’s operational activities are related to one
another. In turn, there are links between these activities and those performed by other functional
areas.
To handle this, managers can used activity-system maps.

What is the framework for the operations and supply strategy?

Operations and supply strategy have to be defined taking as a reference both customers and the
rest of the functional areas.

Productivity measurement
Productivity is a useful measure in diagnosing problems related to the way
operations work, and in assessing the performance of the company.

It’s a relative measure: must be comparated with

something else. The comparisons can be either intra-
company as in the case of yearto-year comparisons of the
same measure, or intercompany as in the case of
benchmarking.
Alternatively, productivity can be also distinguished as follows:
-Technical: Takes into account only the relationship between outputs and inputs measured in their
physical units.
-Economic: Takes into account the relationship between the monetary value of the outputs and
costs of the inputs.
Examples for the case of labor productivity:
 Technical: Quantity Produced/Number of hours worked.
 Economic: Revenue/(No. Hours x hourly wage).

Topic 3 – PRODUCT AND SERVICE DESIGN

Defining the role of product and service design

The Polaroid printer CI-700
During the development of the CI-700 printer, the company face several decisions:
• Does the company posses all the core capabilities to make the product design for this product?
• Should the company outsource the product design of the printer?
• How does the product design for this product leverage the strategy of the company?
• In case of carrying out the product development in-house, should the product design team
increase development spending to increase the reliability of the CI-700?

The locus of the product and service design

Decisions on product and service design have to be made by taking into consideration two relevant
issues:  Identification of which functions and activities during the process of product and
service development will be outsourced to other firms, and which ones will be supported in-
house.
 Identification and development of a company’s core capabilities.
Some companies decide to internalize the entire process of product and service design (in-
house);
others decide to outsource a part of the process and on the other hand some decide do
outsource the entire process.
→This is where specialized business in manufacturing products or delivering services to other
companies come into play. These businesses are called contract manufacturers, in the first case,
and service providers, in the second.

Ex. of a contract manufacturing company

IDEO is specialized in product and service design for other companies seeking to improve the
functionality of their product and services. IDEO exploits the design thinking philosophy.
Design thinking rests on three elements: • People's Needs. • Technical Viability. • Economic
Viability

More on design thinking:

It consists of 5 phases:
1. Empathize: Understand the needs of users
2. Define: Identify key problems whose solution will be key to having an innovative result
3. Devise: Think of possible solutions
4. Prototype: Make simple versions of the product incorporating the most encouraging ideas (lean
management).
5. Test: Observe and analyze the reaction of users in the field. This phase determines if production
can begin, the design must be modified or, directly, cancel the project.

The importance of product and service design: Some examples

The role of product and service design in a firm’s strategy

The design of products and services gives leverage to a firm’s strategy in the following ways:
 Keep the brand and the company's reputation.
 Define the type of innovation that the company requires to meet the needs of its customers.
 Create products and services focused to meet consumers’ needs.

The process of product/service development

-Product and service design refer to the processes through which companies define the
“attributes”, “configuration” and “operations” needed to provide products and services that
meet their customers’ needs.
(attributes are related to the design quality; operations have to do with process quality)

- Product and service development process describes the steps followed by a company to
create, develop, test and commercialize new products and services.
Phases: Sources of ideas - Company capacity to develop the idea - Market needs
- Function definitions: how does it work? - Product and service specifications: how does it
work?
- Design review: Are the current specifications those that better meet costumers’ needs?
- Market test: Does it meet the costumers’ needs and expectations - Market introduction –
Assessment

Types of process of product and service development

Variants of the development process (read this section in chapter 4)
 Generic products (for the market).  Technology driven products.  Platform products. 
Process intensive products.  Custom products.  High risk products.  Products that build fast. 
Complex systems.

Economic analysis of product and service development process

The economic analysis is useful at least in two situations:
Go/no-go milestone: This includes considerations like: Should we try to develop a product to
address new market opportunities? Should we proceed with the implementation of a chosen
product concept?
These questions arise typically at the end of each stage of the product development process.
Operational design and development decisions: This involves questions like: Should we spend
money to hire an outside company to develop a given component to save development time?
Should we launch the product in a given period at a unit costs of “x” euros?

Building a base case: The first step is to determine the schedule for the project. This involves
estimating the timing of each stage of the project.
 Second, we need to estimate also the magnitude of the future cash flows.
 Third, we calculate the Net Presence Value (NPV) of the corresponding cash flows.
 To build the base-case, data coming from the project schedule, project budget, sales volume
forecasts, and estimated production costs will be needed.
 Finally, we should make sensitivity analysis to understand the trade-offs of the project. Based
on
•Project development time. • Sales volume. • Product costs or selling price. • Development
costs.

Net Present Value: Indicates the present value of a monetary flow considering a discount factor
(i.e., interest rate, inflation, capital costs).

Designing for the customer: the quality function deployment (QFD)

How to become customers’ needs into specifications easily incorporated into products and
services.
In order to study this issue, we will use the quality function deployment approach.
This approach gets the voice of the customer into the design specification of
products/services.

Step 1: Identify customers’ needs, classifying them into categories called customers’ requirements
(what’s). Stage 2: Identify core processes, activities and operations needed to get the
product/service (how’s).
Stage 3: Mapping the what’s and how’s. Link identified customers’ requirements to the defined
core activities.
Stage 4: Conduct competitive analysis.

HOUSE OF QUALITY

Designing a Service product

Considerations to design new services or improve existing ones. The question of fit:
 Service experience fit: Additional services must be coherent with existing service experience
for customers.
 Operational fit: Operations to support additional services.
 Financial fit: Financial justification.

What are the main features that distinguish service design? Service design characteristics
The direct customer involvement in service provision makes a difference in the process of service
design. This is because of:  The time that it takes to deliver a service.  Skills and knowledge of
employees and customers.

- Complexity: number of steps required to deliver a service.

- Divergence: number of ways a customer/service provider interaction can vary according to the
needs and ability of each one.
How to measure product development performance?
The following dimensions are considered:
 Time to market
• Measures: This is measured by items like the frequency of new product introductions, time from
initial
concepts to new product introductions, number of started and completed projects, among others.
• Impact: Responsiveness to consumers/competitors. Quality design.
 Productivity
• Measures: Engineering hours per project, costs of materials and tooling per project.
• Impact: Frequency of projects, number of projects.
 Quality
• Measures: Conformance-reliability in use, Design – performance and customer satisfaction.
• Impact: Reputation- customer loyalty, customers’ attractiveness – market share, profitability.

Topic 4 – CAPACITY MANAGEMENT IN OPERATION AND SUPPLY MANAGEMENT

Capacity: amount of output a production system is able to generate in a given period of time.
Capacity must take into account both resources (inputs) and production (outputs) involved.
Examples In the manufacturing companies:
Automobile: Number of units that can be produced in a single shift.
Computers: Number of computer units assembled in a given period.
In the case of service companies: Hotel: Available rooms per month. Restaurant: Number of
tables, number of menus, or available number of seats per schedule.

Short-range (<1 month): adjustaments that smooth production (ex. overtime use, rotations)
Intermediate-range (from 6 to 18 month): hiring personal, lay-off decisions
Long-range (>12 months): acquisitions of new equipments; capital-intensive input; adjustments in
firm size.

Scope of strategic capacity management in the hierarchy

Capacity decisions can be made at different levels within companies. In the case of a
manufacturing company, capacity decisions can be made at the factory level or at the level of the
whole company.
-Capacity at the level of one industrial establishment (factory): 300 units assembled per shift.
-Capacity of the whole company: 1,500 units assembled in country “A”.

Strategic capacity planning

The aim of strategic capacity planning is to provide an approach for determining the overall
capacity of capitalintensive resources (e.g., facilities, equipment, building, labor force) that best
supports the firm’s long-run competitive strategy

Let us take into account the potential consequences of wrong capacity decisions:
-Excessive capacity: a firm might have to reduce prices to stimulate demand, underutilize its
workforce, carry out excess inventory, etc.
-Scarce capacity: slow service delivery, loss of customers, increasing entry of new competitors.

Capacity planning concepts

1)Best operating level
This concept refers to the level of capacity for which a process was designed, and thus it
corresponds to the volume of output at which average unit cost is minimized.
For example:
A hotel with 250 double rooms with 500 stays.
A factory with a capacity to produce 2,000 units per shift.

2)Capacity utilization rate

This is the proportion of the current used capacity with respect to the best operating level. It
measures how close a company is to its best operating level

-if a hotel has 500 available rooms per month and currently rents 480 per month, its capacity
utilization rate is 96%.
-If a plant can produce 1200 units per shift and the current
production is equal to 800 units, the capacity utilization rate is
66.67%.

3)Economies/diseconomies of scale
Economies of scale are cost advantages derived from a firm size.
As a firm gets larger and volume increases, average unit costs decline. Diseconomies of scale arise
when an increasing firm size and production volume results in a raise of average unit costs.
Economies of scale can be classified into:
Technical economies: technical reason that increase efficiency
Pecuniary economies: increases in volume may involve reduction in input prices.

4)Learning curve
This notion refers to saving costs due to a firm’s accumulated experience in the production
process. As the firm produces more, it may gain experience in the best production methods,
which can reduce its production costs.
Increase volume (Q)→gain: experience, capabilities, skills→Learning→efficiency
gains→Reduction costs

Larger plants can provide companies with a twofold cost advantage. Not only these plants gain
economies of scale, but they also will produce more, generating thus learning curve advantages.
Larger plants→ Economies of scale → Low costs →Low prices →Increasing demand → More
volume →
Fast learning

5)Capacity focus
According to this notion, a company works best when it places the attention on limited
production objectives. A way to avoid inconsistencies in capacity focus is to use the notion of
plants within plants (PWP). A focused plant has several PWPs, each one with their own sub-
organizations, equipment, process policies, and workforce policies.

For instance, airlines often assess whether to offer “business class” and “economy class services”,
or alternatively, just to offer “economy class seats”.
The focus on economy class services would mean that a company is placing the attention on a
specific dimension of its competitive strategy: Provision of low-cost services.

6)Capacity flexibility
This relates to the degree of flexibility at which a company can operate its plants. That is, how
fast the company can increase or decrease its production.
This flexibility can materialize in terms of:
Flexible plants: Zero changeover plants. / Flexible process: Flexible manufacturing systems
(economies of scope). / Flexible workers: Multiple skills and training.

Flexibility can lead firms to gain economies of scope. These economies arise when the production
of several products/services in combination reduces the firm’s average unit cost.

7)Economies of scope
Economies of scope occur when producing a wider variety of goods or services in tandem is
more cost effective for a firm than producing less of a variety or producing each good
independently.

CAPACITY PLANNING

We need take into account two considerations:

-Considerations in adding capacity.
-Determinations of capacity requirements.

ADDING CAPACITY
The following issues should be considered when assessing the expansion of capacity:
 Maintaining a system balance.  Frequency of capacity additions.  External sources of
capacity.

-Mantaining a system balance

In a perfectly balanced plant, the output of each stage provides the exact input requirement for
the subsequent stage.
This condition is difficult to achieve because the best operating levels for each stage generally
differ. Variability in product demand and the processes may also lead to imbalance, in the short
run.
You can face lack or excess of capacity

-Frequency in adding capacity

As regards the frequency of capacity additions, we have to evaluate the costs associated with at
least two options: Infrequent vs. frequent capacity expansions.

-Adding external capacity

Two common options:
Outsourcing: For instance, outsourcing of catering or cleaning
services in a hotel.
Sharing capacity: For instance, suppose the case of two airline companies that fly different routes
and face different seasonal demands. They can exchange aircrafts
when one’s routes are heavily used, and the others are not.

DETERMINING OF CAPACITY REQUIREMENTS

In this process, we can distinguish three stages:
1. Demand forecasting.
2. Identification and evaluation of resources required (e.g., labor and
equipment requirements).
3. Determine if:
Demand excesses capacity. Capacity excesses demand. The presence of seasonal demand
adjustments.

PLANNING CAPACITY IN SERVICES

Capacity planning in services should consider:
1. Time (services are periodable)
2. Location (ex. tax policy, Ireland)
3. Volatility of demand (consumers can always modify the demand behaviour)

Prior issues makes demand management a critical issue in planning capacity in services.
Demand management includes issues such as: Booking systems. Queue and waiting lines.
Pricing and discounts. Yield Management (pricing strategy based on
understanding, anticipating and influencing consumer behavior).

Some studies suggest that, in services, the best operating point is

about 70% of maximum capacity. This allows companies to serve
customers individually, and to keep servers busy
DECISION TREES TO ASSESS CAPACITY OPTIONS
A decision tree is a schematic model of the sequence of steps in a problem, in which conditions
and consequences associated with each step are evaluated.

Expected value (EV) is a weighted average of possible outcomes of a chance event.

The higher the EV, the better a particular decision alternative on average when compared to the
other alternatives in the decision tree.

Example A tour agency specializing in boat tours is experiencing a substantial backlog, and the
firm's management is considering three courses of action:
A) Arrange for subcontracting. B) Buy new boats. C) Do nothing (no change).
The correct choice depends largely upon demand, which may be low, medium, or high. By
consensus, management estimates the respective demand probabilities as 10% (low), 50%
(medium), and 40% (high).
Topic 5 – PROCESS ANALYSIS
Definition of process: A process consists of any part of the organization that becomes inputs
into outputs. A process can produce “goods” and/or “services”. In any case, it is expected that
the value of the resulting output will be greater than the value of the inputs.
Example Iberia: The company uses aircrafts, reservation systems, fuel, personnel, among other
inputs to transport clients to one place to another.

Using process analysis, we will try to answer the following sort of questions:
How many clients a process can deal with per hour?
How long does it take to serve a customer?
How does a company can increase its capacity?
How much does a process cost?

The objective of process analysis consists of:

Resolving a problem: For instance, this analysis helps us detect and eliminate bottlenecks.
Understanding the implications derived from changes in how a business will be done in the
future. Improving production: To identify inefficient tasks, spot possible effectiveness
improvement tasks.

Analysis of a process
1)Mapping
2)Measuring its performance

Analyzing a slot machine as a set of processes  The slot machine is activated when a client puts
one of several coins in it.  Next, the client pulls the arm on the machine.  Three bands start
spinning for a while. Then, the bands stop, and each one displays a given symbol.  The machine
pays money when a given combination of symbols arises.

How to map it:

Process flowcharting A flowchart will assist us in representing the element involved in a process.
These elements can include: • Tasks. • Flows (e.g., flows of inputs and outputs, clients,
information). • Decision points. • Storage areas.
Cycle time refers to the average time that elapses to complete successive units in a process. It is
the elapsed time between starting and finishing a job. Let’s get back to the case of the slot
machine. Assume that a “representative client” puts 1 coin of one euro every 20 second. Then,
this time, 20 second, define a cycle time.

Utilization is the ratio of time that a resource is currently used relative to the time it is
available. In the setting of the slot machine, let’s suppose the machine operates 12 out of the 24
hours per day. Thus, in each day its utilization ratio is equal to 0.5.

Types of processes
A single-stage process: The simplest process that only includes one stage.
A multiple-stage process: More complex, made it up by several stages, some of which are
sequential. Multiple-stage with buffer: A sequential process in which some of its stages are
separated by buffers (storage areas).

Other types of processes

Serial flow process: A single path for all stages of production.
Parallel process: Some of production has alternative paths where two or more machines are used
to increase capacity.
Logistics processes: The movement of things, such as materials, people, or finished goods.

Without buffering: Blocking and starving problems

A blocking takes place when the activities in a stage must stop because of the lack of place to
storage items just finished.
If items processed by stage 1 cannot be stored, then stage 1 must stop until the subsequent stage
can process incoming inputs from stage 1. The lack of buffering results in a blocking.

Starving comes about when the activities in a stage stop because of the lack of work.
This situation implies that employees will remain inactive until they receive inputs coming
from previous stages.

Let’s calculate the cycle time of each process:  The cycle time in the first stage is 12 seconds per
unit.
 The cycle time in the second stage is 36 seconds per unit.
 In order to produce 100 units, this two-stage process will take 3612 seconds (36 seconds/unit x
100 units + 12 seconds). The second process is starved 12 seconds at the beginning.

Bottlenecks occur when there is a lack of capacity in a process. This brings about accumulated
backlogs. In addition, resulting units in a bottleneck will be distributed unevenly to subsequent
stages.
If a worker accumulates backlogs in a given stage of a process, he may limit the capacity of
the whole process. As a result, this workers will become into a bottleneck.

Stage 1 → Stage 2
Let’s consider the cycle time of each process: What would happen if the first stage required 45
seconds per unit and the second stage 30 seconds per unit? In this case the first stage would
be the bottleneck and each unit would go directly from the first stage to the second. The second
stage would be starved for 15 seconds waiting for each unit to arrive.

A bottleneck is the process stage with the longest cycle time.

Which of the following production process terms best describes the situation when activities in a
stage of production stop because there is no work? a) Blocking. b) Buffering. c) Starving. d)
Bottleneck.

Another way to classify/characterize a process

Make-to-order: The production process is activated in response to a current order. Inventory
(work-in-progress and finished goods) are kept to a minimum. This option allows the company to
deliver customized products. Make-to-stock: It involves a large volume production-process, where
highly standard products are produced. This option maintains highvolume of work-in-progress and
finished goods using storage. The product is usually delivered very quickly

An advantage of a make-to-stock process is which of the following? a) It features rapid delivery

of a standard product. b) All units of output are unique. c) It responds directly to customer orders.
d) It allows the firm to avoid inventory costs. e) It combines the best features of other processes.

Measuring process performance

Productivity.  Utilization.  Efficiency.  Throughput time.  Operation time.  Cycle time. 
Throughput rate.

Productivity: As shown in previous sessions, productivity defines a relation between the value of
the output generated and the inputs used by a process. There are partial and multi-factor
measures.
= Output/Input

Utilization: As already discussed, utilization is the ratio of the time that a resource is currently
used to the time that it is available.
= Time currently used/Time available

Efficiency: is defined as the ratio of the current output of a process regarding some standard.
= Current output/Standard output
For instance, suppose that an employee is typically able to serve 5 clients/minute. Some days,
however, he/she can serve 7 clients/minutes. In those days, the employees’ efficiency is equal to
140%. That is, a 40% more than expected.

Operation time: is the sum of the setup time and run time.
 Setup time refers to the time needed to prepare an equipment (service) to make (deliver) an
item (client).
 Run time is the time required to produced a batch of parts, or to serve a group of clients.

Consider the operation time of an airline worker, responsible for checking in flights. Suppose this
worker can deliver 3 passengers per minute in the case of international flights, and 4 passengers
per minute in the case of domestic flights. Once an international flight is done, it takes 2 minutes to
get ready the computer-system to check in a domestic flight. What is the operation time needed
to check in a domestic flight of 200 passengers after serving an international flight?

Operational time= 120s + 15s (50people) = 3120s = 52min

SET UP + RUN TIME

Throughput time: It is the sum of the operation time and

queue time.
It is the time a unit spends being worked on along with the
time spent waiting in a queue.
In services, it is the time a customer spends being served
together with the time spent in waiting lines.
= Operational time + Waiting time

Cycle time: As mentioned above, this is the time, on average, that elapses between the beginning
and completion of a process.

How can we determine capacity using these measures?

Throughput rate: This rate gives us the number of products a process can generate over a
given period.
In services, it represents the number of customers a process can deliver in a certain period.
Formally, the throughput rate is mathematically the inverse of the cycle time.
= 1 / Cycle time

Useful to determine capacity

The capacity of a task is the physical limitation in terms of how much can be processed at this
task.
Cycle time: Average time for completion of a unit at a production step or process. Does not
include waiting. Measured as time/unit
Throughput rate: Average number of units processed over a time interval. Measured as
units/time.

Little’s law
establishes a mathematical relationship between the throughput rate, throughput time and the
amount of work-in-process (WIP). The Little’s law gives us the time that an item will spend in
work-in-process inventory. This law is useful to estimate the throughput time of a whole process.

How can we put into practice what we have

learnt so far?
 Assembling is the bottleneck

If 2 pizza bases remain in the WIP inventory, how much time, on average, are those bases
kept in the inventory?

Taking into prior information, let us analyze this

process by focusing the attention on the
following issues:
 Detection of bottlenecks.
 Determination of the process capacity.
 Evaluation of storage areas necessities.
 Calculation of the throughput time of the
process.

Bottleneck and capacity: Let’s start the analysis by determining the cycle time of each step.
Putting everything in terms of batches of 100 loaves, we have that:
 Cycle time of the bread-making step is equal to 1 hour/batch.
 Cycle time of the packaging step is 0.75 hour/batch.
As a result, the first step is a bottleneck because it has a larger cycle time. This is also evidenced
by the throughput rates:
 The bread-making stage has a rate of 1 batch/hour.
 The packaging stage has a rate of 1.33 batches/hour.
If both steps are operated the same number of hours each day, the bakery has a capacity of 1
batch/per hour (100 loaves/hour).

Storage between the steps: Given the presence of a bottleneck in the first stage, inventory would
not build between bread making and packaging. In fact, packaging operations will be starved for
quarter-hour periods.
The throughput time: In this case, it is the sum of the cycle time of each step. The throughput time
of the bakery is: 1 + 0.75 = 1.75 hour/batch.

This option expands the capacity of the first

step. Now, the cycle time of the two bread-
making operation is ½ hour/batch.
The throughput rate is equal to 2
batches/hour.

In this setting, packaging operation turns into the bottleneck of the process. This is so because it
has a larger cycle time and a smaller throughput rate:
 Throughput rate of two bread-making step: 2 batches/hour.
 Throughput rate of packaging: 1.33 batches/hour.

We can solve the bottleneck problem by:

-Creating two shifts of 8 hours each for the bread-making operations.
-Creating three shifts of 8 hour each for the packaging operation.
-Creating storage areas between the steps.

This strategy would eliminate the presence of bottlenecks by balancing the capacity of each step.
Look why: If 1 batch is made in ½ hour, in 16 hours the first stage will produce 32 batches.
If 1 batch is packaged in ¾ of an hour, in 24 hours the second stage will package 32 batches.

Bread making runs two shifts: Produces 2 x 8 x 2 = 32 batches

Packaging runs three shifts: Produces 1.33 x 8 x 3 = 32 batches

We will produce for 16 hours but we will pack for 15 hours because we need to wait for the first set
of bread to come through.
Max WIP = 16 x 2 – 15 x 1.33 = 12 batches
Average WIP = 12/2 = 6 batches

What methods could be used to deal with capacity imbalances?

There are various ways of dealing with capacity imbalances.
1. One is to add capacity to those stages that are the bottlenecks. This can be achieved by
temporary measures such as overtime, leasing equipment, or subcontracting.
2. Another approach is to use buffer inventories so that interdependence between two
departments can be loosened.
3. A third approach involves duplicating the facilities of one department upon which another is
dependent.

a) What is the current maximum output of the process assuming no one work overtime?

b) How long will the picking and packing operations must work if we have a day where the order
taker works at his maximum capacity?

c) Given b), what is the maximum number of orders waiting to be picked? And waiting to be
packed?

d) If we double the packing capacity (from 60 to 120 orders per hour), what impact does this have
on the answers given previously?
Topic 6– MANIFACTURING AND SERVING PROCESSES

Types of Processes  Distribution by project.  Work center (workshop).  Manufacturing cell.

 Assembly line.  Continuous process.

Break-even points for alternative processes

Suppose a manufacturer has identified the following options for obtaining a machined part:
 It can buy the part at $200 per unit (including materials)
 It can make the part on a numerically controlled semiautomatic lathe at $75 per unit (including
materials).
 It can make the part on a machinery center at $15 per unit(including materials).
There is negligible fixed costs if the items is purchased. A semiautomatic lathe costs $80,000, and
a machine center costs $200,000.

Manufacturing process flow design

It evaluates the specific processes to which raw materials, parts, etc. follow as they move through
the plant.
Assembly charts Route sheets

Flow process chart Assembly drawing

What issues should we take into account in the design of services?

Service design
Service design comprises the set of steps by which a service is created, implemented, and
delivered to firms’ customers. The way companies, such as “Ryanair”, “Ritz Carlton” and “Burger
King” provide their services is founded on a set of service design choices that align with their
service strategies.
A key idea is that the process of service design can be managed. In this regard, management
focuses on aspects related to the interaction between customers and the service delivery
system.

The service triangle

According to this view, the customer is the center of things, including the
service strategy, support systems and employees who serve him or her. The
rational behind a company is to serve well its customers’ needs. Systems and
employees exist to achieve this goal.

How can we classify services?

Considering the role of the customer, services can be classified
according to the degree of customer contact involved in the
creation of the service.
In this categorization, three elements are considered:
 The presence or not of the customer.  The role of customer in the creation of the service. 
Extent of contact.

The extent of contact can be approximately defined as the percentage of time the customer
must remain in the system relative to the total time it takes to deliver the customer service.
As one might suppose, service systems with a greater degree of customer contact are much more
difficult to control and manage than those with less customer contact. This fact is due to factors
such as:
-The nature of the service and the time of demand can be altered by the customer.
-Quality or perceived quality.

As services cannot be stored, service capacity becomes a dominant issue.

- Too much capacity brings about additional costs.
- Lack of capacity leads to lost of customers.
In services, the process is the product. They come together. Service operations lack legal
protection typically offered in the case of good production. Service supply can change quickly,
which gives service companies more flexibility than that prevailing in the case of manufacturing
companies

How can we structure service encounters? In order to answer this question, we will use THE
SERVICE-SYSTEM DESIGN MATRIX. This matrix is defined from the interception of three
elements:
 The degree of customer contact.
 The marketing proposition: The greater the customer contact, the greater the opportunity to
sale.
 Impact on production efficiency of customer contact.

-Process efficiency decreases as the customer has more contact. However, face to face contact
provides a high sales opportunity to sell additional products.
-Conversely, low contact (email) allows the system to work more efficiently (no disruptions) but
there is little opportunity for additional sales.

Strategic uses of the matrix

Integration between operations and marketing. Definition of the company’s service portfolio.
Performance of competitive analysis. Analysis of the evolution of the service delivery process.

In the service-system design matrix, a mail contact service encounter is expected to have which of
the following? a) High sales opportunity b) High degree of customer/server contact c) High
production efficiency d) Low sales opportunity e) None of these

Tools to implement service design

Service blueprints and poka-yokes.
Customer experience maps.
Others: • Service scripting. • Service recovery

Service blueprints and poka-yokes

We use flowcharts as blueprints. The idea is to map into a flowchart the set of activities comprising
a service encounter. Service blueprints describes the elements of a service design. They include:
-Steps that make up a service delivery process.
-Points of interaction between customers and service providers.
-Poka-yokes. These are actions to prevent failures over the process of service delivery.

Poka-yokes A service blueprint describes the service design characteristics but does not provide
any direction on how to make the service process conform to that design.
The application of poka-yokes helps us solve this problem. Poke-yokes are fail-safe procedures to
avoid that inevitable mistakes turn into a service defect.
The following cases are example of the use of poka-yokes:
 Beepers at restaurants to avoid customers do not miss table calls.  Chains to configure queues.
 Use of take-a-number systems.  Mirrors on telephones to ensure a “smiling voice”.
 Reminder calls for appointments.  Locks on airline lavatory doors that activate lights inside
Customer experience map
A customer experience map analyzes, from the exclusive customer’s viewpoint, her/his
experience while receiving the service. TOUCH POINTS are identified. These are key points of
contact between the customer and the service system provision. Feeling, perceptions and
reactions of customers are also represented in these maps.

Service scripts
This is a guide for employees in contact with customers, which predetermines words,
phrases, and gestures to be adopted during the service delivering process. This guide can be
used for:
• Defining rules and procedures to greet customers when they come into play.
• Developing practices, such as “up-selling” and “cross-selling”. • Managing customer complaints.

Service recovery
An important part in the process of service design is to anticipate what to do when something
goes wrong. Recommendations: Break silence. Anticipate the need to recover the service. Get
involved quickly.
Provide training to service providers facing customers directly.
Motive employees working at the “front-line”. Implement corrective measures.

Approaches to service design

Production-line approach. This view regards service provision as a manufacturing process.
Orientation is toward production efficiency. This approach dominates in fast-food restaurants.

MC Donald's is a good example of this type of service organization. Mc Donald's philosophy is

oriented toward the efficient production and not toward subordination to the customers. However,
the control of its operations allow the company to provide a service that attracts customers.

Self-service approach. The idea is to change the role of the customer in the process of service
delivery. Instead of being served, the customer produce the service. Examples includes travel on-
line agencies, cash machines, among others.

Buffet in hotels is an example of a design based on a self-service approach. Customers are directly
involved in the production of the service. They design their own menus. The philosophy of this
design is to transfer to customers part of the operations needed to deliver the service.

Personal-attention approach. This design allows a full interaction with the customer. It is based
on relationships built between the customer and the service provider
Ritz Carlton is an example that illustrates the use of this approach. This approach aims to enhance
the customer’s experience and then the perceived quality. Its philosophy is to deliver the best
service to meet customer’s needs.

Which are the main sources of variation in the process of service delivery? Managing
customer-introduced variability
A key decision that operations managers must make is to determine how much they should
accommodate variation introduced by customers into the process of service delivery. Standard
approach is to treat this as a trade-off between cost and quality.
• More accommodation → more cost
• Less accommodation → less satisfaction
Sources of variability that a customer can add up: • Arrival variability. • Request variability. •
Capability variability. • Effort variability. • Subjective preference variability.

Among the strategies to accommodate this variability we have:

-Accommodation: Adding up variations introduced by customers • Classic. • Low-cost.
-Reduction: Restrictions in service delivery to limit variability. • Classic. • Uncompromised.

Behavioral science applications to service design

The front end and the back end of the encounter are not created equal. Segment the pleasure.
Let the customer control the process. Pay attention to norms and rituals.
People are easier to blame than systems. Let the punishment fit the crime in service recovery.

Characteristics of a well-designed service system

Consistent with the operating focus of the firm. Easy to use. Robust.
Consistent performance by its people and system is maintained. Well-established links between the
back office and the front office. It manages evidence of service quality. Cost-effective.

Topic 7 - QUALITY MANAGEMENT

TOTAL QUALITY MANAGEMENT
According to the Spanish Association for Standardization and Certification, quality can be defined
as the set of characteristics of a product or service that enable this product or service to
meet customers’ needs (including explicit or implicit needs).
Following the leaders of the quality movement, quality can be defined as follow:
 Conformance to requirements (Crosby).
 A predictable degree of uniformity and reliability at low cost and intended to meet
customers’ needs (Deming).
 Fitness for use (meet customers’ needs) (Juran)

Quality has acquired a strategic character for shaping companies’ competitiveness.

Indeed, quality management has become a key issue for policy-makers intended to enhance
competitiveness in certain countries (e.g., Japan and USA).

Total quality management (TQM) manages the entire organization so that it excels on all
dimensions of products and services with the aim of meeting customers’ needs.
 TQM adopts a vision in which the production of quality depends on
everyone involved in the production process. Thus, TQM requires
the involvement of stockholders related to the production and
consumption of the firm’s products and services.
TQM has two fundamental operational goals: • Careful design of the
product or service
• Ensuring that the organization’s systems can consistently produce
the design

Notice that previous goals acquire a strategic character when the entire organization aim to reach
them. This comes about when these objectives are aligned with the firm’s mission and vision.

QUALITY SPECIFICATIONS
Quality specifications for a product or service depend critically on a range of strategic decisions:
 Design quality: This element refers to the value of the product or service in the marketplace.
This value depends on the attributes included in the product/service offered by the company.
 Conformance quality: This aspect refers to the extent to which design specifications of a
product or service are met.

The dimensions of design quality refer to characteristics of products and services that relate to
design issues. These dimensions are: Performance. Features. Reliability/durability. Serviceability
Aesthetic. Perceived quality

As discussed previously, we can draw on the “house of quality chart” to

establish the links between design quality and conformance quality.
This approach place the attention on the customer's needs.
The idea is to map customers’ needs into concrete specifications to be
followed over the product/service development process. The objective is
to ensure that resulting product/service designs are aligned with the
customer’s needs.

Quality specifications by using the SERVQUAL model

Tangible: Equipment, physical facilities, layoffs, appearance of personnel.
Reliability: Ability to deliver the promised service dependably and accurately.
Responsiveness: Willingness to help customers and provide prompt services.
Assurance: Knowledge and courtesy of employees and their abilities to inspire trust and
confidence.
Empathy: Caries and individualized attention a company provides its customers

COST OF QUALITY
It involves all the costs attributable to the production of quality that is not 100% perfect.
A less strict definition says that the cost of quality is the difference between what we can expect
from excellent performance and the current costs that exist.

Some estimations show that the costs of quality is 15% to 20% of each sales dollar (Chase et al,
2009). These costs correspond to things such as: Reworking. Scrapping. Repeated services.
Inspections and tests. Warranties.
There are at least three reasons that justify to measure the costs of quality:
Failures are caused. Prevention is cheaper. Performance of production system can be measured.

We can define the two above as “costs of conformance” and the two below as “costs of non-
conformance”.

SIX-SIGMA QUALITY
We can define Six Sigma as a philosophy along with a set of methods that seeks to eliminate
defects in the production process of companies.
The idea is to reduce variability along the production process that may be the cause of defects.
The goal of Six-Sigma is to achieve a maximum of 3.4 defects per million of events
(opportunities).
In this context, a defect represents an event where the product or service does not meet the
customer’s requirements.

Defects per million of opportunities (DPMO)

We can measure the performance of a productive process by using the metric defect per million of
opportunities (DPMO). To do so, we need three pieces of information:
Unit: The item produced or being served.
Defect: Any item or event failing in meeting customers’ requirements.
Opportunity: A chance for a defect to occur.

In a sample of 1,200 products, the quality manager of company “A” identified that 105 defects.

This means that 87,500 products out of every

1,000,000 were produced with some errors. That is,
8.75% of the products are wrongly produced.

Next, the equivalence between the number of defects,

sigma levels and efficiency corresponding to a production process are defined:
Suppose that a company has estimated that the optimal time to serve a customer is 3 minutes.
Less is perceived by the customer as insufficient, and more is regarded as too much (a slow
service). • If the service delivery process has a target of efficiency equal to 3 sigma, we have that
66,807 customers of out every million will served wrongly (in a time that is either less than 3
minutes or more than 3 minute). • If the service delivery process has as a target 6 sigma, then for
every million customers served, only 4 will not be served according to the optimal standard of 3
minutes.

In order to study the Six-sigma methodology, we will put the emphasis on the following steps,
which in turn define a cycle:
Define. Measure. Analyze. Improve. Control.
The DMAIC cycle (acronyms of previous steps) is a version of the continuous improvement
philosophy developed by Deming. The idea seeks improvements of machinery, equipment, labor
utilization and production methods through applications of suggestions proposed by company’s
teams.

What tools are used in the Six- Sigma methodology?

Analytical tools for Six-Sigma Among the most popular, we find:

• Flowcharts
• House quality.
• Pareto charts.
• Cause-and-effect diagrams (fishbone diagrams).
• Control charts.
• Run charts.
Tools: Flowcharts

Tools: House of quality chart

The house of quality allows identifying the customer’s requirements and implementing the
specifications addressed to meet these requirements

Useful for the Define stage of the DMAIC cycle

Tools: Pareto charts

These charts help us to breakdown a problem into the contributions of its components. They are
based on the empirical fact that a large percentages of problems are due to a small portion of
causes. For instance, 80% of the reported complaints of customers are related to “late delivery”,
which represents 20% of the causes listed.

Helpful in the Measure stage of the DMAIC cycle

Tools: Pareto chart

Tools: Control charts

These charts can be used to track ongoing production process quality and quality conformance to
state standards of quality

Useful for the Control stage of the DMAIC cycle

Tools: Run charts

What is the Shingo System?

The Shingo system

• Philosophy orientated to prevention :Methods of control quality do not avoid the defects.
They provide probabilistic information that tells us when a defect can occur.
• Avoidance of defects in the site where they occur: The idea is to design and implement
controls that prevent defects.
• Involvement of employees in control of quality: important part of these controls require
the involvements of the employees that are in contact with a company’s operations and
processes.

The Shingo system (Contd.)

• Errors and defects: Defects arise because people make mistakes. The errors are
inevitable, but defects can be prevented.
• Fail-save design: The use of mechanisms to prevent defects such as poka-yokes gain in
relevance.

The Shingo system (Contd.)

The use of poke-yokes:

• Prevent the worker’s mistakes turn into defects.

• Provide the worker with immediate feedback on anomalies.
The French fry scoop used by McDonald’ employees prevent variability when serving menus. The
idea is that French fries will be served consistently among different menus
Standardization, certification and assessment

Models for quality certification and assessment

There are two kinds of approaches to certify and assess quality:

1. Prescriptive models.

2. Non-prescriptive models.

Prescriptive models

These models are based on standards, which define how a processes or procedures should be
conducted to achieve a target of quality. Auditors certify whether a process conforms to a given
standard. Among the best known, we have the following systems:

• ISO9001: Quality Management Systems.

• ISO14001: Environmental Management.
• Sectorial standards: Spanish Tourism Quality “Q” mark.

ISO 9001 and ISO 14001

o Series of standards agreed upon by the International Organization for Standardization (ISO)
• Adopted in 1987.

• Used in more than 160 countries.

o A prerequisite for the global competition .

o ISO9000 an international reference for quality, ;ISO14000 primarily concerned with
environmental management

Non-prescriptive models

In this case, the models describe the desire outcomes associated with quality, but do not specify
how those should be achieved. The way to generate desirable outcomes depends on the company
decisions and strategies. Examples of this kid of models include:

• EFQM model: European Foundation for Quality Management.

• ServQual scale: The scale for measuring quality.

Non-prescriptive models (Contd.)

EFQM: European foundation quality management (http://www.efqm.org/)

• Based on self-evaluation.

• European scope.
• European Quality Award by the EFQM.

Similar awards:
• Malcom Baldrige (USA).

• Deming (Japan).

Non-prescriptive models (Contd.)

SERVQUAL: By using a 22-questions survey, this methods analyzes the gap between customers’
expectation and experiences along the process of service delivery. To do so, the following
elements are evaluated:

• Tangible.
• Reliability.
• Responsiveness. Assurance.
• Empathy.

What is benchmarking?

Benchmarking: looking external references to improve quality

• The basic premise behind benchmarking is that to deliver quality, you need to compare
your business against the best-in-class business and then make changes to your operation
so that quality is enhanced.
• Benchmarking is the process of determining who is the very best, who sets the standard,
and what that standard is.

COST-VOLUME-PROFIT MODEL (CVP)

VOLUME (Q)
The production made by the company during the time or period of reference, in effective or
predicted conditions of sale.

COSTS
Variable cost will be that which depends on the level of activity; probably the clearest example is
that of the raw material consumed.
Fixed cost will be that which is not altered by increasing or decreasing the level of production; for
instance, rental of an industrial unit or amortisation of some installations.

TC=FC+VC

Short-run: period at which there are input or factors that can’t be changed
Linear case: explanation of variable costs
VC= avc Q

avc= VC/Q

it implies that TC= FC + avcQ

Starting with the CVP MODEL

Assumptions:
1-Classification and typology of costs: As explained in the above section, the analysis is carried
out in the short term, whereby any cost may be classified as a fixed cost or variable cost. The
volume of production is the only relevant factor that affects the costs.
2-The revenue function: The sale price remains constant for any level of activity. The revenue
function can also be represented as a straight line. The quantity produced is fully sold for any
volume of activity, that is, there is no variation in stock of finished products.
3-Stability of external factors: Any external factor may affect any of the variables included in the
model (costs, volume and/or profit); it is assumed to remain invariable for any volume of production
during the period of analysis.
4- Multiproduct companies: The CVP model can be applied to any company, independently of
the number of products it sells.
In the case of multiproduct companies, the percentage represented by the quantity produced/sold
for each product out of the total production is considered stable for the relevant interval of
production.
5- Determinist model: The CVP model that we are going to describe is deterministic and all the
values are known with certainty. Hence, the model does not take into account adjustments due to
risk or uncertainty for any of its variables.

Limitation 1. Overall analysis of the results: The analysis that is the fruit of the application of the
CVP model must be global and conclusions must not be drawn from isolated data and partial
results.
Limitation 2. Qualitative factors are not taken into account.

Determination of the CVP model

P= profit
P = spQ – ( FC + VC(Q)) R= revenues
P = spQ – FC + avcQ sp= selling price
avc= average variable cost
FC= fixed costs
VC= variable costs
TC= total costs

We shall now define a new concept; we shall call the difference between the price and the average
variable cost the unit contribution margin (CM)

The CM indicates what each unit produced and sold contributes to covering the fixed costs of the
company, and once the fixed costs have been covered, it indicates the contribution of each unit
sold to the profit.

Determination of the break-even point (BEP) or profitability threshold

The premise is that the profit is equal to zero.

Thus, the quantity of production units that are
necessary in order to reach break-even point
(Qbe), stems from: P=0

Revenue function is STEEPER than TC function

The volume of production in the hotel industry
Companies in the hotel industry obtain their revenue by providing multiple services. Thus, a hotel
obtains revenue from renting out its rooms, from the bar and restaurant units, and other
complementary activities.
-The number of rooms available in a hotel is a fixed factor and the revenue from room rental is
determined by the room occupancy rate (ROR) and by the price set for each room.
-On the other hand, revenue from other areas, such as the bars and restaurants does not depend
only on the number of rooms occupied but on the number of people-day (stays) occupying
these rooms.

Example: Hotel with 200 double rooms occupied by 200 guests, 100% room occupancy, and a
capacity to generate revenue in other areas of 200 stays.
-This same hotel with 200 double rooms could have 150 rooms occupied by 300 guests; therefore,
with a lower room occupancy rate, it would have a greater capacity to generate revenue in other
areas.
-Thus, in calculating the revenue (and hence, also in calculating the costs associated with this
revenue) the volume of production can be expressed in different ways.

Uniform System of Accounts: develops a homogeneous method of direct cost allocation to each
of the hotel’s areas of revenue.
This system establishes cost allocation criteria in such a way that, for each area of revenue (rooms,
restaurant, bar, etc.), the variable costs can be determined and therefore their contribution margin
to the profit of the operation.
MULTIPRODUCT CASE
We assume that multiproduct companies are able to produce distinct, but related products,
exploiting the same fixed assets (same fixed costs).
Besides, we assume that the total amount of production can be decomposed into different shares
of distinct products.

MIXED COSTS
All costs that have a fixed part and another part that is more or less proportional to the volume
of the activity.
Water and electricity costs have a fixed part that corresponds to the minimum costs charged by
utility companies. However, there is also a variable part that depends on the volume of activity.
-In a hotel, activities like lighting common areas, filling a pool, or refreshing common areas using
air-conditioning generate fixed costs. There are charges that do not depend on the number of
guests. But, there are other charges that do depend on the stays and then generate variable costs.
-In an industrial facility, telephone and electricity bills usually involved a two-part tariff regime,
where one part is fixed while the other is variable.

Remember that the CVP model only admits fixed costs and variable costs. Therefore, if we
encounter mixed costs, we cannot apply the model unless we find a way of separating the fixed
part from the variable part.

First of all, it is quite clear that the insurance policy on the

property behaves as a fixed cost, as it remains constant
throughout each month despite fluctuations in level of occupancy.
Meanwhile, we have laundry costs and electricity costs. Neither
of these is a fixed cost, but we do not know whether they are
exclusively variable costs, or whether they have a fixed part and
are therefore mixed costs. In order to find this out, we can divide
the cost by the level of occupancy for two months with different
occupancies.
It seems that the laundry cost is strictly variable and the cost per stay is approximately 1.1 €.
Looking at electricity we can observe that there is a difference, which leads us to believe this is a
mixed cost, as the result is lower for higher levels of occupancy.

Methods to identify fixed and variable costs from mixed costs

- The high-low method (or extreme values)
Our problem consists of estimating the part of the mixed costs that should be considered fixed and
the part that should be considered variable.

The following steps can be formulated for the application of this method:
1. Select the two extreme values as regards volume of activity (in our example the stays). If
there is a period of abnormal activity it is better to choose the next one that does not have this
problem (for instance, if the hotel is closed for a/some month(s), it is desirable to take the month
with the lowest occupancy out of the months it is open).
2. Calculate the difference between the costs and volume of activity of these two periods. Then,
divide the difference in costs by the difference in the activity. Thus we obtain the variable unit
cost. (avc)

3. By multiplying this variable unit cost by the volume of activity of one of these two periods,
we have the total variable cost for this period (VC of period), while the rest corresponds to the
fixed cost per period. (FC of period)
4. We multiply the fixed cost per period by the number of periods considered and this gives us
the fixed part of the mixed cost (for the whole year) (FC)
DEMAND SEASONABILITY
Annually, the dilemma arises as to whether or not it is convenient to keep the hotel open in the low
season, when demand is ostensibly reduced and the prices at which services can be offered are
much lower than the prices for the rest of the year. The solution to this problem is no easy matter,
but a profound knowledge of the behaviour of costs can help us to correctly assess the
alternatives. In order to set out the issue more clearly we shall use an example.

As can be observed in Table 1, the low season covers 3 months, during which time the hotel had
29% room occupancy with a mean revenue of 15 € per room occupied. The fixed costs amount to
30,000 monthly, whereby if we perform a profit and loss account for the low season, the hotel had
losses of 73.800 €. As the results in the high season were significantly better, the hotel ended the
year with a year on year profit of 288.000€. The question any manager would ask in this situation
would be: Is it convenient to close the hotel during the low season, so as to thereby eliminate the
loss and obtain a greater profit over the whole year? The answer is no. No, because from the cost
analysis we know that the fixed costs are independent of the volume of production; and, therefore,
suspension of activity during this season would mean bearing these costs and not obtaining any
revenue whatsoever.

We can observe, in Table 2, what would have happened upon closure during the low season.

As we had suspected, the profit in the event of closing in the low season is lower than if the hotel
had remained open all year. If the fixed costs are going to have to be borne independently of the
number of rooms occupied, it will be convenient to keep the hotel open in the low season,
provided the revenue obtained is higher than the average variable cost, that is, providing the
contribution margin is positive.
If the contribution margin is positive, each room sold will contribute to covering the fixed
costs, which would not happen if the hotel were closed.

Thus, the decision to close or to keep the hotel open during the low season will be made knowing
the behaviour and magnitude of the fixed and variable costs of the operation. The correct
decision will be to keep the hotel open, provided the revenue obtained per room occupied is
higher than the average variable cost, and will not depend, in principle, on the expected
occupancy in that season.

The problem of fixed costs

Up to now we have assumed that the fact of closing the hotel during the low season cannot entail
any saving in the fixed costs. But suffice to look around us to appreciate that a large proportion of
tourist establishments close during the low season. Is it perhaps impossible for them to market their
beds with a positive contribution margin? This is a possibility, but what probably occurs in most
cases is that these companies adopt cost structures that enable them “to save” part of the costs
which we would initially consider fixed if they close during these periods of low demand. A more
profound analysis of the fixed costs leads us to make a sub-classification which takes into account
the fact that some costs can be reduced when the company closes, whereas others cannot; and
there is even a series of costs that only appear when the company has large periods of inactivity.
We could classify fixed costs in the following way:
-COST OF INACTION (CI): all the costs the company bears whether or not it has any activity,
ex. the depreciation of buildings and facilities, some insurance premiums, etc.
-PREPARATORY COSTS (PC): all the costs that are essential for starting (or restarting) the
productive process. Companies bear these cost just when they decide to shut down.
-MINIMUM OPERATING COSTS (MOC): all the costs that are essential for any volume of positive
activity, but which disappear when there is a perspective of inactivity. Companies bear these cost
just when they decide to keep running the activity.

The initial approach is very similar to the previous one. The difference lies in the fact that now the
decision as to whether or not it is convenient to close is not as immediate. We must analyse in
depth the extent of the costs of inaction, the minimum operating costs and the preparatory
costs when dealing with a scenario of closure.

From the analysis of the profit and loss account, we deduce that, in this second case, it is
convenient to close the hotel in the low season. Yes it is, because by closing we manage to reduce
the fixed costs in such a way that the profit at the end of the year is higher than what we would
have if we were to keep the hotel open. The questions that arise now are the following:
-How much should our low season room occupancy increase in order to decide to keep the
hotel open (assuming 15 € revenue per room occupied)?
-What minimum revenue per room occupied would we need in order to keep the hotel open
all year round (assuming low season occupancy of 29%)?

We will answer the first question by assuming that due to market conditions it is difficult to set
prices higher than 15 € per room. The solution depends on reducing the fixed costs we obtain by
closing. In order to keep the hotel open we must sell a quantity of rooms that is large enough so
that the contribution margins cover at least the reduction or savings in fixed costs that would
be produced if we were to close during the low season.

With 43% room occupancy it makes no difference to keep the hotel open or to close it. The
decision to close or not, taking into account all the costs, will depend on the expected occupancy
with a revenue of 15 € per room occupied. If room occupancy during the low season is less
than 43% (as in the example, 29%) we will keep the hotel closed and if it is higher it will be
more convenient to keep it open.

In order to answer the second question, the reasoning is similar. Given a known occupancy of
29%, that is, 5,400 rooms during the low season, the unknown quantity is now the price.

What this means is that if we manage to get a price higher than 16.44 €, with 29% occupancy, it
will be convenient to keep the hotel open during the low season. If the price is lower, as in the
example (15 €), it will be more convenient to close the hotel during this season.
Topic 8. Supply chain management

Supply chain

Describes the links a company establishes with other organizations/agents along the value chain.
These links are the channel through which flows of inputs, information, and outputs move from
production activities to the marketplace

Characterized by:
• Flows of inputs, information and outputs moving across networks.
• Information flows that gives feedback to a company from suppliers and customers.
• The types of the flows (unidirectional vs. bi-directional.)

A well-designed supply chain can be a critical source of competitive advantages. It can lead firms
to reach cost reduction and efficiency, flexibility and agility, responsiveness to environmental
changes, and capabilities to meet customers' needs.

Measuring supply chain performance

Focusing on the costs of inventories, we can measure it by the amount of value of resources
stored at given
point of time.

To assess the efficiency of the supply chain, we use: inventory turnover and weeks-of-supply.

Inventory turnover

Costs of goods sold: cost of production, excluding selling and administrative expenses.

Average aggregate inventory value: value of all items held in inventory for the company valued
at cost.

The inventory turnover gives us the number of times inventory has to be replaced in a given period
of time.
The higher it is, the more rotation we have, signal of moving inventory frequently.

i.e.: Suppose a company's new annual report claims their costs of goods sold for the year is $160
million and their total average inventory (production materials + work-in-process) is worth $35
million. This company normally has an inventory turn ratio of 10. What is this vear's Inventory
Turnover ratio? What does it mean?

Inventory turnover = ($160m / $35m)= 4,57.

Since the company's normal inventory turnover ratio is 10, a drop to 4,57 means that the inventory
is not turning over as quickly as it had in the past. Each item on average remains longer in the
inventory.

Weeks of supply
It is the inverse of the inventory turnover measure. It gives
us how many weeks’ worth of inventory is available in the
system at a given point in time. It tells us how many days will take us to sell the inventory.

i.e.: Information for Dell for the year 2006.

Inventory turnover = 45958 / (327 + 247) = 80,07 turns/year.

Weeks-of-supply = [(327 + 247) / 45958] x 52 = 0,65 weeks.

Other forms of measuring supply chain performance

• Cost of the supply chain.

• Degree of flexibility. How flexible the supply chain is.
• Customers’ satisfaction.
• Degree of coordination among the organization making up a supply chain.

Supply chain design strategy

It can affect a firm’s competitive position in the market place, it can shape how a firm coordinate
with other organizations, and the lack of coordination among companies along the supply chain can
result in the bullwhip effect.

Bullwhip effect

Patterns of supply and demands are not synchronized. In some stages of the chain, we are
accumulating inventories, and in others we have a shortage.

How to avoid it?

Demand forecasting, knowledge on life cycle of products and services, knowledge on standards
prevailing to product delivery, and through supplier-managed inventories.

This allows:

Cost savings: suppliers and customers eliminate the need to have an excess of inventory thanks to
a better planning of operations (buffer reduction).

Better customer service: supplier is frequently on the site and understands the customer's
operations better.

Elements of the design of a supply chain

Considering the uncertainty of demand, defined by Fisher: functional and innovators.

Considering the uncertainty of supply, defined by Hau Lee: stable and evolutionary.

Types of supply chain strategies

• Efficient supply chain:

o Build economies of scales.

o Getting rid of non-valued added activities.

o Use of optimization techniques to deploybest capacity utilization.

• Risk/hedging supply chain:

o Sharing risks by sharing resources.

o Identify and have alternative sources of

supplies.

• Responsive supply chain:

o Mass customization.

o Build to order process.

• Agile supply chain:

 o Combination of strategies to increase responsiveness and hedge of risk.

Service supply chain

The main distinction between supply chains of services and manufacturers is that the customer has
to be present inn order to be able to present the service.

• Service: Focus on the interaction of the client and the provider.

• Manufacturing: Focus on the creation and entry of a material good.

Customer acts like a supplier → customer-supplier duality

Outsourcing

Process through which companies move some of their activities, and responsibilities, to outside
providers.

Outsourcing leads firms to assess which activities to keep in-house and which to outsource,
determining the core activities of the firm.

Fixed costs disappear, but variable costs increase.

Reasons to outsource

→ Organizationally driven reasons. Enhance effectiveness focusing on what the firm does best,
increase flexibility, ease organizational changes.

→ Financially driven reasons. Reduce investments in assets, generate cash-flows.

→ Improvement driven reasons. Improve operating performance, improve management and

control, acquire innovative ideas, obtain expertise and skills.

→ Revenue-driven reasons. Gain market access and opportunities, accelerate expansion, expand
scale and production.

→ Cost-driven reasons. Turn fixed into variable costs, improve provider performance.
→ Employee-driven reasons. Give employees a stronger career path, increase commitments and

energy in non-core activities.

Framework for structuring supplier relationship

Mass customization

A company's ability to deliver products/services highly customized in a large scale around the
world. It is necessary to postpone the product differentiation for a particular client.

The attributes that distinguish the product are introduced to the product in the last stages of the
transformation process.

There are three requirements:

1. Modularity: products must ne produced by modular subunits that can be loosely coordinated
and integrated.

2. Flexible process: modular process in order to re-order them easily.

3. Supply chain: efficient and quick delivery.

It makes sense in cases where we have a high demand uncertainty and allow supply uncertainty.

Topic 9 – Logistics and facility location

What is logistics?

Logistics and the supply chain

According to the Association for Operations Management, logistics is the art and science of
obtaining, producing, and distributing material and products in the proper place and in
proper quantities.
 Logistics is interrelated to the supply chain design. In fact, Chase et al., (2009) define logistics as
the sound study of how alternative flows of material, services, products, and information
move along the supply chain.

Decisions related to logistics

Logistics decisions are those that have a direct relationship with the choice of how to distribute in
the best possible way the goods produced by the company to its customers.

These decisions are determined by issues, such as:

• The cost of transporting the product.

• The speed of delivery.

• The degree of flexibility to react to changes in delivery conditions.

Decisions in logistics

Following are the main aspects we will consider for decisions in logistics:

• Modes of transportation: Air, water, highway, rail.

• Storage systems: Consolidating and cross-docking.
• Facility location.

Decisions on modes of transportation: Logistics-system design matrix

• A key decision area is deciding how the material will be

• transported.
• The following matrix shows the basic alternatives.
• Each mode is suited better to a certain type of product.
• Few companies have a single mode of transportation.
Multinomial solutions

Decisions on storage system

Cross-docking

Cross-docking is a logistics approach where rather than making larger shipments, large
shipments are broken down into small shipments to be delivered in an area.

• The term cross docking refers to moving a product from a manufacturing plant and
delivering it directly to the customer with little or no material handling in between.
• Cross docking not only reduces material handling but also reduces the need to store the
products in the warehouse.
This approach is characterized by:

• Its capacity to optimize shipping and handling costs.

• Its requirements in terms of coordination, which encourage the adoption of computerized
control systems.

Advantages of cross-docking:

• Minimize needs for warehouse space.

• Reduces inventory costs.
• Reduce material handling.
• Increase product quality.
• Reduces labor quality.
• Reduces costs associated with damages.
• Reduce delivery times.
• Increase customer service levels.
• Reduce transportation costs
• Reduce fixed asset costs.

Issues in facility locations

Facility location is a strategic issue given that location can give companies competitive
advantages.

For example, some of the following factors could lead to these advantages:

• Privileged access to inputs.

• Access to new markets.

• Access to inputs of the best quality.

Business environment: This refers to political, economics, legal and institutional factors that
generate incentives for firms to choose certain areas to site their facilities. PESTEL analysis may
help enterprises to evaluate factors in their business environment that can affect their facility
location decisions.
From previous consideration, the following are factors to be assessed when companies choose
their facility locations:

• Proximity to clients.
• Business climate.
• Total costs.
• Infrastructure.
• Quality of labor.
• Suppliers.
• Other facilities.
• Free trade zones.
• Political risks.
• Governmental barriers.
• Trading blocks.
• Environmental regulation.
• Host community.
• Competitive advantages.
Facility location methods

Here we will review three methods that assist companies in deciding on their facility location:

• Factor-rating systems.

• Centroid method.

• Transportation method of linear programming

Other alternatives include:

• Cost analysis: Assessment of the budget corresponding to alternative sites.

Factor-rating system

o This method consists of the comparison of two or more locations on the basis of a list of
factors
o The ideas is to build scales that allow rating each of the options to be evaluated.
o It is a widely used method, given its simplicy, and its ability to include a wide range of
factors.

A disadvantage of this method is its inability to reflect information about the costs involved in the
considered factors.

Centroid method

• The centroid method is a technique used to determine the location of facilities based on
existing facilities, the distance among them, and the volume of goods to be shipped.
• This method is often used to determine the location of intermediates or distribution
warehouses.
• In its simplest version, the method assumes that the inbound and outbound costs are equal
and that it does not include shipping costs for less than full loads.
This methodology involves formulas used to compute the coordinates of the two-dimensional point
that meets the distance and volume criteria stated earlier.

Where:

Cx = X coordinate of centroid.

Cy = Y coordinate of centroid.

dix = X coordinate of the i-th location.

diy = Y coordinate of the i-th location.

Vi = Volume of goods moved to or from i-th location.

Example

The HiOctane Refining Company needs to locate an intermediate holding facility between its
refining plant in Long Beach and its major distributors.

Next slide shows the coordinate map and the amount of gasoline shipped to or from the plant and
distributors.

In this example, for the Long Beach location (the first location), dix = 325, diy = 75, and Vi = 1,500.
Transportations methods of linear programming

o Transportation method is a special case of a linear programming problem.

o This method allows for determining the best way to transport products from several sources
to several destinations in order to either minimize costs or maximize profits.
o Optimization is done taking into account both the production capacity constraints of various
facilities and demand requirements.

EXPLANATION ON AULA DIGITAL (VIDEO)

Location of service facilities using regression analysis

• Regression analysis is a statistical tool designed for the investigation of relationships

between variables.
• Typically, the research seeks to verify a causal effect of one variable on another. For
instance, the causal effect of the rate of unemployment on firms’ profitability.
• To explore this issue, the researcher collects data on the underlying variables of interest. By
using regression analysis, the quantitative effect of one variable on another is estimated.

Regression models: Screening hotel location sites (Contd.)

• A multisite hotel can use a regression model to screen potential locations for new hotels.
• To do so, a list of variables must be designed, in an attempt to determine factors that
explain the variation in the hotel chain’s operating profit.
• Data is collected on a number of existing sites.
• Regression analysis identifies the variables that associate with operating profit in two years.
Topic 10 and 11 – Planning and inventory control

What in enterprise resource planning (ERP)

Enterprise resource planning systems (ERP) is a software system that integrates applications
addressed to running business operations, from manufacturing, accounting to operations and
supply management. This system assists companies in managing every functional area of a
business

Integration is achieved by using databases that are shared by all the applications (programs
dedicated to each functional area) that make up the software system.

ERP GOALS

These are the main goals pursued by an ERP system:

• To improve the decision-making process in business by providing accurate information

at the moment on the operations and processes carried out by a firm’s functional areas.
• To optimize business processes, eliminating duplicates in the performance of tasks.
• To provide a company with new ways to do business.

SAP AG and the software system R/3

SAP AG, a German company, is leader in the world in the provision of services to enterprise
resources planning. The main product of the company is the R/3 software. This program is
designed to operate with a three- tier client/server configuration.

SAP application modules

SAP software is composed by a range of modules, each of which addresses a specific functional
area. There is one module dedicated to the area of finance, another aimed at the area of human
resources management, a module for the area of operations, and another for the corporate
services area. These modules can be used alone or in combination.
Benefits of ERP

• Because software communicates across all functions, there is absolute visibility of what is
happening in all parts of the business.
• The discipline of forcing business-process-based changes is an effective mechanism for
making all parts of the business more efficient.
• There is a better sense of control of operations that will form the basis for continuous
improvement.
• It enables far more sophisticated communication with customers, suppliers, and other
business partners.
• It is capable of integrating whole supply chains including suppliers’ suppliers and
customers’ customers.
Business intelligence (BI)

• BI refers to te process of gathering, analyzing, and interpreting data of issues such as,
firms’ competitive environment, business climate, and market opportunities, among others.
• There are specialized companies that provide BI services to other firms. The acquisition of
these services allows firms to improve their decision-making process.

Through BI, companies may acquire critical information about:

• Attitudes and behavior of costumers in a particular market.

• Identification of customer groups with high potential for enhancing profitability.
• Evaluation of attractiveness of competing markets .
• Assessment of the experience and perception of a markets or a brand.

Issues on forecasting and demand management

Importance of forecast for a company (why is it necessary in Operations and Supply

Management)

• Companies need to plan for the future to ensure they can meet the needs of the market
efficiently and effectively.
• Forecasting provides information to improve the functioning of processes. It gives relevant
information to take decisions on issues, such as capacity planning, inventory, and
scheduling.

Demand management

The objective of demand management is to identify, coordinate and control all sources of demands
so that the productive process can meet customers’ needs effectively.

To do so, we need to answer the following questions:

o Where does demand come from?

o What actions may a company take to manage demand ?

Demand sources

o Dependent demand: This is demand arising ad a consequence of the demands of other

products, services, and inputs
o Independent demand: This demand doe not come from the demands of other products,
services or inputs.
Actions for managing demand

To adopt an active role, trying to influence demand :

• Advertising campaigns
• Cut prices, and discounts
• Incentives to sales personnel
• Incentives to customers

To adopt a passive role, responding to demand just what it is. This can be the best course of
action in situations in which:

• The company is running at maximum capacity.

• Advertising is costly.
• A firm’s market is stable.
• There are legal, environmental, ethical, or moral reasons.

Forecasting independent demand

Demand forecasting can be classified into two categories:

• Qualitative methods.
• Quantitative methods. In this category, we can identify three subcategories:
• Time series analysis.
• Causal models.
• Simulation methods.
What is sales and operations planning?

• This is a process built on a teamwork between sales, operations, finance, and product
development in which the aim is to strike a balance between supply and demand.
• In doing so, the firm seeks to:
o Improve customer service.
o Lower inventories.
o Stabilize production rates.
o Shorten customer lead times.
The aggregate operation plan

The main purpose of the aggregate operation plan is to find the optimal combination of production
rate, workforce level, and inventory:

• Production rate: The number of units finished per unit of time.

• Workforce level: The number of workers needed for production.
• Inventory (if needed): Unused inventory accumulated from prior periods.

To determine these factors, it is necessary to have demand forecasts that are as reliable as
possible.

In an aggregate planning process, the problem can be defined by the following statement:

Given the demand forecast Ft for each period t in the planning horizon that covers T periods,
determine the production level Pt, the inventory, It, and the workforce, Wt, for periods t=1,2,3, ... T
that minimize the relevant costs over the planning horizon.

Production planning strategies

• Production planning strategies are the plans for meeting demand. Trade offs involved
include workers employed, work hours, inventory and shortages.
• A pure strategy uses just one of these approaches, a mixed strategy uses two or more.

o Chase strategy: Equalize the production rate to the order rate by hiring and laying off
employees as the order rates change.
o Stable workforce-variable work hours: Change the output by varying the number of
hours worked via flexible work schedules or overtime.
 o Level strategy: Keep a stable workforce at a constant production rate, matching order
rates by means of inventory fluctuations.
o Outsourcing: Subcontract part of the production process

Relevant costs

• Basic production costs: Fixed and variable costs including labor costs.
• Costs associated with changes in the production rate:Hiring, training, laying off
personnel.
• Inventory holding costs:Storing,insurance,spoilageand obsolescence.
• Backordering costs: Costs of expediting< loss of customer goodwill, loss of sales revenues
due to backordering, queues.

Aggregate planning techniques

Tucson park and recreational department: aggregate planning services

• Option1: keep a medium-level full-time staff and schedule work during off-seasons
(maintenance tasks during winter) and use of part-time staff in peak-demand periods.
• Option2: keep a lower level of staff over the year and subcontract all additional work
currently done by full-time staff. Still using part-time staff during peak demands
• Option3: maintain administrative staff and subcontract the rest of work, including part-time
staff.
Inventory control

Inventory is the stock of any item or resource used in an organization and can include

• Raw material.
• Finished products.
• Supplies, parts.
• Work-in-process (WIP).

In operations, inventory is viewed as a pile of money stored on shelves as well as in trucks and
planes while in transit. Inventory is money.

The key is to integrate correctly into the supply chain. Reduce inventory order time and increase
forecast accuracy.

The average cost of inventory in the US is between 30 and 35% of its value.

Inventory management

Inventory management: Inventory planning and control to meet the organization's competitive
priorities. Inventory management is a process that requires information on expected demands,
quantities of inventory available, and process of ordering.

The challenge is not to reduce inventories to a minimum to reduce costs, or to have excess
inventory to meet all demands, but to maintain adequate quantity so that the company reaches
its competitive priorities in the most efficient way possible.

Purposes of inventory

1. To maintain the independence of operations (flexibility).

2. To meet variations in product demand.

3. To allow flexibility in production scheduling.

4. To provide a safeguard for variation in raw material delivery time.

5. To take advantage of economic purchase-order size.

Inventory costs

• Holding(or carrying)costs: This includes elements, such as costs for storage, handling,
and insurance.
• Setup(or production change)costs: This includes issues, such as costs for arranging
specific equipment setups.
• Ordering costs: Costs of someone placing an order.
• Shortage costs: Costs of canceling an order.
Inventory systems

• Single-Period Inventory Model:

o One-time purchasing decision (Example: A vendor selling T-shirts at a football
game).
o Seeks to balance the costs of inventory overstock and understock.
• Multi-Period Inventory Models:
o Fixed-Order Quantity Models (Q model): Event-triggered (Example: running out of
stock).
o Fixed-Time Period Models (P model): Time triggered (Example: Monthly sales call
by sales representative).

Single-period inventory model

This type of system refers to those products that have a short life cycle.

Examples: Peddling of newspapers, overbooking of rooms and flights, buffets of a hotel, perishable
products (like fruit and meat)
Newspapers:
• How many newspapers to carry?
• Cost for carrying too many.
• Cost for carrying too few.
Overbooking:
• How many rooms to book if we know that there is a % of cancellations?
• Cost of being overbooked.
• Cost of having empty rooms.

This model states that we should continue to increase the size of the inventory so long as the
probability of not selling the last unit added is equal to or less than the ratio of: Cu/Co+Cu
Where

o Cu cost per unit of demand underestimated

o Co cost per unit of demand overestimated
o P probability that the unit will not sold
o Single-period model example

Example

A college basketball team is playing in a tournament game this weekend. Based on our past
experience, The college sells on average 2,400 shirts with a standard deviation of 350. In doing so,
the college makes $10 on every shirt sold at the game but loses $5 on every shirt not sold.

How many shirts should the college make for the game?

According with the previous information, we know that:

o Cu = $10
o Co = $5

P<= Cu/Cu+Co= 10/10+5= 0.667

Therefore, we need to have 2,400 + 0.432(350)=2,551 T-shirts for the game.

Multiperiod models

Resources are purchased periodically, maintaining inventory levels to meet demand:

• Fixed-quantity models (Q models) - Very frequent in services. Continuous review system.

• Fixed-period models (P models) - Uncommon in services. Periodic review system.

o In a Q(Quantity)model, inventory is continuously monitored, and an order is placed if

inventory is too low. The crucial thing is to establish when the inventory is too low (the
reserve level).
o In a P(Period)model, inventory is monitored only periodically, and an order is placed until
reaching a pre- established level. The crucial thing is to establish how often the inventory is
reviewed (review period).
Fixed-order quantity models

In a Q (Quantity) model, inventory is continuously monitored, and an order is placed if inventory is

too low. We must establish two things.

• When to place the new order.

• What size the order is made.

Assumptions for the model:

• Demand for the product is constant and uniform throughout the period.
• Lead time (time form ordering to receipt) is constant.
• Price per unit of product is constant.
• Inventory holding cost is based on th average inventory.
• Ordering or setup costs are constant
• All demands for the product will be satisfied (No backorders are allowed).

Let us define some elements:

• Q : Maximum inventory level(i.e., order size)

• D : Demand every period
• L : periods it takes for the order to arrive
• R : reserve level. If this inventory level is reached an order is placed
Deriving the EOQ

IN THE EXAMPLE BELOW FIXED-ORDER QUANTITY MODEL

Fixed-order period models

Period model (fixed period)

In a P (Period) model, inventory is monitored only periodically, and an order is placed until reaching
a pre- established level. We must establish two things.

• When to check inventory.

• What size the order is made.

When to review the inventory?

Multi-period models: Comparing models

Advantages of Q models

• Fixed lot sizes, if large enough, can lead to quantity discounts.

• Lower safety inventories that translate into savings.

Advantages of P models

• The system is practical and comfortable because replenishment is done at fixed intervals.
Employees can regularly dedicate a day or a few hours to focus on this specific task.
• Orders for multiple items from the same supplier can be combined into a single purchase
order. Reducing costs for ordering and transportation.