LECTURE 5: Quality Management

Process control: process of detecting whether or not

there has been a change in the underlying process (1)
to identify the reasons behind the variability (2) to take
corrective actions
Process capability: check the current process variability
relative to required specifications
- There is not necessarily a connection between product
specifications and how the process currently behaves.
Statistical Process Control (SPC): Statistical
evaluation of the output of a process
Chance causesdue to Normal variability:
- Natural variability,minor factors, Day-to-day variation,
typical, white noise Nothing wrong and nothing to fix
Assignable causesdue to Abnormal variability:
- Cause can be identified & eliminated and it can be a
good thing
- Something unusual has happened
- The process has changed significantly
- There is a need for intervention
- Change for the worse investigate and fix the problem
- Change for the better investigate,
reinforce/institutionalize the change
Cost of defect depends on where it is detected:
Internal Failure: discovered during production process
lost materials & utilization of all upstream resources
External Failure: discovered after product reaches
consumers- lost reputation, recall, warranty liability cost
Eliminate causes: reduce process variability/do things
consistently Process Control
Improving Process Capability
- Simplify
- Standardize
- Automate
- Mistake-proof
- Upgrade equipment
+ Sample Mean (for X-bar Chart):
Monitors the central tendency of a process

1
X = X i
n i=1
+ Sample Range: (for R-Chart)

Total Quality Management: A philosophy

that involves everyone in an organization in a
continual effort to improve quality and
customer satisfaction.
TQM Approach:
1. Find out what the customer wants 2. Design

a product or service that meets or exceeds

customer wants 3. Design processes that
facilitate doing the job right the first time 4.
Keep track of results 5. Extend these concepts
EPQ
throughout the supply chain
Applicable Old Assumptions: 1,2,3,5 and 6
Independent Demand: Demand not related to other items; New Assumption: Gradual delivery, R>D
the final end-product
Dependent Demand: Derived demand items; component

parts, subassemblies, raw materials; use MRP to manage

these
TOTAL COST (TC)
Purchasing/Manufacturing cost (P) = P x D
Ordering/Setup cost (S) = D/Q x S
Holding/Carrying cost (H) = Q/2 x h
Shortage/Stockout/Backorder cost (B) assume 0
P + S + H +B = TC
Optimal Order Quantity : Q*
No. of optimal orders/period : N* = D/Q*
Time between optimal orders : T* = Q*/D
Optimal Total Controllable Cost per period : TCC*
TCC = S + H + B
Optimal Total Cost per period : TC*
TC = TCC + Purchasing cost per period
EOQ

TC=PD+

R=Max ( X i) Min ( X i )
Control Charts:
+ Centre Line represents the expected performance, i.e.
expected mean x-bar or range R
+ Upper and Lower Control Limits (UCL, LCL)
define the range of acceptable variation
Purpose: to monitor process outputs to see if it is
- In control all data points randomly fall between
the UCL and LCL
- Out of control stop the process and correct it
Types of Control Chart to detect shifts:
- X-bar Chart
- R-Chart
A process is out of control if:
- A point outside the 3 control limits
- A point near either 3 control limits; gather more data
- A run (up, down, or on either side of the centreline
[expected value]) of 7 points in a row
- Cycles or other non-random patterns
- 2 out of 3 points in a row outside of either 2 limits
- 4 out of 5 points in a row outside of either 1 limits
- Specifications: Range of acceptable values established
by engineering design or customer requirements (note:
different from UCL and LSL)
- Process variability: Natural or inherent variability
- Process capability: Process variability relative to
specifications (comparison)
Cp (Process Capability Index): compares what we
need/want (upper specifications USL and lower
specifications LSL) to what we can do (the actual 3
process spread)
Process is capable (meets specification) Cp 1.33
Improve process capability: reduce variability
Cp can be misleading if the mean is not centred
between the upper and lower limits
Cpk is used when a process is not centred
Capable to meet specifications when Cpk 1.33
6 Quality: USL and LSL are each 6 from mean
- Having no more than 3.4 defects per million
- Program designed to reduce defects, to an extent that
US-LS captures +/- 6 Sigma. That is,
Cp=12Sigma/6Sigma=2.0
- Improving quality, reducing costs, and increasing
customer satisfaction
4 Sigma 99.5% Defect Free
- a common thing of Six Sigma is that when a process
achieves 6 Sigma, its defect rate will be 3.4 ppm, Why
isnt this 1.98 ppb? To allow a drift of 1.5 Sigma
ISO 9000 Quality Standards
- Monitored by International Standards Organization
- document processes and monitor quality that follows
the PDCA cycle (Plan-Do-Check-Act)
- ensures consistency in processes not quality products

= mean
= standard deviation
If F(.) is Discrete, use the given cumulative F(.)
If F(.) is Poisson, find Q* using Poisson Distribution
Function Table
If F(.) is Uniform Dist. between a and b
Q = a+SLx(b-a)
ASSUMPTIONS
1. Only one product
2. Demand is random with known probability
distribution, i.e. F(.)
3. Product is salvaged after the selling period
4. Order arrives in single batch before selling period
e.g. Newsboy in retail:
D= random demand with mean and standard deviation
and probability distribution F(.)
w = unit wholesale price
p = unit retail price
v = markdown price (salvage value) for leftovers

Q =

D
Q
S+ H
Q
2

2 DS
H

TCC = 2 DSH
TC = 2 DSH + PD
Assumptions:
1. Demand known and constant
2. No shortages/stock outs allowed
3. Lead time known and constant
4. One batch delivery (instantaneous delivery)
5. Unit purchase cost does not change with order
quantity
6. All other costs remain unchanged (constant)
Reorder Point:
1. If T >= L

ROP=

L
Q=L D
T

2. If T < L

ROP=F

[ ]

L
Q
T

1. D: Demand rate (Units per period)

R: Production Rate (Units per period)
tp: Time when Production occurs
2. Average stock level

I max
2

3. Total Cost:

TC=PD+
Q =

SD
Q
+H
Q
2

2 DS
H

p
pu

( pu )

TCC = 2 DSH 1

ALL UNIT QUANTITY DISCOUNTS

Applicable Old Assumptions: 1, 2, 3, 4 and 6
New Assumption: All Units Quantity Discount
Purchase Cost per Unit changes with Order Quantity
Under this new assumption, the higher the order
quantity, the lower will be the cost per unit. There will
be several values of P, for various ranges of quantity per
order

Inventory Counting System

- Periodic System: physical count at periodic intervals
- Perpetual Inventory System: keeps track of removals
from inventory continuously, thus monitoring current
levels of each item
- Two-Bin System: two containers of inventory; reorder
when the first is empty
Marginal Analysis: NEWSBOYs PROBLEM
If use Cs and Ce representing shortage (too few) and
excess costs (too much), and suppose we have
tentatively decided to order Q units; what happens if we
increases this order to Q+1?
If D>Q:
Net marginal benefit: Cs (unrealised profit per unit)
Chance of this happening is P(D>Q) = 1-F(Q)
If DQ:
Net marginal cost: Ce (pertains to items left over at
the end of period)
Chance of this happening is P(D Q) = F(Q)

F ( Q )=F ( z ) =SL=

C
C s +C

If F(.) is Normal,
LECTURE 7: Inventory Management II

- Useful for organizations that experience seasonal or

other variations in demand
Aggregate planning should be periodically updated:
results in a rolling planning horizon
Aggregate Planning: concerned with qty & timing of
expected demand
Goal: achieve a production plan that will effectively
utilise the organisations resources to satisfy demand
Central issue: lowest cost way to satisfy the aggregated
intermediate future demandqty & timing
Types of Strategies:
Proactive: alter demand to match capacity
- Pricing: shifting demand from peak to off-peak periods
- Promotion: advertising and other forms of promotion
- Back orders: orders are taken in one period and
deliveries promised for a later period
Reactive: alter capacity (supply) to match demand
- Hire and layoff regular full time workers or
overtime/slack time
- Part-time workers (seasonal work)
Cs = p-w Ce = w-v
LECTURE 8: Inventory Management II - RFID and - Subcontracting (temporary capacity)
Mixed / combination of both
Inventory Error
AP Strategies:
RecordActual Inventory:
1. Level Capacity: maintaining a steady rate of output
- Misplaced inventory lost items in the warehouse
+ Stable output rates and workforce
- Transaction errors unintentional, intentional
- Spoilage oudated products, loss of product properties + Good employee morale - Greater inventory costs
- Backordersrecord-keeping, lost sales, overtime/idle
while staying in the warehouse (e.g. car batt)
!!! Keep employees at the same level !!!
- Theft continuous pilferage or shoplifting
2. Chase Demand
- Product quality and yield inventory should not
+
Low
inventory
cost
+ No backorders
include defective products, which are not observed
- The cost of adjusting capacity/output rates and/or
- Information delay inventory is counted to eliminate
workforce
is
high
uncertainty in the records; the time between two
- Workforce moral maybe low
consecutive counts can be termed as information delay,
Overtime or Hire more employees (Full/Part-time)
large organization takes time to process demand data and
Techniques for Aggregate Planning
to pass the results to the inventory manager
General procedure:
RFID (Radio Frequency Identification): a wireless
1. Determine demand for each period
technology to transmit information from small tags
attached to objects in order to automatically identify and 2. Determine capacities for each period
3. Identify company or departmental policies that are
track those items tag | reader | back end processing
pertinent/relevant
systems
4. Determine unit costs
Revenue Management (RM): Get higher revenue while 5. Develop alternative plans and costs
selling same amt of productprice discrimination
6. Select the plan that best satisfies objectives.
Conditions:
Perishable Resource i.e. seats in plane, hotel room
Well-defined market segments
same resource can be used for different segments
e.g. business vs. leisure travellers, price sensitive vs.
price insensitive
Uncertainty more-valuable future demands on
that perishable resource
Randomness in the future demand
High sales volume at the lower price level
Decision(s) to be made
Protection level: quantity to be reserved for the highpaying customers
Booking limit: total number of resources
overbooking
Aggregate planning in Services vs Manufacturing
Decision must be made before uncertainty is resolved 1. Demand for service can be difficult to predict
RM: e.g. Hotel Reservation Challenge
2. Service Capacity availability - difficult to predict
Q = Number of rooms reserved for business travelers
3. Labor flexibility can be an advantage in services
R = Number of business travelers who request rooms
4. Services occur when they are rendered (can't build
SL =The probability that all the business travelers are
inventory)
accommodated = Prob(R Q)
The resulting plan in services is normally a time-phased
p =Profit from a business traveler
projection of service staff requirements
w =Profit from a leisure traveler
Disaggregation (Material Requirement Planning:
Assume that there is plenty of leisure travel demand
PUSH SYSTEM)
(otherwise, the decision goes away).
LECTURE 10: Supply Chain Management
Cs = p-w
Supply Chain Management (SCM): The strategic
Ce = w
coordination of business functions within a business
SL = Cs/(Cs+Ce)
organization and throughout its supply chain
Protection of booking = Total Room Q
The goal of SCM: match supply to demand as
The optimal Q* can then be found by first solving Q
effectively and efficiently as possible
from the equation: Prob(RQ) = F(Q) = SL, and then
- Flow Management - Product and service flow;
round up
Information flow; Financial flow
If F(.) is Normal,
SCM Issues:
Q = +z,
Logistic: movemt of materials, svc, cash, info
where z can be found in the Standard Normal
Containers/ Cargos
Distribution N(, ) Function Table F(z) = SL = CR,
3PL (3rd Party Logistics)outsourcing logistics mgmt
and Q* Q (due to round ups)
4PL (consulting)
= mean
Inventory
= standard deviation
- Inventory location
If F(.) is Uniform Dist. between a and b
- Inventory velocity
Q = a+SLx(b-a)
- The bullwhip effect (inventory variability): distortion
Revenue management works as follows:
of demand information while it passes from one stage to
If additional supply is impossible, adjust the demand
the next across the supply chain
RM: Overbooking
Cs = Rent Variable Cost
Ce = Compensation Cost
Q is the number to overbook
Trade-offs behind this decision
s
The high-paying customers may not show resource
goes unused (reserved too many)
Thee high-paying customers have to be denied service Causes:
- demand forecast updating
resource generates less revenue than it could have
- worse if (1) order batching (2) price fluctuation (3)
LECTURE 9: Aggregate Planning
rationing and shortage gaming phantom orders:
Forward Planning
additional order more than what is needed
- Intermediate-range capacity/supply planning
Solutions:
- Typically covers a time horizon of 2 to 12 months
- demand forecast information sharing
- Aggregation can be used to better predict future
demand

Q = +z,
where z can be found in the Standard Normal
Distribution N(, ) Function Table F(z) = SL = CR,
and Q* Q (due to round ups)

- order batching reduce fixed ordering cost, schedule

deliveries
- price fluctuation Everyday Low Price (EDLP)
- shortage gaming penalize order cancellations,
prioritize retailers
Dells success stories:
- direct sales no reseller markups; build to order mass
customization; quick delivery; supply chain management

Globalization
- Global supply chains
Input from overseas, outsourcing, sell pdt overseas
- Complexities
Language/cultural differences, currency fluctuations,
political instability, high transport costs & lead time
Supplier Management
- Choosing suppliers
Supplier audits, certification
- Supplier relationship management
Long, short- term
- Supplier partnerships (contracts)
CPFR: Collaborative Planning, Forecasting, and
Replenishment
>A supply chain initiative that focuses on information
sharing among supply chain trading partners in planning,
forecasting, and inventory replenishment
Strategic partnering
>VMI (Vendor-Managed Inventory
- Trust among trading partners
- Effective communications
- Supply chain visibility
- Event-management capability
- Performance metrics
The role of Distribution centres:
(1) reduction in transportation links (e.g. 100 suppliers
for 100 customers 100x100links, after using
distribution center 100+100 links)
(2) demand aggregation: The Square Root Law cost
decrease in proportion to the square root of num
aggregated
Advantages:
(+) lower inventory cost
(+) ability to offer a large product selection
Disadvantages:
(-) inventory further away from customers
(-) high delivery cost and time, less responsive
(-) cannot customize for regional preferences
LECTURE 10: JIT/Lean Production System
Justintime: Pull system (just as needed)
JIT is characteristic of lean production systems
Minimal inventories & continuous improvements
Elimination of waste
Big JIT broad focus
Vendor, human relations
Technology, materials and inventory management
Little JIT
narrow
focus
Scheduling
materials,
production
Ultimate
Goal:
balanced,
rapid flow of
inventories
Supporting Goals:
- Eliminate disruptions, facilitating production flow
- Make system flexible by reducing setup times and lead
times, leading to small lot production
- Eliminate waste, especially excess inventory
Sources of Waste
- Waste from overproduction
- Waste of waiting time / Transportation waste
- Inventory waste / Processing waste
- Waste of motion /Waste from product defects

Converting to a JIT System:

- Start by trying to reduce setup times
- Gradually convert operations; produce in smaller lots
- Management may not be committed
- Workers/management may not be cooperative
- Suppliers may resist
The basic goal of the demand flow/pull technology in
the service organization is to provide optimum response
to the customer with the highest quality service and
lowest possible cost
- Change from traditional thinking and practices
frequent ontime delivery of small quantities
- Long term relationships with suppliers as partners

JIT Benefits
- Reduced inventory levels
- High quality products
- Reduced lead times; better flexibility & responsiveness
- Increased productivity and equipment utilization
- Reduced scrap, rework and space requirements
- Pressure for good vendor relationships
- Reduced need for indirect labor
JIT Limitations
- JIT is not suitable for fluctuationg demand
- Cannot handle large spikes in demand
- Cannot handle vastly different product mixes