Posted: January 24th, 2023

Unit 1

No industry has faced more competitive markets in the U.S. than  textiles. The import of foreign textiles made using cheap labor has  decreased profit margins for U.S. companies for years, and many have  left the industry.  In this discussion you will get the opportunity to  “run” production operations of a textile company in a simulation  scenario. Don’t be afraid of this opportunity, rather you should embrace  it.  

This scenario illustrates the complexities typically associated with  decision-making in a production department. The problems you will be  faced with are complex, requiring the active involvement from multiple  functional areas to fully understand the nature and scope of the  problem, explore viable alternatives, commit to a solution, and then  implement, monitor, and make necessary changes to achieve desired  outcomes. As an operations professional, you’re responsible for  executing due diligence when determining whether or not to support or  put forward proposals and new ideas. These proposals can be as simple as  modifying existing processes or as complex as expanding the company  through “organic” or “inorganic” growth strategies. You need to be able  to weigh decisions against existing realities while taking into  consideration future uncertainties.

Don't use plagiarized sources. Get Your Custom Essay on
Unit 1
Just from $13/Page
Order Essay

Unit Learning Outcomes

  1. Demonstrate the impact of operations management on the competiveness and productivity of an organization. (CLO 1 and 2)
  2. Construct a production strategy based on customer demand. (CLO 3 and 4)
  3. Synthesize operations and customer satisfaction data. (CLO 5 and 7)
  4. Calculate productivity metrics for an operational scenario using Microsoft Excel. (CLO 4)

Directions

Accessing McGraw-Hill Connect

Be sure that you have purchased and registered your McGraw-Hill Connect account prior to completing this assignment. See the

Textbook and Materials

page for more information.

Follow

these steps

to view the scenario.

Initial Posting

Go to McGraw-Hill Practice Operations to view the scenario.

  1. Click the “McGraw-Hill Connect” tab in the course navigation menu.
  2. Click the McGraw-Hill Practice Operations link.

Students are to complete Module 1, The Production Process  (Scenario) in Practice Operations. Based on their observations in this  scenario, and upon a careful review of the available literature, the  student is to consider him or herself to be the Chief Operations Officer  (COO) of Kibby and Strand, the company in the scenario.

The CEO has noticed fluctuations in production under the different  shift production managers during the past 6 months. She wants you, the  COO, to document the key factors a production manager needs to consider  when scheduling production in the organization and to prepare a  PowerPoint presentation to be briefed at the next production manager  meeting.  She wants the presentation to include possible reasons for the  variations and how each can be addressed. 

Students are to create their PowerPoint based on knowledge learned in the Scenario, and post it in the discussion.

Instruction Guidance: It would be prudent to  consider content covered in chapters 1 and 2 of the textbook; however,  there are many other useful resources available on the Internet and in  the literature to support the construction of your action plan. 

This PowerPoint should be attached to the unit discussion thread.  There is no minimum or maximum in terms of the word count; however, the  response should explicitly address all required components of this  discussion assignment. The document should be prepared consistent with  the APA writing style (6th edition) and reflect higher level cognitive processing (analysis, synthesis and or evaluation).  

Chapter

1

Introduction to

Operations Management

© McGraw-Hill

Education

.

All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

1

Learning Objectives (1 of 2)

You should be able to:

1.1 Define the terms operations management and supply chain

1.2 Identify similarities and differences between production and service operations

1.3 Explain the importance of learning about operations management

1.4 Identify the three major functional areas of organizations and explain how they interrelate

1.5 Summarize the two major aspects of process management

1.6 Describe the operations function and the nature of the operations manager’s job

1-‹#›

© McGraw-Hill Education.

Learning Objectives (2 of 2)

1.7 Explain the key aspects of operations management decision making

1.8 Briefly describe the historical evolution of operations management

1.9 Describe the current issues in business that impact operations management

1.10 Explain the need to manage the supply chain

1-‹#›
© McGraw-Hill Education.

Learning Objective 1.1

Operations Management

What is operations?

The part of a business organization that is responsible for producing goods or services

How can we define operations management?

The management of systems or processes that create goods and/or provide services

1-‹#›
© McGraw-Hill Education.

Learning Objective 1.1

Good or Service? (1 of 2)

Goods are physical items that include raw materials, parts, subassemblies, and final products.

Automobile

Computer

Oven

Shampoo

1-‹#›
© McGraw-Hill Education.

Learning Objective 1.1

Good or Service? (2 of 2)

Services are activities that provide some combination of time, location, form or psychological value.

Air travel

Education

Haircut

Legal counsel

1-‹#›
© McGraw-Hill Education.

Learning Objective 1.1

Supply Chain

Supply chain – a sequence of activities and organizations involved in producing and delivering a good or service

Suppliers’ suppliers

Direct suppliers

Producer

Distributor

Final customers

1-‹#›
© McGraw-Hill Education.

Learning Objective 1.1

The Transformation Process

Feedback = Measurements taken at various points in the transformation process
Control = The comparison of feedback against previously established standards to determine if corrective action is needed

1-‹#›
© McGraw-Hill Education.

8

Learning Objective 1.2
Goods-service Continuum
Products are typically neither purely service- or purely goods-based.
Goods
Services
Surgery, Teaching
Songwriting, Software Development
Computer Repair, Restaurant Meal
Home Remodeling, Retail Sales
Automobile Assembly, Steelmaking

1-‹#›
© McGraw-Hill Education.

Learning Objective 1.2
Manufacturing versus Service
Degree of customer contact
Uniformity of input
Labor content of jobs
Uniformity of output
Measurement of productivity
Production and delivery
Quality assurance
Amount of inventory
Evaluation of work
Ability to patent design

1-‹#›
© McGraw-Hill Education.

Learning Objective 1.3
Why Study Operations Management?
Every aspect of business affects or is affected by operations
Many service jobs are closely related to operations
Financial services
Marketing services
Accounting services
Information services
Through learning about operations and supply chains you will have a better understanding of:
The world you live in
The global dependencies of companies and nations
Reasons that companies succeed or fail
The importance of working with others

1-‹#›
© McGraw-Hill Education.

Learning Objective 1.4
Basic Functions of the Business Organization
Organization
Marketing
Operations
Finance

1-‹#›
© McGraw-Hill Education.

Learning Objective 1.4
Function Overlap (1 of 2)
Finance & operations
Budgeting
Economic analysis of investment proposals
Provision of funds
Marketing & operations
Demand data
Product and service design
Competitor analysis
Lead time data

1-‹#›
© McGraw-Hill Education.

Learning Objective 1.4
Function Overlap (2 of 2)

1-‹#›
© McGraw-Hill Education.

OM and Supply Chain Career Opportunities
Operations manager
Supply chain manager
Production analyst
Schedule coordinator
Production manager
Industrial engineer
Purchasing manager
Inventory manager
Quality manager

1-‹#›
© McGraw-Hill Education.

OM-Related Professional Societies
APICS – The Association for Operations Management
American Society for Quality (ASQ)
Institute for Supply Management (ISM)
Institute for Operations Research and Management Science (INFORMS)
The Production and Operations Management Society (POMS)
The Project Management Institute (PMI)
Council of Supply Chain Management Professionals (CSCMP)

1-‹#›
© McGraw-Hill Education.

Learning Objective 1.5
Process Management
Process – one or more actions that transform inputs into outputs
Three Categories of Business Processes:
Upper-management processes: These govern the operation of the entire organization.
Operational processes: These are core processes that make up the value stream.
Supporting processes: These support the core processes.

1-‹#›
© McGraw-Hill Education.

Learning Objective 1.5
Supply & Demand
Operations & Supply Chains Sales & Marketing
Supply >
Demand Wasteful
Costly
Supply < Demand Opportunity Loss Customer Dissatisfaction Supply = Demand Ideal 1-‹#› © McGraw-Hill Education. Learning Objective 1.5 Process Variation Four Sources of Variation: Variety of goods or services being offered The greater the variety of goods and services offered, the greater the variation in production or service requirements. Structural variation in demand These are generally predictable. They are important for capacity planning. Random variation Natural variation that is present in all processes. Generally, it cannot be influenced by managers. Assignable variation Variation that has identifiable sources. This type of variation can be reduced, or eliminated, by analysis and corrective action. Variations can be disruptive to operations and supply chain processes. They may result in additional costs, delays and shortages, poor quality, and inefficient work systems. 1-‹#› © McGraw-Hill Education. Learning Objective 1.6 Scope of Operations Management The scope of operations management ranges across the organization. The operations function includes many interrelated activities such as: Forecasting Capacity planning Facilities and layout Scheduling Managing inventories Assuring quality Motivating employees Deciding where to locate facilities And more . . . 1-‹#› © McGraw-Hill Education. Learning Objective 1.6 Role of the Operations Manager The Operations function consists of all activities directly related to producing goods or providing services. A primary function of the operations manager is to guide the system by decision making. System design decisions System operation decisions 1-‹#› © McGraw-Hill Education. Learning Objective 1.6 System Design Decisions System design Capacity Facility location Facility layout Product and service planning Acquisition and placement of equipment These are typically strategic decisions that usually require long-term commitment of resources determine parameters of system operation 1-‹#› © McGraw-Hill Education. Learning Objective 1.6 System Operation Decisions System operation These are generally tactical and operational decisions Management of personnel Inventory management and control Scheduling Project management Quality assurance Operations managers spend more time on system operation decision than any other decision area They still have a vital stake in system design 1-‹#› © McGraw-Hill Education. Learning Objective 1.7 OM Decision Making (1 of 2) Most operations decisions involve many alternatives that can have quite different impacts on costs or profits Typical operations decisions include: What: What resources are needed, and in what amounts? When: When will each resource be needed? When should the work be scheduled? When should materials and other supplies be ordered? 1-‹#› © McGraw-Hill Education. Learning Objective 1.7 OM Decision Making (2 of 2) Where: Where will the work be done? How: How will he product or service be designed? How will the work be done? How will resources be allocated? Who: Who will do the work? 1-‹#› © McGraw-Hill Education. Learning Objective 1.7 General Approach to Decision Making Modeling is a key tool used by all decision makers Model - an abstraction of reality; a simplification of something. Common features of models: They are simplifications of real-life phenomena They omit unimportant details of the real-life systems they mimic so that attention can be focused on the most important aspects of the real-life system 1-‹#› © McGraw-Hill Education. Learning Objective 1.7 Understanding Models Keys to successfully using a model in decision making What is its purpose? How is it used to generate results? How are the results interpreted and used? What are the model’s assumptions and limitations? 1-‹#› © McGraw-Hill Education. Learning Objective 1.7 Benefits of Models Models are generally easier to use and less expensive than dealing with the real system Require users to organize and sometimes quantify information Increase understanding of the problem Enable managers to analyze “What if?” questions Serve as a consistent tool for evaluation and provide a standardized format for analyzing a problem Enable users to bring the power of mathematics to bear on a problem. 1-‹#› © McGraw-Hill Education. Learning Objective 1.7 Model Limitations Quantitative information may be emphasized at the expense of qualitative information Models may be incorrectly applied and the results misinterpreted This is a real risk with the widespread availability of sophisticated, computerized models are placed in the hands of uninformed users The use of models does not guarantee good decisions 1-‹#› © McGraw-Hill Education. Learning Objective 1.7 Quantitative Approaches A decision-making approach that frequently seeks to obtain a mathematically optimal solution Supported by computer calculations Often work together with qualitative approaches 1-‹#› © McGraw-Hill Education. Learning Objective 1.7 Metrics and Trade-Offs (1 of 2) Performance metrics All managers use metrics to manage and control operations Profits Costs Quality Productivity Flexibility Inventories Schedules Forecast accuracy 1-‹#› © McGraw-Hill Education. Learning Objective 1.7 Metrics and Trade-Offs (2 of 2) Analysis of trade-offs A trade-off is giving up one thing in return for something else Carrying more inventory (an expense) in order to achieve a greater level of customer service 1-‹#› © McGraw-Hill Education. Learning Objective 1.7 Systems Approach (1 of 2) System - a set of interrelated parts that must work together The business organization is a system composed of subsystems Marketing subsystem Operations subsystem Finance subsystem 1-‹#› © McGraw-Hill Education. Learning Objective 1.7 Systems Approach (2 of 2) The systems approach Emphasizes interrelationships among subsystems Main theme is that the whole is greater than the sum of its parts The output and objectives of the organization take precedence over those of any one subsystem 1-‹#› © McGraw-Hill Education. Learning Objective 1.7 Establishing Priorities In nearly all cases, certain issues or items are more important than others Recognizing this allows managers to focus their attention to those efforts that will do the most good Pareto Phenomenon - a few factors account for a high percentage of occurrence of some event(s) The critical few factors should receive the highest priority This is a concept that is appropriately applied to all areas and levels of management 1-‹#› © McGraw-Hill Education. Learning Objective 1.8 Historical Evolution of OM Industrial Revolution Scientific management Human relations movement Decision models and management science Influence of Japanese manufacturers 1-‹#› © McGraw-Hill Education. Learning Objective 1.8 Industrial Revolution Pre-Industrial Revolution Craft production - System in which highly skilled workers use simple, flexible tools to produce small quantities of customized goods Some key elements of the industrial revolution Began in England in the 1770s Division of labor - Adam Smith, 1776 Application of the “rotative” steam engine, 1780s Cotton gin and interchangeable parts - Eli Whitney, 1792 Management theory and practice did not advance appreciably during this period 1-‹#› © McGraw-Hill Education. Learning Objective 1.8 Scientific Management Movement was led by efficiency engineer, Frederick Winslow Taylor Believed in a “science of management” based on observation, measurement, analysis and improvement of work methods, and economic incentives Management is responsible for planning, carefully selecting and training workers, finding the best way to perform each job, achieving cooperation between management and workers, and separating management activities from work activities Emphasis was on maximizing output 1-‹#› © McGraw-Hill Education. Learning Objective 1.8 Human Relations Movement The human relations movement emphasized the importance of the human element in job design Lillian Gilbreth – applications of psychology Elton Mayo – Hawthorne studies on worker motivation, 1930 Abraham Maslow – motivation theory, 1940s; hierarchy of needs, 1954 Frederick Hertzberg – Two Factor Theory, 1959 Douglas McGregor – Theory X and Theory Y, 1960s William Ouchi – Theory Z, 1981 1-‹#› © McGraw-Hill Education. Learning Objective 1.8 Decision Models & Management Science F.W. Harris – mathematical model for inventory management, 1915 Dodge, Romig, and Shewart – statistical procedures for sampling and quality control, 1930s Tippett – statistical sampling theory, 1935 Operations Research (OR) Groups – OR applications in warfare George Dantzig – linear programming, 1947 1-‹#› © McGraw-Hill Education. Learning Objective 1.8 Influence of Japanese Manufacturers Refined and developed management practices that increased productivity Credited with fueling the “quality revolution” Just-in-Time production 1-‹#› © McGraw-Hill Education. Learning Objective 1.9 Key Issues for Operations Managers Today Economic conditions Innovating Quality problems Risk management Competing in a global economy 1-‹#› © McGraw-Hill Education. Learning Objective 1.9 Environmental Concerns Sustainability Using resources in ways that do not harm ecological systems that support human existence Sustainability measures often go beyond traditional environmental and economic measures to include measures that incorporate social criteria in decision making All areas of business will be affected Product and service design Consumer education programs Disaster preparation and response Supply chain waste management Outsourcing decisions 1-‹#› © McGraw-Hill Education. Learning Objective 1.9 Ethical Issues in Operations Ethical issues that may arise in many aspects of operations management: Financial statements Worker safety Product safety Quality The environment The community Hiring and firing workers Closing facilities Workers’ rights 1-‹#› © McGraw-Hill Education. Learning Objective 1.10 The Need for Supply Chain Management In the past, organizations did little to manage the supply chain beyond their own operations and immediate suppliers which led to numerous problems: Oscillating inventory levels Inventory stockouts Late deliveries Quality problems 1-‹#› © McGraw-Hill Education. Learning Objective 1.10 Supply Chain Issues The need to improve operations Increasing levels of outsourcing Increasing transportation costs Competitive pressures Increasing globalization Increasing importance of e-business The complexity of supply chains The need to manage inventories 1-‹#› © McGraw-Hill Education. End of Presentation © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 1-‹#›

Chapter 2

Competitiveness

,

Strategy

, and

Productivity

© McGraw-Hill Education.

All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

1

Learning Objectives (1 of 2)

You should be able to:

2.1 List several ways that business organizations compete

2.2 Name several reasons that business organizations fail

2.3 Define the terms mission and strategy and explain why they are important

2.4 Discuss and compare organization strategy and operations strategy, and explain why it is important to link the two

2-‹#›

© McGraw-Hill Education.

Learning Objectives (2 of 2)

2.5 Describe and give examples of time-based strategies

2.6 Define the term productivity and explain why it is important to organizations and to countries

2.7 Describe several factors that affect productivity

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.1

A Cold Hard Fact

Better quality, higher productivity, lower costs, and the ability to respond quickly to customer needs are more important than ever, and…

the bar is getting higher

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.1

Chapter Focus

This chapter focuses on three separate, but related ideas that are vitally important to business organizations

Competitiveness
Strategy
Productivity

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.1
Competitiveness

Competitiveness:

How effectively an organization meets the wants and needs of customers relative to others that offer similar goods or services

Organizations compete through some combination of their marketing and operations functions

What do customers want?

How can these customer needs best be satisfied?

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.1

Marketing’s Influence

Identifying consumer wants and/or needs

Pricing and quality

Advertising and promotion

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.1

Businesses Compete Using Operations

Product and service design

Cost

Location

Quality

Quick response

Flexibility

Inventory

management

Supply chain management

Service

Managers and workers

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.2

Why Some Organizations Fail (1 of 2)

Neglecting operations strategy

Failing to take advantage of strengths and opportunities and/or failing to recognize competitive threats

Too much emphasis on short-term financial performance at the expense of R&D

Too much emphasis in product and service design and not enough on process design and improvement

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.2

Why Some Organizations Fail (2 of 2)

5. Neglecting investments in capital and human resources

6. Failing to establish good internal communications and cooperation

7. Failing to consider customer wants and needs

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.3

Hierarchical Planning

Mission

Goals

Organizational strategies

Functional strategies

Tactics

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.3

Mission, Goals, and Strategy (1 of 2)

Mission

The reason for an organization’s existence

It answers the question “What business are we in?”

Goals

Provide detail and the scope of the mission

Goals can be viewed as organizational destinations

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.3

Mission, Goals, and Strategy (2 of 2)

Strategy

A plan for achieving organizational goals

Serves as a roadmap for reaching the organizational destinations

The organizational strategy guides the organization by providing direction for, and alignment of, the goals and strategies of the functional units

The organizational strategy is a major success/failure factor

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.3
Mission
Mission
The reason for an organization’s existence

Mission statement

States the purpose of the organization

The mission statement should answer the question of “What business are we in?”

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.3

FedEx Mission Statement

FedEx Corporation will produce superior financial returns for its shareowners by providing high value-added logistics, transportation and related information services through focused operating companies.

Customer

requirements will be met in the highest quality manner appropriate to each market segment served. FedEx Corporation will strive to develop mutually rewarding relationships with its employees, partners and suppliers. Safety will be the first consideration in all operations. Corporate activities will be conducted to the highest ethical and professional standards.

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.3
Goals

The mission statement serves as the basis for organizational goals

Goals
Provide detail and the scope of the mission
Goals can be viewed as organizational destinations

Goals serve as the basis for organizational strategies

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.3

Strategies

Strategy
A plan for achieving organizational goals
Serves as a roadmap for reaching the organizational destinations

Organizations have

Organizational strategies

Overall strategies that relate to the entire organization

Support the achievement of organizational goals and mission

Functional level strategies

Strategies that relate to each of the functional areas and that support achievement of the organizational strategy

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.3

Tactics and Operations

Tactics

The methods and actions taken to accomplish strategies

The “how to” part of the process

Operations

The actual “doing” part of the process

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.3

Core Competencies

Core competencies

The special attributes or abilities that give an organization a competitive edge

To be effective core competencies and strategies need to be aligned

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.4

Sample Operations Strategies

Organizational Strategy

Operations Strategy

Examples of Companies or Services Low Price Low cost U.S. first-class postage
Wal-Mart Responsiveness Short processing times
On-time delivery McDonald’s restaurants
FedEx Differentiation:
High Quality High performance design and/or high quality processing
Consistent quality Sony TV
Coca-Cola Differentiation:
Newness Innovation 3M, Apple Differentiation:
Variety Flexibility
Volume Burger King (Have it your way”)
McDonald’s (“Buses Welcome”) Differentiation:
Service Superior customer service Disneyland
IBM Differentiation:
Location Convenience Supermarkets; mall stores

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.4

Strategy Formulation (1 of 2)

Effective strategy formulation requires taking into account:

Core competencies

Environmental scanning

SWOT

Successful strategy formulation also requires taking into account:

Order qualifiers

Order winners

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.4

Strategy Formulation (2 of 2)

Order qualifiers

Characteristics that customers perceive as minimum standards of acceptability for a product or service to be considered as a potential for purchase

Order winners

Characteristics of an organization’s goods or services that cause it to be perceived as better than the competition

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.4

Environmental Scanning

Environmental scanning is necessary to identify

Internal factors

Strengths and weaknesses

External factors

Opportunities and threats

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.4

Key External Factors

Economic conditions

Political conditions

Legal environment

Technology

Competition

Markets

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.4

Key Internal Factors

Human resources

Facilities and equipment

Financial resources

Customers

Products and services

Technology

Suppliers

Other

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.4
Operations Strategy

Operations strategy

The approach, consistent with organization strategy, that is used to guide the operations function

2-‹#›
© McGraw-Hill Education.

26

Learning Objective 2.4

Strategic OM

Decision Area

s

Decision Area

Product and service design

Location

Quality

Inventory

What the Decisions Affect
Costs, quality, liability, and environmental issues
Capacity Cost, structure, flexibility
Process selection and layout Costs, flexibility, skill level needed, capacity
Work design Quality of work life, employee safety, productivity
Costs, visibility
Ability to meet or exceed customer expectations
Costs, shortages
Maintenance Costs, equipment reliability, productivity
Scheduling Flexibility, efficiency
Supply chains Costs, quality, agility, shortages, vendor relations
Projects Costs, new products, services, or operating systems

2-‹#›
© McGraw-Hill Education.

Quality-based strategy

Strategy that focuses on quality in all phases of an organization

Pursuit of such a strategy is rooted in a number of factors:

Trying to overcome a poor quality reputation

Desire to maintain a quality image

A desire to catch up with the competition

A part of a cost reduction strategy

Quality-Based Strategies

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.5

Time-Based Strategies (1 of 2)

Time-based strategies

Strategies that focus on the reduction of time needed to accomplish tasks

It is believed that by reducing time, costs are lower, quality is higher, productivity is higher, time-to-market is faster, and customer service is improved

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.5

Time-Based Strategies (2 of 2)

Areas where organizations have achieved time reductions:

Planning time

Product/service design time

Processing time

Changeover time

Delivery time

Response time for complaints

2-‹#›
© McGraw-Hill Education.

Agile Operations

Agile operations

A strategic approach for competitive advantage that emphasizes the use of flexibility to adapt and prosper in an environment of change

Involves the blending of several core competencies:

Cost
Quality

Reliability

Flexibility

2-‹#›
© McGraw-Hill Education.

The Balanced Scorecard

Approach

A top-down management system that organizations can use to clarify their vision and strategy and transform them into action

Develop objectives

Develop metrics and targets for each objective

Develop initiatives to achieve objectives

Identify links among the various perspectives

Finance

Customer

Internal business processes

Learning and growth

Monitor results

2-‹#›
© McGraw-Hill Education.

The Balanced Scorecard

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.6
Productivity
Productivity
A measure of the effective use of resources, usually expressed as the ratio of output to input
Productivity measures are useful for
Tracking an operating unit’s performance over time
Judging the performance of an entire industry or country

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.6
Why Productivity Matters
High productivity is linked to higher standards of living
As an economy replaces manufacturing jobs with lower productivity service jobs, it is more difficult to maintain high standards of living
Higher productivity relative to the competition leads to competitive advantage in the marketplace
Pricing and profit effects
For an industry, high relative productivity makes it less likely it will be supplanted by foreign industry

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.6
Productivity Measures

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.6
Productivity Calculation Example
Units produced: 5,000
Standard price: $30/unit
Labor input: 500 hours
Cost of labor: $25/hour
Cost of materials: $5,000
Cost of overhead: 2× labor cost
What is the multifactor productivity?

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.6
Solution

What is the implication of an unitless measure of productivity?

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.6
Productivity Growth

Example: Labor productivity on the ABC assembly line was 25 units per hour in 2014. In 2015, labor productivity was 23 units per hour. What was the productivity growth from 2014 to 2015?

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.6
Service Sector Productivity (1 of 2)
Service sector productivity is difficult to measure and manage because
It involves intellectual activities
It has a high degree of variability
A useful measure related to productivity is process yield
Where products are involved
Ratio of output of good product to the quantity of raw material input

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.6
Service Sector Productivity (2 of 2)
Where services are involved, process yield measurement is often dependent on the particular process:
Ratio of cars rented to cars available for a given day
Ratio of student acceptances to the total number of students approved for admission

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.7
Factors Affecting Productivity
Methods
Quality
Management
Technology
Capital

2-‹#›
© McGraw-Hill Education.

Learning Objective 2.7
Improving Productivity
Develop productivity measures for all operations
Determine critical (bottleneck) operations
Develop methods for productivity improvements
Establish reasonable goals
Make it clear that management supports and encourages productivity improvement
Measure and publicize improvements
Don’t confuse productivity with efficiency

2-‹#›
© McGraw-Hill Education.

End of Presentation

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
2-‹#›

image1

Student Manual
Updated June 3, 201

5

McGraw-Hill Practice Operations

1

Table of Contents

Introduction …………………………………………………………………………………………………………………………………………………………..

3

Game Description …………………………………………………………………………………………………………………………………………………………………. 3

How to Win ……………………………………………………………………………………………………………………………………………………………………………. 3

Gameplay ………………………………………………………………………………………………………………………………………………………………………………. 3

Learning Outcomes ………………………………………………………………………………………………………………………………………………………………

4

Overview of Modules ……………………………………………………………………………………………………………………………………………………………. 4
Module 1: The Production Process …………………………………………………………………………………………………………………………….. 4
Module 2: Managing Suppliers ……………………………………………………………………………………………………………………………………. 4
Module 3: Forecasting and Contracts ………………………………………………………………………………………………………………………… 4
Module 4: Human Resources and

Capacity Planning

…………………………………………………………………………………………….. 4
Module 5: The New Branch ………………………………………………………………………………………………………………………………………….. 4
Module 6: Maximize Net Worth ………………………………………………………………………………………………………………………………….. 5

System Requirements ………………………………………………………………………………………………………………………………………………………….. 5

Registering and Logging In ………………………………………………………………………………………………………………………………….

6

Module 1: The Production Process …………………………………………………………………………………………………………………….

7

Make-to-Order Processes …………………………………………………………………………………………………………………………………………………….

8

Operations Management: Priority and Utilization …………………………………………………………………………………………………………

9

Follow the Tutorial for Module 1 ……………………………………………………………………………………………………………………………………..

11

Module 2: Managing Suppliers ………………………………………………………………………………………………………………………… 1

2

The “Lean or “Just-In-Time” Strategy ……………………………………………………………………………………………………………………………..

13

Quality Inspection ……………………………………………………………………………………………………………………………………………………………….

15

Quantity Flexibility and Supplier Capacity …………………………………………………………………………………………………………………….

16

Creating a Vendor Scorecard ……………………………………………………………………………………………………………………………………………

17

Follow the Tutorial for Module 2 ……………………………………………………………………………………………………………………………………..

19

Module 3: Forecasting and Contracts ………………………………………………………………………………………………………………

20

Research ………………………………………………………………………………………………………………………………………………………………………………. 20

Make-to-Order vs. Make-to-Stock ……………………………………………………………………………………………………………………………………. 20

Bids ……………………………………………………………………………………………………………………………………………………………………………………….. 20

Work Request Analysis……………………………………………………………………………………………………………………………………………………….

21

Batch Manufacturing …………………………………………………………………………………………………………………………………………………………

23

Forecasting and Specialization ………………………………………………………………………………………………………………………………………..

24

Follow the Tutorial for Module 3 …………………………………………………………………………………………………………………………………….. 24

Module 4: Human Resources and Capacity Planning ……………………………………………………………………………………

25

Human Resources ………………………………………………………………………………………………………………………………………………………………. 25

McGraw-Hill Practice Operations

2

Training……………………………………………………………………………………………………………………………………………………………………………

26

Hiring ………………………………………………………………………………………………………………………………………………………………………………. 26
Managing the Organization Chart ……………………………………………………………………………………………………………………………..

27

Capacity Planning ………………………………………………………………………………………………………………………………………………………………. 27

Scheduling a Job Shop with a Spreadsheet …………………………………………………………………………………………………………………….

29

Gather Basic Information ……………………………………………………………………………………………………………………………………………. 29
Prepare a Schedule ………………………………………………………………………………………………………………………………………………………. 29
Compare Schedules using Different Priorities ……………………………………………………………………………………………………….

30

Matching Capacity to Demand …………………………………………………………………………………………………………………………………………

31

Maximizing Throughput ……………………………………………………………………………………………………………………………………………… 31

Constraints and Bottlenecks ……………………………………………………………………………………………………………………………………………..

32

Routing Pathways………………………………………………………………………………………………………………………………………………………….

33

Finding Bottlenecks ……………………………………………………………………………………………………………………………………………………… 33

End of the Tutorial ……………………………………………………………………………………………………………………………………………………………..

36

Module 5: The New Branch ……………………………………………………………………………………………………………………………….

37

Hiring vs. Training ……………………………………………………………………………………………………………………………………………………………… 37
Analyzing Employee Expenses …………………………………………………………………………………………………………………………………..

38

Reputation ……………………………………………………………………………………………………………………………………………………………………………

42

Module 6: Maximizing Profits …………………………………………………………………………………………………………………………..

43

Long-Term Perspective ……………………………………………………………………………………………………………………………………………………… 43
Total Cost of Ownership ………………………………………………………………………………………………………………………………………………

44

McGraw-Hill Practice Operations

3

Introduction

Game Description

Practice Operations puts players in the role of an operations decision maker for a clothing
manufacturing company. Operations is the engine that drives a business. Play begins with an overview
of the heart of that engine – managing the production process. Players review the contract
specifications as well as the production process by walking through the Production Floor and Shipping
area. Players then analyze the receiving department functions of managing the supply chain and
material inventories to ensure client needs can be met. In order to grow the business, players choose
which new contracts to pursue and then optimize their receiving, production, and shipping departments
accordingly. As the business grows, players manage both the human and facility resources in order to
meet capacity challenges. Customer satisfaction is a key metric for success. In the final stages of the
game, the company puts players in complete control over all areas of operations at the New Branch,
with the challenge to build the most profitable company possible.

How to Win

Your goal is to make the most money possible. This will happen if you run your operation efficiently.
Getting orders out to customers on time, with the correct quantity and quality will make your customers
happy, which in turn raises your reputation. As your reputation increases, you will be able to
successfully bid on contracts from a larger pool of customers, which will generate more revenue. If you
run your operation poorly and your customers receive orders late or with errors in quality or amount,
your sales force will lose bids to your competitors and you will make less money, or even run a deficit!

Gameplay

The game is turn-based. Each turn is one week. Each module is a specific length and has objectives that
must be achieved before time runs out.

McGraw-Hill Practice Operations

4

Learning Outcomes

 The interactive experience focuses on gaining experience through trial and error and learning
how the elements of operations and production come together.

 Supports online, out-of-class play and competition between you and your fellow students.

 Features game-world data and situations that reflect real world operational situations.

 Highlights the inherently interdisciplinary nature of business by demonstrating that the various
functional areas of the company – Human Resources, Manufacturing, Accounting, and Sales –
must work together in order to meet company goals.

 Opportunity for actual hands-on practice as an operations manager in a manufacturing scenario

 Analyze and evaluate quality considerations in the production process.

 Stresses both customer satisfaction and financial results as the key success metrics.

 Provides reporting features that make it easy for instructors and students to review and assess
your performance and decision-making.

Overview of Modules

Module 1: The Production Process

Operations is the engine that drives a business. This module focuses on the heart of that engine,
managing the production process. Module 1 should take 25-45 minutes to complete.

Module 2: Managing Suppliers

This module unlocks the receiving department, putting players in charge of managing the supply
chain and material inventories to meet client needs. Module 2 should take 25-45 minutes to
complete.

Module 3: Forecasting and Contracts

In this module, players choose which contracts to pursue, and optimize their receiving,
production, and shipping departments accordingly. Module 3 should take 25-45 minutes to
complete.

Module 4: Human Resources and Capacity Planning

In this challenging scenario, players will manage both human and facility resources to meet
capacity challenges. Module 4 should take 35-55 minutes to complete.

Module 5: The New Branch

In this module, players will have complete control over all areas of their operations, and will be
challenged to reach a net worth of $50,000 as quickly as possible. Module 5 should take 1 to 2
hours to complete.

McGraw-Hill Practice Operations

5

Module 6: Maximize Net Worth

In this capstone module, players again have complete control over all areas of their operations.
The goal is to maximize the net worth of the firm over 50 turns. Module 6 should take 2 to 3
hours to complete.

System Requirements

Computers used to run Practice Operations must meet the Technical Requirements listed below.

Windows OS:

1. Operating systems: Windows XP with Service Pack 3 / Windows Vista SP2 / Windows 7 /

Windows 8.

2. Internet Browser: Firefox version 31 or above OR Internet Explorer 11 or above OR

Google Chrome

version 31 or above

3. Memory: 512MB RAM

4. Processor: Intel Pentium 3-4 processor or equivalent/better

5. Video: NVIDIA GeForce 6600 or better OR ATI Radeon 8500, 9250 or better OR Intel 9

45

chipset or better, 1024 x 768 resolution minimum

6. Internet: 128kbit/s Cable/DSL/LAN connection per computer

7. Hard Disk Space: 500MB free

8. Direct X: DirectX 9.0c

Mac OSX:

1. Operating system: Must have OS X 10.6 (Snow Leopard) or later.

2. Processor: Intel Core 2 Duo (PowerPC not supported)

3. RAM: 1GB System Memory

4. Video Memory: 256MB graphics card or decent integrated graphics chip. Must support

OpenGL 1.5+

5. Internet Browser: Firefox version 31 or above OR Safari 7.1 or above OR Google Chrome

version 31 or above

Apple iPad:

1. Model: iPad2 or later.

2. Operating System: iOS 8 or later.

3. Screen Resolution: 1024×768 or greater.

McGraw-Hill Practice Operations

6

Android Tablet:

1. Operating System: Android 4 or later.

Registering and Logging In

Navigate to www.mhpractice.com. There are two ways to register for Practice Operations and log in:
1) you can click on the Practice Operations link in Connect, or
2) you can click on the link that has been sent to you from your instructor by email.

If you are registering for the first time, the following screen will appear. Click ‘Register’ located in the
lower middle of the screen. If you have already registered, simply click the Login button.

If you are registering for the first time, you will see the following screen; enter the code from the card
included with your textbook, or the code that you purchased separately.

Operations

Operations Sc 101

http://www.mhpractice.com/

McGraw-Hill Practice Operations

7

Module 1: The Production Process

In this module, you will learn to manage the basic production process. This product flow appears in the
Production Floor panel (below), and you can also see the progression of products through the various
machines. The managers in the game will help guide you through the process.

In Practice Operations, the production floor uses a workcenter (or job shop) layout, where machines are
grouped by type, with products traveling from one machine to the next as they are completed. Products
start in Cutting and then move through Sewing, Press Transfer (for some products), and finally arrive at
Packaging. Additional workcenters will be added in later modules, and each station can be upgraded for
a one-time cost to increase the speed and maximum amount that can be processed.

McGraw-Hill Practice Operations

8

Make-to-Order Processes

By following the screen prompts, a production order that precisely matches the customer order is
started on the production floor. This 1:1 relationship between customer orders and production orders is
a key characteristic of a make-to-order process.

For example, review the open contract from Stallion Apparel (below), highlighting the importance of
individual orders in a make-to-order system. In particular, the key elements are the client, item ordered,
order quantity, unit price, and due date.

McGraw-Hill Practice Operations

9

Once your production is underway, you can
view the details by looking at the Current
Production Runs panel. The side arrows let
you quickly cycle through all products
currently in production. The icons under
Production Tasks let you see which machines
are required for the specific product. You can
view the material required per unit and see
how much of that material you have in stock.
You can view the current status, the amount
being produced, what priority you have it set
for, and finally the quantity of

finished

product you have in stock.

Operations Management: Priority and Utilization

One of your key decisions is the sequencing of jobs. By varying the priority of jobs, the quantity of each
item produced during a given period can be varied widely. In this example, the priority of three jobs
(shirts, shorts, and pants) is varied to show how this can impact total output. Prioritization of jobs is
established in the Production Area.

Click the Manager’s Desk, then select each order from the Production Schedule.

McGraw-Hill Practice Operations

10

To keep track of the state of multiple orders, go to the View Production Plan panel.

The Production Plan panel shows which machines are in use and how much of their total capacity is
being utilized. ! Prioritizing jobs can save players from several utilization mishaps such as being on track
to complete orders for your customers on time only to have several products all arrive at the packaging
station at the same time

NOTE:

You can also change
priority of production
with the mouse by
grabbing a product in
“Current Production
Runs” and dragging it
to a new slot.

McGraw-Hill Practice Operations

11

Can you get your average utilization to 100 percent?

Probably not, but the higher that score, the more efficient you are managing your operations. See the
equation below:

𝑈𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 =
𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑢𝑠𝑒𝑑

𝐵𝑒𝑠𝑡 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑙𝑒𝑣𝑒𝑙
=

1280

2400
= 53.3%

This priority order has increased the utilization average by 10%!

Follow the Tutorial for Module 1

It’s important to follow the in-game tutorial for this module to be sure you are introduced to all the key

elements. They will be needed when you start playing Module 2. If you are unsure of any part of the

McGraw-Hill Practice Operations

12

module, replay it, and then review this section of the manual. If you feel comfortable with the concepts

introduced in Module 1, try playing through it several times to beat your own high score!

Module 2: Managing Suppliers

Time to get busy with supply chain management! This module introduces the receiving department,

and shows how to efficiently order the materials you need to produce your products. As you learned in

Module 1, proper scheduling is critical to keep your production running smoothly. The same is true with

managing your supply chain. You must make sure you receive the proper amount and quality of

materials in a time frame that allows you to sort them, send them to production to create completed

products, and ship them in enough time to arrive at their destination within the specified number of

weeks. This will make your clients happy and increase your reputation.

Of course, it is also important to manage the costs associated with suppliers. In Practice Operations,

there are two main costs associated with raw materials – purchasing costs and holding costs. Purchasing

costs can be managed by selecting a vendor with the right quality (to avoid overpaying for excessive

quality), by taking advantage of lead-time and quantity discounts, and by comparing prices among

vendors. Holding costs are

charged for materials held in

stock (about 10% per turn for

raw materials, 5% per turn for

finished

products) and

can be

minimized

through careful

scheduling of

purchases and

production.

Excess materials

can be sold, but the cash

received for inventory (either

raw materials or finished

products) that are disposed of

in this manner is a small

portion of the original cost.

In the receiving department,

you click on the manager’s desk to order new materials, and you will see trucks back up to the loading

McGraw-Hill Practice Operations

13

docks when materials arrive. Materials first go to the double pallet at the bottom of the screen until

they can be sorted. Then each pallet displays specific raw materials that are letter coded.

The “Lean” or “Just-In-Time” Strategy

One gameplay option you can experiment with in Module 2 is to use a true lean/JIT approach, ordering
raw materials to arrive just as they are needed. For example, in turn 3 (January, week 3) orders arrive for
slacks (250 units) and shorts (400 units). Both of these products are due to arrive at the customer in 6
weeks (March, week 1). Less than one week is required for production of these items (the limiting factor
is packaging capacity, but even this step can be completed in less than a week for both products).
Therefore, with 2 weeks to ship and 1 week to produce, these two production orders can be started as
late as February, week 2. Therefore, when ordering the raw materials, ordering with a lead time of 3
weeks will minimize inventory holding and allow for just-in-time delivery of raw materials.

JIT/Lean requires highly reliable suppliers: for khaki either United Fabrics or Preston Premium would be
preferred suppliers. Both offer the required level of quality and both can meet the required quantity.
Since the price is the same for both, place an order for 500 units of khaki with Preston Premium.

For silk, Preston Premium, Reliable Clothing, and United Fabrics are highly reliable suppliers. Once again,
all meet the necessary quality level. Reliable Clothing offers a significantly better price, even though an
order of 400 units of silk will not qualify for a quantity discount. Preston Premium is more expensive
than Reliable Clothing
and United Fabrics has
a minimum order
quantity of 500 units.
Therefore, we place an
order for 400 units of
silk with Reliable
Clothing.

McGraw-Hill Practice Operations

14

Thanks to our reliable suppliers, the requested
quantities of silk and khaki arrive exactly as
promised in February, week 2, and can be used in
production the following week.

However, we have encountered a
snag! The sorting capacity in the
warehouse is insufficient to process
the shipments. 98 units of khaki and
2 units of silk are left unsorted. This is
going to delay production.

This element of operations is dealt
with in Module 4, where you will get
the opportunity to expand your staff
for different departments. In the
meantime, it’s vital to run the
numbers ahead of time to avoid
these situations, especially since
hiring more staff may not be an
option for you.

Due to the delay in getting materials sorted, the slacks and shorts are not completed and in finished
goods inventory until February, week 4. As a result, you would be forced to use expedited shipping to
get the products to the customers on time at an additional cost of $404! That small holdup will
significantly impact your bottom line!

McGraw-Hill Practice Operations

15

Quality Inspection

Stock inspections can increase the quality of your raw materials. This identifies and removes sub-
standard items, decreasing the available quantity but increasing the overall quality of the remaining
stock. Inspection is
generally an expensive
option since you are, in
effect, throwing away raw
materials that you’ve
already paid for.

In Module 2 gameplay, you
are prompted to inspect a
shipment of Denim. Quality
inspection is initiated from
the Material Stock window.

Students are asked to confirm the inspection…

…and are shown the results of the inspection. Here, 19 “defective”
units were removed, raising the quality level of the 81 remaining units
to 59.0.

However, inspection is rarely an
efficient strategy for improving
quality. In fact, if a higher quality
material had been purchased in the
first place, the total cost of the
materials would be significantly
lower.

United Fabrics offers a higher-quality
denim for $1.80 per unit.

A comparison of final cost per unit
shows that purchasing from United Fabrics would result in a lower cost of ownership.

McGraw-Hill Practice Operations

16

Red Maple Fabrics United Fabrics

Purchase Price per Unit $1.50 $1.80

Inspection Cost 19 x $1.50 = $28.50 $0.00

Final Quantity 81 100

Final Cost per Unit $178.50/81 = $2.20 $1.80

So how can inspections help you? Well, they can allow you to make use of extra materials. Perhaps you

ordered cotton at a quality of 40 and you have several hundred left over. If a small order comes in with

a quick turnaround at quality 50, you may be able to produce it right away by inspecting the lower

quality material and finding enough quality 50 material to get the job done.

Quantity Flexibility and Supplier Capacity

Although price is an important consideration in vendor selection, ability to meet surges in demand is
also an
important
attribute.
Vendors with
low levels of
available
capacity may be
unable to meet
demand.

For example,
Alpine and
Tigerlily Textiles
are very similar
suppliers of
wool. Both have
the same price,
reliability, and
quality levels.
However, their
available capacity is not comparable.

McGraw-Hill Practice Operations

17

Vendor selection must include more aspects than just quoted price. Quantity discounts, lead times, and
other factors can make a significant difference between vendors.

Creating a Vendor Scorecard

By now it is clear that there are several different dimensions you can use to evaluate the suppliers.
These include price, quality, and reliability. This data can be used to prepare a vendor scorecard. For
example, an evaluation of cotton suppliers can be prepared by gathering data from the Receiving
screen.

McGraw-Hill Practice Operations

18

After gathering this data for all cotton suppliers, the following table can be assembled.

Supplier Price Quality Reliability

Owens Textiles $0.08 50 Low

Freeway Fabrics $0.08 25 Medium

Preston Premium $0.12 80 High

Reliable Clothing $0.10 35 High

Tigerlily Textiles $0.10 60 Medium

United Fabrics $0.12 70 High

The vendor scorecard can be prepared in many ways. One possibility is to rank the vendors in each
category, and to assign equal weighting to each category. The vendor with the lowest weighted rating is
most attractive.

Rank

Supplier Price Quality Reliability Score

Owens Textiles 1 4 3 2.67

Freeway Fabrics 1 6 2 3.00

Preston Premium 3 1 1 1.67

Reliable Clothing 2 5 1 2.67

Tigerlily Textiles 2 3 2 2.33

United Fabrics 3 2 1 2.00

In this example, Preston Premium would be considered the “best” vendor.

Use of different weights for the three categories can lead to a different result. Consider the results if
price is considered most important (assigned a weight of 0.6), while quality and reliability are assigned a
weight of 0.2.

3 + 1 + 1

3
= 1.67

McGraw-Hill Practice Operations

19
Rank
Supplier Price Quality Reliability Score

Owens Textiles 1 4 3 2.00

Freeway Fabrics 1 6 2 2.20

Preston Premium 3 1 1 2.20

Reliable Clothing 2 5 1 2.

40

Tigerlily Textiles 2 3 2 2.20

United Fabrics 3 2 1 2.40

Now Owens Textiles is the preferred vendor.

Follow the Tutorial for Module 2

As with Module 1, it is important to follow the in-game tutorial for this module to be sure you are

introduced to all the key elements. A clear understanding of all the points from the two modules you’ve

played through will be needed when you start playing Module 3. If you are unsure of any part of the

module, replay it, and review this section of the manual. If you feel comfortable with the concepts

introduced in Module 2, make use of your Vendor Scorecard and try playing through it several times to

beat your own high score!

0.6(1) + 0.2(4)
+ 0.2(3) = 2.00

McGraw-Hill Practice Operations

20

NOTE:
In longer games, purchase as much market
research as you can right away. There is a
minimal cost to buy it, and the knowledge
can really help you plan your strategy!

Module 3: Forecasting and Contracts

Making the right choices about which contracts to bid on can make a huge difference on your bottom

line. One way to do that is forecasting. By obtaining market research that predicts upcoming trends,

you will gain a better understanding of which products customers will likely be asking for. Another

important element in this module is evaluating contracts and making effective bids.

Research

You can buy market research reports that forecast

trends for up to a year in advance.

Make-to-Order vs. Make-to-Stock

Until now, you have been running a Lean / Just-in-Time operation and buying specific raw materials

when you needed them. However, once you have a sense of what products will be popular in the near

future, you can stockpile required materials in advance, and upgrade or add machines to your

production floor. Of course, there is a risk involved in purchasing materials without a specific contract in

place.

Bids

It’s tempting to bid on everything; however, if too many bids are accepted, you can easily be swamped

and unable to complete the work. Therefore,Module 3 limits you to 2 bids per turn. A higher concern is

bidding on contracts that you are unlikely to win.In this case, you can easily find yourself with too much

of your facility idle and losing money. Properly acknowledging these scenarios can help you build a

positive reputation!

McGraw-Hill Practice Operations

21

Work Request Analysis

A good match between producer and customer is important. The bidding process offers a chance to
strategically analyze jobs to determine if the opportunity is a good fit. In Practice Operations, key
aspects are reputation, quality, materials, processes, capacity, and profitability. The bidding process can
be used to highlight each of these aspects.

At the beginning of
Module 3, there are
three materials already
in stock – Nylon, Silk,
and Cotton.

Notice that the factory
is already short of
cotton, so bidding on
jobs that use cotton
will require additional
purchases. However,
we have unallocated
supplies of both Nylon
and Silk, so jobs that
use those materials will
allow us to reduce our
overall inventory
holdings.

Looking at the production floor, we currently have four
processes available – cutting, sewing, press transfer, and
packaging. Jobs that require other processes will
necessitate a capital investment before we can begin
production.

McGraw-Hill Practice Operations

22

There is only one production run currently in process, so there
is sufficient capacity for additional work requests.

Looking at the work requests available for bid, most are out of
our league (as far as reputation is concerned) or require
materials that are already in short supply, such as cotton.
However, the order for Boxer Shorts (Down Under) and one
order for sports pants (Burgundy Fashion) are possibilities. We
can see that both orders require only cutting, sewing, and
packaging, so no new equipment is needed. Although both require more material than we currently
have on hand, the lead time is sufficient to obtain more.

These appear to be good matches for
our system.. Notice that the quality
requirements for each are in line
with the quality level of our existing
materials. The final check is to ensure
profitability of the orders.

Boxer Shorts use one unit of silk for
each item. Silk of acceptable quality (50) can be purchased for $3.20 per unit from Owens Textiles.

Since we are already paying our
employees, their salaries are a sunk
cost, unless we intend to fire them.
However, in this module, employee
costs can be ignored (each employee’s
salary is $0.00 per week).

Shipping the products will cause some additional costs to be incurred, but the unit price of $15.25, with
a material cost of just $3.20, leaves plenty of room for profit.

McGraw-Hill Practice Operations

23

To overcome the mismatch in reputation with Down Under, we reduce the unit price to $13.50.

Sports pants use 2 units of nylon for each item. Nylon of acceptable quality (50) can be purchased for
$1.76 per unit from Owens Textiles. Once again, the unit price of $14.75 leaves a large profit margin.

To overcome the mismatch in reputation with Burgundy Fashions, we reduce the unit price to $13.00.

Although both bids are
rejected, additional
opportunities to reduce raw
material inventories will
arise. In turn 3, a work
request from Stallion Apparel
becomes available for
bidding. This request
matches our reputation
better, and still utilizes the
existing stock of nylon.
However, it requires heat
transfer equipment which is
not currently in the factory.
This equipment must be
purchased at a cost of $1,800.

In this case, the profitability of the order ($5,850 less $1,056 in materials) can justify the purchase of the
new equipment. If the bid is accepted, the new equipment can be purchased in the next turn.

Batch Manufacturing

In Practice Operations, products are produced in batches. Each batch moves through the factory
together, from machine to machine, until all necessary processes have been completed. The
shortcomings of batch manufacturing can be highlighted in Practice Operations.

For example, a work order for
200 coaches’ jackets will first be
processed at the cutting station,
then proceed to sewing, heat
transfer, and packaging.

Notice that each step doesn’t
begin until the preceding step is
completed, which results in a
long lead time for the products,
with much of the time spent idle.
In this example, each finished
goods item spends 550 seconds
being processed (96 seconds in cutting, 166 seconds in sewing, 144 seconds in heat transfer, and 144
seconds in packaging.) However, total production time for the batch of 200 units is 1,873 minutes.
Therefore, each item spends less than 0.5% of its time in the factory actually being processed and over
99.5% of the time waiting! Batch processes can also lead to low levels of equipment usage.

McGraw-Hill Practice Operations

24

NOTE:
Raw material availability
may allow bidding on
lucrative short lead-time
contracts.

Forecasting and Specialization

Rather than attempting to be all
things to all customers, an effective
strategy is to specialize. Focusing on a
few, similar products can simplify
processes and minimize investment in
equipment. Selecting an area of
specialization can begin with
forecasting.

In the Research screen, the Top
Product and Hot Products are
identified. Examining the reports
(here only the winter and spring
reports since the Module 3 simulation
lasts for 20 turns), it is clear that only a small number of materials are used to produce the majority of
the Top/Hot products.

Clearly silk and nylon offer more
flexibility. This allows speculative
purchases of these raw materials to
ensure stock is available on short
notice.

In addition to raw material considerations, process commonality is another key factor. Existing
processes (cutting, sewing, press transfer, and packaging) can support sports pants, ties, and boxer
shorts. Addition of heat transfer equipment will allow production of coaches’ jackets and windbreakers.

A specialized production system with cutting, sewing, press transfer, heat transfer, and packaging, using
nylon and silk raw materials, would support at least two of the top/hot products for both the winter and
spring seasons.

Follow the Tutorial for Module 3

As with previous modules, it is important to follow the in-game tutorial for this module to be sure you

are introduced to all the key elements. Players will need a clear understanding of of the previous

modules before starting Module 4. If you are unsure of any part of the module, replay it, and review

MATERIAL “HOT” PRODUCTS

Silk Boxer Shorts, Ties

Nylon Sports pants, Coaches Jackets
and Windbreakers

Denim Denim Jackets

Wool Hunting Pants

Khaki Bermuda Shorts

McGraw-Hill Practice Operations

25

this section of the manual. If you feel comfortable with the concepts introduced in Module 3, try

different bidding and purchasing strategies to see how it affects your profits.

Module 4: Human Resources and Capacity Planning

So far, you’ve been managing production, ordering, shipping, receiving, sales and predicting the market.

It’s time to add human resources to the mix. This module will help you identify when and how to

expand your workforce to handle a growing customer base seeking more and larger orders. You will

also see when it is cost effective to purchase upgraded equipment and to train existing staff to increase

production capacity.

Human Resources

When more work is required in a specific area, you can either train an existing employee or hire
somebody new. This area is also where you manage the organization of each department.

McGraw-Hill Practice Operations

26

NOTE:
Be sure to compare all potential hires
before making a decision. An employee
may require a higher salary but have skill in
multiple areas, saving you the cost of
training later. Conversely, hiring someone
with higher skills in a single area for less
salary can make sense if that area is always
busy.

(More on this is in the Tips in Module 5)

Training

When you get really busy, you will

quickly reach a point where more

help is needed. You can train an

existing employee or hire someone

new. If you have an area that won’t

be busy for several weeks, it can

make sense to train an employee

who is currently working in a

relatively quiet department and

reassign that person to the busy

area. Staff trained in multiple areas

can be very useful at preventing

holdups in production.

Hiring

Training is a good idea overall, but you will also need to

hire new people when the volume of work demands it.

Your pool of potential hires will have a variety of skills and

demand different amounts for a salary. For example, Tom

O’Leary is hired into the receiving department in order to

help sort more incoming materials. As was illustrated

earlier in the manual, the inability to sort fast enough can

delay production. However, that skill will also serve you if

you need to shift Tom to the shipping department after

materials have been sorted and you need more staff

helping to get product out the door.

Try not to wait too long to hire or train new staff.

Anticipating your needs will prevent delays that

may occur while waiting for a person to accept

your offer or complete training.

Severance

McGraw-Hill Practice Operations

27

Employee salaries are paid whether or not

the worker is busy. While it may be

tempting to fire an idle worker, Practice

Operations does impose a severance

charge of two weeks’ salary for any

employee who is fired. Careful planning of

staffing levels, along with retraining and

reassignment of current workers can help

players avoid these charges.

Managing the Organization Chart

Clicking on the HR manager’s desk brings up the organization chart. Here you can review payroll, both

overall and for specific departments. You can see how many staff you have in each department and

how good they are at their assigned job. Their skill level raises the amount of work they can do, so a

person with 4 stars in Production will create more product than someone with only 2 stars.

Capacity Planning

McGraw-Hill Practice Operations

28

NOTE:
Longer term, you should
observe your usage of raw
materials and plan your
receiving staff accordingly.

The most straightforward approach to capacity planning takes place in the receiving area. Each shipment
must be sorted before it is available for use. Since incoming shipments are fairly predictable,
determining the necessary
capacity is easier here than
elsewhere. Each week’s
expected deliveries can be
observed in the Receiving
screen by clicking on the
Delivery Schedule.

For example, early in
Module 4, the delivery
schedule shows 825 units
per week are scheduled to
arrive.

However, there is already a backlog of unsorted stock
(accessed by clicking on the unsorted stock in the Receiving
area) and sorting capacity is currently insufficient to keep
up with incoming materials (in this example, sorting
capacity is 525 units per week as shown in the Unsorted
Stock window). With over 1,400 units unsorted, plus 825
units per week arriving, sorting capacity must be increased
to about 1,525 units per week to clear the backlog in two
weeks. This will require hiring two or three new employees
to work in the receiving area.

McGraw-Hill Practice Operations

29

Scheduling a Job Shop with a Spreadsheet

With multiple work requests in process, prioritization can become an issue. With three or more
workcenters, even a small number of work requests can be daunting to prioritize. A spreadsheet
program (for example, Microsoft Excel) can be a useful tool when evaluating potential schedules.

At the beginning of Module 4,
there are five work requests
waiting to be scheduled in the
Production area.

These five products have different routings, which causes different processing durations as they pass
through production. Here it will be helpful for you to build an interactive spreadsheet to evaluate the
impact of different prioritization schemes.

Gather Basic Information

First, some basic information must be gathered and a few calculations are needed. The quantity for each
order is entered in column C and the due date is entered in column J. Multiplying the processing time for
each station (Cutting, Sewing, etc.) by the quantity ordered allows the student to calculate the time
required (shown in weeks here) for each process/job combination.

Prepare a Schedule

With this information, it is possible to prepare a schedule for each work center. The Cutting process for
the first job (Plain T-Shirts) starts at time 0 and lasts 0.9 weeks. Once this order is complete, the next job
at the Cutting center (Sports Shorts) can begin and the Plain T-Shirts order can begin at the Sewing
center (the next process required for this product).

McGraw-Hill Practice Operations

30

Note that an order cannot begin processing until it has finished at the preceding workstation. For
example, Sports Shorts cannot begin processing at the Dyeing station when Plain T-Shirts are finished (at
time 6.0) because the Sports Shorts are not finished at the Press Transfer station until time 8.2. Sports
Shorts are similarly delayed at the Packaging station.

Compare Schedules using Different Priorities

For example, compared to the earliest due date schedule shown earlier, scheduling jobs to prioritize
those with the shortest overall duration reduces the number of late jobs (from two to one), but
increases the total lateness (from 2.4 weeks to 4.2 weeks).

McGraw-Hill Practice Operations

31

Matching Capacity to Demand

On the Production Floor, capacity is determined in two ways. First, the number of jobs that can be in the
system at any given time is limited by the number of production employees (one employee is required
for each job after the first). Second, the processing rate of each machine can limit the number of items
that can be produced each week.

To determine the number of employees to staff the production floor, it is necessary to balance the
capacity across all aspects of the business. If too many jobs are active in production, there may be
insufficient capacity in Receiving and/or Shipping. In addition, to keep production employees busy, it
may be necessary to hire additional
customer service agents.

For example, at the beginning of
Module 4 there are 5 work requests
waiting to be produced.

Maximizing Throughput

In order to maximize throughput, these jobs should be processed as quickly as possible. Assuming there
are no equipment upgrades, the production floor should be staffed to maximize utilization of the
equipment. Although this staffing level does depend somewhat on the order in which jobs are

McGraw-Hill Practice Operations

32

processed, we will assume jobs are processed in order of their due dates. Therefore, the approximate
production schedule for these jobs will be as follows (if no equipment upgrades are purchased).

From this production schedule, it is clear that as many as 4 jobs can be active at any time. In fact, if we
consider that additional work requests may be added to the schedule as earlier jobs are completed, it
seems that 3 or 4 active jobs will be the norm. Therefore, staffing the production floor with 3 employees
is a good starting point.

With this production schedule, it will be necessary to have all raw materials in stock and available within
3 weeks. This means that receiving capacity may need to be as high as 3,000 units per week. This is, in
fact, not feasible in this module. A more reasonable plan might be to increase receiving capacity to
1,500 units per week (by hiring 3 new employees for the receiving area). This causes the production
schedule to be modified, but production staffing of 3 employees is still reasonable.

In the Shipping area, base capacity is quite low. One order with a size limit of 75 pounds is insufficient.
Therefore, additional staffing is required. Hiring two workers increases capacity to three orders per
week with a total weight of about 2,500 pounds. This may be more weight than is needed, but our long
term goal of having about 3 orders per week in process will require this level of capacity.

Finally, the Bidding and Contracts area also needs to be in balance with the rest of the facility. With two
to three jobs being completed each week, the ability to bid on two or three orders (assuming some bids
will not be won) is needed. Staffing the Bidding and Contracts area with two employees gives us the
ability to bid on three contracts each week.

At this point, the production system is well-balanced, with each department capable of supporting the
goal of three active jobs at any given time.

Constraints and Bottlenecks

Because the Practice Operations factory is set up as a job shop with batch scheduling, attention to
constraints and bottlenecks is particularly important. Identifying the bottlenecks in the process is
straightforward, beginning with determining cycle time for each work station.

To prepare for this demonstration, employees must be hired in Receiving (hire 2 employees) and
Production (hire 2 employees). Start production orders for Plain T-Shirts, Sports Shorts, White Socks,
and Low-Rise Jeans as soon as all workers are available.

McGraw-Hill Practice Operations

33

Routing Pathways

At the start of Module 4 there are five work requests in the factory, with three separate routings.

Routing 1 Plain T-shirts Cutting, Sewing, Press Transfer, Packaging

Routing 2 Sports Shorts and White Socks Cutting, Sewing, Packaging

Routing 3 Low Rise Jeans and Bermuda Shorts Cutting, Sewing, Dyeing, Packaging

Finding Bottlenecks

To identify the bottleneck, cycle through the stations and record the cycle time (notice that the cutting
station has already been upgraded in the first turn).

Process Time (seconds per unit)

Routing Cutting Sewing Press Transfer Dyeing Packaging Bottleneck

1 72 166 244 N/A 144 Press Transfer

2 72 166 244 N/A 144 Press Transfer

3 72 166 N/A 144 144 Sewing

For routings 1 and 2, the bottleneck operation is Press Transfer. For routing 3, the bottleneck operation
is Sewing. Upgrading both of these work stations is recommended (with the following results).

Process Time (seconds per unit)
Routing Cutting Sewing Press Transfer Dyeing Packaging Bottleneck

1 72 136 196 N/A 144 Press Transfer

2 72 136 196 N/A 144 Press Transfer

3 72 136 N/A 144 144 Dyeing/Packaging

After the upgrades, the Press Transfer station remains the bottleneck for routings 1 and 2, but Dyeing
and Packaging are now bottlenecks for routing 3.

the presence of several different routings complicates the bottleneck analysis. An alternative means of
identifying bottlenecks is to examine the utilization of equipment. Machines with particularly high
utilizations are potential bottlenecks.

McGraw-Hill Practice Operations

34

With four work requests active in the factory, the production plan initially shows that Sewing is the most
highly-utilized work station (after upgrades as described earlier).

This is not surprising because Sewing (and Packaging) are two of the three operations that all work
requests pass through (the third is Cutting, but capacity there is highest of all workstations). Packaging
has not been highly utilized at this point because no jobs have reached that stage.

For the next week, the production plan shows that Sewing and Press Transfer are the most utilized
operations.

For February, Week 2, utilization changes as the product mix begins to shift.

McGraw-Hill Practice Operations

35

As products move closer to completion, the Packaging station becomes highly utilized.

McGraw-Hill Practice Operations

36

And remains so for several weeks.

Note that in this example no new jobs were started into the system. However, it is clear from actual
utilizations that the bottleneck resources are still Sewing and Packaging. Upgrading each of these
stations is recommended.

Students can continue this analysis as the module progresses to better tune their system.

End of the Tutorial

There is a brief Tutorial at the start of Module 4 to introduce Human Resources and describe how to hire

and train people. From then on, you are on your own! Make use of this manual as a reference

supplement. As you can see from the material above in Module 4, there are a lot of useful tips for

improving your results when playing Practice Operations. More of these plans are contained in the next

section for the full length game in Module 5.

McGraw-Hill Practice Operations

37
Module 5: The New Branch

Module 5 gives you the opportunity to be in total control of Kibby & Strand. Your goal is simple – build
your net worth to $50,000 as quickly as possible. You can choose any strategy you like, but be sure you
are as efficient as possible to keep those orders (and profits) rolling in!

You’ve already learned a lot in the other modules, but module 5 offers a chance to polish your human
resources skills. One way to keep your operation efficient is to employ highly-skilled workers. In Practice
Operations, there are two ways to accomplish this task. You can hire outside talent or you can develop
your own workers through training.

Hiring vs. Training

A common human resources dilemma is whether to hire talent from outside the organization or to
develop talent within the firm. This issue can be explored in Practice Operations, Module 5.

One way to explore the
talent development issue
is to look at the total cost
of employment. At the
beginning of Module 5, a
number of applicants are
waiting to be hired. Two
of these are Aiko Chan
and Sandeep Patel.

If we are hiring for the Production area, Aiko Chan has a higher
skill level (his Machine Operations skill level is 3) than Sandeep
Patel. However, the higher skill level comes with a higher salary
cost. To equalize the skill level, we will need to provide Sandeep
Patel with training at a cost of $800 per week (for two weeks). In
addition, Sandeep will not be available to work during the two
weeks of training, making the total cost of training $1,240.

However, after training, Sandeep Patel will have equivalent skills to Aiko Chan at a lower salary. The
train-versus-hire decision can be evaluated using a “make versus buy” analysis.

McGraw-Hill Practice Operations

38

The total cost of
hiring Sandeep Patel
becomes less
expensive after 42
weeks of employment
(41.33 weeks, in fact)
and benefits of in-
house training
continue to accrue
after that. If you
expect to reach your
goal sooner than 42
weeks, you may be
better off hiring Aiko
Chan.

Analyzing Employee Expenses

The hiring process involves a number of factors. One is the current needs of the organization while a
second is the availability of candidates. In Module 5, students can learn that one key element of hiring
success is alignment between different functional units and human resources. For example, if the firm
has a hiring goal of three production employees, it is helpful for human resources to have this
information early to allow for strategic hiring.

At the beginning of Module 5, there are three candidates in the hiring pool.

Employee Training Cost Weekly Salary

Aiko Chan $0 $250

Sandeep Patel $1,240 $220

McGraw-Hill Practice Operations

39

Since we are hiring for the Production area, the candidates’ Machine Operations skills are of highest
interest to us. Clearly, Ali Ismail is significantly more expensive to hire than either Danny Kaiser or
Joseph Escobar. It seems prudent at this point to hire only two candidates and to wait to see if a better
candidate arises in the near future. Note that this ability to wait is only available if the firm has planned
ahead and begins the hiring process before actual needs occur. In this case, an economic analysis of
total hiring costs can be used to examine the total cost of employment.

Assuming employees will be actively working in Production for 10 weeks (starting in week 4), total cost
for these three candidates is:

Candidate Week 2 Week 3 Weeks 4 – 13

Total Cost

Ali Ismail $400 $400 $4,000 $4,800

Danny Kaiser $220 $220 $2,200 $2,640

Joseph Escobar $150 $150 $1,500 $1,800

To complete week 1, hire Danny Kaiser and Joseph Escobar, with
both assigned to the Production area.

At the beginning of week 2,
only one candidate is available in
human resources.

With a weekly salary of $200, Johnathan Martin has a favorable
total cost of employment (compared to both Ali Ismail and Danny
Kaiser).

Candidate Week 2 Week 3 Weeks 4 – 13 Total Cost
Ali Ismail $400 $400 $4,000 $4,800
Danny Kaiser $220 $220 $2,200 $2,640
Joseph Escobar $150 $150 $1,500 $1,800

Johnathan Martin $0 $200 $2,000 $2,200

Although it may be prudent to hire Johnathan Martin, we may decide to see if a better option will arise
in week 3.

McGraw-Hill Practice Operations

40

In week 3, there are three candidates available.

Total cost analysis for the candidates shows the possible outcomes.

Candidate Week 2 Week 3 Weeks 4 – 13 Total Cost
Ali Ismail $400 $400 $4,000 $4,800
Danny Kaiser $220 $220 $2,200 $2,640
Joseph Escobar $150 $150 $1,500 $1,800
Johnathan Martin $0 $200 $2,000 $2,200

Aleksander Batalev $0 $0 $1,700 $1,700

Ming Zhou $0 $0 $2,200 $2,200

Dolph Bankins $0 $0 $2,000 $2,000

If we choose to hire Aleksander Batalev, total costs for the decisions made are $6,140.

Candidate Week 2 Week 3 Weeks 4 – 13 Total Cost
Danny Kaiser $220 $220 $2,200 $2,640
Joseph Escobar $150 $150 $1,500 $1,800
Aleksander Batalev $0 $0 $1,700 $1,700

Total $6,140

McGraw-Hill Practice Operations

41

If we had known the available pool of candidates ahead of time, we could have made the best possible
hiring decisions, with a resulting total cost of just $5,500.

Candidate Week 2 Week 3 Weeks 4 – 13 Total Cost
Joseph Escobar $150 $150 $1,500 $1,800
Aleksander Batalev $0 $0 $1,700 $1,700
Dolph Bankins $0 $0 $2,000 $2,000

Total $5,500

On the other hand, hiring the first three available candidates would result in a total cost of $9,240.

Candidate Week 2 Week 3 Weeks 4 – 13 Total Cost

Ali Ismail $400 $400 $4,0000 $4,800

Danny Kaiser $220 $220 $2,200 $2,640
Joseph Escobar $150 $150 $1,500 $1,800

Total $9,240

Remember, if you find you don’t need an employee’s services you can fire him/her. However, this is not
a decision to be taken lightly. You will be charge the equivalent of two week’s salary in severance
charges.

McGraw-Hill Practice Operations

42

Reputation

In Practice Operations, customers rate performance on three dimensions. Quality is determined by the
quality of raw materials used, timeliness is measured by how well the requested delivery date was met,
and customer service is driven by the number and skill of Bidding and Contracts staff.

As in the real world, improving your reputation increases your potential customer base and can improve
margins by allowing the firm to charge a higher price for goods. Students can directly observe the impact
of quality, timeliness, and customer service on an order-by-order basis.

In this case,
timeliness was
good, quality was
fair, and customer
service was poor,
leading to a
moderately
satisfied
customer.

In this order,
timeliness was
poor, quality was
bad, and customer
service was good,
leading to a
moderately
dissatisfied
customer.

McGraw-Hill Practice Operations

43

Finally, by
exceeding
customer
expectations in
quality and
delivery, strong
improvements in
customer
satisfaction can be
realized.

Although the treatment of customer satisfaction in Practice Operations is necessarily simplified, the
impact of meeting (or exceeding) customer expectations is clearly visible.

Module 6: Maximizing Profits

This is it! A chance to see if all your training in the previous 4 modules will pay off. You are now the
boss of a brand new branch! All the decisions are yours to make! Can you run an efficient operation
and make so much money that all your fellow classmates can do is shower you with admiration and ask
your advice? Or will your workcenter be the one labeled as what –NOT– to do? This section of the
manual will offer you a number of tips to help you be in the former category. GOOD LUCK!

Long-Term Perspective

In this module, you are committed to run your business for 50 turns, so be sure to consider the long-
term effects of you decisions. The two main expenses you are likely to encounter are employee wages
and inventory costs. Wages were covered in the Module 4 and 5 guides. In module 6, you should also
pay close attention to your inventory expenses.

McGraw-Hill Practice Operations

44

Total Cost of Ownership

Naturally, the purchase price for raw materials is a key element of inventory cost. However, other
factors also contribute to the total cost of ownership. One of the less-visible issues associated with
inventory is holding costs. Holding costs have many potential causes:

 Opportunity costs – the inability to use capital that is tied up in inventory for other purposes

 Storage costs – the need to rent or buy space to hold inventory

 Loss/damage/theft – inventory in storage is susceptible to many hazards

 Taxes – some government entities assess annual inventory taxes on the value of stock being

held

These costs can really add up! In Practice Operations, the cost of holding raw materials is about 10% of
the inventory value each turn. Finished products are less expensive, but still cost you 5% of value each
turn. Managing inventory carefully can really contribute to your net worth.

One way to carefully manage your inventory is to delay raw material purchases as long as possible. This
expands upon the vendor selection discussion that was started in module 2. The Total Cost of Ownership
analysis allows us to develop a more complete view of what each vendor really offers.

Let’s examine the Total Cost of Ownership for silk material by evaluating two potential vendors. First, we
need to gather the necessary data.

We will compare two potential vendors – Owens Textiles and Tigerlily Textiles. For silk, the holding cost
is $0.41 per unit each turn (this is based upon the average cost of all vendors). To continue our analysis,
we will also need the specific quantities and price discounts offered by each vendor.

McGraw-Hill Practice Operations

45

For now, we will ignore the difference in quality between the two vendors. Both vendors offer a
quantity discount, although Tigerlily is more generous with this discount if the quantities are high
enough. On the other hand, Owens offers a larger discount if we can provide them with sufficient lead
time. To keep our analysis from getting too complicated, we will assume that we can order with at least
three weeks’ lead time and that we will order at least 175 units at any given time. This evens the special
discounts to 25% for each vendor.

The biggest difference between the two vendors is their maximum order quantity. Owens can provide
up to 250 units per week while Tigerlily can meet larger weekly orders –up to 1,200 units per week. If
we need to accumulate larger quantities, this could be very beneficial. Of course, Tigerlily’s higher initial
price may still tilt the scales in favor of Owens.

To complete our analysis, we will evaluate the two vendors over a range of purchase quantities to
determine the total cost of ownership.

For any given desired quantity, we will need to determine how long it will take to accumulate the
materials from the vendor. This will allow us to calculate the average inventory and holding costs
associated with waiting for the materials to all become available.

For example, if we want to have 1,000 units of silk available at some time in the future (say 5 weeks
from now), we can place an order with Tigerlily to have all 1,000 units delivered 5 weeks from now.
However, the quantity constraints imposed by Owens will require us to have the deliveries spread over
time. It will take us 4 weeks to accumulate 1,000 units from Owens, so we will hold inventory according
to this schedule.

Period Week 1 Week 2 Week 3 Week 4 Week 5

Inventory 0 250 500 750 1000

Holding Cost $0.00 $102.50 $205.00 $307.50 $0.00

For weeks 1 through 4, our average inventory is 375 units (
0+250+500+750

4
= 375). At a holding cost of

$0.41 per unit each week, this is a total added cost of $615. If we choose to work with Tigerlily, we have
no holding costs in weeks 1 – 4 because our entire inventory arrives in
week 5.

The other major difference between the two vendors is quality. Owens
delivers a lower quality product, so we may have to perform an
inspection to achieve the higher level of quality offered by Tigerlily.
Inspecting 250 units of silk from Owens appears to result in about 11%

McGraw-Hill Practice Operations

46

of the units being rejected. This raises our cost per unit if we purchase from Owens.

Continuing this analysis for a range of quantities, we can determine the total cost of ownership
associated with the two vendors.

Total Cost of Ownership – Owens Textiles

Quantity Unit
Price

Time to
accumulate
(weeks)

Average
Inventory

Total
Holding
Cost

Purchase
Cost

Quality
Cost

Total Cost

250 $2.40 1 0 $0.00 $ 600.00 $ 64.80 $664.80

500 $2.40 2 125 $102.50 $1,200.00 $129.60 $1,432.10

750 $2.40 3 250 $307.50 $1,800.00 $194.40 $2,301.90

1000 $2.40 4 375 $615.00 $2,400.00 $259.20 $3,274.20

1250 $2.40 5 500 $1,025.00 $3,000.00 $324.00 $4,349.00

1500 $2.40 6 625 $1,537.50 $3,600.00 $388.80 $5,526.30

1750 $2.40 7 750 $2,152.50 $4,200.00 $453.60 $6,806.10

2000 $2.40 8 875 $2,870.00 $4,800.00 $518.40 $8,188.40

2250 $2.40 9 1,000 $3,690.00 $5,400.00 $583.20 $9,673.20

2500 $2.40 10 1,125 $4,612.50 $6,000.00 $648.00 $11,260.50

2750 $2.40 11 1,250 $5,637.50 $6,600.00 $712.80 $12,950.30

3000 $2.40 12 1,375 $6,765.00 $7,200.00 $777.60 $14,742.60

Total Cost of Ownership – Tigerlily Textiles

Quantity Unit
Price
Time to
accumulate
(weeks)
Average
Inventory
Total
Holding
Cost
Purchase
Cost
Quality
Cost
Total Cost

250 $ 3.00 1 0 $0.00 $ 750.00 $0.00 $750.00

500 $ 3.00 1 0 $0.00 $1,500.00 $0.00 $1,500.00

750 $ 3.00 1 0 $0.00 $2,250.00 $0.00 $2,250.00

1000 $ 3.00 1 0 $0.00 $3,000.00 $0.00 $3,000.00

1250 $ 3.00 2 1200 $492.00 $3,750.00 $0.00 $4,242.00

1500 $ 3.00 2 1200 $492.00 $4,500.00 $0.00 $4,992.00

1750 $ 3.00 2 1200 $492.00 $5,250.00 $0.00 $5,742.00

2000 $ 3.00 2 1200 $492.00 $6,000.00 $0.00 $6,492.00

2250 $ 3.00 2 1200 $492.00 $6,750.00 $0.00 $7,242.00

2500 $ 3.00 3 1800 $738.00 $7,500.00 $0.00 $8,238.00

2750 $ 3.00 3 1800 $738.00 $8,250.00 $0.00 $8,988.00

3000 $ 3.00 3 1800 $738.00 $9,000.00 $0.00 $9,738.00

The results of this comparison show that for small quantities (500 or fewer units), Owens Textiles
provides a lower total cost of ownership. However, once the required quantity rises to 750 or more
units, choosing Tigerlily Textiles can lead to significant savings. In addition, Tigerlily’s ability to provide

McGraw-Hill Practice Operations

47

larger weekly quantities means your firm can respond much more quickly to large customer orders. By
the time the required quantity reaches 2,000 or more units, the total savings can add up to thousands of
dollars. Of course, be careful not to order too much material. If you have to sell it back later you will lose
all of these savings and more!

Careful analysis of purchasing options allows you to consider all of the costs of buying (and holding)
materials. The cost savings you identify can quickly add up, enabling your firm to achieve a truly
impressive net worth.j

Expert paper writers are just a few clicks away

Place an order in 3 easy steps. Takes less than 5 mins.

Calculate the price of your order

You will get a personal manager and a discount.
We'll send you the first draft for approval by at
Total price:
$0.00

Order your essay today and save 20% with the discount code Newyr