CTA – Quality Management and Location Planning

Location Planning
and Analysis

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distribution without the prior written consent of McGraw-Hill Education.
8-1

You should be able to:
LO 8.1
Identify some of the main reasons organizations need to make
location decisions
LO 8.2
Explain why location decisions are important
LO 8.3
Discuss the options that are available for location decisions
LO 8.4
Discuss key considerations related to global location decisions.
LO 8.5
Outline the decision process for making location decisions
LO 8.6
Describe some of the key factors that guide service and retail
location decisions.
LO 8.7
Use the techniques presented to evaluate location alternatives.

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8-2

 Location decisions arise for a variety of reasons:
 Addition of new facilities
 As part of a marketing strategy to expand markets
 Growth in demand that cannot be satisfied by expanding
existing facilities

 Depletion of basic inputs requires relocation
 Shift in markets
 Cost of doing business at a particular location makes

relocation attractive

LO 8.1

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8-3

 Location decisions:
 Are closely tied to an organization’s strategies
 Low-cost
 Convenience to attract market share
 Affect capacity and flexibility
 Represent a long-term commitment of resources

 Affect investment requirements, operating costs, revenues, and operations
 Impact competitive advantage
 Importance to supply chains

LO 8.2

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8-4

 Location decisions are based on:
 Profit potential or cost and customer service
 Finding a number of acceptable locations from which to choose
 Position in the supply chain
 End: accessibility, consumer demographics, traffic patterns, and local customs
are important
 Middle: locate near suppliers or markets
 Beginning: locate near the source of raw materials
 Web-based retail organizations are effectively location independent

LO 8.2

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8-5

 Location criteria can depend on where a business is in the

supply chain
 Supply chain management must address supply chain
configuration:
 Number and location of suppliers, production facilities,
warehouses and distribution centers
 Centralized vs. decentralized distribution
 The importance of such decisions is underscored by their
reflection of the basic strategy for accessing customer
markets

LO 8.2

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8-6

 Existing companies generally have four options

available in location planning:
1.
2.
3.
4.

LO 8.2

Expand an existing facility
Add new locations while retaining existing facilities
Shut down one location and move to another
Do nothing

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8-7

 Two key factors have contributed to the attractiveness

of globalization:
 Trade agreements such as
 North American Free Trade Agreement (NAFTA)
 General Agreement on Tariffs and Trade (GATT)
 U.S.-China Trade Relations Act
 EU and WTO efforts to facilitate trade
 Technology
 Advances in communication and information technology

LO 8.3

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8-8

 A wide range of benefits have accrued to organizations

that have globalized operations:
 Markets
 Cost savings
 Legal and regulatory
 Financial
 Other

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8-9

 There are a number of disadvantages that may

arise when locating globally:
 Transportation costs
 Security costs
 Unskilled labor
 Import restrictions
 Criticism for locating out-of-country
 Productivity

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8-10

 Organizations locating globally should be aware

of potential risk factors related to:
 Intellectual property rights
 Political instability and unrest
 Terrorism
 Economic instability
 Legal regulation
 Ethical considerations

 Cultural differences
 Quality

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8-11

 Managerial implications for global operations:
 Language and cultural differences
 Risk of miscommunication
 Development of trust
 Different management styles
 Corruption and bribery
 Increased travel (and related) costs
 Challenges associated with managing far-flung operations
 Level of technology and resistance to technological change
 Domestic personnel may resist locating, even temporarily

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8-12

 Steps:
1.
Decide on the criteria to use for evaluating location alternatives
2. Identify important factors, such as location of markets or raw
materials
3. Develop location alternatives
a. Identify the country or countries for location
b. Identify the general region for location
c. Identify a small number of community alternatives
d. Identify the site alternatives among the community alternatives
4. Evaluate the alternatives and make a decision

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McGraw-Hill Education.

8-13

Factors Relating to Foreign Locations
Government

a.

Policies on foreign ownership of production facilities
Local content requirements
Import restrictions
Currency restrictions
Environment regulations
Local product standards
Liability laws
b. Stability issues

Cultural differences

Living circumstances for foreign workers and their dependents
Ways of doing business
Religious holidays/traditions

Customer preferences

Possible “buy locally” sentiment

Labor

Level of training and education of workers
Work ethic
Wage rates
Possible regulations limiting the number of foreign employees
Language differences

Resources

Availability and quality of raw materials, energy, transportation
infrastructure

Financial

Financial incentives, tax rates, inflation rates, interest rates

Technological

Rate of technological change, rate of innovations

Market

Market potential, competition

Safety

Crime, terrorism threat

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8-14

 Primary regional factors:
 Location of raw materials
 Necessity
 Perishability
 Transportation costs
 Location of markets
 As part of a profit-oriented company’s competitive strategy
 So not-for-profits can meet the needs of their service users
 Distribution costs and perishability

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8-15

 Labor factors
 Cost of labor
 Availability of suitably skilled workers
 Wage rates in the area
 Labor productivity
 Attitudes toward work
 Whether unions pose a serious potential problem
 Other factors
 Climate and taxes may play an important role in location
decisions

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8-16

 Many communities actively attempt to attract new

businesses they perceive to be a good fit for the community
 Businesses also actively seek attractive communities based
on such factors such as:
 Quality of life

 Services
 Attitudes
 Taxes
 Environmental regulations
 Utilities
 Development support

LO 8.5

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8-17

 Primary site location considerations are
 Land
 Transportation
 Zoning
 Other restrictions

LO 8.5

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8-18

 Organizing operations
 Product plant strategy
 Entire products or product lines are produced in separate
plants, and each plant usually supplies the entire domestic
market

 Market area plant strategy
 Plants are designated to serve a particular geographic
segment of the market
 Plants produce most, if not all, of a company’s products

LO 8.5

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8-19

 Organizing operations
 Process plant strategy
 Different plants focus on different aspects of a process
 Automobile manufacturers – engine plant, body stamping plant,

etc.
 Coordination across the system becomes a significant issue

 General-purpose plant strategy
 Plants are flexible and capable of handling a range of
products

LO 8.5

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8-20

 Examples
 Logistics companies use GIS data to plan fleet
 Publishers of magazines and newspapers use a GIS to
analyze circulation and attract advertisers
 Banks use a GIS to help decide where to locate branch banks
 Utility companies use a GIS to balance supply and demand,
and identify problem areas
 Insurance companies use a GIS to determine premiums
based on population distribution, crime figures, and
likelihood of natural disasters such as flooding in various
locations, and to manage risk

LO 8.5

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8-21

 GIS
 A computer-based tool for collecting, storing, retrieving,

and displaying demographic data on maps
 Aids decision makers in
 Targeting market segments

 Identifying locations relative to their market potential
 Planning distribution networks

 Portraying relevant information on a map makes it

easier for decision makers to understand

LO 8.5

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8-22

 Considerations:
 Nearness to raw materials is not usually a consideration
 Customer access is
 A prime consideration for some: restaurants, hotels, etc.
 Not an important consideration for others: service call
centers, etc.
 Tend to be profit or revenue driven, and so are
 Concerned with demographics, competition, traffic volume
patterns, and convenience

 Clustering
 Similar types of businesses locate near one another

LO 8.6

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8-23

 Common techniques:
 Locational cost-volume-profit analysis
 Transportation model
 Factor rating
 Center of gravity method

LO 8.7

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8-24

 Locational cost-profit-volume analysis
 Technique for evaluating location choices in economic terms
 Steps:
1.
Determine the fixed and variable costs for each alternative
2. Plot the total-cost lines for all alternatives on the same graph
3. Determine the location that will have the lowest total cost (or
highest profit) for the expected level of output

LO 8.7

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8-25

 Assumptions

Fixed costs are constant for the range of probable
output
2. Variable costs are linear for the range of probable
output
3. The required level of output can be closely estimated
4. Only one product is involved
1.

LO 8.7

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8-26

 For a cost analysis, compute the total cost for each

alternative location:

Total Cost = FC + v  Q
where
FC = Fixed cost
v = Variable cost per unit
Q = Quantity or volume of output

LO 8.7

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8-27

 Fixed and variable costs for four potential plant

locations are shown below:

LO 8.7

Location

Fixed Cost
per Year

Variable Cost
per Unit

A

$250,000

$11

B

$100,000

$30

C

$150,000

$20

D

$200,000

$35

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8-28

Plot of Location Total Costs

LO 8.7

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8-29

 Range approximations
 B Superior (up to 4,999 units)

 C Superior (>5,000 to 11,111 units)

 A superior (11,112 units and up)

LO 8.7

Total Cost of C = Total Cost of B
150,000 + 20Q = 100,000 + 30Q
50,000 = 10Q
Q = 5,000
Total Cost of A = Total Cost of C
250,000 + 11Q = 150,000 + 20Q
100,000 = 9Q
Q = 11,111.11

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8-30

 Factor rating
 General approach to evaluating locations that includes quantitative
and qualitative inputs
 Procedure:
Determine which factors are relevant
Assign a weight to each factor that indicates its relative importance
compared with all other factors

1.
2.


3.
4.
5.
6.

LO 8.7

Weights typically sum to 1.00

Decide on a common scale for all factors, and set a minimum acceptable
score if necessary
Score each location alternative
Multiply the factor weight by the score for each factor, and sum the results
for each location alternative
Choose the alternative that has the highest composite score, unless it fails
to meet the minimum acceptable score

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8-31

 A photo-processing company intends to open a new branch store. The

following table contains information on two potential locations. Which is
better?

Scores
(Out of 100)
Factor

Weight

Alt 1

Alt 2

Proximity to
existing source

.10

100

60

Traffic volume

.05

80

80

Rental costs

.40

70

90

Size

.10

86

92

Layout

.20

40

70

Operating Cost

.15

80

90

1.00

LO 8.7

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8-32

 A photo-processing company intends to open a new branch store. The

following table contains information on two potential locations. Which is
better?
Scores
(Out of 100)
Factor

Weight

Alt 1

Alt 2

Alt 1

Proximity to
existing source

.10

100

60

.10(100) = 10.0

.10(60) = 6.0

Traffic volume

.05

80

80

.05(80) = 4.0

.05(80) = 4.0

Rental costs

.40

70

90

.40(70) = 28.0

.40(90) = 36.0

Size

.10

86

92

.10(86) = 8.6

.10(92) = 9.2

Layout

.20

40

70

.20(40) = 8.0

.20(70) = 14.0

Operating Cost

.15

80

90

.15(80) = 12.0

.15(90) = 13.5

70.6

82.7

1.00

LO 8.7

Weighted Scores
Alt 2

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8-33

 Center of gravity method
 Method for locating a distribution center that minimizes
distribution costs
 Treats distribution costs as a linear function of the distance and
the quantity shipped
 The quantity to be shipped to each destination is assumed to be
fixed
 The method includes the use of a map that shows the locations
of destinations
 The map must be accurate and drawn to scale

 A coordinate system is overlaid on the map to determine relative

locations

LO 8.7

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8-34

Figure 8.1

LO 8.7

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8-35

 If quantities to be shipped to every location are equal, you can obtain

the coordinates of the center of gravity by finding the average of the xcoordinates and the average of the y-coordinates.

x

x=

i

n

y

y=

i

n

where
xi = x coordinate of destinatio n i
yi = y coordinate of destinatio n i
n = Number of destinatio ns

LO 8.7

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8-36

Suppose you are attempting to find the center of
gravity for the problem depicted in Figure 8.1c.
Destination

x

y

D1

2

2

D2

3

5

D3

5

4

D4

8

5

18

16

x 18

x=
= = 4.5
i

n

4

y 16

y=
=
=4
i

n

4

Here, the center of gravity is (4.5,4). This is
slightly west of D3 from Figure 8.1.

LO 8.7

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8-37

 When the quantities to be shipped to every location are unequal, you

can obtain the coordinates of the center of gravity by finding the
weighted average of the x-coordinates and the average of the ycoordinates.
xi Qi

x=
 Qi

yQ

y=
Q
i

i

i

where
Qi = Quantity t o be shipped to destinatio n i
xi = x coordinate of destinatio n i
yi = y coordinate of destinatio n i
LO 8.7

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8-38

 Suppose the shipments for the problem depicted in Figure 8.1a are not

all equal. Determine the center of gravity based on the following
information.

LO 8.7

Destination

x

y

Weekly
Quantity

D1

2

2

800

D2

3

5

900

D3

5

4

200

D4

8

5

100

18

16

2,000

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8-39

x Q 2(800) + 3(900) + 5(200) + 8(100) 6,100

x=
=
=
= 3.05
2,000
2,000
Q
i

i

i

yQ
2(800) + 5(900) + 4(200) + 5(100) 7,400

y=
i=
=
= 3.7
2,000
2,000
Q
i

i

i

 The coordinates for the center of gravity are (3.05, 3.7). You may round

the x-coordinate down to 3.0, so the coordinates for the center of
gravity are (3.0, 3.7). This is south of destination D2 (3, 5).

LO 8.7

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8-40

LO 8.7

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8-41

Management of
Quality

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distribution without the prior written consent of McGraw-Hill Education.

You should be able to:
LO 9.1 Discuss the philosophies of quality gurus
LO 9.2 Define the term quality as it relates to products and as it relates to
services
LO 9.3 Identify the determinants of quality
LO 9.4 Explain why quality is important and the consequences of poor
quality
LO 9.5 Describe and give examples of the costs associated with quality
LO 9.6 Discuss the importance of ethics in managing quality
LO 9.7 Compare the quality awards
LO 9.8 Discuss quality certification and its importance
LO 9.9 Describe TQM
LO 9.10 Give an overview of problem solving
LO 9.11 Give an overview of process improvement
LO 9.12 Describe the Six Sigma methodology
LO 9.13 Describe and use various quality tools

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 Quality
 The ability of a product or service to consistently meet or

exceed customer expectations
 For a decade or so, quality was an important focal point in

business. After a while, this emphasis began to fade as other
concerns took precedence
 There has been a recent resurgence in attention to quality
given recent experiences with the costs and adverse attention
associated with highly visible quality failures:
 Auto recalls
 Toys
 Produce
 Dog food
 Pharmaceuticals

LO 9.1

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 Walter Shewart
 “Father of statistical quality control”
 Control charts
 Variance reduction
 W. Edwards Deming
 Special vs. common cause variation
 The 14 points
 Joseph Juran
 Quality Control Handbook, 1951
 Viewed quality as fitness-for-use
 Quality trilogy – quality planning, quality control, quality
improvement
LO 9.1

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 Armand Feigenbaum
 Quality is a “total field”
 The customer defines quality
 Philip B. Crosby
 Zero defects
 Quality is Free, 1979
 Kaoru Ishikawa
 Cause-and-effect diagram
 Quality circles
 Recognized the internal customer

LO 9.1

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 Genichi Taguchi
 Taguchi loss function
 Taiichi Ohno and Shigeo Shingo
 Developed philosophy and methods of kaizen

LO 9.1

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 Performance – main characteristics of the product

 Aesthetics – appearance, feel, smell, taste
 Special features – extra characteristics
 Conformance – how well the product conforms to design

specifications
 Reliability – consistency of performance
 Durability – the useful life of the product
 Perceived quality – indirect evaluation of quality
 Serviceability – handling of complaints or repairs
 Consistency – quality doesn’t vary

LO 9.2

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 Convenience – the availability and accessibility of the service

 Reliability – ability to perform a service dependably, consistently, and

accurately
 Responsiveness – willingness to help customers in unusual situations and

to deal with problems
 Time – the speed with which the service is delivered

 Assurance – knowledge exhibited by personnel and their ability to convey

trust and confidence
 Courtesy – the way customers are treated by employees
 Tangibles – the physical appearance of facilities, equipment, personnel, and

communication materials
 Consistency – the ability to provide the same level of good quality repeatedly
 Expectancy – meet (or exceed) customer expectations

LO 9.2

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 Audit service to identify strengths and weaknesses
 In particular, look for discrepancies between:
1.
Customer expectations and management perceptions of those
expectations
2. Management perceptions, customer expectations, and servicequality specifications
3. Service quality and service actually delivered
4. Service actually delivered and what is communicated about the
service to customers
5. Customers’ expectations of the service provider and their
perceptions of provider delivery

LO 9.2

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 Quality of design
 Intention of designers to include or exclude features in a product or service

 Quality of conformance
 The degree to which goods or services conform to the intent of the

designers
 Ease-of-use and user instructions
 Increase the likelihood that a product will be used for its intended purpose

and in such a way that it will continue to function properly and safely
 After-the-sale service
 Taking care of issues and problems that arise after the sale

LO 9.3

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 Top management
 Design
 Procurement
 Production/operations

 Quality assurance
 Packaging and shipping
 Marketing and sales

 Everyone in the

organization has some
responsibility for quality,
but certain areas of the
organization are involved
in activities that make
them key areas of
responsibility

 Customer service

LO 9.3

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 Enhanced reputation for quality
 Ability to command premium prices
 Increased market share
 Greater customer loyalty

 Lower liability costs
 Fewer production or service problems
 Lower production costs

 Higher profits

LO 9.4

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 Loss of business
 Liability
 Productivity
 Costs

LO 9.4

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 Appraisal costs
 Costs of activities designed to ensure quality or uncover

defects
 Prevention costs
 All TQ training, TQ planning, customer assessment,

process control, and quality improvement costs to
prevent defects from occurring

LO 9.5

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 Failure costs – costs incurred by defective

parts/products or faulty services
 Internal failure costs
 Costs incurred to fix problems that are detected before the
product/service is delivered to the customer
 External failure costs
 All costs incurred to fix problems that are detected after the
product/service is delivered to the customer

LO 9.5

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McGraw-Hill Education.

 Substandard work
 Defective products
 Substandard service
 Poor designs
 Shoddy workmanship
 Substandard parts and materials

Having knowledge of this and failing to correct
and report it in a timely manner is unethical.

LO 9.6

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McGraw-Hill Education.

 Award categories
1.
2.
3.
4.
5.
6.

Education
Healthcare
Manufacturing
Nonprofit/government
Service
Small Business

 Purpose of the award
1.
2.
3.

LO 9.7

Stimulate efforts to improve quality
Recognize quality achievements
Publicize successful programs
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Leadership
II. Strategic planning
III. Customer focus
IV. Measurement, analysis, and knowledge management
V. Workforce focus
VI. Operations focus
VII. Results
I.

LO 9.7

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McGraw-Hill Education.

 International Organization for Standardization
 ISO 9000
 Set of international standards on quality management and quality
assurance, critical to international business
 ISO 14000
 A set of international standards for assessing a company’s
environmental performance
 ISO 24700
 Pertains to the quality and performance of office equipment that
contains reused components

LO 9.8

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McGraw-Hill Education.

 ISO 9000
 Quality principles
 Principle 1
Customer focus
 Principle 2 Leadership
 Principle 3 Involvement of people
 Principle 4 Process approach
 Principle 5 System approach to management
 Principle 6 Continual improvement
 Principle 7 Factual approach to decision making
 Principle 8 Mutually beneficial supplier relationships

LO 9.8

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McGraw-Hill Education.

 Business leaders are increasingly recognizing the

importance of their supply chains in achieving their
quality goals
 Requires:
 Measuring customer perceptions of quality
 Identifying problem areas
 Correcting these problems
 Supply chain quality management can benefit from a

collaborative relationship with suppliers
 Helping suppliers with quality assurance efforts
 Information sharing on quality-related matters

LO 9.8

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McGraw-Hill Education.

 A philosophy that involves everyone in an organization

in a continual effort to improve quality and achieve
customer satisfaction

T

LO 9.9

Q

M

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1.
2.
3.
4.
5.
6.

Find out what the customer wants
Design a product or service that meets or exceeds
customer wants
Design processes that facilitate doing the job right the
first time
Keep track of results
Extend these concepts throughout the supply chain
Top management must be involved and committed

LO 9.9

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McGraw-Hill Education.

Continuous improvement
2. Competitive benchmarking
3. Employee empowerment
4. Team approach
5. Decision based on fact, not opinion
6. Knowledge of tools
7. Supplier quality
8. Champion
9. Quality at the source
10. Suppliers are partners in the process
1.

LO 9.9

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McGraw-Hill Education.

 Continuous improvement
 Philosophy that seeks to make never-ending

improvements to the process of converting inputs into
outputs
 Kaizen
 Japanese word for continuous improvement

LO 9.9

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McGraw-Hill Education.

 The philosophy of making each

worker responsible for the quality of
his or her work
 “Do it right” and “If it isn’t right, fix it”

LO 9.9

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McGraw-Hill Education.

 Obstacles include:
 Lack of company-wide definition of quality
 Lack of strategic plan for change
 Lack of customer focus
 Poor intra-organizational communication
 Lack of employee empowerment
 View of quality as a “quick fix”
 Emphasis on short-term financial results
 Inordinate presence of internal politics and “turf” issues
 Lack of strong motivation
 Lack of time to devote to quality initiatives
 Lack of leadership

LO 9.9

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McGraw-Hill Education.

 Overzealous advocates may pursue TQM programs blindly,

focusing attention on quality
 Programs may not be linked to the strategies of the
organization in a meaningful way
 Quality-related decisions may not be tied to market
performance
 Failure to carefully plan a program before embarking on it can
lead to false starts, employee confusion, and meaningless
results
 Organizations sometimes pursue continuous improvement
 Quality efforts may not be tied to results

LO 9.9

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McGraw-Hill Education.

Act

Plan

Study

Do

 Plan-Do-Study-Act (PDSA) cycle
 Plan
 Begin by studying and documenting the current process.
 Collect data on the process or problem
 Analyze the data and develop a plan for improvement
 Specify measures for evaluating the plan
 Do
 Implement the plan, document any changes made, collect
data for analysis

LO 9.10

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McGraw-Hill Education.

Act

Plan

Study

Do

 Plan-Do-Study-Act (PDSA) cycle
 Study
 Evaluate the data collection during the do phase
 Check results against goals formulated during the plan phase
 Act
 If the results are successful, standardize the new method and
communicate it to the relevant personnel
 Implement training for the new method
 If unsuccessful, revise the plan and repeat the process

LO 9.10

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McGraw-Hill Education.

LO 9.10

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McGraw-Hill Education.

 Process improvement
 A systematic approach to improving a process
 Map the process
 Collect information about the process and identify each step in

the process
 Prepare a flowchart that accurately depicts the process
 Analyze the process
 Ask critical questions about the process
 Ask specific questions about each step in the process

 Redesign the process

LO 9.11

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McGraw-Hill Education.

 Six Sigma
 A business process for improving quality, reducing costs,

and increasing customer satisfaction
 Statistically
 Having no more than 3.4 defects per million

 Conceptually
 Program designed to reduce defects
 Requires the use of certain tools and techniques

LO 9.12

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McGraw-Hill Education.

 Principles
 Reduction in variation is an important goal
 The methodology is data driven; it requires data validation
 Outputs are determined by inputs
 Only a critical few inputs have a significant impact on outputs
 DMAIC
 Define:
 Measure:
 Analyze:
 Improve:
 Control:

LO 9.12

Set the context and objectives for improvement
Determine the baseline performance and capability of
the process
Use data and tools to understand the cause-and-effect
relationships of the process
Develop the modifications that lead to a validated
improvement of the process
Establish plans and procedures to ensure that
improvements are sustained

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McGraw-Hill Education.

 Flowchart
 Check sheet
 Histogram
 Pareto chart
 Scatter diagram
 Control chart
 Cause-and-effect diagram

LO 9.13

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McGraw-Hill Education.

LO 9.13

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McGraw-Hill Education.

 Brainstorming
 Quality circles
 Benchmarking

LO 9.13

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McGraw-Hill Education.

 Quality circle
 Groups of workers who meet to discuss ways of improving products
or processes
 Less structured and more informal than teams involved in
continuous improvement
 Quality circle teams have historically had relatively little
authority to make any but the most minor changes

LO 9.13

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McGraw-Hill Education.

1.
2.
3.
4.

5.

Identify a critical process that needs improvement
Identify an organization that excels in this process
Contact that organization
Analyze the data
Improve the critical process

LO 9.13

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McGraw-Hill Education.

 Quality is a strategic imperative for organizations
 Customers are very concerned with the quality of goods and services
they receive
 Quality is a never-ending journey
 It is important that most organizational members understand and
buy into this idea
 Customer satisfaction ≠ customer loyalty
 Quality needs to be incorporated throughout the

entire supply chain, not just the organization itself

LO 9.13

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McGraw-Hill Education.

Quality Control

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written consent of McGraw-Hill Education.

10-1

You should be able to:
LO 10.1
LO 10.2
LO 10.3
LO 10.4

Explain the need for quality control
Discuss the basic issues of inspection
List and briefly explain the elements of the control process
Explain how control charts are used to monitor a process, and
the concepts that underlie their use
LO 10.5 Use and interpret control charts
LO 10.6 Perform run tests to check for nonrandomness in process output
LO 10.7 Assess process capability

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10-2

 Quality control
 A process that evaluates output relative to a standard

and takes corrective action when output doesn’t meet
standards
 If results are acceptable no further action is required

 Unacceptable results call for correction action

 Inspection alone is not sufficient to achieve a reasonable

level of quality
 Most organizations rely upon some inspection and a great

deal of process control to achieve an acceptable level of
quality

LO 10.1

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McGraw-Hill Education.

10-3

LO 10.1

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McGraw-Hill Education.

10-4

 Inspection
 An appraisal activity that compares goods or services to

a standard
 Inspection issues:






LO 10.2

How much to inspect and how often
At what points in the process to inspect
Whether to inspect in a centralized or on-site location
Whether to inspect attributes or variables

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McGraw-Hill Education.

10-5

LO 10.2

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McGraw-Hill Education.

10-6

 Typical inspection points:
 Raw materials and purchased parts
 Finished products
 Before a costly operation
 Before an irreversible process
 Before a covering process

LO 10.2

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McGraw-Hill Education.

10-7

Inspection Point
Characteristics
Accounting/billing
Accuracy, timeliness
Building and grounds
Appearance and safety
Main desk
Appearance, waiting times, accuracy of bills
Maid service
Completeness, productivity
Personnel
Appearance, manners, productivity
Reservations/occupancy Over/underbooking, percent occupancy
Restaurants
Kitchen, menus, meals, bills
Room service
Waiting time, quality of food
Supplies
Ordering, receiving, inventories

LO 10.2

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McGraw-Hill Education.

10-8

 Effects on cost and level of disruption are a major

issue in selecting centralized vs. on-site inspection
 Off-Site
 Specialized tests that may best be completed in a lab
 More specialized testing equipment
 More favorable testing environment

 On-Site
 Quicker decisions are rendered
 Avoid introduction of extraneous factors
 Quality at the source

LO 10.2

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McGraw-Hill Education.

10-9

 Quality control seeks quality of conformance
 A product or service conforms to specifications

 A tool used to help in this process:
 SPC
 Statistical evaluation of the output of a process
 Helps us to decide if a process is “in control” or if corrective

action is needed

LO 10.2

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McGraw-Hill Education.

10-10

 Two basic questions concerning variability:

Issue of process control
 Are the variations random? If nonrandom variation
is present, the process is said to be unstable.
2. Issue of process capability
 Given a stable process, is the inherent variability of
the process within a range that conforms to
performance criteria?
1.

LO 10.2

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McGraw-Hill Education.

10-11

 Variation
 Random (common cause) variation:
 Natural variation in the output of a process, created by

countless minor factors
 Assignable (special cause) variation:
 A variation whose cause can be identified
 A nonrandom variation

LO 10.2

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McGraw-Hill Education.

10-12

 SPC involves periodically taking samples of process

output and computing sample statistics:
 Sample means
 The number of occurrences of some outcome

 Sample statistics are used to judge the randomness of

process variation

LO 10.2

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McGraw-Hill Education.

10-13

FIGURE 10.4A The sampling distribution of means is normal, and it
has less variability than the process distribution, which might not be normal
LO 10.3

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McGraw-Hill Education.

10-14

 Sampling and corrective action are only a part of the

control process
 Steps required for effective control:
 Define: What is to be controlled?
 Measure: How will measurement be accomplished?

 Compare: There must be a standard of comparison
 Evaluate: Establish a definition of out of control
 Correct: Uncover the cause of nonrandom variability and fix it
 Monitor: Verify that the problem has been eliminated

LO 10.3

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McGraw-Hill Education.

10-15

 Control chart
 A time-ordered plot of representative sample statistics

obtained from an ongoing process (e.g. sample means),
used to distinguish between random and nonrandom
variability
 Control limits
 The dividing lines between random and nonrandom

deviations from the mean of the distribution
 Upper and lower control limits define the range of acceptable

variation

LO 10.4

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McGraw-Hill Education.

10-16

Each point on the control chart represents a sample of n
observations
LO 10.4

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McGraw-Hill Education.

10-17

 Type I error
 Concluding a process is not in control when it actually is.
 The probability of rejecting the null hypothesis when the null

hypothesis is true
 Manufacturer’s risk

 Type II error
 Concluding a process is in control when it is not.
 The probability of failing to reject the null hypothesis when the null

hypothesis is false
 Consumer’s risk

LO 10.4

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McGraw-Hill Education.

10-18

LO 10.4

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McGraw-Hill Education.

10-19

LO 10.4

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McGraw-Hill Education.

10-20

 Variables generate data that are measured
 Mean control charts
 Used to monitor the central tendency of a process
 “x-bar” charts

 Range control charts
 Used to monitor the process dispersion
 R charts

LO 10.5

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McGraw-Hill Education.

10-21

k

k

x=

 xi
i =1

k

where
x = Average of sample means
x i = mean of sample i

R

R = i =1
k
where

i

R = Average of sample ranges
Ri = Range of sample i

k = number of samples

LO 10.5

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McGraw-Hill Education.

10-22

 Used to monitor the central tendency of a process

x − chart Control Limits
UCLx = x + A2 R
LCLx = x − A2 R
where
A2 = a control chart factor based on sample size, n
LO 10.5

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McGraw-Hill Education.

10-23

 Used to monitor process dispersion

R Chart Control Limits
UCLR = D4 R
LCLR = D3 R
where
D3 = a control chart factor based on sample size, n
D4 = a control chart factor based on sample size, n
LO 10.5

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McGraw-Hill Education.

10-24

LO 10.5

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McGraw-Hill Education.

10-25

LO 10.5

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McGraw-Hill Education.

10-26

 To determine initial control limits:
 Obtain 20 to 25 samples
 Compute appropriate sample statistics
 Establish preliminary control limits
 Determine if any points fall outside of the control limits
 If you find no out-of-control signals, assume the process is in control
 If you find an out-of-control signal, search for and correct the

assignable cause of variation
 Resume the process and collect another set of observations on

which to base control limits
 Plot the data on the control chart and check for out-of-control
signals

LO 10.5

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McGraw-Hill Education.

10-27

 Attributes generate data that are counted.
 p-chart
 Control chart used to monitor the proportion of defectives in

a process
 c-chart
 Control chart used to monitor the number of defects per unit

LO 10.5

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McGraw-Hill Education.

10-28

 When observations can be placed into two

categories
 Good or bad
 Pass or fail

 Operate or don’t operate

 When the data consists of multiple samples of

several observations each

LO 10.5

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McGraw-Hill Education.

10-29

Total number of defectives
p=
Total number of observatio ns
p (1 − p )
ˆ p =
n
UCL p = p + z (ˆ p )
LCL p = p − z (ˆ p )
LO 10.5

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McGraw-Hill Education.

10-30

 Use only when the number of occurrences per unit of

measure can be counted; non-occurrences cannot be
counted.
Scratches, chips, dents, or errors per item
 Cracks or faults per unit of distance
 Breaks or tears per unit of area
 Bacteria or pollutants per unit of volume
 Calls, complaints, failures per unit of time


UCL c = c + z c
LCL c = c − z c
LO 10.5

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McGraw-Hill Education.

10-31

 At what points in the process to use control charts
 What size samples to take
 Sample frequency

 What type of control chart to use
 Variables
 Attributes

LO 10.5

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McGraw-Hill Education.

10-32

 Even if a process appears to be in control, the data may

still not reflect a random process
 Analysts often supplement control charts with a run
test
 Run test

 A test for patterns in a sequence
 Run
 Sequence of observations with a certain characteristic

LO 10.6

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McGraw-Hill Education.

10-33

LO 10.6

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McGraw-Hill Education.

10-34

 Once a process has been determined to be stable, it is

necessary to determine if the process is capable of
producing output that is within an acceptable range
 Tolerances or specifications
 Range of acceptable values established by engineering design or

customer requirements
 Process variability
 Natural or inherent variability in a process
 Process capability

 The inherent variability of process output (process width)

relative to the variation allowed by the design specification
(specification width)
LO 10.7

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McGraw-Hill Education.

10-35

Lower
Upper
Specification Specification

Process variability (width)
exceeds specifications

Lower
Specification

Lower
Specification

Upper
Specification

Process variability (width)
matches specifications width

Upper
Specification

Process variability (width) is less
than the specification width

LO 10.7

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McGraw-Hill Education.

10-36

UTL – LTL
Cp =
6
where
UTL = upper tole rance (specifica tion) limit
LTL = lower tole rance(spec ification) limit

LO 10.7

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McGraw-Hill Education.

10-37

 Used when a process is not centered at its target, or

nominal, value

C pk = min C pu , C pl 
 UTL − x x − LTL 
= min 
,

3 
 3

LO 10.7

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10-38

 Simplify
 Standardize
 Mistake-proof
 Upgrade equipment

 Automate

LO 10.7

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McGraw-Hill Education.

10-39

LO 10.7

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McGraw-Hill Education.

10-40

 There are several risks of using capability

measures:
 The process may not be stable
 The process output may not be normally distributed
 The process is not centered but Cp is used

LO 10.7

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McGraw-Hill Education.

10-41

 Quality is a primary consideration for nearly all

customers
 Achieving and maintaining quality standards is of

strategic importance to all business organizations
 Product and service design

 Increase capability in order to move from extensive use of

control charts and inspection to achieve desired quality
outcomes

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McGraw-Hill Education.

10-42

Operations Management

Operations Management
FOURTEENTH EDITION

William J. Stevenson
Saunders College of Business

Rochester Institute of Technology

OPERATIONS MANAGEMENT, FOURTEENTH EDITION
Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2021 by McGraw-Hill
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Library of Congress Cataloging-in-Publication Data
Library of Congress Cataloging-in-Publication Data
Names: Stevenson, William J., author.
Title: Operations management / William J. Stevenson, Saunders College of
Business, Rochester Institute of Technology.
Description: Fourteenth edition. | New York, NY : McGraw-Hill Education,
[2021] | Includes bibliographical references and index.
Identifiers: LCCN 2019044799 | ISBN 9781260238891 (bound edition ;
acid-free paper) | ISBN 126023889X (bound edition ; acid-free paper) |
ISBN 9781260718423 (loose-leaf edition ; acid-free paper) | ISBN
1260718425 (loose-leaf edition ; acid-free paper)
Subjects: LCSH: Production management.
Classification: LCC TS155 .S7824 2021 | DDC 658.5–dc23
LC record available at

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not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not
guarantee the accuracy of the information presented at these sites.
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v

Preface
The material in this book is intended as an introduction to the
field of operations management. The topics covered include
both strategic issues and practical applications. Among the
topics are forecasting, product and service design, capacity
planning, management of quality and quality control, inventory management, scheduling, supply chain management, and
project management.
My purpose in revising this book continues to be to provide
a clear presentation of the concepts, tools, and applications of
the field of operations management. Operations ­management
is evolving and growing, and I have found updating and
­integrating new material to be both rewarding and challenging, particularly due to the plethora of new developments in
the field, while facing the practical limits on the length of
the book.
This text offers a comprehensive and flexible amount
of content that can be selected as appropriate for different
courses and formats, including undergraduate, graduate, and
executive education.
This allows instructors to select the chapters, or portions
of chapters, that are most relevant for their purposes. That
flexibility also extends to the choice of relative weighting
of the qualitative or quantitative aspects of the material, and
the order in which chapters are covered, because chapters do
not depend on sequence. For example, some instructors cover
project management early, others cover quality or lean early,
and so on.
As in previous editions, there are major pedagogical f­ eatures
designed to help students learn and understand the material.
This section describes the key features of the book, the ­chapter
elements, the supplements that are available for teaching the
course, highlights of the fourteenth edition, and suggested
applications for classroom instruction. By providing this support, it is our hope that instructors and students will have the
tools to make this learning experience a rewarding one.

What’s New in This Edition
In many places, content has been rewritten or added to
improve clarity, shorten wording, or update information. New
material has been added on supply chains, and other topics.
Some problems are new, and others have been revised. Many
new readings and new photos have been added.
Some of the class preparation exercises have been revised.
The purpose of these exercises is to introduce students to the
subject matter before class in order to enhance classroom

learning. They have proved to be very popular with students, both as an introduction to new material and for study
purposes. These exercises are available in the Instructor’s
Resource Manual. Special thanks to Linda Brooks for her
help in developing the exercises.

Acknowledgments
I want to thank the many contributors to this edition. Reviewers and adopters of the text have provided a “continuously
improving” wealth of ideas and suggestions. It is encouraging to me as an author. I hope all reviewers and readers will
know their suggestions were valuable, were carefully considered, and are sincerely appreciated. The list includes post-­
publication reviewers.
Jenyi Chen
Eric Cosnoski
Mark Gershon
Narges Kasiri
Nancy Lambe
Anita Lee-Post
Behnam Nakhai
Rosa Oppenheim
Marilyn Preston
Avanti Sethi
John T. Simon
Lisa Spencer
Nabil Tamimi
Oya Tukel
Theresa Wells
Heath Wilken

Cleveland State University
Lehigh University
Temple University
Ithaca College
University of South Alabama
University of Kentucky
Millersville University of Pennsylvania
Rutgers Business School
Indiana University Southeast
University of Texas at Dallas
Governors State University
California State University, Fresno
University of Scranton
Cleveland State University
University of Wisconsin-Eau Claire
University of Northern Iowa

Additional thanks to the instructors who have contributed extra
material for this edition, including accuracy ­checkers: Ronny
Richardson, Kennesaw State University and Gary Black,
­University of Southern Indiana; Solutions and ­SmartBook:
Tracie Lee, Idaho State University; PowerPoint Presentations:
Avanti Sethi, University of Texas-Dallas; Test Bank: Leslie
Sukup, Ferris State University.
Special thanks goes out to Lisa Spencer, California State
University-Fresno, for her help with additional readings and
examples.

vii

viii

Preface

Finally, I would like to thank all the people at ­McGraw-Hill
for their efforts and support. It is always a pleasure to work
with such a professional and competent group of p­eople.
Special thanks go to Noelle Bathurst, Portfolio Manager;
Michele Janicek, Lead Product Developer; Fran Simon and
Katie Ward, Product Developers; Jamie Koch, Assessment
Content Project Manager; Sandy Ludovissy, Buyer; Matt Diamond, Designer; Jacob Sullivan, Content Licensing Specialist; Harper Christopher, Executive Marketing Manager; and
many others who worked behind the scenes.
I would also like to thank the many reviewers of previous
editions for their contributions: Vikas Agrawal, Fayetteville
State University; Bahram Alidaee, University of Mississippi;
Ardavan Asef-Faziri, California State University at Northridge; Prabir Bagchi, George Washington State University;
Gordon F. Bagot, California State University at Los Angeles;
Ravi Behara, Florida Atlantic University; Michael Bendixen,
Nova Southeastern; Ednilson Bernardes, Georgia Southern
University; Prashanth N. Bharadwaj, Indiana University of
Pennsylvania; Greg Bier, University of Missouri at Columbia;
Joseph Biggs, Cal Poly State University; Kimball Bullington,
Middle Tennessee State University; Alan Cannon, University
of Texas at Arlington; Injazz Chen, Cleveland State University; Alan Chow, University of Southern Alabama at Mobile;
Chrwan-Jyh, Oklahoma State University; Chen Chung, University of Kentucky; Robert Clark, Stony Brook University;
Loretta Cochran, Arkansas Tech University; Lewis Coopersmith, Rider University; Richard Crandall, Appalachian State
University; Dinesh Dave, Appalachian State University; Scott
Dellana, East Carolina University; Kathy Dhanda, DePaul
University; Xin Ding, University of Utah; Ellen Dumond,
California State University at Fullerton; Richard Ehrhardt,
University of North Carolina at Greensboro; Kurt Engemann,
Iona College; Diane Ervin, DeVry University; Farzaneh
Fazel, Illinois State University; Wanda Fennell, University of
Mississippi at Hattiesburg; Joy Field, Boston College; Warren Fisher, Stephen F. Austin State University; Lillian Fok,
University of New Orleans; Charles Foley, Columbus State
Community College; Matthew W. Ford, Northern Kentucky
University; Phillip C. Fry, Boise State University; Charles
A. Gates Jr., Aurora University; Tom Gattiker, Boise State
University; Damodar Golhar, Western Michigan University;
Robert Graham, Jacksonville State University; Angappa
Gunasekaran, University of Massachusetts at Dartmouth;
Haresh Gurnani, University of Miami; Terry Harrison, Penn
State University; Vishwanath Hegde, California State University at East Bay; Craig Hill, Georgia State University;
Jim Ho, University of Illinois at Chicago; Seong Hyun Nam,
University of North Dakota; Jonatan Jelen, Mercy College;

Prafulla Joglekar, LaSalle University; Vijay Kannan, Utah
State University; Sunder Kekre, Carnegie-Mellon University;
Jim Keyes, University of Wisconsin at Stout; Seung-Lae Kim,
Drexel University; Beate Klingenberg, Marist College; John
Kros, East Carolina University; Vinod Lall, Minnesota State
University at Moorhead; Kenneth Lawrence, New Jersey
Institute of Technology; Jooh Lee, Rowan University; Anita
Lee-Post, University of Kentucky; Karen Lewis, University of
Mississippi; Bingguang Li, Albany State University; Cheng
Li, California State University at Los Angeles; Maureen P.
Lojo, California State University at Sacramento; F. Victor
Lu, St. John’s University; Janet Lyons, Utah State University; James Maddox, Friends University; Gita Mathur, San
Jose State University; Mark McComb, Mississippi College;
George Mechling, Western Carolina University; Scott Metlen,
University of Idaho; Douglas Micklich, Illinois State University; Ajay Mishra, SUNY at Binghamton; Scott S. Morris,
Southern Nazarene University; Philip F. Musa, University of
Alabama at Birmingham; Roy Nersesian, Monmouth University; Jeffrey Ohlmann, University of Iowa at Iowa City; John
Olson, University of St. Thomas; Ozgur Ozluk, San Francisco
State University; Kenneth Paetsch, Cleveland State University; Taeho Park, San Jose State University; Allison Pearson,
Mississippi State University; Patrick Penfield, Syracuse University; Steve Peng, California State University at Hayward;
Richard Peschke, Minnesota State University at Moorhead;
Andru Peters, San Jose State University; Charles Phillips,
Mississippi State University; Frank Pianki, Anderson University; Sharma Pillutla, Towson University; Zinovy Radovilsky, California State University at Hayward; Stephen A.
Raper, University of Missouri at Rolla; Pedro Reyes, Baylor
University; Buddhadev Roychoudhury, Minnesota State University at Mankato; Narendra Rustagi, Howard University;
Herb Schiller, Stony Brook University; Dean T. Scott, DeVry
University; Scott J. Seipel, Middle Tennessee State University; Raj Selladurai, Indiana University; Kaushic Sengupta,
Hofstra University; Kenneth Shaw, Oregon State University;
Dooyoung Shin, Minnesota State University at Mankato;
Michael Shurden, Lander University; Raymond E. Simko,
Myers University; John Simon, Governors State University;
Jake Simons, Georgia Southern University; Charles Smith,
Virginia Commonwealth University; Kenneth Solheim,
DeVry University; Young Son, Bernard M. Baruch College;
Victor Sower, Sam Houston State University; Jeremy Stafford, University of North Alabama; Donna Stewart, University of Wisconsin at Stout; Dothang Truong, Fayetteville State
University; Mike Umble, Baylor University; Javad Varzandeh, California State University at San Bernardino; Timothy
Vaughan, University of Wisconsin at Eau Claire; Emre Veral,

Preface

Baruch College; Mark Vroblefski, University of Arizona;
Gustavo Vulcano, New York University; Walter Wallace,
Georgia State University; James Walters, Ball State University; John Wang, Montclair State University; Tekle Wanorie,
Northwest Missouri State University; Jerry Wei, University
of Notre Dame; Michael Whittenberg, University of Texas;

ix

Geoff Willis, University of Central Oklahoma; Pamela Zelbst,
Sam Houston State University; Jiawei Zhang, NYU; Zhenying Zhao, University of Maryland; Yong-Pin Zhou, University of Washington.
William J. Stevenson

Walkthrough
MAJOR STUDY AND LEARNING FEATURES
A number of key features in this text have been specifically
designed to help introductory students learn, understand, and
apply operations concepts and problem-solving techniques.
Examples with Solutions
Rev.Confirming Pages

Throughout the text, wherever a quantitative or
analytic technique is introduced, an example is
included to illustrate the application of that technique. These are designed to be easy to follow.
Chapter Three Forecasting

EXAMPLE

Determining a Regression Equation
Sales of new houses and three-month lagged unemployment are shown in the following
table. Determine if unemployment levels can be used to predict demand for new houses
and, if so, derive a predictive equation.
Period . . . . . . . . . . . . . 1
Units sold . . . . . . . . . . 20
Unemployment %
(three-month lag)
7.2

1.

2
41

3
17

4
35

5
25

6
31

7
38

8
50

9
15

10
19

11
14

4.0

7.3

5.5

6.8

6.0

5.4

3.6

8.4

7.0

9.0

Plot the data to see if a linear model seems reasonable. In this case, a linear model
seems appropriate for the range of the data.
50

Units sold, y

40
30
20
10
0

2

4

6

8

10

Level of unemployment (%), x

2.

Check the correlation coefficient to confirm that it is not close to zero using the website template, and then obtain the regression equation:
r = −.966
This is a fairly high negative correlation. The regression equation is
y = 71.85 − 6.91x
Note that the equation pertains only to unemployment levels in the range 3.6 to 9.0, because
sample observations covered only that range.

x

103

8

mhhe.com/stevenson14e

S O L U T I O N

Solved Problems
At the end of chapters
and chapter ­supplements,
“Solved Problems” are
­provided to illustrate
­problem solving and the
core ­concepts in the chapter.
These have been carefully
prepared to help students
understand the steps
involved in solving different
types of problems. The Excel
logo indicates that a spreadsheet is available on the
text’s website.

2.

Strategy formulation is critical because strategies provide direction for the organization, so they
can play a role in the success or failure of a business organization.

3.

Functional strategies and supply chain strategies need to be aligned with the goals and strategies
of the overall organization.

4.

The three primary business strategies are low cost, responsiveness, and differentiation.

5.

Productivity is a key factor in the cost of goods and services. Increases in productivity can
become a competitive advantage.

6.

High productivity is particularly important for organizations that have a strategy of low costs.

competitiveness, 42
core competencies, 46
environmental scanning, 48
goals, 44
mission, 44

mission statement, 44
operations strategy, 51
order qualifiers, 48
order winners, 48
productivity, 56

quality-based strategies, 52
strategies, 44
SWOT, 48
tactics, 45
time-based strategies, 53

SOLVED PROBLEMS

Computing Productivity

A company that processes fruits and vegetables is able to produce 400 cases of canned peaches in
one-half hour with four workers. What is labor productivity?
400 cases
Quantity produced
Labor productivity = ________________ = ________________________
Labor hours
4 workers × 1 / 2 hour / worker

Problem 1
mhhe.com/stevenson14e

Solution

= 200 cases per labor hour

Computing Multifactor Productivity

A wrapping-paper company produced 2,000 rolls of paper in one day. Labor cost was $160, material
cost was $50, and overhead was $320. Determine the multifactor productivity.
Quantity produced
Multifactor productivity = ______________________________
Labor cost + Material cost + Overhead

Problem 2
mhhe.com/stevenson14e

Solution

2,000 rolls
= _______________ = 3.77 rolls per dollar input
$160 + $50 + $320
A variation of the multifactor productivity calculation incorporates the standard price in the
numerator by multiplying the units by the standard price.Rev.Confirming Pages

Computing Multifactor Productivity

Compute the multifactor productivity measure for an eight-hour day in which the usable output was
300 units, produced by three workers who used 600 pounds of materials. Workers have an hourly
wage of $20, and material cost is $1 per pound. Overhead is 1.5 times labor cost.

TABLE 16.5 Excel solution for Example 2a

KEY TERMS

Chapter Sixteen Scheduling Usable output
707
Multifactor productivity = __________________________________
Labor cost + Material cost + Overhead cost
300 units
= _____________________________________________________
(3 workers × 8 hours × $20 / hour) + (600 pounds × $1 / pound) +
(3 workers × 8 hours × $20 / hour × 1.50)
300 units
= ________________
$480 + $600 + $720
= .167 units of output per dollar of input

Problem 3
mhhe.com/stevenson14e

Solution

Excel Spreadsheet
Solutions

ste3889X_ch02_040-073.indd

63

Where applicable, the
­examples and solved
­problems include screen
shots of a spreadsheet
solution.

09/04/19 09:59 AM

Source: Microsoft

c.

Using earliest due date as the selection criterion, the job sequence is C-A-E-B-D-F.
The measures of effectiveness are as follows (see table):
(1) Average flow time: 110/6 = 18.33 days
(2) Average tardiness: 38/6 = 6.33 days
(3) Average number of jobs at the work center: 110/41 = 2.68

xi

CHAPTER ELEMENTS
Within each chapter, you will find the following elements
that are designed to facilitate study and learning. All of
these have been carefully developed over many editions and
have proven to be successful.
Learning Objectives
Every chapter and supplement lists the ­learning
objectives to achieve when studying the ­chapter
material. The learning objectives are also
included next to the specific material in the
­margins of the text.

Rev.Confirming Pages

Rev.Confirming Pages

4

Product and Service
Design

C H A P T E R

LEARNING OBJECTIVES
After completing this chapter, you should be able to:
LO4.1

Explain the strategic importance of product and service design.

LO4.2

Describe what product and service design does.

LO4.3

Name the key questions of product and service design.

LO4.4

Identify some reasons for design or redesign.

LO4.5

List some of the main sources of design ideas.

LO4.6

Discuss the importance of legal, ethical, and sustainability considerations in product and service design.

LO4.7

Explain the purpose and goal of life-cycle assessment.

LO4.8

Explain the phrase “the 3 Rs.”

LO4.9

Briefly describe the phases in product design and development.

LO4.10

Discuss several key issues in product or service design.

LO4.11

Discuss the two key issues in service design.

LO4.12

List the characteristics of well-designed service systems.

LO4.13

List some guidelines for successful service design.

C H A P T E R
4.1

Mark Lennihan/AP Images

4.11 Service Design 165
Overview of Service Design 166
Differences between
Service Design and
Product Design 166
Phases in the Service Design
Process 167

Service Blueprinting 168
Characteristics of WellDesigned Service Systems 168
Challenges of Service
Design 169
Guidelines for Successful
Service Design 169

4.12 Operations Strategy 170
Operations Tour: High Acres
Landfill 174
Chapter Supplement:
Reliability 176

O U T L I N E

Introduction 140

4.7

What Does Product and Service
Design Do? 140
Objectives of Product and
Service Design 141
Key Questions 141
Reasons for Product or Service
Design or Redesign 141

4.2

Idea Generation 142

4.3

Legal and Ethical
Considerations 144

4.4

Human Factors 145

4.5

Cultural Factors 145

4.6

Global Product and Service
Design 146

4.8

Environmental Factors:
Sustainability 146

Designing for Mass
Customization 154
Reliability 156
Robust Design 157
Degree of Newness 158
Quality Function Deployment 158
The Kano Model 160

Cradle-to-Grave Assessment 146
End-of-Life Programs 147
The Three Rs: Reduce, Reuse,
and Recycle 147
Reduce: Value Analysis 147
Reuse: Remanufacturing 148
Recycle 149

4.9

Other Design
Considerations 151

4.10 Designing for Production 163

Strategies for Product or
Service Life Stages 151
Product Life Cycle
Management 153
Degree of Standardization 153

Phases in Product Design
and Development 162
Concurrent Engineering 163
Computer-Aided Design
(CAD) 164
Production Requirements 165
Component Commonality 165

The essence of a business organization is the products and services it offers, and every
LO4.1 Explain the strateaspect of the organization and its supply chain are structured around those products
gic importance of product
and services. Organizations that have well-designed products or services are more
and service design.
likely to realize their goals than those with poorly designed products or services. Hence,
organizations have a strategic interest in product and service design. Product or service design should be closely tied
to an organization’s strategy. It is a major factor in cost, quality, time-to-market, customer satisfaction, and competitive
advantage. Consequently, marketing, finance, operations, accounting, IT, and HR need to be involved. Demand forecasts and projected costs are important, as is the expected impact on the supply chain. It is significant to note that an
important cause of operations failures can be traced to faulty design. Designs that have not been well thought out, or
are incorrectly implemented, or instructions for assembly or usage that are wrong or unclear, can be the cause of product and service failures, leading to lawsuits, injuries and deaths, product recalls, and damaged reputations.
continued

138

ste3889X_ch04_138-175.indd 138

139

08/01/19 07:17 AM

ste3889X_ch04_138-175.indd

139

Chapter Outlines

Opening Vignettes

Every chapter and supplement includes an
outline of the topics covered.

Each chapter opens with an introduction to the
important operations topics covered in the ­chapter.
This enables students to see the relevance of
­operations management in order to actively engage
in learning the material.

xii

08/01/19 07:17 AM

Figures and Photos
The text includes photographs and
graphic illustrations to support
­student learning and provide interest
and motivation. Approximately 100
­carefully selected photos highlight
the 14th edition. The photos illustrate
applications of operations and supply
chain concepts in many successful
companies. More than 400 graphic
illustrations, more than any other
text in the field, are included and all
are color coded with ­pedagogical
­consistency to assist students in
understanding concepts.
56

Chapter Two

A major key to Apple’s continued
success is its ability to keep pushing
the boundaries of innovation. Apple
has demonstrated how to create
growth by dreaming up products so
new and ingenious that they have
upended one industry after another.

Rev.Confirming Pages

246

Chapter Six

Process Selection and Facility Layout

FIGURE 6.1

Process selection and
capacity planning influence
system design

Inputs

Outputs

Forecasting

Facilities and
equipment
Capacity
Planning

Product and
service design

Layout

Rev.Confirming Pages
Process
Selection
Technological
change

Work
design

Competitiveness, Strategy, and Productivity

LO6.1 Explain the
strategic importance of
process selection and the
influence it has on the
organization and its supply
chain.

6.1 INTRODUCTION
Process selection refers to deciding on the way production of goods or services will be organized. It has major implications for capacity planning, layout of facilities, equipment, and
design of work systems. Process selection occurs as a matter of course when new products or
services are being planned. However, it also occurs periodically due to technological changes
in products or equipment, as well as competitive pressures. Figure 6.1 provides an overview
of where process selection and capacity planning fit into system design. Forecasts, product
and service design, and technological considerations all influence capacity planning and process selection. Moreover, capacity and process selection are interrelated, and are often done in
concert. They, in turn, affect facility and equipment choices, layout, and work design.
How an organization approaches process selection is determined by the organization’s process strategy. Key aspects include:
• Capital intensity: The mix of equipment and labor that will be used by the organization.
• Process flexibility: The degree to which the system can be adjusted to changes in
processing requirements due to such factors as changes in product or service design,
changes in volume processed, and changes in technology.

Pieter Beens/Shutterstock

Moreover, this approach pays little attention to suppliers and government regulations, and
community, environmental, and sustainability issues are missing. These are closely linked,
theoftwo
and business organizations LO6.2
need to Name
be aware
the impact they are having in these areas and
Process
choice
demand-driven.
main factors
that influence
respond accordingly. Otherwise,
organizations
may be subject
to attack
by is
pressure
groups The two key questions in process selection are:
process selection.
and risk damage to their reputation.

6.2 PROCESS SELECTION
1.
2.

LO2.6 Define the term
productivity and explain
why it is important to companies and to countries.
Productivity A measure of
the effective use of resources,
usually expressed as the ratio
of output to input.

How much variety will the process need to be able to handle?
How much volume will the process need to be able to handle?

Answers to these questions will serve as a guide to selecting an appropriate process. Usually, volume and variety are inversely related; a higher level of one means a lower level of the
other. However, the need for flexibility of personnel and equipment is directly related to the
One of the primary responsibilities of a manager is to achieve productive use of an organizalevel
of variety the
will need to handle: The lower the variety, the less the need for
tion’s resources. The term productivity is used to describe this.
Productivity
is anprocess
index that
flexibility,
while
the higher
the variety, the greater the need for flexibility. For example, if a
measures output (goods and services) relative to the input (labor,
materials,
energy,
and other
worker’s
job to
in input:
a bakery is to make cakes, both the equipment and the worker will do the same
resources) used to produce it. It is usually expressed as the ratio
of output
thing day after day, with little need for flexibility. But if the worker has to make cakes, pies,
Output
cookies, brownies, and croissants,
both the worker and the equipment must have the flexibilProductivity = ______
(2–1)
Input
ity to be able to handle the different requirements of each type of product.
Thereitisisanother
aspect
of variety that is important. Variety means either having dedicated
Although productivity is important for all business organizations,
particularly
impordifferentthe
product or service, or if not, having to get equipment ready every
tant for organizations that use a strategy of low cost, becauseoperations
the higherfor
theeach
productivity,
time there is the need to change the product being produced or the service being provided.
lower the cost of the output.

2.7 PRODUCTIVITY

A productivity ratio can be computed for a single operation, a department, an organization, or an entire country. In business organizations, productivity ratios are used for planning
workforce requirements, scheduling equipment, financial analysis, and other important tasks.
Productivity has important implications for business organizations and for entire nations.
For nonprofit organizations, higher productivity means lower costs; for profit-based organizations, productivity is an important factor in determining how competitive a company is. For
a nation, the rate of productivity
growth is of great importance. Productivity growth is the
ste3889X_ch06_244-299.indd 246
increase in productivity from one period to the next relative to the productivity in the preceding period. Thus,
Current productivity − Previous productivity
Productivity growth = _____________________________________ × 100
Previous productivity

(2–2)

08/01/19 07:28 AM

xiii

Rev.Confirming Pages

Chapter Five

Strategic Capacity Planning for Products and Services

213

Operations Strategies

5.12 OPERATIONS STRATEGY

An Operations Strategy section
The strategic implications of capacity decisions can be enormous, impacting all areas of the
organization. From an operations management standpoint, capacity decisions establish a set
is included at the end of most
of conditions within which operations will be required to function. Hence, it is extremely
­chapters. These sections discuss
important to include input from operations management people in making capacity decisions.
how the chapters’ concepts can
Flexibility can be a key issue in capacity decisions, although flexibility is not always an
option, particularly in capital-intensive industries. However, where possible, flexibility allows
be applied and how they impact
an organization to be agile—that is, responsive to changes in the marketplace. Also, it reduces
the operations of a company.
to a certain extent the dependence on long-range forecasts to accurately predict demand. And
flexibility makes it easier for organizations to take advantage of technological and other innovations. Maintaining excess capacity (a capacity cushion) may provide a degree of flexibility,
albeit at added cost.
Some organizations use a strategy of maintaining a capacity cushion for the purpose of
blocking entry into the market by new competitors. The excess capacity enables them to produce at costs lower than what new competitors can. However, such a strategy means higherthan-necessary unit costs, and it makes it more difficult to cut back if demand slows, or to
shift to new product or service offerings.
Efficiency improvements and utilization improvements can provide capacity increases.
Such improvements can be achieved by streamlining operations and reducing waste. The
chapter on lean operations describes ways for achieving those improvements.
Bottleneck management can be a way to increase effective capacity, by scheduling nonbottleneck operations to achieve maximum utilization of bottleneck operations.
In cases where capacity expansion will be undertaken, there are two strategies for determining the timing and degree of capacity expansion. One is the expand-early strategy (i.e.,
before demand materializes). The intent might be to achieve economies of scale, to expand
Rev.Confirming Pages
market share, or to preempt competitors from expanding. The risks of this strategy include
an oversupply that would drive prices down, and underutilized equipment that would result in
higher unit costs.
The other approach is the wait-and-see strategy (i.e., to expand capacity only after demand
materializes, perhaps incrementally). Its advantages include a lower chance of oversupply due
to more accurate matching of supply and demand,
and higher capacity utilization. The key
READING
DUTCH BOY BRUSHES UP ITS PAINTS
risks are loss of market share and the inability to meet demand if expansion requires a long
lead time.
Sherwin-Williams’ Dutch Boy Group put a revolutionary spin on
In cases where capacity contraction will paint
be undertaken,
capacity
disposal Twist
strategies
cans with its innovative
square-shaped
& PourTM
become important. This can be the result of thepaint-delivery
need to replace
equipment
with
container aging
for the Dirt
Fighter interior
latexnewer
paint line.
The four-piece
square containeroperations.
could be the first
major
change
equipment. It can also be the result of outsourcing
and downsizing
The
cost
or in
how house paint is packaged in decades. Lightweight but sturdy,
benefit of asset disposal should be taken into account
when
contemplating
these
actions.
the Twist & Pour “bucket” is packed with so many conveniences, it

Readings

is next to impossible to mess up a painting project.
Winning Best of Show in an AmeriStar packaging competition sponsored by the Institute of Packaging Professionals, the
exclusive,
paint services
container stands
7½ in. time
tall and
Capacity refers to a system’s potential for producing goods orall-plastic
delivering
over aalmost
specified
holds 126isoz.,
a bit lesson
than
1 gal. Rust-resistant
moistureinterval. Capacity decisions are important because capacity
a ceiling
output
and a majorand
determiresistant, the plastic bucket gives users a new way to mix, brush,
nant of operating costs.
and store paint.
Three key inputs to capacity planning are the kind ofA capacity
thatonwill
muchtowill
hollow handle
one be
sideneeded,
makes it how
comfortable
pourbe
and
needed, and when it will be needed. Accurate forecasts
areA critical
to the
planning
process.
carry.
convenient,
snap-in
pour spout
neatly pours paint into
a trayimportant
with no dripping
but canthat
be removed
if desired,
allow
The capacity planning decision is one of the most
decisions
managers
make.toThe
a wide
brushinvolving
to be dipped
into the 5¾-in.-diameter
mouth. Capcapacity decision is strategic and long term in nature,
often
a significant
initial investment
ping
the
container
is
a
large,
twist-off
lid
that
requires
no
tools
of capital. Capacity planning is particularly difficult in cases where returns will accrue over a lengthyto
open or close. Molded with two lugs for a snug-finger-tight closperiod, and risk is a major consideration.
ing, the threaded cap provides a tight seal to extend the shelf life
A variety of factors can interfere with effective capacity,
so effective capacity is usually somewhat
of unused paint.
less than design capacity. These factors include facilities
and layout,
product/
Whiledesign
the lid requires
no tools human
to access,factors,
the snap-off
carry bail
is assembled
on theconsiderations.
container in a “locked-down position” and
service design, equipment failures, scheduling problems,
and quality
can
be
pulled
up
after
purchase
for
toting
or
hanging
on
a ladder.
Capacity planning involves long-term and short-term considerations. Long-term considerations relate
Large, nearly 4½-inch-tall label panels allow glossy front and back
to the overall level of capacity; short-term considerations relate to variations in capacity requirements
labels printed and UV-coated to wrap around the can’s rounded
due to seasonal, random, and irregular fluctuations corners,
in demand.
Ideally, display.
capacity will match demand.
for an impressive
Jim MacDonald, co-designer of the Twist & Pour and a packaging engineer at Cleveland-based Sherwin-Williams, tells Packaging
Digest that the space-efficient, square shape is easier to ship and
easier to stack in stores. It can also be nested, courtesy of a recess

Readings highlight important
real-world applications, ­provide
examples of production/­
operations issues, and offer
further elaboration of the text
material. They also provide a
basis for classroom discussion
and generate interest in the
subject matter. Many of the
end-of-chapter readings include
assignment questions.

ste3889X_ch05_190-221.indd 213

xiv

LO4.5 List some of the
main sources of design
ideas.

SUMMARY

Jerry Simon

in the bottom that mates with the lid’s top ring. “The new design
allows for one additional shelf facing on an eight-foot rack or
shelf area.”
The labels are applied automatically, quite a feat, considering
their complexity, size, and the hollow handle they likely encounter
during application. MacDonald admits, “Label application was a
challenge. We had to modify the bottle several times to accommodate the labeling machinery available.”
Source: “Dutch Boy Brushes Up Its Paints,” Packaging Digest, October 2002.
Copyright ©2002 Reed Business Information. Used with permission.

4.2 IDEA GENERATION

08/01/19 07:22 AM

Ideas for new or redesigned products or services can come from a variety of sources, including customers, the supply chain, competitors, employees, and research. Customer input can
come from surveys, focus groups, complaints, and unsolicited suggestions for improvement.
Input from suppliers, distributors, and employees can be obtained from interviews, direct or
indirect suggestions, and complaints.
One of the strongest motivators for new and improved products or services is competitors’ products and services. By studying a competitor’s products or services and how the
competitor operates (pricing policies, return policies, warranties, location strategies, etc.), an
organization can glean many ideas. Beyond that, some companies purchase a competitor’s

∑ y − b∑ t
a = ______ or ¯y − b¯t
n
Trend-adjusted
forecast

Linear regression
forecast

TAF t+1 = S t + T t
where
S t = TAF t + α( A t − TAF t)
T t = T t−1 + β( TAF t − TAF t−1 − T t−1)

t = Current period
TAF t+1 = Trend-adjusted forecast for
next period
S = Previous forecast plus
smoothed error
T = Trend component

Y c = a + bx
where
n (∑ xy ) − (∑ x) (∑ y)
b = _____________________
n(∑ x 2) − (∑ x 2)

y c = Computed value of dependent
variable
x = Predictor (independent) variable
b = Slope of the line
a = Value of y c when x = 0

∑ y − b∑ x
a = ______ or ¯y − b¯x
n

END-OF-CHAPTER RESOURCES
Standard error of
estimate

√

________

Se =

(y − y c) 2
∑
_______
n−2

S e = Standard error of estimate
y = y value of each data point
n = Number of data points

For student study and review, the following items are
√
√
√
­provided at the end
of each chapter or chapter supplement.
t

Tracking signal

∑e
TS t = _____
MAD t

Control limits

UCL = 0 + z MSE
_____
LCL = 0 − z MSE

_____

_____

MSE = standard deviation
z = Number of standard deviations;
2 and 3 are typical values

Microsoft

1.
2.
3.
4.

Demand forecasts are essential inputs for many business decisions. They help managers decide
how much supply or capacity will be needed to match expected demand, both within the organization and in the supply chain.
Because of random variations in demand, it is likely that the forecast will not be perfect, so managers need to be prepared to deal with forecast errors.
Other, nonrandom factors might also be present, so it is necessary to monitor forecast errors to
check for nonrandom patterns in forecast errors.
It is important to choose a forecasting technique that is cost-effective and one that minimizes forecast error.

associative model, 80
judgmental forecasts, 80
regression, 98
bias, 109
least squares line, 99
seasonality, 82
centered moving average, 96
linear trend equation, 89
seasonal relative, 94
Chapter
One deviation
Introduction to Operations
Management
control chart, 107
mean absolute
seasonal variations,
93
correlation, 102
(MAD), 106
standard error of estimate, 100
cycle, 82
mean absolute percent error
time series, 82
7. What
are models
Delphi
method,and
81why are they important?
(MAPE), 106
time-series forecasts, 80
8. Why
is the
degree of customization an mean
important
consideration
in process
error,
105
squared
error (MSE),
106 planning?
tracking signal, 109
smoothing,
87consider for
moving
trend, 82
9. Listexponential
the trade-offs
you would
each average,
of these 84
decisions:
focus forecasting, 88
naive forecast, 82
trend-adjusted exponential
a. Driving your own car versus public transportation.
forecast, 76
predictor variables, 98
smoothing, 92
b. irregular
Buying a variation,
computer 82
now versus waiting
for an
improved82model.
random
variations,
weighted average, 86
c. Buying a new car versus buying a used car.
d. Speaking up in class versus waiting to get called on by the instructor.
e. A small business owner having a website versus newspaper advertising.

Taking Stock and Critical
Thinking Exercises

10. Describe each of these systems: craft production, mass production, and lean production.
11. Why might some workers prefer not to work in a lean production environment?
12. Discuss the importance of each of the following:
a. ste3889X_ch03_074-137.indd
Matching supply and demand
117

b. Managing a sup…
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