IE 3265 Production & Operations Management

1. IE 3265 Production & Operations Management R. R. Lindeke, Ph.D. Spring 2006 Lecture Set 1

2. Simplex JIT CMS Kanban EUAC NPW MRP ATCF/BTCF MARR SMED Poka-Yoka Exponential Smoothing Winter’s Method APR Bullwhip Effect Functional Silo Pre-Quiz – Terms

3. IRR ROI EOQ Push Control Pull Control 6-sigma Johnson’s Rule Bottleneck Queing Markov Chain Transportation Model Duality Complementary Slackness Breakeven Analysis Pre-Quiz Terms, cont

4. Career Goals? • Manufacturing? • Services Industry? • Management of Operations • And Then Where?

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

6. Marketing Operations Finance Functional Areas of the Firm

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

8. Strategic Time Horizons – Short Term 3. Short Term Decisions • Purchasing • Shift Scheduling • Inventory Control

9. Time Horizon Short Term Intermediate Long Term Evaluation Cost Quality Profitability Customer satisfaction Focus Process Technology Market Issues Volume Quality Tasks Consistency Professionalism Proliferation Changes in the task Explicit goals The Elements of Strategy

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

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

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

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

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

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

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

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

18. Along What Other Dimensions Do Firms Compete? • Delivery Speed, Delivery Reliability • Federal Express, United Parcel Service • Flexibility • Toyota: provides many models to various market groups • Service • Nordstrom bases its reputation on providing a high quality of service to customers

19. Just-In-Time or LEAN Manufacturing • LEAN Mfg. is a production control system that grew out of Toyota’s kanban system. • It is a philosophy of production control that attempts to reduce inventories to an absolute minimum and eliminate waste in any of its forms. • It has become pretty much a standard way of thinking in many industries (especially automotive.)

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

21. An example from Engineering Economy – Machine Replacement analysis – After Tax Basis • Current Equipment “The Defender” (purchased a few years ago before Company started rational Quality Management system and JIT system) • Design Capacity: 310 molds/hr (620 parts/hr) • Part Tolerance: 0.030” across parting line • Average Quality: 2.9% defectives • Average Maintenance: $12000/yr

22. Machine Replacement analysis – After Tax Basis • When purchased, average “Lot Size” was 7500 molds and pattern change took 45 minutes • Currently, production lot size has fallen to 375 molds (and without significant investment) pattern change is still 45 minutes • Indicates 375/310 = 1.25 hr/pattern ‘run’ or 375 molds every 2 hours (with pattern change time) • Real Production rate is: 188 molds/hr (375 parts/hr)! (the horrors of JIT!)

23. Machine Replacement analysis – After Tax Basis • Quality/Maintenance “Downtime” consume 1 hour/shift • The plant operates two 10 hour shifts (20 planned hours) • but with downtime actual productive time is 18 productive hours/day on this machine • Good Castings/day = 375*.971*18 = 6555 (1,645,300/251day-year) • Scrap Castings/day = 375*.029*18 = 195 (48945/251day-year)

24. Quality Costs Are Like Icebergs! Sometimes Only 10% Are Visible The Rest Sink The Ship! • Visible Costs: • Scrap • Rework • Warranty Claims • Hidden Costs: • Eng/Mgt Time • Downtime • Increased Inventory • Decreased Capacity • Customer Dissatisfaction • Lose of Market Share

25. Machine Replacement analysis – After Tax Basis • Quality Cost Issues: • Eng/Mgt time: = 20400 • 8 hr/wk*51wks/yr@$50/hr • Inspect time: = 63750 • 50hr/wk *51wk/yr@$25/hr • Warranty Claims 85@$200 = 17000 • “Goodwill Costs” = 8000 • Total These Costs $109150

26. Machine Replacement analysis – After Tax Basis • “Product Issues” • Prod Costs (labor/mat’l/etc.) = 7.00 • Avg. Sale Price = 8.00 • NOTE: in most JIT (LEAN) systems cost must drop 5 to 10% annually to customer!!!! • Annual Income Defender (Rev – Costs) • Costs: • Pr. Cost (All Castings) + Qual. Costs + Maint. Costs7*(1645300 + 48945) + 109150 + 12000 = $11,980,865 • Revenue: • Price * # Good Parts = 8*1645300 = $13,162,400 • Income: 13,162,400 - $ 11,980,865 = $1,181,535

27. Machine Replacement analysis – After Tax Basis • Challenger Equipment • Design Capacity: 235 molds/hr (470 parts/hr) • Part Tolerance: +0.010” across parting line • Average Quality: 0.5% defectives • Average Maintenance: $8500/yr • This machine has ‘built-in’ quick change pattern technology so change is about 5 minutes (0.083 hours) • 750 parts takes (1.6 hrs + 0.083hr) = 1.68 hrs on this unit • This machine has an effect production rate of: 445 parts/hour

28. Machine Replacement analysis – After Tax Basis • Company does Preventative Maintenance so this machine works 20 hr/day • # Good Castings: 445*20*.995 = 8855*251=2,222,730/yr • # Scrap Castings: 445*20*.005 = 44*251 =11170/yr • Quality Costs: • Eng/Mgt time: NONE! • Insp. Time (spot Check) 5hr/wk*51 = $6375 • Warranty Costs 5/yr@$125 = $625 • Goodwill Costs NONE! • Total Q. Costs: =$7000

29. Machine Replacement analysis – After Tax Basis • Product Issues: • Production Costs: $7.10 • Avg Selling Price: $8.15(higher due to improved tolerances but will have to achieve continuing 5 – 10% reduction annually) • Annual Income Challenger (Rev – Costs) • Costs: • Pr. Cost (All Castings) + Qual. Costs + Maint. Costs7.1*(2222730 + 11170) + 7000 + 8000 = $15,875,690 • Revenue: • Price * #Good Parts = 8.15*2222730 = $18,115,250 • Income = $18,115,250 - $15,875,690 = $2,239,560

30. Machine Replacement analysis –Depreciation Issues • Defender (7yr MACRS asset now 3 yrs old) • Initial Cost: $1.5 Million • Present Mkt. Value: $650,000 • Pr. Book Value (1.25M – (.143 + .245 +.175)*1.25M) : $546,250 • Salvage Value (5 yrs): $220,000 • Challenger (7yr MACRS asset) • Initial Cost: $1 Million • Salvage Value (5 yrs): $425,000

31. Machine Replacement analysis – After Tax Basis – Depreciation Schedule

32. Machine Replacement analysis – After Tax Basis: 38% C. Tax rate, 12% MARR Potential Cap. Gain not taken by keeping Defender Long Term Cap. Gain -- Taken Saving in Income Tax Burden for not getting Cap. Gain of Selling Defender at > Bk Value

33. Machine Replacement analysis – After Tax Basis: 38% C. Tax rate, 12% MARR Long Term Cap. Gain Taken {since salvage value ($425K) exceeds Bk. Value ($223K)}

34. Defender “Followup” • You’re the Engineer – think about what to do? • Q 1 (homework): How much can this company spend to add ‘Quick-Change’ technology to existing machine? • Q2 (homework): Just by ‘Fixing’ Quality Issues, could the defender be kept? Show why or why not.