Assignment 1 OM 7011 Summer 2014

All answers to questions should be at most one paragraph long.

This is an individual assignment. Sharing answers, spreadsheets etc. violates the University Honor
code.
Reading 1: Scope and Language of Operations Management
1. Provide at least 2 examples of firms that might be considered as using operations for competitive
advantage. Justify your choice in 2-3 sentences.
2. Study Table 1.2: Key decision areas in operations management
a. Whats missing (for example sustainability, ethics etc.)?
b. Do you agree that operations problems can be compartmentalized in this way? Argue for
or against this reductionist thinking in one para.
3. Match each business strategy with the most appropriate manufacturing mission:
Business Strategy Operations Mission

a. Market dominance
b. Specialty market niche
c. Delivery response
d. Market coverage response
e. Custom product response
f. Product innovation
g. Technical innovation
h. Quick delivery
i. Highest service quality
Introduce a variety of products
Shortest lead time
Support new-product technology
Produce to changing schedules
Manufacture to specification
Manufacture all new products
Produce to small batch run
Staff Expertise
Lowest unit cost

4. Provide a personal example in which the five service quality dimensions (Tangibles, Reliability,
Responsiveness, Assurance, Empathy as in PowerPoint handout, Module 1, slide with Quality metric)
have either been addressed well or poorly in a service encounter that you have had recently.
5. Contrast rational, process and political models of operations strategy. Construct a table to
highlight the examples of methods in each category and salient differences.

Operations strategy may be formally defined as the set of decisions across the value chain that
supports the implementation of higher-level business strategies.
To illustrate this, consider three types of business strategies for a manufacturer:
1. Produce a well-defined set of products in a fairly stable market environment as a low-cost leader,
2. Provide high product variety and customization in a turbulent market that requires innovative
designs to meet customer-specific requirements, and
3. Provide rapid response for constantly changing product lines in an unstable, uncertain, and
unpredictable market.
In the first situation, the firm would be best served by emphasizing quality, productivity, and
flexibility in production. This would require a well-balanced, synchronized manufacturing approach
with small setup and changeover times, strong supplier involvement, and high work standardization.
In the second situation, the firm would need to be able to operate at different levels of production
volume while also achieving low cost and high quality. Product design would require constant
innovation and short development cycles. Operations would need to be highly flexible in a make-to-
order environment, with employees having high levels of knowledge and skills and diverse
capabilities. An operations strategy based on mass customization would be appropriate.
Finally, in the third situation, the operations function would need to be highly responsive to
unplanned change in a competitive environment. Product design might have to be more collaborative
with customers and suppliers. Production processes would need to be highly flexible. The workforce
would have to be entrepreneurial in a dynamic and flexible organizational structure.


6. Complete either Experience OM 1 OR Experience OM2 at the end of Teaching note 1.
Experience OM2

Operational Challenges in health care on transition from Fee for Service to Capitation
Category Decision area Before After
Structure Products (What?) Medical Care and billing will be
on the Insurance companies
Customers to enroll in
program and fixed
payments to HMOs
Processes (How?) Patients received healthcare
from primary providers such as
doctors and hospitals who then
billed the insurance firm for the
costs
The health care
provider receives a
fixed capitation fee for
every patient enrolled
in the program and is
responsible for
providing medical
services for that
patient
Capacity (How
Much?)
On the basis of the patients On the basis of the
patients
Facilities (Where?) In the Hospitals but payments
by Insurance companies
Fixed payments to the
MHOs
Infrastructure Quality management
(How to Improve?)
It can be improved by having
good insurance policies by the
patients.
It can be improved by
providing good health
care benefits to the
patients
Inventory and supply
chain management
(How to acquire and
deliver?)
Direct contact with the
Insurance companies
Direct contact with the
MHOs
Schedule
management
(When?)
Payment at the time of final
settlement between patients
and the insurance companies
Payment at the initial
phase by the patients
to the MHOs
Project management
(How to manage non-
routine tasks?)
No need to manage non routine
tasks as the same can be
managed by insurance
companies. Each customer
transaction is unique and the
service can often be treated
more like a project.
MHOs to manage the
same
Organization Workforce
(Who?)
Doctors, Hospitals and
Insurance companies
Doctors, Hospitals and
MHOs
Organization
(What Structure?)
Decentralized as Insurance
companies are not centralized
Centralized at MHOs


Reading 2: Capacity and Facilities Planning
7. What is a facility charter? How does it help a firm establish its facilities strategy?




Facility charters define the focus of the facility; that is, area of expertise in which a facility
specializes.
Specifying a facility charter entails defining:
The core competency of the facility. For example, is it focused on cost reduction, customer
access, or innovation?
The breadth of products and services provided by the facility. An important decision is
whether to outsource any products or services.
The span of process that the facility will engage in. Many manufacturing firms, for example,
do final assembly and testing at distribution centers, leaving component manufacturing to a
central plant.
Establishing the match between facilities and products, process and markets, particularly for
organizations offering multiple products and services through multiple facilities is not an easy task.

8. Why is the number of beds in a hospital NOT a measure of its capacity?
Capacity planning involves carefully balancing the needs of the market with resource efficiency and
utilization. The purpose of capacity planning is to ensure the right quantity of goods or services at
the right time, and with the best use of available resources. Too little capacity results in the
inability to meet customer demand, while too much capacity leads to high costs and inefficient use
of resources.

In the hospitals the main concern is doing the patient service. Over the years as inpatient services
have declined because of reductions in average length of stay, more effective medical treatments,
and migration of inpatient procedures to outpatient services, hospitals have reconfigured their
facilities with more offices, clinics and conference rooms. Due to all these shifts in the hospital it
is not feasible to measure the capacity by number of beds. Number of beds is a wonderful measure
of capacity when all a hospital does is inpatient services and all beds are occupied. However, a 500-
bed hospital with one doctor has obviously much less capacity than a 50 bed hospital with 4 doctors.
Also, as the hospitals product mix shifts from inpatient to outpatient services, bed capacity
becomes a less useful indicator of the size of the hospital.








9. Complete Internet project 3

Attribute Hub and Spoke Point-to-Point
Scope
Optimized by connecting service to
wide geographical area and many
destinations
Each route serves a single
city pair. Individual routes
may be dispersed
Connectivity
Most passengers connect at hub(s)
for a continuing flight(s) to
destination
No connections provided
(although incidental or
"rolling hub" connections
are common)
Dependence
Each route highly dependent on
other routes for connecting
passengers
Routes operate
independently, traffic is not
affected by demand from
other routes
Demand
Varying demand in any given city-
pair may be offset by demand from
other markets
Only varying frequency and
pricing available to counter
demand variance
Market Size
Efficiently serves cities of greatly
varying size
Requires high density
markets with at least one
end-point being a high
demand origin/destination
Frequency
Supports high daily :frequency to
all destinations
Generally lower frequency
depending on market type
and density
Pricing
Frequency and coverage appeal to
business travellers providing a
margin for higher business fares
Both business and leisure
passengers are generally
price seeking
Asset Utilization
Limited by network geography,
connection timing, and hub
congestion
No network constraints on
utilization
Cost of
Operation
Hub connections significantly
increase cost per available seat
mile, somewhat offset by use of
larger mainline aircraft
Lowest cost per available
seat mile per city-pair
Fleet
Requirement
Large range in seating capacity is
necessary to match capacity with
traffic, usually requires more than
one fleet Suited to a single fleet type



10. Explain the implications of Figure 2.8 and the following OM Principle in your own words.
Capacity expansions can be justified on the basis of incremental revenue, but the incremental
revenue should be calculated based on forecasted utilization of capacity as opposed to historical
utilization of capacity.


Capacity expansions can be justified on the basis of incremental revenue, but the incremental
revenue should be calculated based on forecasted utilization of capacity as opposed to historical
utilization of capacity. This problem is in the case of seasonal demands as shown in the above
figure. By using forecasted utilization one can easily plan for the upcoming capacity as shown in the
above figure if company goes with the historical demand then every month average will be 100 and
so yearly capacity of 1200. So it will plan accordingly but in case of seasonality the demand will be
high in the seasons and so capacity utilization does not work on historical basis. For firms operating
with seasonal, monthly, weekly, or daily variations in demand, one can easily foresee the increasing
difficulty in justifying capacity to meet all demand as we reach the demand peaks trying to
increase customer service levels, resources are utilized less and less.



11. Over the last few years, Japanese automakers have built a significant number of assembly plants
in North America and now the Korean auto firms are also looking into it. Most of these plants
produce 2 or 3 models of cars as opposed to a single model or many different models.
i. Explain briefly operational consequences of making a single product versus a large
variety of products within a facility
A plant development comes with a huge cost and development. Every company will work towards
enabling and utilizing the plant to maximum. The main point to consider under the single product is
the cost involved in the setting of the plant. By using a plant to develop multiple models the
companies enable full utilization of the plants and thus increasing the revenues. By utilizing the
plants the companies tries to minimize the failure and losses against the same. It enables mix
flexibility the ability to change products quickly and volume flexibility the ability to ramp up
and ramp down quickly and efficiently with changes in demand of a facility with a wide range of
products with that of a facility with a narrow range of products.
ii. Give arguments that would support the intermediate variety strategy when a firm
has a network of many plants.
When a firm has a network of many plants then the main use of the same is the economics of scale,
where in the company can produce intermediary variety of products and parts to be used by other
product or by other part. This helps the company to have increase in revenue and to fully use the
plants and thus leading to more products and sales.

iii. How are the operational metrics (cost, quality, time and availability) impacted across
the 3 options (i) single product in a plant (ii) few products in a plant (iii) many
products in a plant?
Options Cost Quality Time Availability
Single product in
a plant
High cost of
manufacture as
whole plant will
produce single
product
Good quality Less time to
produce
Whole plant will
be available for
single product
Few products in a
plant
Medium, as cost
will be
distributed
Medium, as time
will be
distributed
Medium, as time
will be
distributed
Medium
Many products in
a plant
Low, as economics
of scale will
reduce cost
Low as many
products under
same plant will be
produced
Time to
manufacture a
single product will
increase as there
will be time
distribution
Availability will
decrease



12. The annualized cost of acquiring capacity for the new Barracuda drives at Seagate is calculated
as $20 per unit and the contribution margin for the product is $40 per unit. The demand forecast
for the Barracuda drives is uniform between 100 and 200.
a. What service level (percentile of demand met) should Seagate target for in building
capacity? How much capacity will it build?
Cx=20
Cs=40
Service Level = (40/20+40)= 40/60=0.66
As it is greater than 0.5, so more capacity than the median forecast should be provided



b. How does this service level change, if Seagate outsources manufacturing to China, to
arrive at an annualized cost of capacity of $10 per unit? How much capacity will it build?
Cx=10
Cs=40
Service Level = (40/10+40) = 40/50=0.8
As it is greater than 0.5, so more capacity than the median forecast should be provided



c. How does this service level change if the inbound shipment cost per unit from China to US
reduces the margin per unit to $35? How much capacity will it build?
Cx=10
Cs=35
Service Level = (35/10+35) = 35/45=0.77
As it is greater than 0.5, so more capacity than the median forecast should be provided



d. Conduct the capacity calculations in all 3 scenarios above when the forecast for the
Barracuda drives is expected to follow the following distribution:
Demand will be
less than
Probability Cumulative
Probability
100 0.1 0.1
120 0.2 0.3
140 0.3 0.6
160 0.1 0.7
180 0.15 0.85
200 0.15 1.0

Scenario 1: We expect demand to be uniformly distributed between 100 and 200 units (each
demand instance between 100 and 200 has the same likelihood, or equal probability). Then the 66th
percentile demand would be 166. Suppose we expected demand to be normally distributed with a
mean of 100 and standard deviation of 20

Capacity = 100+ Z0.66*20 = 100+0.4*20 = 108
Scenario 2: We expect demand to be uniformly distributed between 100 and 200 units (each
demand instance between 100 and 200 has the same likelihood, or equal probability). Then the 80th
percentile demand would be 180. Suppose we expected demand to be normally distributed with a
mean of 100 and standard deviation of 20

Capacity = 100+ Z0.80*20 = 100+0.8*20 = 116

Scenario 3: We expect demand to be uniformly distributed between 100 and 200 units (each
demand instance between 100 and 200 has the same likelihood, or equal probability). Then the 77th
percentile demand would be 177. Suppose we expected demand to be normally distributed with a
mean of 100 and standard deviation of 20

Capacity = 100+ Z0.77*20 = 100+0.7*20 = 114





Purchase Y
$20

Process X at A
20 minutes
Purchase X
$10
Purchase Z
$5

Circles
Max demand
100
Price $100
Assemble Y and Z
at B
5 minutes
Assemble X
with YZ at B
for 5 minutes
Process Z at A
15 minutes
Assemble Z
with YZ for A
for 15 minutes
Squares
Max demand 200
Price $75

Reading 3: Process design and Improvement
13. The process diagram for two products made by B/N Inc is given as follows:














a. Which resource is the bottleneck?
Process X at A

b. Which product will you make more of and why?
Z, because the price is low and the process time is 15 minutes

c. If both resource A and B operate for 2400 minutes a week, how many Circles and how many Squares should be sold
every week? What is the contribution margin derived from this strategy?
Circle: 30 minutes give 1 circle so 2400 = 80
Square:35 minutes give 1 square so 2400 = 68


d. If the capacity of the bottleneck is doubled (that is from 2400 to 4800 minutes), how does your strategy in part
(b) change?





Circle: 30 minutes give 1 circle so 4800 = 160
Square:35 minutes give 1 square so 4800 = 137






14. Driving license applications are processed sequentially though a 4 stage process consisting of (1)
filling out the application, (2) eye test, (3) photographing and (4) printing and lamination. The time
for each process is 5 minutes, 8 minutes, 3 minutes and 5 minutes. There are 5 people for taking
applications, 2 manned Eye testing stations, 1 photographers and 2 printing/lamination stations.
a. What is the cycle time for each operation? For the whole process? (Note: please be careful not to confuse work
content of an operation e.g. 8 minutes for eye test, with the process cycle time)


5 people for taking applications, 2 manned Eye testing stations, 1 photographer and 2
printing/lamination stations
Cycle Time
Application = 5 min
Eye Test = 8 min
Photograph = 3 min
Print = 5 min
Whole process = 5+8+3+5 = 21 min


b. How many customers can be handled in an hour?

21 min for 1 customer so in 60 min = 3 customers

c. If there are currently 60 customers in the facility, what is the throughput time for an average customer?

= 1/21 = 0.04 minutes per customer = 3 customers per hour





15. All of the following relate to Littles law:

Average throughput = Work in Progress/Cycle Time
a) Material Flow: Wendys processes an average of 5,000 lb. of hamburgers per week. The typical inventory of raw
meat is 2,500 lb. What is the average hamburgers throughput time and Wendys turnover?
Throughput time =2500/5000 = 0.5 lb per week
Turnover = 1/T = 1/0.5 = 2 /week


b) Cash Flow: Motorola sells $300 million worth of cellular equipment per year. The average accounts
receivable in the cellular group is $45 million. What is the average billing to collection process throughput time?
=1/45 = 0.022


c) A general manager at Baxter states that her inventory turns three times a year. She also states that everything
that Baxter buys gets processed and leaves the docks within six weeks. Is there an inconsistency in her
statement? What is the gap between actual and implied throughput time indicative of?
Everything leaves in the 6 weeks shows that the cycle time of the same is 6 weeks, so inventory needs to
be turned up every 6 weeks whereas it happens every 4 months. This is inconsistency in her statement.