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Operations Management

Operations Management . Final Review. EOQ. Buying a couple of beer kegs or a six pack? Depends on Demand (D) Space in the refrigerator / cost of a new refrigerator (H) Distance to the nearest seller (S) Therefore the relationship SQRT(2 * D * S / H) = EOQ. Quantity. L. Time.

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Operations Management

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  1. Operations Management Final Review

  2. EOQ Buying a couple of beer kegs or a six pack? Depends on Demand (D) Space in the refrigerator / cost of a new refrigerator (H) Distance to the nearest seller (S) Therefore the relationship SQRT(2 * D * S / H) = EOQ

  3. Quantity L Time Q system SS + Q Q Q Q Reorder Point Safety Stock

  4. L Time Q 14 Total Inventory R = 4500 = Red + Safety stock Red = Mu * L = 800 * 5 = 4000 Safety stock = 4500-4000 =500 PLUS Cyclical stock = Q = 6000 So, AVG cyclical stock = (6000 + 0)/2 = 3000 = 3000+500 = 3500 PLUS SS + Q 6000 4500 ??

  5. days Q 14 continued BY Little’s law I = 800 *4 = 3200 SO total=3500+3200= 6700 Assembly 800

  6. Quantity L Next order placement date Order placement date Time P-system Target Q Period P

  7. A combination of P and Q • Every Saturday I top up my gas at Costco (P) • Maximum gas my tank can take = target qty T • But during the week if I see an empty tank warning light (re-order point) I top it up again • Note: I reach the gas station and the tank is filled up in 4 minutes. So is my lead time 4 min? • NO The lead time here is the time it takes for me to reach Costco.

  8. MRP Explanations: • The lead time for next item need not be same as final assembly time so what’s the logic behind making the final assembly start be the trigger for ordering? • All items have safety stock • Definitely wrong, in fact just the opposite • The underlying logic for level-by-level (or “backward explosion”) processing in an MRP system is: • Starting final assembly signals an order release for the next item. • Items without safety stock quantities must be processed before items that have safety stocks greater than zero. • Items must be processed in order of increasing lead time. • All parents (subassemblies or inputs) of an item must be processed before that item is processed.

  9. Q 2 Explanations: • Cant be, then how would companies adopt MRP? • No way, in fact just the opposite. • Again, just the opposite. • Which one of the following statements is an advantage of using an MRP system instead of a reorder point system? • MRP provides forward visibility for planning purposes. • MRP assumes a uniform demand rate. • MRP assumes independence among the inventory items. • MRP does not need bills of materials as an input.

  10. Q 3 • Consider the following scenario. A company produces products to customer order but has plenty of lead time to get the job done. Some components are standard, but many are designed or purchased for the particular customer order. The number of levels in the bills of material is variable, but tends to be large. Lot sizes must be large in some cases because of lengthy setup times or bottleneck operations. Based on this information, the production inventory system most likely to succeed would be: • Materials requirements planning • Q-system • Newsvendor • P-system Explanation: • Can’t be Q because many items are non standard so how can you order a large qtty and just wait for it to be consumed? • Can’t be Newsvendor because this company cant afford to work on the ‘probability’ that there will be an understockage, besides there’s no marginal profit from overstocking • Its made to order so the inventory has non standard items with a one time demand so a target order quantity makes no sense

  11. MRP - So what is it? • http://en.wikipedia.org/wiki/Material_resource_planning • Explodes the Master Production Schedule (MPS) to give you a start date for each antecedent process. • A project plan with the end date in sight, (sort of)

  12. MRP - So what? • SO if it’s so cool, why is everybody not using it? I’ve never heard of MRP before. • They are using it! • Functionality got added to address capacity, non manufacturing activities, services, suppliers etc. • So MRP => MRP II + SRP + DRP +bells and whistles = ERP, which every one has heard of!

  13. MRP Thanksgiving MRP 12:00 start mashed potatoes 01 2:15 yams in 2:05 prep yams 3:00pm Dinner 01 – Turkey – Taters 01 – Dressing 02 – Rolls rise: 38, cook: 12 01 – Yams ½ hr – green beans – gravy 01 2:00 dressing in oven 1:15 – 1:30 prep dressing 01 10:00 Turkey In oven 9:30 process turkey 2:00 Turkey out of oven 2:20 green beans 02 2:45 rolls cook 11:45 start rolls rising

  14. News Vendor Model • You have to place an order Q in an environment where demand is unknown. • So rationally you’d decide such that the profit of having the qth item > the loss incurred by having the qth item. • What are we really doing? • Marginal Profit (qth item) > Marginal Loss (qth item) • Prob of profit = p and prob of loss = 1-p • So p x Profit > (1-p) x Loss • So p > Loss/ (profit + loss) = Co/(Co + Cu) => Pr (p) = Pr (D>Q) = Co/(Co + Cu)

  15. Q 15 sample final • Customer cost of late flight = opportunity cost • Opportunity cost = money that could have been made if there was one more quantity available • This money = cost of under stocking

  16. Q 16 sample final 55 69 6 6 6 0 z Z = (69 – 55) / 6 = 2.33 Corresponding to 2.33 from the table we get 99% HOW? = 1 – .99 = .01 = 1%

  17. Q 17 sample final • Pr (D>Q) = Co / (Co + Cu) = .2173 • Because .2173 is on the left of the mean and most tables give the right of the mean, calculate the are of the green blob and look that up on the table. Which is 1- .2173 = .7827 so from the table the Z that gives a value of .7827 = .785 55 .7827 0.2173 0 .785 So converting Z to the un-normalised value Q = Z * 6 + 55 = 59.71 = 60

  18. Product Cycling • HW#2 q9, see archived TA session. • The M&M problem is nothing new. • Demand = throughput • But easier way • From lecture slides: insights for Product Cycling • < Tmin? Cant be done because MINIMUM time required to meet demand • > Tmin? Idle time, Tmin is all that’s required.

  19. SCM • Learnings from the beer game • Information transparency or else suffer the Bullwhip! • Single point inventory quantity decision • Decide qtty based on historic info not forecast.

  20. More on Bullwhip • Real Life: i2 a leading SCM product vendor removed a demand forecast module from their suite after some remarkable failures (e.g. NIKE) • Why it happens? • Guesstimates • Local maximisation (transport dept reduces cost by dispatching only full trucks – order batching) • Price promo – induces variability. But can be countered by information transparency • Shortage Gaming • Vendor-Managed Inventory

  21. JIT • We looked at Q, lead time, total cost, where use the adjective “Right” = JIT • PULL system • No bullwhip

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