HECParis

OperationsManagement
Prof.SvenjaSommer

FinalExam

Key

NAME,FirstName(inBLOCKletters):______________________________________

Signature:_________________________________

Instructions:

(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)

Thisisaclosedbookexam;onlythedistributedformulasheetisallowed.
Computersandcellphonesarenotallowed,calculatorsareallowed.
ExamDuration=2hrs
Thereare5questionsfor100pointsintotal.
Pointsforeachquestionareinparentheses()nexttothequestion.
Answerallquestionsinthespaceprovided,usingthebackofpagesifnecessary.
Forfullcreditshowyourcalculations.

Question
1

Points
_________outof40

_________outof25

_________outof10

_________outof10

_________outof15

TOTAL

_________outof100

Question1(40points):
Shortanswerquestions(10pointseach).

(a) WhycanShouldice(aCanadianclinicperformingonlyherniaoperations)beconsideredafocused
factoryandwhatadvantagesmightitobtainfrombeingafocusedfactoryascomparedtoa
generalhospital?Doyouseeanydrawbacksorrisksassociatedwithit?

Keypoints:

Explainfocusedfactory:standardizedprocess,oneorfewproductswithsameprocessing
requirements;hereonetypeofoperationscomparedtomanydifferentailmentstreatedata
generalhospital

Processhasanumberofadvantages:lowercoste.g.duetoeconomiesofscale,higherquality
duetostandardizedprocessandexperienceofdoctors,higherspeedofdeliveryduetolower
variabilityinprocessingtimesandherewithwaitinglistsalsoinarrivaltimes

drawbacks/risks:riskofoverlookingnewtechnologies,limitedmarketsizeandgrowth(and
sometimesriskofmarketsdisappearing,thoughnotinthiscase),motivationandretentionof
personnel

(b) IncreaseddemandvolatilityintheUShascausedmanymanufacturerstoconsidermoving
productionbacktotheUS.Whymightincreaseddemandvolatilitymakedomesticproduction
moreattractive?
WhenUSmanufacturersoffshore,theydosoforlowertotalcosts.Ifdemandvolatilityincreases,
thismeansthedemandbecomeshardertopredict.Theresultsarehigherexpectedlostsales
(remember:stockouts=L(z)*sigma*Sqrt(LT))andhigherrequiredsafetystockandhencehigher
inventorycosts(remember:safetystock=z*sigma*Sqrt(LT)).Bymovingtheproductionbackto
theUS,manufacturerslowertheleadtime,andhencelowertheseexcessandshortagecosts.
Thehigherthevariability,themorethedifferenceinexcessandshortagecosts.Thus,increasing
demandvariabilityhaschangedthetradeoffbetweenlowerproductioncostsoffshoreandlower
excessandshortagecostsintheUSinfavoroflocalproduction.

(c) Aproductionplantforindustriallyproducedbreadfaceshugeswingsindemand.Someweeks
thetotaldemandfromitscustomers,thelocalsupermarkets,is5timestheorderquantity
receivedinotherweeks.Tomeetthesedemandpeaks,theplantmanagerisfacingpressure
fromhiscustomerstoexpandhiscapacity;however,capacityexpansionsareverycostly,sinceit
isahighlyautomatedproductionline.Theplantmanagerisprettysurethattheendcustomer
demandisstableovertime,andheseeksyourhelpinimprovingthesituation.What
phenomenonishefacingandwhatrecommendationswouldyoumaketohim?

Thephenomenonheisfacingiscalledthebullwhipeffect:Thedemandvariabilityincreasesasone
movesupthesupplychain.
Tomakegoodrecommendations,youmightwanttoaskhimfirstsomequestions:Doyouoffer
discountsforlargeorderquantities?Doyouofferpromotionsduringtheyear?Howisthe
transportationorganizeddoesthesupplierpickupeachbatch?
Iftheanswerisyestoanyofthesequestions,thesemightbethemainreasonsforthedemand
variability,andyoucouldsuggesttohimdiscountstobebasedonitemssoldduringtheyear
(ratherthanorderquantityperbatch),toskippromotions(andexplaintoretailersbenefitof
everydaylowprices),andoffertodeliverthebreadwithonedeliverytrucktoallsupermarketsin
thesamearea(forthesamecostascurrentdelivery,butwithalotmorefrequentdeliveries)
Iftheanswerisnototheabovequestions,thevariabilityisseeminglyjustrandom.Leadtimeand
intermediariesdonotseemtobetheproblem(localsupermarketsaredirectcustomersbut
worthwhiletocheckifleadtimecouldbereduced).Iftheendcustomerdemandisindeedstable,
themanagercouldtrytoimplementVMI(JITdistribution),i.e.,asysteminwhichthe
manufacturerreplenishesthestockbasedonpointofsalesandinventorydata.Thisincreasesthe
visibilityoftheendcustomerdemand,butmoreimportantlythemanufacturercanmatchhis
productiontotheactualcustomerneeds.(Notethatjustsharingthepointofsalesandinventory
data,withthesupermarketsstillinsistingontheirbulkdeliveries,wouldnotreallyhelp,unless
therearemultiplelayersthatcoulddistorttheinformation,whichdoesnotseemtobethecase.)
ImplementingVMImightfacesomeresistance,sotheplantmanagermightneedtoproposesome
trialperiodtoitscustomers(andifinplace,changehissalespeopleincentives)tomakethiswork.

(d) Anewtechnologyallowsbookstobeprintedintenminutes.BOOKYhasdecidedtopurchase
machinesforeachofitsstores.Assumethatthecostofprintingabookinthestoreissomewhat
higherthanthatofbuyingitreadyfromthepublisher.WhichbooksshouldBOOKYcarryinstock
andwhichbooksshouldBOOKYprintondemand?Doyourecommendthistechnologyforbest
sellersorforslowsellingbooks(assumingthecostofeachbookisthesame)?Explain.

Thisnewtechnologyallowsfordelayedthedifferentiation(rememberBenettonorZara).Thisis
particularlyvaluableiftheproducthashighriskofshortagesand/orleftovers.Hereyoudonon
perishablegoods,sotheleftovercostsarelargelytheholdingcosts.
Ifyouhavetomakeachoice,itisbettertouseitforslowsellinggoods.Onetheonehand,the
demandisveryhardtoforecast.(Oneweekyousellthem,thenseveralweeksnot,thatmakes
forecastingdifficult.)Inaddition,youtendtoholdtheminstockforalongtimebeforesellinga
bookyouhaveinstock,soyouhavehighholdingcosts.(Bestsellers,ontheotherhand,are
easiertoforecastandyoucanbefairlycertaintosellthebooksyouorderedforthismonth,the
nextmonthifnecessary.Soyoucankeepahighsafetystocktoavoidrunningout,andstillbe
reasonablysurenottoholdthisinventorytoolong.(Ofcourse,oncethebestsellerisslowing
down,andbecomesaslowsellingbook,thesameargumentasforslowsellingbooksapplies.)
Finally,ifyouhavetomakethischoice,youwouldhavetoprintalotofbestsellers,incurring
highadditionalcostsandalsorunningmostlikelyintoacapacityproblemofyourmachine.
Ifyoucancombinesellingprintedandpurchasedbooks,youcouldalsolowerthesafetystockfor
bestsellers(stillnottoomuch;youdonotwanttoincurthehigherproductioncoststoooften),
andprintthebestseller,wheneveryouriskrunningout.(Dualsourcing)

Question2:Chairproduction(25points)
Thefollowingrepresentsaprocessusedtoassembleachairwithanupholsteredseat.StationsA,B,
andCmaketheseat;stationsJandKassemblethechairframe;stationXiswherethetwo
subassembliesarebroughttogether;andsomefinaltasksarecompletedinstationsYandZ.One
workerisassignedtoeachofthestations,exceptinstationXwheretwoworkers(X1andX2)
performthesametaskinparallel.Generally,thereisnoinventorykeptanywhereinthesystem,
althoughthereisroomforsomeunitsbetweeneachofthestations(notdrawnexceptbefore
stationX)thatmightbeusedforinventorystorage,wheneverneeded.(Thatis,thereisnoplanned
inventorybuffer,butitcanhappenthatthereisinventoryinthesystem.)

A
B
C
X-1

Z
Y

X-2
J
K

Thefollowingamountofworkinsecondsisrequiredateachstation.(Youmaynoticethedifference
forthetwoworkersinstationX.Thisdifferenceisduetoadifferenceinexperienceandisexpected
tostaylikethisforthenearfuture.)
A 42

C 35
J 32
X1 60
Y 45
B 33

K 30
X2 75
Z 20

a. Whatisthepossibledailyoutputofthisprocessifoneshiftwith7hoursofprocessingtimeis
availableeachday?(10points)

Weneedtofindthebottleneckoftheprocess.LetsfirstcalculatethecapacityofstationXper
minute:60/60+60/75=1.8unitsperminute.
Outoftheotherstations,stationYistheslowestandhencethepotentialbottleneck.Itscapacityis
60/45=1.33unitsperminute,andhencelowerthanthatofstationX.ThusYisthebottleneckand
determinesthedailyoutput.
Thusthepossibledailyoutputis60/45units/perminute*(7*60)minutes/shift=560unitsperday.

(Alternatively,youcancalculatethecycletimeofstationx.)

b. Whatistheminimumthroughputtimeoftheprocessinseconds?Explain.(5points)
Theseatreachesthebufferafter42+33+35=110seconds;thechairframereachesthebufferafter
32+30=62seconds.StationXcanstartassemblyonlyafter110seconds,whenbothsubassemblies
areavailable.Usingthefasterworker(forminimumTT)atstationXandaddingtheremaining
processingtimes,weget:minimumTT=110+60+45+20=235seconds.

c. Thecompanyconsidershiringanadditionalworkertoincreasethecapacityoftheprocess.You
havetohirethisworkerforthefullshift.Atwhichstationwouldyouaddtheworker,ifyou
decidedtodoso?(Why?)Isitworthit,ifthisworkercosts200perday,hasthesame
processingtimeastheotherworkeratthechosenstationandtheprofitmarginforthechairis
currently8perunit?(Assumealladditionallyproducedunitscanbesold.)Showallcalculations
tojustifyyouranswer.(10points)
Toincreasetheprocesscapacity,youneedtoaddtheworkeratthebottleneck,i.e.,instationY.
Therewouldbenowtwoworkersperformingthesametaskinparallel(likeinstationXbefore).Given
thesameprocessingtimes,thecapacityatstationYwoulddoubleto2.66unitsperminute.
However,theprocesscapacitywillNOTdouble,sincethebottleneckshifts.Wealreadyknowthat
stationXhasacapacityof1.8unitsperminute.TheotherpotentialbottleneckisnowstationA(the
sloweststationotherwise).ThecapacityofstationAperminuteis60/421.43unitsperminute,and
itisindeedthebottleneckanddeterminesthenewprocesscapacity.
Thenewdailyprocessoutputisnow60/42units/perminute*(7*60)minutes/shift=600units/
shift,hencehiringthenewworkerresultsinapossibleincreaseinoutputof600560=40units.Ifall
unitsaresold,thisincreasestherevenuesperdayby40units*8=320comparedtoanincreasein
thecostsof200.Hence,itisworthittohiretheadditionalworker.

Question3(10points)
PharmaDevdevelopsandmarketsnewtechnologicalproductstobeusedinhealthcare.The
developmentofanewproductoperatesasfollows.
Whenanewtechnologymeetstherequisitemarketpotential,anewpatentisfiled.Patentsare
grantedforaperiodof12years,startingfromthedateofissue.Oncethepatentisissued,thenew
technologyisdevelopedatitsdevelopmentcenter,andisthenlaunchedtothemarket.
Onaverage,PharmaDevwinsanewpatentevery5monthswithacoefficientofvariationforarrivals
of1.Theaveragedevelopmentprocesslasts4monthswithacoefficientofvariationforthe
developmentprocessof2.

(a) Howmanymonthsofpatentlifeareleftforanaverageproductlaunchedtothemarket?[7
points]?
TotalPatentLife=12years=144months
PatentLifeleft=1444monthsintheprocesswaitingtime

Utilization=4/5=0.8
Waitingtimeinthequeue=4*0.8/(10.8)*(1^2+2^2)/2=40months

PatentLifeleft=144440=100months

(b) Onaveragehowmanypatentedproductsareundergoingdevelopmentorwaitingtobe
developed?[3points]
LittlesLaw:FlowRate=1/5patentspermonth,Timeinsystem=FT=44months;
WIP=FR*FT=8.8products.

Question4(10points)
TomRichandJoeMiserhaveanechecking/savingsaccountattheeJouyBank.BothTomandJoe
had5000intheiraccountatthestartofthecalendaryear2012.Bothhaveprojectedcashusageof
50perweekataconstantrate.eJouyBankchargesa0.75ATMwithdrawalfeeforeveryATM
transaction,whichisbilledtotheaccountattheendofthecalendaryear.Inreturn,theaccount
offersagreatannualinterestrateof6%,whichisbasedontheaverageannualbalance,and
depositedintheaccountattheendoftheyear.Forthepurposeofsimplifyingyourcalculations,
assume50weeksperyear.

(a)Tomhasafatwalletandhencewithdraws$500wheneverherunsoutofcash,whileJoe
withdrawscasheveryMondayonhiswaytolunch.Whowillhaveahigheraccountbalanceatthe
endofcalendaryear?(5points)

ThisisanEOQproblem;toknowwhowillhavethehigherbalance,wejustneedtocomparewho
willhavethelowercosts.Sincebothstartwiththesamebalanceandbothhavethesame
projectedcashusage,weonlyneedtocomparetheannualholdingandorderingcosts(AHO):

Tom: AHO=0.06*500/2+0.75*2500/500=18.75
Joe:Withdraws2500/50=50perweek.

AHO=0.06*50/2+0.75*2500/50=39
JoesAHO>TomsAHO
Hence,Tomwillhaveahigherendingbalance.

(b)TomandJoeobviouslyhavenotenrolledforOperationsManagement.Whatwillbeyouradvice
toTomandJoeontheirrespectiveCashwithdrawalstrategies?(Thatis,howmuchcashshouldTom
withdraw/howfrequentshouldJoegototheATM.)(5points)

EOQ=Sqrt(2*2500*0.75)/0.06)=250
Tomshouldwithdraw250;thiscorrespondsto10timesperyear;henceintermsofJoespolicy:
every5weeks.

Question5(15points)
Yourcompanybuildsfullycustomizedoneofakindcruiseshipsforecotourismcruiseoperatorsthat
visitdestinationssuchastheGalapagosIslands,theAntarctic,etc.Everytimeacustomer(acruise
company) orders a ship, you have to quote a delivery date, but you struggle with the uncertainty
involved.Becauseeachindividualshipishighlycustomized,youcannotpredictinadvanceprecisely
howlongitwilltaketodesignandbuildeachship.Currently,acustomerfromAmazonRiverCruises
Inc.requestedyoutosubmitaquoteQ(thedecisionvariable)foraship.TheactualdeliverytimeDis
uncertainandwillfollowanormaldistribution,withameanof12monthsandastd.dev.of3months.
The customer assumes that you will deliver the ship precisely on the delivery date you quote; for

instance,ifyousayQ=12;i.e.,theshipwillbedeliveredin12months,thecustomerwillimmediately
beginsellingcruisesonthatshipstartingprecisely12monthsfromnow.Thecustomerhasnousefor
theshippriortotheagreeddeliverydate,soifyoucompletetheshipbeforethequoteddeliverydate,
youorthecustomerwillhavetoberthitsomewhereuntiltheoriginallyagreedupondeliverydate.
ThatwillcostEur12,000perday.Ifyoudelivertheshiptoolate,thecustomerhastopostponetaking
theshipintoservice,whichmeanscancelingcruisesthathavealreadybeensold.Youwillhavetopay
thecustomerapenaltyofEUR24,000foreachdaybywhichyouexceedtheoriginallyagreedupon
deliverydate.
(a)Whatdeliverydate(inmonthsfromtoday)shouldyouofferAmazonRiverCruisesInc.?(7p)

Ifyouhavetoolittletimebuffer:Cu=24,000;ifyouhavetoomuch:Co=12,000.
TargetSL=Cu/(Cu+Co)=0.666;Z=0.426

Deliverydate=12+0.426*3=13.278monthsfromtoday

(b)Assumethatthecostsassociatedwithearlyorlatedeliveryaresimilarforalltheshipsyoubuildin
thefollowingsense:thepenaltyforeachdayyouarelateisalwaystwiceashighasthecostsinvolved
witheachdayyoudeliveryearly.Forexample,inthecaseofyourcurrentorder,thelatepenaltyis
EUR24,000perday,whichisdoublethecostsofbeingtooearly(i.e.,EUR12,000).Forsomeother
order,thosefigurescouldbeforinstanceEUR50,000andEUR25,000respectively.Inrecentyears,
youhavedeliveredapproximately70%ofordersontime(i.e.,notbeinglate).
YourCEOisnothappywiththe70%ontimedeliveryperformanceandwantstobringthatto90%.
Howshouldyoumodifyyouroffer(fromparta)forthecurrentrequestfromAmazonRiverCruises
Inc.?(4p)

NewTargetSL=90%;z=1.28
Deliverydate=12+1.28*3=15.84monthsfromtoday
Hencequoteadeliverydelay~2.5monthslaterthaninanswer(a)

(c) Whatvalue(inEUR)isyourCEOimplicitlyattachingtotheintangiblecostsofbeinglatesoas
tojustifyanontimedeliverytargetof90%?(4p)
Intangiblecostsofdelaycancapturecostssuchasareducedchanceofwinninganorderinthefuture.
Tofindouthowmuchvalueheputsonit,weneedtoseewhatcouldincreasetheTargetSL=90%.

Cu/(Cu+Co)=(2+i)/(2+i+1)=0.9=>i=7.Thatmeans,theratioofCutoCoisnot2:1but9:1.Incaseof
theAmazonRiverCruisescontract,thecostofbeinglateishencenot24,000perdaybut108,000.He
clearlyassumesthatbeingontimecanhelpyouwinalotofadditionalcontracts.