12 - © 2014 Pearson Education, Inc.Inventory Mana.docx

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© 2014 Pearson Education, Inc.
Inventory Management
PowerPoint presentation to accompany
Heizer and Render
Operations Management, Eleventh Edition
Principles of Operations Management, Ninth Edition
PowerPoint slides by Jeff Heyl
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Outline
Global Company Profile:
Amazon.comThe Importance of InventoryManaging
InventoryInventory ModelsInventory Models for Independent
Demand

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Outline - Continued
Probabilistic Models and Safety Stock
Single-Period Model
Fixed-Period (P) Systems
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Learning Objectives
When you complete this chapter you should be able to:Conduct
an ABC analysisExplain and use cycle countingExplain and use
the EOQ model for independent inventory demandCompute a
reorder point and safety stock
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Learning Objectives
When you complete this chapter you should be able to:Apply

the production order quantity modelExplain and use the quantity
discount modelUnderstand service levels and probabilistic
inventory models
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Inventory Management at Amazon.comAmazon.com started as a
“virtual” retailer – no inventory, no warehouses, no overhead;
just computers taking orders to be filled by othersGrowth has
forced Amazon.com to become a world leader in warehousing
and inventory management
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Inventory Management at Amazon.com
Each order is assigned by computer to the closest distribution
center that has the product(s)
A “flow meister” at each distribution center assigns work crews
Lights indicate products that are to be picked and the light is
reset

Items are placed in crates on a conveyor, bar code scanners scan
each item 15 times to virtually eliminate errors
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Inventory Management at Amazon.comCrates arrive at central
point where items are boxed and labeled with new bar codeGift
wrapping is done by hand at 30 packages per hourCompleted
boxes are packed, taped, weighed and labeled before leaving
warehouse in a truckOrder arrives at customer within 1 - 2 days
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Inventory Management
The objective of inventory management is to strike a balance
between inventory investment and customer service

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Importance of InventoryOne of the most expensive assets of
many companies representing as much as 50% of total invested
capitalOperations managers must balance inventory investment
and customer service
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Functions of InventoryTo provide a selection of goods for
anticipated demand and to separate the firm from fluctuations in
demandTo decouple or separate various parts of the production
processTo take advantage of quantity discountsTo hedge against
inflation
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Types of InventoryRaw materialPurchased but not
processedWork-in-process (WIP)Undergone some change but
not completedA function of cycle time for a
productMaintenance/repair/operating (MRO)Necessary to keep

machinery and processes productiveFinished goodsCompleted
product awaiting shipment
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The Material Flow Cycle
Figure 12.1
InputWait forWait toMoveWait in queueSetupRunOutput
inspectionbe movedtimefor operatortimetime
Cycle time
95%5%
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Managing Inventory How inventory items can be classified
(ABC analysis)How accurate inventory records can be
maintained
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ABC AnalysisDivides inventory into three classes based on
annual dollar volumeClass A - high annual dollar volumeClass
B - medium annual dollar volumeClass C - low annual dollar
volumeUsed to establish policies that focus on the few critical
parts and not the many trivial ones
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ABC AnalysisABC Calculation(1)(2)(3)(4)(5)(6)(7)ITEM
STOCK NUMBERPERCENT OF NUMBER OF ITEMS
STOCKEDANNUAL VOLUME (UNITS)xUNIT
COST=ANNUAL DOLLAR VOLUMEPERCENT OF ANNUAL
DOLLAR VOLUMECLASS#1028620%1,000$ 90.00$
90,00038.8%A#11526500154.0077,00033.2%A#127601,55017.0
026,35011.3%B#1086730%35042.8615,0016.4%B#105001,0001
2.5012,5005.4%B#12572600$ 14.17$
8,5023.7%C#140752,000.601,200.5%C#0103650%1008.50850.4

%C#013071,200.42504.2%C#10572250.60150.1%C8,550$232,0
57100.0%
72%
23%
5%
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ABC Analysis
Figure 12.2
A Items
B Items
||||||||||
102030405060708090100

Percentage of annual dollar usage
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 –
Percentage of inventory items
C Items
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ABC AnalysisOther criteria than annual dollar volume may be
usedHigh shortage or holding costAnticipated engineering
changesDelivery problemsQuality problems
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ABC AnalysisPolicies employed may include

More emphasis on supplier development for A items
Tighter physical inventory control for A items
More care in forecasting A items
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Record AccuracyAccurate records are a critical ingredient in
production and inventory systemsPeriodic systems require
regular checks of inventoryTwo-bin systemPerpetual inventory
tracks receipts and subtractions on a continuing basisMay be
semi-automated
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Record AccuracyIncoming and outgoing
record keeping must be
accurateStockrooms should be secureNecessary to make precise
decisions about ordering, scheduling, and shipping
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Cycle CountingItems are counted and records updated on a
periodic basisOften used with ABC analysis Has several
advantages
Eliminates shutdowns and interruptions
Eliminates annual inventory adjustment
Trained personnel audit inventory accuracy
Allows causes of errors to be identified and corrected
Maintains accurate inventory records
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Cycle Counting Example
5,000 items in inventory, 500 A items, 1,750 B items, 2,750 C
items
Policy is to count A items every month (20 working days), B
items every quarter (60 days), and C items every six months
(120 days)ITEM CLASSQUANTITYCYCLE COUNTING
POLICYNUMBER OF ITEMS COUNTED PER DAYA500Each
month500/20 = 25/dayB1,750Each quarter1,750/60 =
29/dayC2,750Every 6 months2,750/120 = 23/day77/day

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Control of Service InventoriesCan be a critical component
of profitabilityLosses may come from
shrinkage or pilferageApplicable techniques include
Good personnel selection, training, and discipline
Tight control of incoming shipments
Effective control of all goods leaving facility
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Inventory ModelsIndependent demand - the demand for item is
independent of the demand for any other item in

inventoryDependent demand - the demand for item is dependent
upon the demand for some other item in the inventory
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Inventory ModelsHolding costs - the costs of holding or
“carrying” inventory over timeOrdering costs - the costs of
placing an order and receiving goodsSetup costs - cost to
prepare a machine or process for manufacturing an orderMay be
highly correlated with setup time
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Holding CostsTABLE 12.1Determining Inventory Holding Costs
CATEGORYCOST (AND RANGE) AS A PERCENT OF
INVENTORY VALUEHousing costs (building rent or
depreciation, operating costs, taxes, insurance)6% (3 -
10%)Material handling costs (equipment lease or depreciation,
power, operating cost)3% (1 - 3.5%)Labor cost (receiving,
warehousing, security)3% (3 - 5%)Investment costs (borrowing
costs, taxes, and insurance on inventory)11% (6 -
24%)Pilferage, space, and obsolescence (much higher in
industries undergoing rapid change like PCs and cell phones)3%
(2 - 5%)Overall carrying cost26%

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Holding CostsTABLE 12.1Determining Inventory Holding Costs
CATEGORYCOST (AND RANGE) AS A PERCENT OF
INVENTORY VALUEHousing costs (building rent or
depreciation, operating costs, taxes, insurance)6% (3 -
10%)Material handling costs (equipment lease or depreciation,
power, operating cost)3% (1 - 3.5%)Labor cost (receiving,
warehousing, security)3% (3 - 5%)Investment costs (borrowing
costs, taxes, and insurance on inventory)11% (6 -
24%)Pilferage, space, and obsolescence (much higher in
industries undergoing rapid change like PCs and cell phones)3%
(2 - 5%)Overall carrying cost26%

Holding costs vary considerably depending on the business,
location, and interest rates. Generally greater than 15%, some
high tech and fashion items have holding costs greater than
40%.
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Inventory Models for Independent Demand
Need to determine when and how much to orderBasic economic
order quantity (EOQ) modelProduction order quantity
modelQuantity discount model
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Basic EOQ ModelDemand is known, constant, and
independentLead time is known and constantReceipt of
inventory is instantaneous and completeQuantity discounts are
not possibleOnly variable costs are setup (or ordering) and
holdingStockouts can be completely avoided
Important assumptions
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Inventory Usage Over Time
Figure 12.3
Order quantity = Q (maximum inventory level)
Usage rate
Average inventory on hand
Q
2
Inventory level
Time

0
Minimum inventory
Total order received
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Minimizing Costs
Objective is to minimize total costs
Table 12.4(c)
Annual cost
Order quantity
Total cost of holding and setup (order)
Holding cost
Setup (order) cost
Minimum total cost
Optimal order quantity (Q*)
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Minimizing CostsBy minimizing the sum of setup (or ordering)
and holding costs, total costs are minimizedOptimal order size
Q* will minimize total costA reduction in either cost reduces
the total costOptimal order quantity occurs when holding cost
and setup cost are equal
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Minimizing Costs
Q= Number of pieces per order
Q*= Optimal number of pieces per order (EOQ)
D= Annual demand in units for the inventory item
S= Setup or ordering cost for each order
H= Holding or carrying cost per unit per year
Annual setup cost =(Number of orders placed per year)
x (Setup or order cost per order)
Annual demand
Number of units in each order
Setup or order cost per order
=
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Minimizing Costs
Annual holding cost =(Average inventory level)
x (Holding cost per unit per year)
Order quantity
2
(Holding cost per unit per year)
=
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Minimizing Costs
Optimal order quantity is found when annual setup cost equals
annual holding cost
Solving for Q*

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An EOQ Example
Determine optimal number of needles to order
D = 1,000 units
S = $10 per order
H = $.50 per unit per year
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An EOQ Example
Determine expected number of orders
D = 1,000 units Q*= 200 units
S = $10 per order
1,000
200
N = = 5 orders per year
Demand
Order quantity
= N = =
Expected number of orders

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An EOQ Example
Determine optimal time between orders
S = $10 per orderN= 5 orders/year
250
5
T = = 50 days between orders
Number of working days per year
Expected number of orders
= T =
Expected time between orders
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An EOQ Example
Determine the total annual cost
H = $.50 per unit per yearT= 50 days

Total annual cost = Setup cost + Holding cost
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The EOQ Model
When including actual cost of material P
Total annual cost = Setup cost + Holding cost + Product cost
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Robust ModelThe EOQ model is robustIt works even if all
parameters and assumptions are not metThe total cost curve is
relatively flat in the area of the EOQ
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An EOQ Example
Determine optimal number of needles to order

H = $.50 per unit per yearT= 50 days
Only 2% less than the total cost of $125 when the order quantity
was 200
1,500 units
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Reorder PointsEOQ answers the “how much” questionThe
reorder point (ROP) tells “when” to orderLead time (L) is the
time between placing and receiving an order
= d x L
Lead time for a new order in days
Demand per day
ROP =
D
Number of working days in a year
d =
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Reorder Point Curve
Figure 12.5

Resupply takes place as order arrives
Q*
ROP (units)
Inventory level (units)
Time (days)
Lead time = L
Slope = units/day = d
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Reorder Point Example
Demand = 8,000 iPods per year
250 working day year
Lead time for orders is 3 working days, may take 4
ROP = d x L
= 8,000/250 = 32 units
= 32 units per day x 3 days = 96 units
= 32 units per day x 4 days = 128 units
D
Number of working days in a year
d =
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Production Order Quantity Model

Used when inventory builds up over a period of time after an
order is placed
Used when units are produced and sold simultaneously
Figure 12.6
Inventory level
Time
Demand part of cycle with no production (only usage)
Part of inventory cycle during which production (and usage) is
taking place
t
Maximum inventory
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Q =Number of pieces per order p =Daily production rate
H =Holding cost per unit per year d =Daily demand/usage rate
t =Length of the production run in days
Annual inventory holding cost

Holding cost
per unit per year
= (Average inventory level) x
Annual inventory level
= (Maximum inventory level)/2
Maximum inventory level
Total produced during the production run
Total used during the production run
= –
= pt – dt
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However, Q = total produced = pt ; thus t = Q/p
Total produced during the production run
Total used during the production run

= –
= pt – dt
Q
p
Q
p
d
p
= p – d = Q 1 –
d
p
Q
2
2
Holding cost = (H) = 1 –
H
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Production Order Quantity Example
D =1,000 units p =8 units per day
S =$10 d =4 units per day
H =$0.50 per unit per year
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When annual data are used the equation becomes
Note:

D
Number of days the plant is in operation
1,000
250
d = 4 = =
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Quantity Discount ModelsReduced prices are often available
when larger quantities are purchasedTrade-off is between
reduced product cost and increased holding costTABLE 12.2A
Quantity Discount Schedule DISCOUNT NUMBERDISCOUNT
QUANTITYDISCOUNT (%)DISCOUNT PRICE (P)10 to 999no
discount$5.0021,000 to 1,9994$4.8032,000 and over5$4.75

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Quantity Discount Models
Total annual cost = Setup cost + Holding cost + Product cost
whereQ= Quantity orderedP= Price per unit
D= Annual demand in unitsH= Holding cost per unit per year
S= Ordering or setup cost per order
Because unit price varies, holding cost (H) is expressed as a
percent (I) of unit price (P)
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Steps in analyzing a quantity discountFor each discount,
calculate Q*If Q* for a discount doesn’t qualify, choose the
lowest possible quantity to get the discountCompute the total
cost for each Q* or adjusted value from Step 2Select the Q* that
gives the lowest total cost
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Figure 12.7
1,000
2,000

Total cost $
0
Order quantity
Q* for discount 2 is below the allowable range at point a and
must be adjusted upward to 1,000 units at point b
a
b
1st price break
2nd price break
Total cost curve for discount 1
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Quantity Discount Example
Calculate Q* for every discount
Q1* = = 700 cars/order
2(5,000)(49)
(.2)(5.00)

2(5,000)(49)
(.2)(4.80)
2(5,000)(49)
(.2)(4.75)
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Calculate Q* for every discount
2(5,000)(49)
(.2)(5.00)
2(5,000)(49)
(.2)(4.80)
2(5,000)(49)
(.2)(4.75)
1,000 — adjusted
2,000 — adjusted

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Choose the price and quantity that gives the lowest total cost
Buy 1,000 units at $4.80 per unit
TABLE 12.3Total Cost Computations for Wohl’s Discount Store
DISCOUNT NUMBERUNIT PRICEORDER
QUANTITYANNUAL PRODUCT COSTANNUAL ORDERING
COSTANNUAL HOLDING
COSTTOTAL1$5.00700$25,000$350$350$25,7002$4.801,000$
24,000$245$480$24,7253$4.752,000$23.750$122.50$950$24,82
2.50
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Probabilistic Models and
Safety StockUsed when demand is not constant or certainUse
safety stock to achieve a desired service level and avoid
stockouts
ROP = d x L + ss
Annual stockout costs = the sum of the units short x the
probability x the stockout cost/unit
x the number of orders per year
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Safety Stock Example
ROP = 50 unitsStockout cost = $40 per frame
Orders per year = 6 Carrying cost = $5 per frame per
50.360.270.11.0
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Safety Stock Example
ROP = 50 unitsStockout cost = $40 per frame
Orders per year = 6 Carrying cost = $5 per frame per year
A safety stock of 20 frames gives the lowest total cost
ROP = 50 + 20 = 70 frames
SAFETY STOCKADDITIONAL HOLDING COSTSTOCKOUT
COSTTOTAL COST20(20)($5) = $100$0$10010(10)($5) = $
50(10)(.1)($40)(6)=$240$2900$ 0(10)(.2)($40)(6) +
(20)(.1)($40)(6)=$960$960
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Probabilistic Demand
Figure 12.8
Safety stock
16.5 units

Place order
Inventory level
Time
0
Minimum demand during lead time
Maximum demand during lead time
Mean demand during lead time
Normal distribution probability of demand during lead time
Expected demand during lead time (350 kits)
ROP = 350 + safety stock of 16.5 = 366.5
Receive order
Lead time
*
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Use prescribed service levels to set safety stock when the cost
of stockouts cannot be determined
ROP = demand during lead time + ZsdLT
whereZ =Number of standard deviations
sdLT =Standard deviation of demand during lead time
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Safety stock
Probability of
no stockout
95% of the time
Mean demand 350
ROP = ? kits
Quantity
Number of
standard deviations

0
z
Risk of a stockout (5% of area of normal curve)
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Probabilistic Example
m =Average demand = 350 kits
sdLT =Standard deviation of
demand during lead time = 10 kits
Z =5% stockout policy (service level = 95%)
Using Appendix I, for an area under the curve of 95%, the Z =
1.65
Safety stock = ZsdLT = 1.65(10) = 16.5 kits
Reorder point=Expected demand during lead time + Safety stock
=350 kits + 16.5 kits of safety stock
=366.5 or 367 kits
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Other Probabilistic ModelsWhen data on demand during lead
time is not available, there are other models available

When demand is variable and lead time is constant
When lead time is variable and demand is constant
When both demand and lead time are variable
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Other Probabilistic Models
Demand is variable and lead time is constant
ROP =(Average daily demand
x Lead time in days) + ZsdLT
wheresdLT= sd Lead time
sd= standard deviation of demand per day
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Average daily demand (normally distributed) = 15
Lead time in days (constant) = 2
Standard deviation of daily demand = 5
Service level = 90%
Z for 90% = 1.28

From Appendix I
Safety stock is about 9 computers
ROP= (15 units x 2 days) + ZsdLT
= 30 + 1.28(5)( 2)
= 30 + 9.02 = 39.02 ≈ 39
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Lead time is variable and demand is constant
ROP =(Daily demand x Average lead time in days) +Z x (Daily
demand) x sLT
wheresLT= Standard deviation of lead time in days
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Daily demand (constant) = 10
Average lead time = 6 days
Standard deviation of lead time = sLT = 1
Service level = 98%, so Z (from Appendix I) = 2.055
ROP= (10 units x 6 days) + 2.055(10 units)(1)
= 60 + 20.55 = 80.55

Reorder point is about 81 cameras
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Both demand and lead time are variable
ROP =(Average daily demand
x Average lead time) + ZsdLT
wheresd=Standard deviation of demand per day
sLT=Standard deviation of lead time in days
sdLT=(Average lead time x sd2)
+ (Average daily demand)2s2LT
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Average daily demand (normally distributed) = 150
Standard deviation = sd = 16
Average lead time 5 days (normally distributed)
Standard deviation = sLT = 1 day
Service level = 95%, so Z = 1.65 (from Appendix I)

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Single-Period ModelOnly one order is placed for a productUnits
have little or no value at the end of the sales period
Cs = Cost of shortage = Sales price/unit – Cost/unit
Co = Cost of overage = Cost/unit – Salvage value
Cs
Cs + Co
Service level =
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Single-Period Example
Cs = cost of shortage = $1.25 – $.70 = $.55
Co = cost of overage = $.70 – $.30 = $.40
Service level =
Cs
Cs + Co
.55
.55 + .40
.55

.95
=
= = .579
Service level 57.9%
Optimal stocking level
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Single-Period Example
From Appendix I, for
The optimal stocking level
= 120 + (.20)(15) = 120 + 3 = 123 papers
The stockout risk = 1 – Service level
= 1 – .579 = .422 = 42.2%
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Fixed-Period (P) SystemsOrders placed at the end of a fixed
periodInventory counted only at end of periodOrder brings
inventory up to target levelOnly relevant costs are ordering and
holdingLead times are known and constantItems are independent
of one another

*
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Fixed-Period (P) Systems
Figure 12.9
On-hand inventory
Time
Q1
Q2
Target quantity (T)
P
P
P
Q3
Q4
*

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Fixed-Period SystemsInventory is only counted at each review
periodMay be scheduled at convenient timesAppropriate in
routine situationsMay result in stockouts between periodsMay
require increased safety stock
*
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All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system, or transmitted, in any
form or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior written permission of
the publisher.
Printed in the United States of America.
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Annual setup cost =
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S
Annual setup cost =
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S
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Q* =
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H
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Q
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=
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H
Q
*
=
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H
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Q
*
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Q* =
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Q
*
=
2(1,000)(10)
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=40,000=200 units
D
Q*
D
Q
*
TC =
D
Q
S +
Q
2
H
=
1,000
200
($10)+
200
2
($.50)

= (5)($10)+(100)($.50)
=$50+$50=$100
TC=
D
Q
S+
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2
H
=
1,000
200
($10)+
200
2
($.50)
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=$50+$50=$100
TC =
D
Q
S +
Q
2
H +PD
TC=
D
Q
S+
Q
2
H+PD

TC =
D
Q
S +
Q
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H
=
1,500
200
($10)+
200
2
($.50)
=$75+$50=$125
TC=
D
Q
S+
Q
2
H
=
1,500
200
($10)+
200
2
($.50)
=$75+$50=$125

=
1,500
244.9
($10)+
244.9
2
($.50)
=6.125($10)+122.45($.50)
=$61.25+$61.22=$122.47
=
1,500
244.9
($10)+
244.9
2
($.50)
=6.125($10)+122.45($.50)
=$61.25+$61.22=$122.47
Setup cost = (D /Q)S
Holding cost = 1
2
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Classmate 1
French vs. British colonies
While both the French and British nations’ colonies had
successful trade with the Native Americans of the time, how
they went about establishing their colonies was quite different.
When the French came to settle in America, they limited their
colonies to only Catholic settlers (Shi 110). Whereas the British
allowed more religious freedom to their settlers. The French
emigrated to America by order of the crown and were under
“absolute rule” of the French crown. Again, the English settlers
were granted more freedom and were allowed to self-govern in
their individual colonies, providing they followed English law
while doing so (Colonization and Settlement). Due to their strict
rules, the French colonies were far fewer in numbers than the
English colonies. According to the text, the population of New
France in the 1660’s was less than the small British colony of
Rhode Island (Shi 110).
The British colonies were larger in numbers and focused more
on farming, fishing and trading. The French focused on fur
trading as it was more profitable, although their government did
encourage more farming efforts. Harsh winters took their toll on
the French colonies and those in charge new they needed to rely
on help from the Native Americans. The French were successful
in establishing strong alliances with the neighboring tribes.
They assigned people to learn the languages and ways of the
indigenous people and had them marry into their families as
well (Shi 110). This effort strengthened the alliance with the
Native Americans, but did not do much in the way of growing
their colonies.
The British colonies may have started out relatively peaceful
with the Native Americans, but as greed took over, British
colonies quickly started showing blatant disregard for the
indigenous people and their land. Even after the British bested

the French during the French and Indian war, the French
“handed over” land that did not belong to them as a part of “The
Treaty of Paris.” The British king established the Royal
Proclamation of 1763, stating that the land to the west of the
Appalachians belonged to the Native Americans and the white
settlers were not to disturb them. Even though the King sent
soldiers to ensure compliance, it was unsuccessful and the
settlers continued to steal land without respect for the current
inhabitants (Shi 124-125).
COLONIZATION AND SETTLEMENT (1585–1763) English,
French, and Spanish Colonies: A Comparison. Facts on File
Inc.,
www.granburyisd.org/cms/lib/TX01000552/Centricity/Domain/2
87/Fact_Sheet_U1_Comparison_of_Eng_Fr_Sp_Col.pdf.
Classmate #2
There were many challenges that the American military leaders
faced during the Revolutionary war. The first issue was that the
Colonies did not have a professional army with the full-time
commitment to protect. Most of the American solders were
citizen-solders, known as militiamen. These militiamen were
“civilians called out from their farms and shops on short notice
to defend their local communities… once the danger was past,
they disappeared, for there were chores to do at home”(Shi, pg.
159). George Washington, the General of what became know as
the Continental army, knew that they could not win a war with
only using citizen soldiers. He recognized the need for a full-
time professional army, which he came to realize, would be a
difficult task to accomplish. Washington began recruiting
members whom sometimes arrived only to “claim the $20 in
cash and 100 acres of land offered by the Continental Congress
to those who would enlist for three years,” (Shi, pg. 166) and
“Washington and his officers soon began whipping the
Continental army into shape”, (Shi, pg. 159). Another problem

with obtaining troops for the Army was that many individuals
sided with Britain and did not support the war against them.
Eventually Washington realized that the only way to win the
war with the military that was available was to outlast Britain
and win the war with small surprise attacks. Britain eventually
ran out of money and resources due to the dragging on of the
war and Washington’s strategies were successful.
Lack of supplies was also a challenge for the American military
and lead to the taking of “supplies- grain and livestock –
directly from farmers in return for promises of future payment”,
(Shi, pg. 159). During the winter months the army suffered from
lack of clothing, which lead to extreme suffering. Lack of
supplies affected also contributed to the lack of soldiers as
many members went home during the winter months. One way
the American military solved the issues with lack of supplies as
well as troops were the alliances made with other Nations. The
American militaries alliances with France, Spain, and the
Netherlands was a “crucial development during the war…” as
these “nations provided the American revolutionaries
desperately needed money, supplies, soldiers, and warships.
Ninety percent of the gunpowder used by American soldiers
came from Europe,” (Shi, pg. 157). These alliances proved to
be successful and helped lead the American military to winning
the war.
6 - *
Managing Quality
Heizer and Render

6
6 - *
Outline
Arnold Palmer HospitalQuality and StrategyDefining
QualityTotal Quality ManagementTools of TQMThe Role of
InspectionTQM in Services
*
6 - *
Learning Objectives
When you complete this chapter you should be able to:Define
quality and TQMDescribe the ISO international quality
standardsExplain what Six Sigma isExplain how benchmarking
is used in TQM Explain quality robust products and

Taguchi conceptsUse the seven tools of TQM
*
6 - *
Managing Quality Provides a Competitive Advantage
Arnold Palmer HospitalDeliver over 12,000 babies
annuallyVirtually every type of quality tool is
employedContinuous improvementEmployee
empowermentBenchmarkingJust-in-timeQuality tools
*
6 - *
Quality and StrategyManaging quality supports differentiation,
low cost, and response strategiesQuality helps firms increase
sales and reduce costsBuilding a quality organization is a
demanding task
6 - *

Two Ways Quality
Improves Profitability
Figure 6.1
Improved Quality
Increased Profits
Increased productivityLower rework and scrap costsLower
warranty costs
Reduced Costs viaImproved responseFlexible pricingImproved
reputation
Sales Gains via
*
6 - *
The Flow of Activities
Organizational Practices
Leadership, Mission statement, Effective operating procedures,
Staff support, Training
Yields:What is important and what is to be
accomplished
Figure 6.2
Quality Principles
Customer focus, Continuous improvement, Benchmarking, Just-
in-time, Tools of TQM
Yields:How to do what is important and to be

accomplished
Employee Fulfillment
Empowerment, Organizational commitment
Yields:Employee attitudes that can accomplish
what is important
Customer Satisfaction
Winning orders, Repeat customers
Yields:An effective organization with
a competitive advantage
6 - *
Defining Quality
An operations manager’s objective is to build a total quality
management system that identifies and satisfies customer needs
6 - *
Defining Quality
The totality of features and characteristics of a product or
service that bears on its ability to satisfy stated or implied
needs
American Society for Quality
6 - *

Different ViewsUser-based: better performance, more
featuresManufacturing-based: conformance to standards, making
it right the first timeProduct-based: specific and measurable
attributes of the product
6 - *
Implications of QualityCompany reputationPerception of new
productsEmployment practicesSupplier relationsProduct
liabilityReduce riskGlobal implicationsImproved ability to
compete
6 - *
Malcolm Baldrige National Quality AwardEstablished in 1988
by the U.S. governmentDesigned to promote TQM
practicesRecent winners include
Lockheed Martin Missiles and Fire Control, MESA Products
Inc., North Mississippi Health Services, City of Irving,
Concordia Publishing House, Henry Ford Health System,
MEDRAD, Nestlé Purina PetCare Co., Montgomery County
Public Schools
*
6 - *

Baldrige Criteria
Applicants are evaluated
on:CATEGORIESPOINTSLeadership120Strategic Planning
85Customer Focus85Measurement, Analysis, and Knowledge
Management 90Workforce Focus85Operations
Focus85Results450
6 - *
ISO 9000 International Quality StandardsInternational
recognitionEncourages quality management procedures, detailed
documentation, work instructions, and recordkeeping2009
revision emphasized sustained successOver one million
certifications in 178 countriesCritical for global business
*
6 - *

ISO 9000 International Quality StandardsManagement
principlesTop management leadershipCustomer
satisfactionContinual improvement Involvement of
peopleProcess analysisUse of data-driven decision makingA
systems approach to managementMutually beneficial supplier
relationships
*
6 - *
Costs of QualityPrevention costs - reducing the potential for
defectsAppraisal costs - evaluating products, parts, and
servicesInternal failure costs - producing defective parts or
service before deliveryExternal failure costs - defects
discovered after delivery
6 - *
Costs of Quality
External Failure
Internal Failure
Total Cost
Quality Improvement

Total Cost
6 - *
Takumi
A Japanese character that symbolizes a broader dimension than
quality, a deeper process than education, and a more perfect
method than persistence
6 - *
Leaders in QualityTABLE 6.1Leaders in the Field of Quality
ManagementLEADERPHILOSOPHY/CONTRIBUTIONW.
Edwards DemingDeming insisted management accept
responsibility for building good systems. The employee cannot
produce products that on average exceed the quality of what the
process is capable of producing. His 14 points for implementing
quality improvement are presented in this chapter. Joseph M.
JuranA pioneer in teaching the Japanese how to improve
quality, Juran believed strongly in top-management
commitment, support, and involvement in the quality effort. He
was also a believer in teams that continually seek to raise
quality standards. Juran varies from Deming somewhat in
focusing on the customer and defining quality as fitness for use,
not necessarily the written specifications.

6 - *
Leaders in QualityTABLE 6.1Leaders in the Field of Quality
ManagementLEADERPHILOSOPHY/CONTRIBUTIONAmarnd
FeigenbaumHis 1961 book Total Quality Control laid out 40
steps to quality improvement processes. He viewed quality not
as a set of tools but as a total field that integrated the processes
of a company. His work in how people learn from each other’s
successes led to the field of cross-functional teamwork. Philip
B. CrosbyQuality Is Free was Crosby’s attention-getting book
published in 1979. Crosby believed that in the traditional trade-
off between the cost of improving quality and the cost of poor
quality, the cost of poor quality is understated. The cost of poor
quality should include all of the things that are involved in not
doing the job right the first time. Crosby coined the term zero
defects and stated, “There is absolutely no reason for having
errors or defects in any product or service.”
6 - *

Ethics and Quality ManagementOperations managers must
deliver healthy, safe, quality products and servicesPoor quality
risks injuries, lawsuits, recalls, and regulationEthical conduct
must dictate response to problemsAll stakeholders much be
considered
6 - *
Total Quality Management
Encompasses entire organization from supplier to customer
Stresses a commitment by management to have a continuing
companywide drive toward excellence in all aspects of products
and services that are important to the customer
*
6 - *
Deming’s Fourteen PointsTABLE 6.2Deming’s 14 Points for
Implementing Quality Improvement1.Create consistency of
purpose 2.Lead to promote change3.Build quality into the
product; stop depending on inspections to catch
problems4.Build long-term relationships based on performance
instead of awarding business on price5.Continuously improve
product, quality, and service6.Start training7.Emphasize
leadership

*
6 - *
Deming’s Fourteen PointsTABLE 6.2Deming’s 14 Points for
Implementing Quality Improvement8.Drive out fear9.Break
down barriers between departments10.Stop haranguing
workers11.Support, help, and improve12.Remove barriers to
pride in work13.Institute a vigorous program of education and
self-improvement14.Put everyone in the company to work on
the transformation

*
6 - *
Seven Concepts of TQM
Continuous improvement
Six Sigma
Employee empowerment
Benchmarking
Just-in-time (JIT)
Taguchi concepts
Knowledge of TQM tools
*
6 - *
Continuous ImprovementNever-ending process of continual
improvement Covers people, equipment, materials,
proceduresEvery operation can be improved
*

6 - *
Shewhart’s PDCA Model
Figure 6.3
4. Act
Implement the plan, document
2. Do
Test the plan
3. Check
Is the plan working?
Plan
Identify the pattern and make a plan
*
6 - *

Continuous ImprovementKaizen describes the ongoing process
of unending improvementTQM and zero defects also used to
describe continuous improvement
*
6 - *
Six SigmaTwo meaningsStatistical definition of a process that
is 99.9997% capable, 3.4 defects per million opportunities
(DPMO)A program designed to reduce defects, lower costs,
save time, and improve customer satisfactionA comprehensive
system for achieving and sustaining business success
6 - *
Six SigmaTwo meaningsStatistical definition of a process that
is 99.9997% capable, 3.4 defects per million opportunities
(DPMO)A program designed to reduce defects, lower costs,
save time, and improve customer satisfactionA comprehensive
system for achieving and sustaining business success
Figure 6.4
Mean

Lower limits
Upper limits
3.4 defects/million
2,700 defects/million
6 - *
Six Sigma ProgramOriginally developed by Motorola, adopted
and enhanced by Honeywell and GEHighly structured approach
to process improvementA strategyA discipline – DMAICA set
of 7 tools
6 - *
Six SigmaDefines the project’s purpose, scope, and outputs,
identifies the required process information keeping in mind the
customer’s definition of qualityMeasures the process and
collects dataAnalyzes the data ensuring

repeatability and reproducibilityImproves by modifying or
redesigning existing
processes and proceduresControls the new process
to make sure performance
levels are maintained
DMAIC Approach
6 - *
Implementing Six SigmaEmphasize defects per million
opportunities as a standard metricProvide extensive
trainingFocus on corporate sponsor support (Champions)Create
qualified process improvement experts (Black Belts, Green
Belts, etc.)Set stretch objectives
This cannot be accomplished without a major commitment from
top level management
6 - *

Employee EmpowermentGetting employees involved in product
and process improvements85% of quality problems are due
to process and material TechniquesBuild communication
networks
that include employeesDevelop open, supportive
supervisorsMove responsibility to employeesBuild a high-
morale organizationCreate formal team structures
*
6 - *
Quality CirclesGroup of employees who meet regularly to solve
problemsTrained in planning, problem solving, and statistical
methodsOften led by a facilitatorVery effective when done
properly
*
6 - *
Benchmarking
Selecting best practices to use as a standard for
performanceDetermine what to benchmarkForm a benchmark
teamIdentify benchmarking partnersCollect and analyze
benchmarking informationTake action to match or exceed the

benchmark
*
6 - *
Best Practices for Resolving Customer ComplaintsTable
6.3BEST PRACTICEJUSTIFICATIONMake it easy for clients
to complainIt is free market researchRespond quickly to
complaintsIt adds customers and loyaltyResolve complaints on
first contactIt reduces costUse computers to manage
complaintsDiscover trends, share them, and align your
servicesRecruit the best for customer service jobsIt should be
part of formal training and career advancement
*

6 - *
Internal BenchmarkingWhen the organization is large
enoughData more accessibleCan and should be established in a
variety of areas
6 - *
Just-in-Time (JIT)
Relationship to quality:JIT cuts the cost of qualityJIT improves
qualityBetter quality means less inventory and better, easier-to-
employ JIT system
*
6 - *
Just-in-Time (JIT)‘Pull’ system of production scheduling
including supply managementProduction only when
signaledAllows reduced inventory levelsInventory costs money
and hides process and material problemsEncourages improved
process and product quality
*
6 - *

Taguchi ConceptsEngineering and experimental design methods
to improve product and process designIdentify key component
and process variables affecting product variationTaguchi
ConceptsQuality robustnessQuality loss functionTarget-oriented
quality
*
6 - *
Quality RobustnessAbility to produce products uniformly in
adverse manufacturing and environmental conditionsRemove the
effects of adverse conditionsSmall variations in materials and
process do not destroy product quality
*
6 - *
Quality Loss FunctionShows that costs increase as the product
moves away from what the customer wantsCosts include
customer dissatisfaction, warranty
and service, internal
scrap and repair, and costs to societyTraditional conformance

specifications are too simplistic
Target-oriented quality
*
6 - *
Quality Loss Function
Figure 6.5
Unacceptable
Poor
Good
Best
Fair
High loss
Loss (to producing organization, customer, and society)
Low loss
L = D2C
where
L =loss to society
D2 =square of the distance from target value
C =cost of deviation

Lower
Target
Upper
Specification
Frequency
Target-oriented quality yields more product in the “best”
category
Target-oriented quality brings product toward the target value
Conformance-oriented quality keeps products within 3 standard
deviations
6 - *
TQM ToolsTools for Generating IdeasCheck SheetScatter
DiagramCause-and-Effect DiagramTools to Organize the

DataPareto ChartFlowchart (Process Diagram)
*
6 - *
TQM ToolsTools for Identifying ProblemsHistogramStatistical
Process Control Chart
*
6 - *
Hour
Defect12345678
A
B
C
Seven Tools of TQM
(a)Check Sheet: An organized method of recording data
Figure 6.6
/

/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/
/

*
6 - *
Seven Tools of TQM
(b)Scatter Diagram: A graph of the value of one variable vs.
another variable
Figure 6.6
Absenteeism
Productivity
*
6 - *

Seven Tools of TQM
(c)Cause-and-Effect Diagram: A tool that identifies process
elements (causes) that might effect an outcome
Figure 6.6
Cause
Materials
Methods
Manpower
Machinery
Effect
*
6 - *
Seven Tools of TQM

(d)Pareto Chart: A graph to identify and plot problems or
defects in descending order of frequency
Figure 6.6
Frequency
Percent
ABCDE
*
6 - *
Seven Tools of TQM
(e)Flowchart (Process Diagram): A chart that describes the
steps in a process
Figure 6.6

*
6 - *
Seven Tools of TQM
(f)Histogram: A distribution showing the frequency of
occurrences of a variable
Figure 6.6
Distribution
Repair time (minutes)
Frequency
*

6 - *
Seven Tools of TQM
(g)Statistical Process Control Chart: A chart with time on the
horizontal axis to plot values of a statistic
Figure 6.6
Upper control limit
Target value
Lower control limit
Time
*
6 - *
Cause-and-Effect Diagrams
Figure 6.7

Material
(ball)
Method
(shooting process)
Machine
(hoop &
backboard)
Manpower
(shooter)
Missed
free-throws
Rim alignment
Rim size
Backboard stability
Rim height
Follow-through
Hand position
Aiming point
Bend knees
Balance
Size of ball

Lopsidedness
Grain/Feel (grip)
Air pressure
Training
Conditioning
Motivation
Concentration
Consistency
*
6 - *
Pareto Charts
Number of occurrences
12
4
3
2

54
Room svcCheck-inPool hoursMinibarMisc.
72%16%5%4%3%
– 100
– 93
– 88
– 72
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 –
Frequency (number)
Causes and percent of the total
Cumulative percent
Data for October
6 - *

Flow Charts
MRI FlowchartPhysician schedules MRIPatient taken to
MRIPatient signs inPatient is preppedTechnician carries out
MRITechnician inspects filmIf unsatisfactory, repeatPatient
taken back to roomMRI read by radiologistMRI report
transferred to physicianPatient and physician discuss
11
10
20%
9
8
80%
1
2
3
4
5
6
7

6 - *
Statistical Process Control (SPC)Uses statistics and control
charts to tell when to take corrective actionDrives process
improvementFour key stepsMeasure the processWhen a change
is indicated, find the assignable causeEliminate or incorporate
the causeRestart the revised process
*
6 - *
Control Charts
Figure 6.8

Upper control limit
Coach’s target value
Lower control limit
Game number
|||||||||
123456789
40%
20%
0%
Plot the percent of free throws missed
6 - *
InspectionInvolves examining items to see if an item is good or
defectiveDetect a defective productDoes not correct deficiencies
in process or productIt is expensiveIssuesWhen to inspectWhere
in process to inspect
*
6 - *
When and Where to InspectAt the supplier’s plant while the
supplier is producingAt your facility upon receipt of goods from

your supplierBefore costly or irreversible processesDuring the
step-by-step production processWhen production or service is
completeBefore delivery to your customerAt the point of
customer contact
*
6 - *
InspectionMany problemsWorker fatigueMeasurement
errorProcess variabilityCannot inspect quality into a
productRobust design, empowered employees, and sound
processes are better solutions
6 - *
Source InspectionAlso known as source controlThe next step in
the process is your customerEnsure perfect
product to your
customer
6 - *
Source InspectionPoka-yoke is the concept of foolproof devices
or techniques designed to pass only acceptable
productChecklists ensure

consistency and
completeness
6 - *
Service Industry InspectionTABLE 6.4Examples of Inspection
in ServicesORGANIZATIONWHAT IS
INSPECTEDSTANDARDJones Law OfficeReceptionist
performance
Billing
AttorneyPhone answered by the second ring
Accurate, timely, and correct format
Promptness in returning callsHard Rock HotelReception desk
Doorman
Room
MinibarUse customer’s name
Greet guest in less than 30 seconds
All lights working, spotless bathroom
Restocked and charges accurately posted to bill

*
6 - *
INSPECTEDSTANDARDArnold Palmer HospitalBilling
Pharmacy
Lab
Nurses
AdmissionsAccurate, timely, and correct format
Prescription accuracy, inventory accuracy
Audit for lab-test accuracy
Charts immediately updated
Data entered correctly and completelyOlive Garden
RestaurantBusboy
Busboy
WaiterServes water and bread within 1 minute
Clears all entrée items and crumbs prior to dessert
Knows and suggest specials, desserts

*
6 - *
INSPECTEDSTANDARDNordstrom Department
StoreDisplay areas
Stockrooms
SalesclerksAttractive, well-organized, stocked, good lighting
Rotation of goods, organized, clean
Neat, courteous, very knowledgeable
*

6 - *
Attributes Versus Variables
Attributes
Items are either good or bad, acceptable or unacceptable
Does not address degree of failure
Variables
Measures dimensions such as weight, speed, height, or strength
Falls within an acceptable range
Use different statistical techniques
6 - *
TQM In ServicesService quality is more difficult to measure
than the quality of goodsService quality perceptions depend on
Intangible differences between productsIntangible expectations
customers have of those products
*
6 - *
Service Quality
The Operations Manager must recognize:The tangible
component of services is importantThe service process is
importantThe service is judged against the customer’s

expectationsExceptions will occur
6 - *
Service Specifications
6 - *
Determinants of Service QualityTable 6.5Reliability involves
consistency of performance and dependabilityResponsiveness
concerns the willingness or readiness of employees to provide
serviceCompetence means possession of the required skills and
knowledge to perform the serviceAccess involves
approachability and ease of contactCourtesy involves
politeness, respect, consideration, and
friendlinessCommunication means keeping customers informed
and listening to themCredibility involves trustworthiness,
believability, and honestySecurity is the freedom from danger,
risk, or doubtUnderstanding/knowing the customer involves
making the effort to understand the customer’s needsTangibles
include the physical evidence of the service

6 - *
Service Recovery Strategy
Managers should have a plan for when services fail
Marriott’s LEARN routine
Listen
Empathize
Apologize
React
Notify
6 - *
the publisher.
C H A P T E R 6 | M A N AG I N G Q UA L I T Y 225
range. If a piece of electrical wire is supposed to be 0.01 inch in
diameter, a micrometer can be

used to see if the product is close enough to pass inspection.
Knowing whether attributes or variables are being inspected
helps us decide which statisti-
cal quality control approach to take, as we will see in the
supplement to this chapter.
TQM in Services
The personal component of services is more difficult to measure
than the quality of the tangible
component. Generally, the user of a service, like the user of a
good, has features in mind that
form a basis for comparison among alternatives. Lack of any
one feature may eliminate the
ser-vice from further consideration. Quality also may be
perceived as a bundle of attributes in
which many lesser characteristics are superior to those of
competitors. This approach to product
com-parison differs little between goods and services. However,
what is very different about the
selection of services is the poor definition of the (1) intangible
differences between products and
(2) the intangible expectations customers have of those
products. Indeed, the intangible attributes
may not be defined at all. They are often unspoken images in
the purchaser’s mind. This is why
all of those marketing issues such as advertising, image, and
promotion can make a difference.
The operations manager plays a signi!cant role in addressing
several major aspects of
service quality. First, the tangible component of many services
is important. How well the ser-
vice is designed and produced does make a difference. This
might be how accurate, clear, and
complete your checkout bill at the hotel is, how warm the food

is at Taco Bell, or how well your
car runs after you pick it up at the repair shop.
Second, another aspect of service and service quality is the
process. Notice in Table 6.5 that
9 out of 10 of the determinants of service quality are related
to the service process. Such things
as reliability and courtesy are part of the process. An
operations manager can design processes
(service products) that have these attributes and can ensure their
quality through the TQM
techniques discussed in this chapter.
Third, the operations manager should realize that the customer’s
expectations are the stan-
dard against which the service is judged. Customers’
perceptions of service quality result from
a comparison of their “before-service expectations” with their
“actual-service experience.” In
VIDEO 6.2
TQM at Ritz-Carlton Hotels
Aircraft 97%
boarded 10 min.
before departure
time
1st bag to
conveyor belt
15 min. after
arrival
First passenger boarded
40 min. before departure

Flight attendants on- board
45 min. before departure
Cargo door opened
1 min. afer arrival
All doors closed
2 min before
departure
On board count-
check-in count
5 min. before
departure
Final load
closeout
2 min. before
departure
Like many service organizations, Alaska Airlines, sets quality
standards in areas such as courtesy,
appearance, and time. Shown here are some of Alaska Airlines’s
50 quality checkpoints, based on a
timeline for-each departure.
2123_Heizer_Ch06_pp205-234.indd 225 9/27/12 7:18 PM
5 - *

Design of Goods and Services
Heizer and Render
5
5 - *
Outline
Global Company Profile: Regal MarineGoods and Services
SelectionGenerating New ProductsProduct DevelopmentIssues
for Product DesignProduct Development Continuum
*
5 - *
Outline - Continued
Defining a Product
Documents for Production
Service Design

Application of Decision Trees to Product Design
Transition to Production
*
5 - *
Learning ObjectivesDefine product life cycleDescribe a product
development systemBuild a house of qualityExplain how time-
based competition is implemented by OM
When you complete this chapter you should be able to :
*
5 - *
Learning ObjectivesDescribe how products and services are
defined by OMDescribe the documents needed for
productionExplain how the customer participates in the design
and delivery of servicesApply decision trees to product issues
When you complete this chapter you should be able to :
*
5 - *

Global market
3-dimensional CAD system
Reduced product development time
Reduced problems with tooling
Reduced problems in production
Assembly line production
JIT
Regal Marine
*
5 - *
Organizations exist to provide goods or services to society
Great products are the key to success
Top organizations typically focus on core products
Customers buy satisfaction, not just a physical good or
particular service
Fundamental to an organization's strategy with implications
throughout the operations function
Goods and Services Selection
*

5 - *
Goods or services are the basis for an organization's existence
Limited and predicable life cycles requires constantly looking
for, designing, and developing new products
New products generate substantial revenue
*
5 - *
Figure 5.1
The higher the percentage of sales from the last 5 years, the
more likely the firm is to be a leader.
Industry leader
Top third
Middle third
Bottom third
Position of firm in its industry
Percent of sales from new products
50% –
40% –
30% –

20% –
10% –
0% –
*
5 - *
The objective of the product decision is to develop and
implement a product strategy that meets the demands of the
marketplace with a competitive advantage
Product Decision
*
5 - *
Product Strategy OptionsDifferentiationShouldice HospitalLow
costTaco BellRapid responseToyota
*
5 - *

Product Life CyclesMay be any length from a few days to
decadesThe operations function must be able to introduce new
products successfully
*
5 - *
Product Life Cycle
Negative cash flow
Figure 5.2
IntroductionGrowthMaturityDecline
Sales, cost, and cash flow
Cost of development and production
Cash flow
Net revenue (profit)
Sales revenue
Loss

*
5 - *
Life Cycle and Strategy
Introductory PhaseFine tuning may warrant unusual expenses
forResearchProduct developmentProcess modification and
enhancementSupplier development
*
5 - *
Product Life Cycle
Growth PhaseProduct design begins to stabilizeEffective
forecasting of capacity becomes necessaryAdding or enhancing
capacity may be necessary
*
5 - *
Product Life Cycle

Maturity PhaseCompetitors now establishedHigh volume,
innovative production may be neededImproved cost control,
reduction in options, paring down of product line
*
5 - *
Product Life Cycle
Decline PhaseUnless product makes a special contribution to the
organization, must plan to terminate offering
*
5 - *
Product Life Cycle Costs
Costs incurred
Costs committed
Ease of change
ConceptDetailedManufacturingDistribution,
designdesignservice,
prototypeand disposal
Percent of total cost

100 –
80 –
60 –
40 –
20 –
0 –
*
5 - *
Product-by-Value Analysis
Lists products in descending order of their individual dollar
contribution to the firm
Lists the total annual dollar contribution of the product
Helps management evaluate alternative strategies
*
5 - *
Generating New ProductsUnderstanding the customerEconomic
changeSociological and demographic changeTechnological
changePolitical and legal changeMarket practice, professional

standards, suppliers, distributors
*
5 - *
Product Development Stages
Figure 5.3
Scope for design and engineering teams
Evaluation
Introduction
Test Market
Functional Specifications
Design Review
Product Specifications
Customer Requirements
Feasibility
Concept

*
5 - *
Quality Function Deployment
Identify customer wants
Identify how the good/service will satisfy customer wants
Relate customer wants to product hows
Identify relationships between the firm’s hows
Develop customer importance ratings
Evaluate competing products
Compare performance to desirable technical attributes
*
5 - *
QFD House of Quality
Relationship
matrix

How to satisfy
customer wants
Interrelationships
Technical
evaluation
Target values
What the customer
wants
Customer importance ratings
Weighted rating
*
1
5 - *
House of Quality Example

Your team has been charged with designing a new camera for
Great Cameras, Inc.
The first action is
to construct a
House of Quality
*
5 - *
Customer
importance
rating
(5 = highest)

Lightweight 3
Easy to use 4
Reliable5
Easy to hold steady 2
High resolution1
What the customer wants
What the Customer
Wants
Relationship
Matrix
Technical
Attributes and
Evaluation
How to Satisfy
Customer Wants
Interrelationships
Analysis of
Competitors
*

5 - *
What the Customer
Wants
Relationship
Matrix
Technical
Attributes and
Evaluation
How to Satisfy
Customer Wants
Interrelationships
Analysis of
Competitors
Low electricity requirements
Aluminum components
Auto focus
Auto exposure
High number of pixels
Ergonomic design

How to Satisfy
Customer Wants
*
5 - *
Lightweight 3
Easy to use 4
Reliable5
High resolution1
What the Customer
Wants
Relationship

Matrix
Technical
Attributes and
Evaluation
How to Satisfy
Customer Wants
Interrelationships
Analysis of
Competitors
High relationship
Medium relationship
Low relationship

Relationship matrix
*
5 - *
Aluminum components
Auto focus
Auto exposure
Ergonomic design

Relationships between the things we can do
What the Customer
Wants
Relationship
Matrix
Technical
Attributes and
Evaluation
How to Satisfy
Customer Wants
Interrelationships
Analysis of
Competitors

*
5 - *
Weighted rating
Lightweight 3
Easy to use 4
Reliable5
High resolution1

Our importance ratings22927273225
What the Customer
Wants
Relationship
Matrix
Technical
Attributes and
Evaluation
How to Satisfy
Customer Wants
Interrelationships
Analysis of
Competitors
*
5 - *

Company A
Company B
GP
GP
FG
GP
PP
Lightweight 3
Easy to use 4

Reliable5
High resolution1
Our importance ratings225
How well do competing products meet customer wants
What the Customer
Wants
Relationship
Matrix
Technical
Attributes and
Evaluation
How to Satisfy
Customer Wants
Interrelationships
Analysis of
Competitors

*
5 - *
What the Customer
Wants
Relationship
Matrix
Technical
Attributes and
Evaluation
How to Satisfy
Customer Wants
Interrelationships
Analysis of
Competitors
Target values
(Technical attributes)
Technical evaluation
Company A0.760%yes1okG
Company B0.650%yes2okF
Us0.575%yes2okG
2 circuits

Failure 1 per 10,000
Panel ranking
0.5 A
75%
2’ to ∞
*
5 - *
Completed House of Quality

Aluminum components
Auto focus
Auto exposure
Ergonomic design
Company A
Company B
Lightweight3
Easy to use4
Reliable5
Easy to hold steady2

High resolution1
Our importance ratings
GP
GP
FG
GP
PP
Target values
(Technical attributes)
Technical evaluation
Company A0.760%yes1okG
Company B0.650%yes2okF

Us0.575%yes2okG
0.5 A
75%
2’ to ∞
2 circuits
Failure 1 per 10,000
Panel ranking
22 9 27 27 32 25
*
5 - *
House of Quality Sequence
Figure 5.4
Deploying resources through the organization in response to
customer requirements
Production process
Quality plan
House 4

Specific components
Production process
House 3
Design characteristics
Specific components
House 2
Customer requirements
Design characteristics
House 1
*
5 - *
Organizing for Product Development
Traditionally – distinct departments
Duties and responsibilities are defined
Difficult to foster forward thinking
A Champion
Product manager drives the product through the product
development system and related organizations

*
5 - *
Organizing for Product Development
Team approach
Cross functional – representatives from all disciplines or
functions
Product development teams, design for manufacturability teams,
value engineering teams
Japanese “whole organization” approach
No organizational divisions
*
5 - *
Manufacturability and
Value Engineering
Benefits:
Reduced complexity of the product
Reduction of environmental impact
Additional standardization of components
Improvement of functional aspects of the product
Improved job design and job safety
Improved maintainability (serviceability) of the product
Robust design

*
5 - *
Cost Reduction of a Bracket via Value Engineering
Figure 5.5
*
5 - *
Issues for Product Design
Robust design
Modular design
Computer-aided design (CAD)
Computer-aided manufacturing (CAM)
Virtual reality technology
Value analysis
Sustainability and Life Cycle Assessment (LCA)
*
5 - *

Robust DesignProduct is designed so that small variations in
production or assembly do not adversely affect the
productTypically results in lower cost and higher quality
*
5 - *
Modular Design
Products designed in easily segmented components
Adds flexibility to both production and marketing
Improved ability to satisfy customer requirements
*
5 - *
Using computers to design products and prepare engineering
documentation
Shorter development cycles, improved accuracy, lower cost
Information and designs can be deployed worldwide
Computer Aided Design (CAD)
*

5 - *
Design for Manufacturing and Assembly (DFMA)
Solve manufacturing problems during the design stage
3-D Object Modeling
Small prototype
development
CAD through the
internet
International data
exchange through STEP
Extensions of CAD
*
5 - *
Computer-Aided Manufacturing (CAM)Utilizing specialized
computers and program to control manufacturing
equipmentOften driven by the CAD system (CAD/CAM)
*
5 - *

Product quality
Shorter design time
Production cost reductions
Database availability
New range of capabilities
Benefits of CAD/CAM
*
5 - *
Virtual Reality Technology
Computer technology used to develop an interactive, 3-D model
of a product from the basic CAD data
Allows people to ‘see’ the finished design before a physical
model is built
Very effective in large-scale designs such as plant layout
*
5 - *
Value Analysis
Focuses on design improvement during production
Seeks improvements leading either to a better product or a
product which can be produced more economically with less

environmental impact
*
5 - *
Sustainability and Life Cycle Assessment (LCA)Sustainability
means meeting the needs of the present without compromising
the ability of future generations to meet their needsLCA is a
formal evaluation of the environmental impact of a product
*
5 - *
Product Development ContinuumProduct life cycles are
becoming shorter and the rate of technological change is
increasingDeveloping new products faster can result in a
competitive advantageTime-Based Competition
*
5 - *

Product Development Continuum
Figure 5.6
InternalCost of product development Shared
LengthySpeed of product developmentRapid and/
or Existing
HighRisk of product developmentShared
External Development Strategies
Alliances
Joint ventures
Purchase technology or expertise
by acquiring the developer
Internal Development Strategies
Migrations of existing products
Enhancements to existing products
New internally developed products
*
5 - *
Product Development ContinuumPurchasing technology by

acquiring a firmSpeeds developmentIssues concern the fit
between the acquired organization and product and the hostJoint
VenturesBoth organizations learnRisks are shared
*
5 - *
Product Development ContinuumThrough AlliancesCooperative
agreements between independent organizationsUseful when
technology is developingReduces risks
*
5 - *
Defining a ProductFirst definition is in terms of
functionsRigorous specifications are developed during the
design phaseManufactured products will have an engineering
drawingBill of material (BOM) lists the components of a
product
*
5 - *

Monterey Jack Cheese
(a)U.S. grade AA. Monterey cheese shall conform to the
following requirements:
(1) Flavor. Is fine and highly pleasing, free from undesirable
flavors and odors. May possess a very slight acid or feed
flavor.
(2) Body and texture. A plug drawn from the cheese shall be
reasonably firm. It shall have numerous small mechanical
openings evenly distributed throughout the plug. It shall not
possess sweet holes, yeast holes, or other gas holes.
(3) Color. Shall have a natural, uniform, bright and attractive
appearance.
(4) Finish and appearance—bandaged and
paraffin-dipped. The rind shall be sound,
firm, and smooth providing a good
protection to the cheese.
Code of Federal Regulation, Parts 53 to 109, General Service
Administration
*
5 - *
Engineering drawing
Shows dimensions, tolerances, and materials
Shows codes for Group Technology
Bill of Material

Lists components, quantities and where used
Shows product structure
Product Documents
*
5 - *
Engineering Drawings
Figure 5.8
*
5 - *
Bills of Material
BOM for a Panel Weldment
Figure 5.9 (a)
NUMBERDESCRIPTIONQTY
A 60-71PANEL WELDM’T1
A 60-7LOWER ROLLER ASSM.1
R 60-17 ROLLER1
R 60-428 PIN1
P 60-2 LOCKNUT1
A 60-72GUIDE ASSM. REAR1

R 60-57-1 SUPPORT ANGLE1
A 60-4 ROLLER ASSM.1
02-50-1150 BOLT1
A 60-73GUIDE ASSM. FRONT1
A 60-74 SUPPORT WELDM’T1
R 60-99 WEAR PLATE1
02-50-1150 BOLT1
*
5 - *
Bills of Material
Hard Rock Cafe’s Hickory BBQ Bacon Cheeseburger
Figure 5.9 (b)
DESCRIPTIONQTY
Bun1
Hamburger patty8 oz.

Cheddar cheese2 slices
Bacon2 strips
BBQ onions1/2 cup
Hickory BBQ sauce1 oz.
Burger set
Lettuce1 leaf
Tomato1 slice
Red onion4 rings
Pickle1 slice
French fries5 oz.
Seasoned salt1 tsp.
11-inch plate1
HRC flag1
*
5 - *
Parts grouped into families with similar characteristics
Coding system describes processing and physical characteristics
Part families can be produced
in dedicated manufacturing cells
Group Technology
*

5 - *
Group Technology Scheme
Figure 5.10
(a) Ungrouped Parts
(b) Grouped Cylindrical Parts (families of parts)
GroovedSlotted ThreadedDrilledMachined
*
5 - *
Improved design
Reduced raw material and purchases
Simplified production planning and control
Improved layout, routing, and machine loading
Reduced tooling setup time, work-in-process, and production
time
Group Technology Benefits
*

5 - *
Documents for Production
Assembly drawing
Assembly chart
Route sheet
Work order
Engineering change notices (ECNs)
*
5 - *
Assembly DrawingShows exploded view of productDetails
relative locations to show how to assemble the product
Figure 5.11 (a)
*
5 - *
Assembly Chart
Figure 5.11 (b)
Identifies the point of production where components flow into
subassemblies and ultimately into the final product

1
2
3
4
5
6
7
8
9
10
11
SA
1
SA
2

A1
A2
A3
A4
A5
R 209 Angle
R 207 Angle
Bolts w/nuts (2)
R 209 Angle
R 207 Angle
Bolt w/nut
R 404 Roller
Lock washer
Part number tag
Box w/packing material
Bolts w/nuts (2)
Left
bracket
assembly
Right
bracket
assembly
Poka-yoke inspection

*
5 - *
Route Sheet
Lists the operations and times required to produce a component
SetupOperation
ProcessMachineOperationsTimeTime/Unit
1Auto Insert 2Insert Component 1.5.4
Set 56
2Manual Insert Component .52.3
Insert 1 Set 12C
3Wave SolderSolder all 1.54.1
components
to board
4Test 4Circuit integrity .25.5
test 4GY

*
5 - *
Work Order
Instructions to produce a given quantity of a particular item,
usually to a schedule
Work Order
ItemQuantityStart DateDue Date
ProductionDelivery
DeptLocation
157C1255/2/085/4/08
F32Dept K11
*

5 - *
Engineering Change Notice (ECN)A correction or modification
to a product’s definition or documentationEngineering
drawingsBill of material
Quite common with long product life cycles, long
manufacturing lead times, or rapidly changing technologies
*
5 - *
Configuration ManagementThe need to manage ECNs has led to
the development of configuration management systemsA
product’s planned and changing components are accurately
identified and control and accountability for change are
identified and maintained
*
5 - *
Product Life-Cycle Management (PLM)Integrated software that
brings together most, if not all, elements of product design and
manufactureProduct designCAD/CAM, DFMAProduct

routingMaterialsAssemblyEnvironmental
*
5 - *
Service DesignService typically includes direct interaction with
the customerProcess – chain – network (PCN) analysis focuses
on the ways in which processes can be designed to optimize
interaction between firms and their customers
*
5 - *
Process-Chain-Network (PCN) Analysis
Figure 5.12
5 - *
Process-Chain-Network (PCN) Analysis Direct interaction
region includes process steps that involve interaction between
participants The surrogate (substitute) interaction region
includes process steps in which one participant is acting on
another participant’s resources The independent processing
region includes steps in which the supplier and/or the customer

is acting on resources where each has maximum control
5 - *
Process-Chain-Network (PCN) Analysis All three regions have
similar operating issues but the appropriate way of handling the
issues differs across regionsService operations exist only within
the area of direct and surrogate interactionPCN analysis
provides insight to aid in positioning and designing processes
that can achieve strategic objectives
5 - *
Adding Service EfficiencyService productivity is notoriously
low partially because of customer involvement in the design or
delivery of the service, or bothComplicates product design
5 - *
Adding Service EfficiencyLimit the optionsImproves efficiency
and ability to meet customer expectationsDelay
customizationModularizationEases customization of a service
5 - *
Adding Service EfficiencyAutomationReduces cost, increases
customer serviceMoment of truthCritical moments between the
customer and the organization that determine customer

satisfaction
5 - *
Documents for ServicesHigh levels of customer interaction
necessitates different documentationOften explicit job
instructions Scripts and storyboards are other techniques
*
5 - *
First Bank Corp. Drive-up Teller Service Guidelines
Be especially discreet when talking to the customer through the
microphone.
Provide written instructions for customers who must fill out
forms you provide.
Mark lines to be completed or attach a note with instructions.
Always say “please” and “thank you” when speaking through
the microphone.
Establish eye contact with the customer if the distance allows it.
If a transaction requires that the customer park the car and come
into the lobby, apologize for the inconvenience.
*
5 - *

Application of Decision Trees to Product DesignParticularly
useful when there are a series of decisions and outcomes which
lead to other decisions and outcomes
*
5 - *
Application of Decision Trees to Product DesignInclude all
possible alternatives and states of nature - including “doing
nothing”Enter payoffs at end of branchDetermine the expected
value of each branch and “prune” the tree to find the alternative
with the best expected value
Procedure
*
5 - *

Decision Tree Example
Figure 5.13
(.6)
Low sales
(.4)
High sales
(.6) Low sales
(.4)
High sales
Purchase CAD
Hire and train engineers
Do nothing
*
5 - *

EMV (purchase CAD system)= (.4)($1,000,000) + (.6)(–
$20,000)
Figure 5.13
(.6) Low sales
(.4)
High sales
Purchase CAD
(.6)
Low sales
(.4)
High sales
Do nothing
$2,500,000Revenue
– 1,000,000Mfg cost ($40 x 25,000)
– 500,000CAD cost

$1,000,000Net
$800,000Revenue
– 320,000Mfg cost ($40 x 8,000)
– 500,000CAD cost
– $20,000Net loss
*
5 - *
$388,000
EMV (purchase CAD system)= (.4)($1,000,000) + (.6)(–
$20,000)
= $388,000
Figure 5.13
(.6) Low sales
(.4)
High sales

Purchase CAD
(.6)
Low sales
(.4)
High sales
Do nothing
$2,500,000Revenue
– 1,000,000Mfg cost ($40 x 25,000)
– 500,000CAD cost
$1,000,000Net
$800,000Revenue
– 320,000Mfg cost ($40 x 8,000)
– 500,000CAD cost
– $20,000Net loss
*

5 - *
Figure 5.13
(.6)
Low sales
(.4)
High sales
(.6) Low sales
(.4)
High sales
Purchase CAD
$388,000
$365,000
Do nothing $0
$0 Net
$800,000Revenue

– 400,000Mfg cost ($50 x 8,000)
– 375,000Hire and train cost
$25,000Net
$2,500,000Revenue
– 1,250,000Mfg cost ($50 x 25,000)
– 375,000Hire and train cost
$875,000Net
$2,500,000Revenue
– 1,000,000Mfg cost ($40 x 25,000)
– 500,000CAD cost
$1,000,000Net
$800,000Revenue
– 320,000Mfg cost ($40 x 8,000)
– 500,000CAD cost
– $20,000Net loss
*
5 - *

Know when to move to production
Product development can be viewed as evolutionary and never
complete
Product must move from design to production in a timely
manner
Most products have a trial production period to insure
producibility
Develop tooling, quality control, training
Ensures successful production
*
5 - *
Responsibility must also transition as the product moves
through its life cycle
Line management takes over from design
Three common approaches to managing transition
Project managers
Product development teams
Integrate product development and manufacturing organizations
*
5 - *

the publisher.
174 P A R T 2 | D E S I G N I N G O P E R AT I O N S
A process chain is a sequence of steps that accomplishes an
activity, such as building a home,
completing a tax return, or preparing a sandwich. A process
participant can be a manufac-
turer, a service provider, or a customer. A network is a set of
participants.
Each participant has a process domain that includes the set of
activities over which it has
control. The domain and interactions between two participants
for sandwich preparation are
shown in the PCN diagram (Figure 5.12). The activities are
organized into three process
regions for each participant:
1. The direct interaction region includes process steps that
involve interaction between par-
ticipants. For example, a sandwich buyer directly interacts with
employees of a sandwich
store (e.g., Subway, in the middle of Figure 5.12).
2. The surrogate (substitute) interaction region includes
process steps in which one partici-
pant is acting on another participant’s resources, such as their

information, materials,
or technologies. This occurs when the sandwich supplier is
making sandwiches in the
restaurant kitchen (left side of Figure 5.12) or, alternately,
when the customer has access
to buffet ingredients and assembles the sandwich himself (right
side of the figure). Under
surrogate interaction, direct interaction is limited.
3. The independent processing region includes steps in which
the sandwich supplier and/or
the sandwich customer is acting on resources where each has
maximum control. Most
make-to-stock production fits in this region (left side of Figure
5.12; think of the firm that
assembles all those prepackaged sandwiches available in
vending machines and conveni-
ence stores). Similarly, those sandwiches built at home occur to
the right, in the customer’s
independent processing domain.
All three process regions have similar operating issues—quality
control, facility location and lay-
out, job design, inventory, and so on—but the appropriate way
of handling the issues differs across
regions. Service operations exist only within the area of direct
and surrogate interaction.
From the operations manager’s perspective, the valuable aspect
of PCN analysis is insight
to …
8 - *

Location Strategies
Heizer and Render
8
8 - *
Outline
FedExThe Strategic Importance of LocationFactors That Affect
Location DecisionsMethods of Evaluating Location
AlternativesService Location StrategyGeographic Information
Systems
*
8 - *

Learning Objectives
When you complete this chapter you should be able to:Identify
and explain seven major factors that effect location
decisionsCompute labor productivityApply the factor-rating
methodComplete a locational break-even analysis graphically
and mathematically
*
8 - *
When you complete this chapter you should be able to:
Learning ObjectivesUse the center-of-gravity
methodUnderstand the differences between service- and
industrial-sector location analysis
*
8 - *
Location Provides Competitive Advantage for FedExCentral hub
conceptEnables service to more locations with fewer
aircraftEnables matching of aircraft flights with package
loadsReduces mishandling and delay in transit because there is
total control of packages from pickup to delivery

*
8 - *
The Strategic Importance of LocationOne of the most important
decisions a firm makesIncreasingly global in natureSignificant
impact on fixed and variable costsDecisions made relatively
infrequently
*
8 - *
The Strategic Importance of LocationLong-term decisions Once
committed to a location, many resource and cost issues are
difficult to change
*
8 - *

The Strategic Importance of Location
The objective of location strategy is to maximize the benefit of
location to the firm
Options includeExpanding existing facilitiesMaintain existing
and add sitesClosing existing and relocating
*
8 - *
Location and CostsLocation decisions based on low cost require
careful considerationOnce in place, location-related costs are
fixed in place and difficult to reduceDetermining optimal
facility location is a good investment
*
8 - *
Factors That Affect Location DecisionsGlobalization adds to
complexityMarket economicsCommunicationRapid, reliable
transportationEase of capital flowDiffering labor costsIdentify
key success factors (KSFs)
*

8 - *
Location Decisions
Country Decision
Key Success FactorsPolitical risks, government rules, attitudes,
incentivesCultural and economic issuesLocation of
marketsLabor talent, attitudes, productivity, costsAvailability of
supplies, communications, energyExchange rates and currency
risks
Figure 8.1

*
8 - *
Location Decisions
Region/ Community Decision
Key Success FactorsCorporate desiresAttractiveness of region
Labor availability and costsCosts and availability of
utilitiesEnvironmental regulationsGovernment incentives and
fiscal policiesProximity to raw materials and
customersLand/construction costs
Figure 8.1
MN
WI
MI
IL
IN
OH

*
8 - *
Location Decisions
Site Decision
Key Success FactorsSite size and costAir, rail, highway, and
waterway systemsZoning restrictionsProximity of services/
supplies neededEnvironmental impact issues
Figure 8.1
*
8 - *
Global Competitiveness Index of CountriesTABLE
8.1Competitiveness of 142 Selected CountriesCOUNTRY2011-
2012
RANKINGSwitzerland1Singapore2Sweden3Finland4USA5Japan
9UK10Canada12Israel22China26Mexico58Vietnam65Russia66H
aiti141Chad142

*
8 - *
Factors That Affect
Location DecisionsLabor productivityWage rates are not the
only costLower productivity may increase total cost
Labor cost per day
Productivity (units per day)
= Cost per unit

= $1.17 per unit
$70
60 units
South Carolina
= $1.25 per unit
$25
20 units
Mexico
8 - *
Factors That Affect
Location DecisionsExchange rates and currency risksCan have a
significant impact on costsRates change over timeCostsTangible
- easily measured costs such as utilities, labor, materials,
taxesIntangible - less easy to quantify and include education,
public transportation, community, quality-of-life
8 - *
Factors That Affect
Location DecisionsExchange rates and currency risksCan have a
significant impact on costsRates change over timeCostsTangible
- easily measured costs such as utilities, labor, materials,
taxesIntangible - less easy to quantify and include education,
public transportation, community, quality-of-life
Location decisions based on costs alone can create difficult
ethical situations

8 - *
Factors That Affect
Location DecisionsPolitical risk, values, and cultureNational,
state, local governments attitudes toward private and
intellectual property, zoning, pollution, employment stability
may be in fluxWorker attitudes towards turnover, unions,
absenteeismGlobally cultures have different attitudes towards
punctuality, legal, and ethical issues
8 - *
Ranking Corruption
Rank Country2012 CPI Score (out of 100)
1Demark, Finland, New Zealand 90
4Sweden88
5Singapore87
6Switzerland 86
7Australia, Norway85
9Canada, Netherlands84
13Germany79
14Hong Kong77
17Japan, UK74
19USA73
37Taiwan61
39Israel60
45South Korea56
80China39
123Vietnam31
133Russia28

Least Corrupt
Most Corrupt
*
*
CPI is the Corrupt Perceptions Index calculated by
Transparency International, an organization dedicated to
fighting business corruption. The Index is calculated from up to
13 different individual scores. For details and the methodology,
see www.transparency.org.
In 2012 they changed their scoring system from “out of 10” to
“out of 100”.
In case students are interested, three countries tied for the
lowest score in the 2012 survey with a score of 8 out of 100 –
Afghanistan, North Korea, and Somalia.
8 - *
Factors That Affect
Location DecisionsProximity to marketsVery important to
servicesJIT systems or high transportation costs may make it
important to manufacturersProximity to suppliersPerishable
goods, high transportation costs, bulky products
8 - *
Factors That Affect

Location DecisionsProximity to competitors (clustering)Often
driven by resources such as natural, information, capital,
talentFound in both manufacturing and service industries
8 - *
Clustering of CompaniesTABLE 8.3Clustering of
CompaniesINDUSTRYLOCATIONSREASON FOR
CLUSTERINGWine makingNapa Valley (US) Bordeaux region
(France)Natural resources of land and climateSoftware
firmsSilicon Valley, Boston, Bangalore (India)Talent resources
of bright graduates in scientific/technical areas, venture
capitalists nearbyClean energyColoradoCritical mass of talent
and information, with 1,000 companies
*
8 - *

CLUSTERINGTheme parks (Disney World, Universal Studios,
and Sea World)Orlando, FloridaA hot spot for entertainment,
warm weather, tourists, and inexpensive laborElectronics
firmsNorthern MexicoNAFTA, duty free export to
U.S.Computer hardware manufacturersSingapore, TaiwanHigh
technological penetration rate and per capita GDP,
skilled/educated workforce with large pool of engineers
*
8 - *
CLUSTERINGFast food chains (Wendy’s, McDonald’s, Burger
King, and Pizza Hut)Sites within 1 mile of each otherStimulate
food sales, high traffic flowsGeneral aviation aircraft (Cessna,
Learjet, Boeing, Raytheon)Wichita, KansasMass of aviation

skillsAthletic footwear, outdoor wearPortland, Oregon300
companies, many owned by Nike, deep talent pool and outdoor
culture
*
8 - *
Factor-Rating MethodPopular because a wide variety of factors
can be included in the analysisSix steps in the methodDevelop a
list of relevant factors called key success factorsAssign a
weight to each factorDevelop a scale for each factorScore each
location for each factorMultiply score by weights for each
factor for each locationMake a recommendation based on the
highest point score
*

8 - *
Factor-Rating Example
TABLE 8.4Weights, Scores, and
Solution
SCORES
(OUT OF 100)WEIGHTED
SCORESKSFWEIGHTFRANCEDENMARKFRANCEDENMAR
KLabor availability and attitude.257060(.25)(70) =
17.5(.25)(60) = 15.0People-to-car ratio.055060(.05)(50) =
2.5(.05)(60) = 3.0 Per capita income.108580(.10)(85) =
8.5(.10)(80) = 8.0Tax structure.397570(.39)(75) =
29.3(.39)(70) = 27.3Education and health.216070(.21)(60) =
12.6(.21)(70) = 14.7Totals1.0070.468.0

*
8 - *
Locational
Cost-Volume AnalysisAn economic comparison of location
alternativesThree steps in the methodDetermine fixed and
variable costs for each locationPlot the cost for each location
Select location with lowest total cost for expected production
volume
*
8 - *
Locational Cost-Volume Analysis Example

Three locations:
Total Cost = Fixed Cost + (Variable Cost x Volume)
Selling price = $120
Expected volume = 2,000 units
Athens$30,000$75$180,000
Brussels$60,000$45$150,000
Lisbon$110,000$25$160,000
FixedVariableTotal
CityCostCostCost
*
8 - *
Crossover point – Athens/Brussels
30,000 + 75(x)= 60,000 + 45(x)
30(x)= 30,000
(x)= 1,000
60,000 + 45(x)= 110,000 + 25(x)

20(x)= 50,000
(x)= 2,500
Crossover point – Brussels/Lisbon
*
8 - *
Figure 8.2
–
$180,000 –
–
$160,000 –
$150,000 –
–
$130,000 –
–
$110,000 –
–

–
$80,000 –
–
$60,000 –
–
–
$30,000 –
–
$10,000 –
–
Annual cost
|||||||
05001,0001,5002,0002,5003,000
Volume
Athens lowest cost
Brussels
lowest cost
Lisbon lowest

cost
Lisbon cost curve
Athens
cost curve
Brussels
cost curve
*
8 - *
Center-of-Gravity MethodFinds location of distribution center
that minimizes distribution costsConsidersLocation of
marketsVolume of goods shipped to those marketsShipping cost
(or distance)

*
8 - *
Center-of-Gravity MethodPlace existing locations on a
coordinate gridGrid origin and scale is arbitrary Maintain
relative distances Calculate x and y coordinates for ‘center of
gravity’Assumes cost is directly proportional to distance and
volume shipped
*
8 - *
Center-of-Gravity Method
wheredix=x-coordinate of location i
diy=y-coordinate of location i

Qi=Quantity of goods moved to or from location i
x-coordinate of the center of gravity
y-coordinate of the center of gravity
*
8 - *
Center-of-Gravity MethodTABLE 8.5Demand for Quain’s
Discount Department StoresSTORE LOCATIONNUMBER OF
CONTAINERS
SHIPPED PER MONTHChicago 2,000Pittsburgh 1,000New
York1,000Atlanta2,000

*
8 - *
Figure 8.3
d1x = 30
d1y = 120
Q1 = 2,000
North-South
East-West
120 –
90 –
60 –
30 –
–

||||||
306090120150
Arbitrary origin
New York (130, 130)
Pittsburgh (90, 110)
Chicago (30, 120)
Atlanta (60, 40)
*
8 - *
(30)(2000) + (90)(1000) + (130)(1000) + (60)(2000)
2000 + 1000 + 1000 + 2000

x-coordinate =
= 66.7
y-coordinate =
(120)(2000) + (110)(1000) + (130)(1000) + (40)(2000)
2000 + 1000 + 1000 + 2000
= 93.3
*
8 - *
Figure 8.3
North-South
East-West
120 –
90 –
60 –
30 –

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