SOLUTIONS MANUAL for Operations Management Processes and Supply Chains by digitaldownload87

Operations Management: Processes and Supply Chains, 13th edition Lee J. Krajewski, Manoj Malhotra

TABLE OF CONTENTS CHAPTER 1. Using Operations to Create Value PART 1: MANAGING PROCESSES CHAPTER 2. Process Strategy and Analysis CHAPTER 3. Quality and Performance CHAPTER 4. Lean Systems CHAPTER 5. Capacity Planning CHAPTER 6. Constraint Management CHAPTER 7. Project Management PART 2: MANAGING CUSTOMER DEMAND CHAPTER 8. Forecasting CHAPTER 9. Inventory Management CHAPTER 10. Operations Planning and Scheduling

CHAPTER 11. Resource Planning PART 3: MANAGING SUPPLY CHAINS CHAPTER 12. Supply Chain Design CHAPTER 13. Supply Chain Logistic Networks CHAPTER 14. Supply Chain Integration CHAPTER 15. Supply Chain Sustainability

Chapter

1 Using Operations to Create Value 1.

Answering this question demonstrates that processes underlie all of our jobs. What might be surprising is how many students would put their job in the category of “other,” suggesting that many jobs do not fall neatly into any one functional area. Perhaps many in the “other” category might best be called “operations” on further reflection. Customers, both internal and external, are part of each process, and the goal is to manage the processes to add the most value for them.

Amazon.com offers a very broad range of services and products at competitive prices. Its competitive priorities would include fast delivery time, on-time delivery, customization, variety and low-cost operations. As a business, Amazon.com is actually assembling a customized basket of goods that must be delivered in a short window of time in a dependable fashion. Low-cost operations are needed to remain competitive. To remain in business, Amazon.com needs to maintain high volumes of traffic. Operations strategy must focus on stock availability and quick, economical, and dependable delivery.

The hospital’s commitment to provide attention to patients arriving to the emergency unit in less than 15 minutes and never to turn away patients who need to be hospitalized implies that the facility must be designed to have extra capacity in both beds and emergency room facilities. It must plan on having extra personnel in the emergency room and also plan on having additional emergency personnel on call to take care of unprecedented heavy loads. In line with the mission statement, maximum utilization of the facilities (i.e., beds and emergency room personnel) would not be one of the performance objectives for the hospital.

FedEx traditionally has competed on the basis of fast, dependable delivery. Before the boom in Internet applications, many businesses relied on FedEx to get things to other businesses overnight. Now, this need is beginning to diminish as sophisticated systems are being installed to assist companies in planning operations better. And, the Internet based companies are adding more demands for low cost ground deliveries to specific customer doors. FedEx, in order to remain competitive with companies such as UPS, has moved into the door-to-door delivery business, perhaps through acquisition. Nonetheless, it will require changes to this company’s competitive priorities.

Technology Management. To identify a market segment, we need to determine answers to questions such as: Which colleges and departments currently offer the subject? What do instructors desire in the way of textbook support? Is there a trend toward Technology Management courses? Are there other Technology Management

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Using Operations to Create Value  CHAPTER 1 

texts? Some needs assessment can be accomplished by survey, but the response rate may be low. A high-investment strategy would be to ask or hire instructors to review and critique a list of topics, then an outline, then a draft. Explicit services include supplying information about the subject in the form of a textbook and instructor support in the form of ancillary publications. 6.

It is often not a good idea for a company to try to excel in all of the competitive priorities because it is generally impossible to do so. Mediocrity is a predictable result. The choice and the minimum level of one or more of the competitive priorities are set by the order qualifiers for the particular product or service. The choice of the competitive priorities that the company should emphasize is usually governed by the company’s strategy driven by its mission statement and the core competencies that the company wants to harness to seek the best competitive advantage.

Core processes should link to a firm’s core competencies. Core processes are those processes that provide the firm the best competitive advantage. Essential to the definition a firm’s core processes is the concept of “interaction costs.” These costs include the time and money that are expended whenever people and companies exchange services, products, or ideas. If the transaction costs are higher to retain a process within the firm’s organization than to outsource the process, the process should be outsourced.

Wendy’s assembles hamburgers to order. When materials are held at the stage just before final assembly, they can be used to complete a wide variety of different sandwiches. Because no finished-goods stock exists, when customers say, “Hold the sauce,” there is no delay or waste of materials. Service clerks specialize. One clerk takes orders and payment. Others fill portions of the order. Orders are processed in single file. Throughput is normally restricted by transactions at the cash register. At busy times, throughput is increased by splitting the bottleneck operation. One clerk takes customer orders, another receives payment. The Wendy’s operation has some characteristics of assembly. Therefore, the impact of new menu items on the production operations must be carefully considered.

Grandmother’s Chicken. a. Kathryn Shoemaker’s strategic plans include the following:  Product and service plans: Should the new location offer a new mix?  Competitive priorities: If the product mix and service mix are different at the new location, the thrust could be on low volumes and high quality.  Quality management: Should the goal be reliability or top quality?  Process strategy: What processes will be needed to make chicken dinners in the addition or new facility?  New technologies: Is it time to automate? Is this why there is a problem in service times?  Capacity: How large should the addition or new facility be?  Location: Should we locate in Uniontown or expand in Middlesburg?

Using Operations to Create Value  CHAPTER 1 

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b. Attitudes toward nutrition could change the demand for chicken. Competitors such as Boston Market may be planning to move to Uniontown or even Middlesburg. There may be a trend toward demands for ever-faster service, which cannot be supported by the processes specified in the “unique recipe.” The economy of Uniontown might not be supportive of restaurant services. Shoemaker should also consider the availability of key resources, such as servers, whole chickens, spices, and cooking oil. Will Uniontown labor organize? c. The possible distinctive competencies at Grandmother’s Chicken Restaurant include the “unique recipe,” the homey atmosphere, and friendly, prompt service. 10. Wild West, is recognizable as US WEST, which was bought out by Qwest in a hostile takeover in June, 2000. But many other “Baby Bells” are in a similar position. a. Strategic plans include reducing overhead, reengineering operations, and investing in new technologies to meet competition. The “do-nothing” option of remaining a local monopoly telephone company is not viable because of competition from cable systems and wireless systems that are capable of business and personal communication. If the mission is too broad, Wild West should sell its financial services and commercial real-estate businesses. Those businesses do not match their distinctive competencies. b. One environmental issue is whether communication, like health care, will be viewed as a “right” and therefore should be free. A significant portion of Wild West’s business is governed by regulatory agencies. Customer service in their core business is essential to maintaining a favorable regulatory environment. Other business opportunities, such as manufacturing and providing information services, are prohibited by the same court order that formed the “Baby Bells” from AT&T. c. Wild West’s distinctive competency is in connecting people (or machines) for the purpose of communication. A weakness is high overhead inherited from the era of telecommunication monopoly. 11. Although the answers may vary depending on the “niche” elements of the business, the competitive priorities would include on-time delivery, low-cost operations, and customization. The latter competitive priority comes from the capability to assemble unique “baskets” of food items for each customer. There may be a need to coordinate a given basket between two different stores. Capabilities to develop would include information systems and Web page design, efficient scheduling of delivery trucks (which must first collect the items in the basket and then deliver them to the customer’s door), and an adequate fleet of trucks with drivers. 12. Additive manufacturing is an excellent approach to achieving low volume, highly customized output. If time is of the essence in producing the parts and the manufacturer has access to 3D printers, they may be able to produce what they need more quickly than working with a subcontractor or outsourcing the work. If volumes increase, then the inexpensive, custom tooling that can be achieved via additive manufacturing may not be the best approach. The high volume of output might enable the manufacturer to recoup their investment in more substantial tooling or by exploring the use of other forms of automation.

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PROBLEMS

Addressing the Trends and Challenges in Operations Management 1.

Boehring University a. Value of output: students credit-hours  $200 tuition + $100 state support  75 ×3 ×  = $67,500 class class student credit-hours   Value of input: labor + material + overhead  $25  $6500 +  × 75 students  + $30, 000  student  = $38,375 class class Multifactor Productivity ratio: Output $67,500 Productivity = = = 1.76 Input $38,375 Compared to Solved problem 1, multifactor productivity has increased from 1.25 to 1.76. b. Value of output is the same as in part a: $67,500 class Labor-hours of input: weeks hours hours 20 × 16 = 320 week class class Productivity ratio: Output $67,500 Labor Productivity = = = $210.94 hour Input 320 hours The $192 season ticket price is not used in this calculation. It is a “red herring.”

Suds and Duds Laundry a. Labor productivity Week 1 2 3 4 5

Number of Workers 2 2 3 3 2

Input (Labor-hours) 24 46 62 51 45

Output (Shirts) 68 130 152 125 131

Output/Input Ratio 2.83 shirts/hour 2.83 shirts/hour 2.45 shirts/hour 2.45 shirts/hour 2.91 shirts/hour

b. Output per person does not vary much whether it is Sud, Dud, or Jud working. Productivity declines when all three are present. Perhaps there isn’t enough work to keep three persons occupied, or perhaps there is not enough work space or equipment to accommodate three workers.

Using Operations to Create Value  CHAPTER 1 

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White Tiger Electronics compact disc players Value of Output: $300 Value of Input: Labor + Materials + Overhead $300 Ouput Productivity = = = 2.000 Input $30 + $70 + $50 10% productivity improvement → 2.00 × 110 . = 2.200 Given productivity = 2.20 , and the value of output = $300, we solve for the cost of inputs: Ouput $300 Productivity = = = 2.20 Input Input $300 Input = = $136.36 or $136 2.2 The cost of inputs must decrease by ($150 − $136 ) = $14 . a. A $14 reduction in material costs is $14 $70 = 20.00% b. A $14 reduction in labor costs is $14 $30 = 46.67% c. A $14 reduction in overhead is $14/$50 = 28.00%

Symtecks The output of a process is valued at $100 per unit. The cost of labor is $50 per hour including benefits. The accounting department provided the following information about the process for the past four weeks: Week 1 1124 112,400 12,735 254.7 21,041 8,992 2.63 4.41 units/hr

Units Produced Total Value Labor ($) Labor (hrs) Material ($) Overhead ($) Multifactor Productivity Labor Productivity

Week 2 1310 131,000 14,842 296.8 24,523 10,480 2.63 4.41units/hr

Week 3 1092 109,200 10,603 212.1 20,442 8,736 2.75 5.15 units/hr

Week 4 981 98,100 9526 190.5 18,364 7,848 2.75 5.15 units/hr

a. Use the multifactor productivity ratio to see whether recent process improvements had any effect and, if so, when the effect was noticeable. Value of output 1124units × $100 = $112, 400 Value of input: labor + material + overhead

$12,735 + $21,041 + $8,992 = $42,768 Productivity ratio: Labor Productivity =

Output Input

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Using Operations to Create Value  CHAPTER 1 

Week 1

Productivity =

Output $112, 400 = = 2.628 $42, 768 Input

Week 2

Productivity =

Output $131, 000 = = 2.628 $49,845 Input

Week 3

Productivity =

Output $109, 200 = 2.745 = $39, 781 Input

Week 4

Productivity =

Output $98,100 = 2.745 = $35, 738 Input

2.745 − 2.628 ×100% = 4.45% 2.628 Improved 4.45% - noticeable in Week 3 b. Has labor productivity changed? Use the labor productivity ratio to support your answer. Labor-hours of input: Labor $50/hour Labor costs Week 1 = $12,735/$50 = 254.7 Week 2 = $14,842/$50 = 296.84 Week 3 = $10,603/$50 = 212.06 Week 4 = $9,526/$50 = 190.52

Productivity ratio: Output Input 1124 = 4.4130 / hour 254.7 hours 1310 = 4.413 / hour 296.84 hours 1092 = 5.1495 / hour 212.06 hours 981 = 5.1491/ hour 190.52 hours

Labor Productivity = Output = Input Output Week 2 = Labor Productivity = = Input Output Week 3 = Labor Productivity = = Input Output Week 4 = Labor Productivity = = Input 5.1491 − 4.4130 ×100% = 16.68% 4.4130 Improved 16.68%

Week 1 =

Labor Productivity =

Using Operations to Create Value  CHAPTER 1 

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Alyssa’s Custom Cakes a. 5 Birthday cakes x $50 per cake = $250 2 Wedding cakes x $150 per cake = $300 3 Specialty cakes x $100 per cake = $300 Total monthly revenue = $850

Multifactor productivity ratio = output/input 1.25 = $850/x Solve for x = $850/1.25 = $680 Total costs = $680 Average cost per cake = $680/10 = $68/cake b. Labor productivity Birthday cake = $50/ 1.5 hours = $33.30/hour Wedding Cake = $150/ 4 hours = $37.50/hour Specialty Cake = $100/1 hours = $100/hour c. Based on labor productivity, Alyssa should try to sell specialty cakes the most. d. Yes, Alyssa should stop selling birthday cakes. Based on answer a, she loses $68 - $50 = $18 every time she sells a birthday cake. 6.

Big Black Bird Company The Big Black Bird Company problem is based on a product made by Raven Industries. None of the numbers are representative of actual costs or volume. a. Multifactor Productivity Original Situation: Value of output: (2500 uniforms × $200) = $500,000 Value of input: (2500 uniforms × $120) = $300,000 Productivity ratio: Ouput $500,000 Productivity = . = = 167 Input $300,000 Overtime Situation: Value of output: (4000 uniforms × $200) = $800,000 Value of input: (4000 uniforms × $144) = $576,000 Productivity ratio: Ouput $800,000 Productivity = . = = 139 Input $576,000 Productivity decreases by: 1.67 − 1.39 × 100% = 16.77% 1.67 b. Labor Productivity Original Situation: Value of output (from part a) is: $500,000 Labor-hours of input: ( 70 × 40 hours) + (30 × 40 hours) = 4000 hours

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Labor productivity = $500,000 4000 hours = $125 hour Overtime Situation: Value of output (from part a) is: $800,000 Labor-hours of input: ( 7 0 × 7 2 h o u r s ) + (3 0 × 7 2 h o ur s ) = 7 2 0 0 h o u r s Labor productivity =$800,000 / 7200 hours = $111.11/hours Labor productivity decreases by: (125/111.11) / 125 x 100% = 11.1% c. Gross profits Original Situation: $500,000 − $300,000 = $200,000 Overtime Situation: $800,000 − $576,000 = $224,000 Weekly profits increased. 7.

Mack’s Guitar Company a. Labor productivity = output/input Output = 100 guitars x 80% completion rate x price/guitar = 80 guitars/ month x $250/guitar = $20,000 Input Labor = 10/hours per guitar x 100 guitars = 1000 hours Labor productivity is $20,000/1000 = $20/hour Multifactor productivity ratio = output/input Output = 100 guitars x 80% completion rate x price/guitar = 80 guitars/ month x $250/guitar = $20,000 Input Labor = $10/hour x 10/hours per guitar x 100 guitars = $10, 000 Material = $40/guitar x 100 guitars = $4, 000 Overhead = $4,000 Multifactor productivity ratio = $20, 000/$18, 000 = 1.11 b. Option 1. Increase sales price by 10% Output = 100 guitars x 80% completion rate x ($250 x 1.1) = $22,000 Input Labor is same as in part (a) = $10,000 Material is same as in part (a) = $4,000 Overhead is same as in part (a) = $4,000 Multifactor productivity ratio = $22,000/$18,000 = 1.22 Option 2. Improve Quality Output = 100 guitars x 90% completion rate x $250/guitar = $22,500 Input Labor is same as in part (a) = $10,000 Material is same as in part (a) = $4,000 Overhead is same as in part (a) = $4,000 Multifactor productivity ratio = $22,500/$18,000 = 1.25 Option 3. Reduce costs by 10% Output = same as in part (a) = $20,000 Input

Using Operations to Create Value  CHAPTER 1 

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Reduce costs by 10% yields 90% of the input costs from part (a). = $18,000 x 0.90 = $16,200 Multifactor productivity ratio = $20,000/$16,200 = 1.23 Darren should choose Option 2 and improve quality because it yields the greatest improvement in multifactor productivity. 8.

Mariah Enterprises Productivity of Process Alpha and Process Beta Excel used to perform all calculations

Total Value of Output Total Cost of Labor Total Cost of Materials Total Cost of Overhead Labor Productivity Multifactor Productivity

Process Alpha Beta $17,150 $16,450 $2,600 $3,000 $5,500 $4,900 $6,000 $5,000 $6.596 $5.483 $1.216 $1.275

unit $/ labor $ unit $/ total $

Process alpha has 20% [(6.596-5.483)/5.483] higher labor productivity. Process beta has 5% [(1.275-1.216)/1.216] higher multifactor productivity. While process beta generates more dollars of output per dollar invested in input, it doesn’t use labor as efficiently as process alpha. 9.

Morning Brew Coffee Shop Excel used to perform all calculations a.

Current labor and multifactor productivity Currently Output in dollars Labor cost Material cost Equipment cost Overhead cost

Regular Coffee

Cappuccino

$700.00

$300.00

$175.00

Vienna coffee

total

$600.00 $1,600.00 $320.00 $75.00 $187.50 $437.50 $125.00 $225.00 Profit $492.50

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Using Operations to Create Value  CHAPTER 1 

Labor Productivity Multifactor Productivity After adding new product After Adding Regular Cappuccino New Product Coffee Output in dollars Labor cost Material cost Equipment cost Overhead cost

Vienna coffee

$700.00

$300.00 $600.00

$175.00

$75.00 $187.50

Profit

Eiskaffee

5.0000 1.4447

total

$375.00 $1,975.00 $320.00 $112.50 $550.00 $200.00 $350.00 $555.00

Labor Productivity Multifactor Productivity

6.1719 1.3908

Change in Labor Productivity Change in Multifactor Productivity

23.438% -3.727%

The units of Eiskaffee that would have to be sold to ensure that the multifactor productivity increases from its current level may be calculated as follows:

Coffee sold in $ output = 1.4447 = Labor cos t + Material cos t + Equipment cos t + Overhead cos t input 350($2) + 100($3) + 150($4) + x($5) = 1.4447 $320 + (350($.5) + 100($.75) + 150($1.25) + x($1.5)) + 200 + 350 $1600 + $5.0 x = 1.4447 $1307.5 + $1.5 x $1600 + $5 x = 1.4447($1307.5 + $1.5 x) $1600 + 5 x = 1888.945 + 2.1670 x 2.833 X = 288.945 x ≅ 102

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Calculation confirmed in Excel: After Adding New Product

Regular Coffee

Cappuccino

Vienna coffee

Output in dollars Labor cost Material cost Equipment cost Overhead cost

$700.00

$300.00

$600.00

$175.00

$75.00

$187.50

Profit

Eiskaffee

total

$510.00 $2,110.00 $320.00 $153.00 $590.50 $200.00 $350.00 $649.50

Labor Productivity Multifactor Productivity

6.5938 1.4447

Change in Labor Productivity Change in Multifactor Productivity

31.875% 0.001%

CASE: CHAD’S CREATIVE CONCEPTS * A.

Synopsis This case describes a small furniture manufacturing company that has gained a reputation for creative designs and quality by focusing on producing custom-designed furniture. As its reputation grew, it began to sell some standard furniture pieces to retail outlets. The overall growth in sales volume and the diversification into the production of standard furniture pieces have caused a number of issues to arise concerning both the internal manufacturing operations and its relationship to the other functional areas of the company. Purpose This case is designed to be used as either a “cold-call” case for class discussion or an assigned homework reading. Major points to be brought out in the discussion include: 1. The range of decisions that are made in designing and operating processes. 2. The impact that these operating decisions have on the organization as a whole, such as on marketing and finance. 3. The impact that decisions made in other functional areas of the organization have on the operating function. 4. The need to go beyond the “functional silo” mentality and manage in an integrative manner. Analysis

This case was prepared by Dr. Brooke Saladin, Wake Forest University, as a basis for classroom discussion.

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Using Operations to Create Value  CHAPTER 1 

Question 1: What types of decisions must Chad Thomas make daily for his company’s operations to run effectively? Over the long run? The students should be able to discuss a number of short-term-oriented decisions that are facing Chad Thomas. These should include: a. How to set priorities and schedule different orders? Chad is receiving orders for both custom-made, low-volume furniture pieces and higher-volume, standard pieces. Sales have increased, but the amount of equipment and the production capacity of the company have not. Neither has the type or mix of equipment changed. Different orders with different manufacturing requirements are now competing for the same productive capacity. b. What orders to accept and how long of a lead time to plan for in promising a delivery date? c. What type of work policies should be maintained for his employees? Decisions such as the number and type of employees to employ, the number of hours to work per day, and the amount of overtime to allow are all work policy decisions that impact the available capacity level. d. The allocation of resources, equipment, labor, and money to each product line. e. The level of inventory to maintain at various stages of the production process for both the custom and standard furniture lines (i.e., raw material, WIP, finished goods). These decisions are linked to the longer-term, total inventory-investment decision. Examples of longer-term decisions that face Chad Thomas include: a. Amount of money to tie up in the total inventory investment. b. The type of equipment to invest in to support efficient production. At what point should more specialized equipment be purchased to manufacture high-volume, standard furniture pieces more efficiently? c. What should be the overall workforce level to maintain, and what should be the proper mix of skills and capabilities? d. How should the facilities be laid out to accommodate the two different product lines? This gets the students into a whole range of capacity and equipment allocation decisions including size, type, and configuration. In these decisions it is important that the students see the significance of maintaining consistency of both strategic and operating decisions across functional areas.

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Question 2: How did sales and marketing affect operations when they began to sell standard pieces to retail outlets? Standard furniture pieces compete on a different set of competitive priorities than customdesigned pieces. Timely delivery and low costs are much more important than product flexibility. Quality may also be defined differently. The existing facilities are set up to provide flexibility with its job-shop orientation and general-purpose equipment. By introducing a standard line that should be manufactured on a flow line with some dedicated, more specialized equipment, a conflict has developed, and scheduling problems have resulted. Question 3: How has the move to producing standard furniture pieces affected the company’s financial structure? Inventory investment and operating costs are rising because of the frequent changeovers to accommodate the two different product lines and their scheduling conflicts. Profit margins for the standard line are smaller, which puts pressure on manufacturing to increase productivity and reduce costs. There may also be an issue concerning the assignment of overhead costs to each product line. Finally, the potential need to rent warehouse space to store either WIP or finished-goods inventory cuts into the profit margin for the standard furniture line. Question 4: What might Chad Thomas have done differently to help avoid some of these problems he now faces? Chad needs to address issues relating to functional areas. Make sure the student is able to identify decisions that relate to more than one functional area. Examples include the following: Operations Function 1. Monitoring capacity and utilization of facilities 2. Formulating inventory policies—dollars, items, and unit levels 3. Setting scheduling policies and priorities 4. Maintaining product line quality Marketing and Sales 1. Accurately forecasting orders for standard pieces 2. Defining market segments and customer needs 3. Determining what delivery schedules can be promised to customers Finance 1. Deciding level and type of investment

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2. Investigating the effect of capacity investment decisions on ROI Distribution/Logistics 1. Managing distribution and pipeline inventory 2. Comparing cost and advantages of various transportation modes 3. Meeting delivery lead times Three possible avenues that students may focus on are: Chad Thomas might have a. Established a plan for a more controlled growth. Part of this plan would be the development of the appropriate infrastructure to manage a controlled growth as to what markets to enter, what product lines to develop, and how to develop the proper manufacturing capabilities. b. Maintained the company focus on custom-designed furniture only. This alternative presents a whole different set of issues and decisions pertaining to future growth, but it would have avoided the issues of mixed competitive priorities and scheduling conflicts. c. Realized the different requirements for each product line and focused the manufacturing facilities into two separate sets of production facilities designed to cater to each product line’s specific needs. D.

Recommendations This case is not designed to be a decision-making case per se but rather a vehicle to get students thinking about the types and the integrated nature of decisions that operations managers face. The students may, indeed, have suggestions as to what should be done to help out Chad Thomas. These recommendations will more than likely follow the alternatives already discussed. As recommendations are provided by students, make sure you push them to understand the implications of their recommendations with respect to the company as a whole and the other functional areas.

Teaching Strategy This case can be effectively discussed in 20 to 30 minutes by following the discussion questions provided at the end. The questions are interconnected and somewhat redundant on purpose to reinforce the inter-relatedness of decisions made in various functional areas of the company. The intent is to have the students understand the range of decisions that face managers in the operations function and to realize that different types of products competing in different markets place different demands on the operations function. Therefore, manufacturing systems will take on a variety of configurations. Exhibit TN.1 lays out a sample table to be written on the board displaying important issues in the class discussion. Each column can be used to compare and contrast the differences in the requirements imposed by custom versus standard furniture for each area.

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EXHIBIT TN.1 Board Plan

Important Issues

Custom Furniture

Standard Furniture

Marketing Quality level and quality control Process equipment Process flow Production scheduling system Purchasing Type of inventory and inventory control system Type of engineering Type of labor and supervision needed Wage/reward system Layout

Crayola: Using Operations to Create Value at Crayola Length:

07:50

Subject:

Using Operations to Create Value at Crayola

Textbook Reference:

Chapter 1: Using Operations to Create Value, page 29

Summary This video discusses the operations and supply chain strategy and challenges at Crayola, the world’s leading company in arts and crafts products. A set of supply chain leadership principles are defined as cost, innovation, quality & ethical responsibility, sustainability, and resilience and agility. These principles are derived from the daily decisions Crayola faces such as choosing colors to drive demand, and launching new products while maintaining quality standards. As the supply chain grows globally and the company enters new foreign markets, operational challenges arise in managing fluctuating demands and a complex supply base. Key Concepts related to the chapter The video case includes rich discussion avenues in operations strategy, competitive priorities and capabilities. Also, the written case in the textbook covers Crayola’s potentially new markets in China, which creates challenges as well as opportunities. The instructor should make sure that students understand and become comfortable in applying the core concepts of operations strategy and competitive priorities/capabilities to this case.

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Using Operations to Create Value  CHAPTER 1 

Operations Strategy The corporate strategy and market analysis of Crayola can be discussed in detail. In order to develop a corporate strategy, Crayola first monitors and identifies adjustments that need to be implemented. Already being the dominant player in the North American market, Crayola is now looking for new markets overseas including China. Consumer needs are becoming more diversified than ever, and a large portion of purchasing takes place online. Crayola has strong core competencies in terms of customer-focused culture, strong innovation capabilities, and reliable product quality. Another key issue to be pointed out is their strong focus around environmental sustainability, which originated from the founders of the company. By leveraging their core competencies and adjusting to these external changes, Crayola strengthened their operations management functions and supply chain management activities. Four key strategies were developed -international expansion, consumer commercialization, dot.com strategy, and Crayola experience. Two points to consider for the international expansion are - what works well in their home country might not work well elsewhere?, and secondly, the importance of choosing the appropriate entry strategy such that it can ward off fierce competition and overcome cultural frictions. Competitive Priorities and Capabilities The competitive priorities of Crayola are characterized by its five principles of cost, innovation, quality & ethical responsibility, sustainability, and resilience & agility. These critical operational dimensions can be elaborated in detail based on the case information. Competitive priorities of cost, quality, time, and flexibility should be critically evaluated to make sure that its achieved competitive capability goals are met. Students should be able to make clear distinctions between priorities (targeted) and capabilities (achieved) in order to address the discussion questions at the end of the case. Another useful way to assess a firm’s ability is to use the order winner and order qualifier framework. In the video, Crayola’s customers mention order qualifiers as givens, and include consistently top quality, quick and on-time delivery, customized products and displays, variety, and flexibility. Order winners on the other hand, are mentioned as color selection (market knowledge), innovation, and high product reliability. Discussion Questions Based on Video 1.

Map Crayola’s five pillars of operational leadership to the competitive priorities in Table 1.3.

Using Operations to Create Value  CHAPTER 1 

•

The figure above shows an example of mapping the five pillars to the four competitive priorities. The pillars can be translated as having low operations and environmental costs, consistent and safe quality levels, fast new product development speed, and high responsiveness via customization and volume flexibility.

Create an assessment of Crayola’s competitive priorities as it relates to their Asian expansion plants. Competitive Priority/Pillar Low cost Operations

Measure

Capability

Gap

Action

Production cost Transportation cost Material cost

Mostly sourced in USA Automated with US workers

Carbon dioxide emission Energy consumption Fair wages to workers Adherence to all local laws and ethical standards

Recycled plastic Reforested wood Solar farm Meeting laws and standards in North America

Foreign expansion causes additional costs Acceptable

Multilanguage packaging Offshore production and sourcing No action

Acceptable

No action

Acceptable

No action

Variety

Product mix range

Acceptable

No action

Volume flexibility

Utilization Order-fill rate

High consistency in packaging and product quality All products are non-toxic First to the market with every innovation Wide variety of colors Maintains capacity and integrated supply base in US

Education of local managers for strict adherence to the company’s ethical standards No action

High safety quality Development speed

Percent defects Rework, scrap Product returns Certifications Chemical use New product time to market

Foreign markets may have different laws and standards Acceptable

Less responsive to overseas demand fluctuations

Postponement Modular process

Sustainable efficiency Ethical responsibility

Consistent quality

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Which of the competitive priorities might present the biggest challenge to Crayola as it expands internationally? In order to maintain their emphasis on quality and environmental sustainability, Crayola sources most of the required materials from the USA. However, this practice could be put into question when they decide to aggressively expand to overseas markets. Studies show that locating production facilities in foreign countries and increasing the local presence reduces customer aversion and enhances market penetration. Crayola would also have to decide whether the benefits arising from the low production cost in the Chinese labor market are sufficient to overcome the disadvantages associated with technology leakage, political risks, quality risks, and increased competition.

Chapter

2 Process Strategy and Analysis DISCUSSION QUESTIONS 1.

Many processes at manufacturing facilities involve customer contact. Internal customers would include those employees whose operation(s) are subsequent. Quality Control could be considered an internal customer as could design engineering or sales. Quality Control, design engineering, marketing, sales and other organizations represent the customer at various stages of any process. Customer contact can be very high, especially between production and engineering and production and quality control.

Some students may see this as a difference in competitive priorities. Others may see a difference in management styles. Ritz-Carlton empowers their employees and the local restaurant does not seem to empower. Ritz-Carlton believes that by having employees treat customers and other employees with respect, customer service is enhanced. A restaurant that does not allow employees to resolve a customer issue may not see enhanced customer service. The restaurant may believe that the to-go customer will be better satisfied with fast and accurate orders. The in-store customer gets the chips and salsa to utilize the time while waiting for an order to be prepared. The to-go customer has already placed that order and it is ready when the customer arrives at the pickup window.

eBay has considerable arrival and request variability, because its customers do not want service at the same time or at times necessarily convenient to the company. They have request variability, seeking to buy and sell an endless number of items. Their process strategy allows significant customer involvement. Their customers perform virtually all of the selling and buying processes. McDonald’s instead offers a considerable variety of foods, but from a standard menu. Staffing varies, depending on the time of day. Customization is not encouraged, and the hours during which a store is open can be controlled. Its processes have virtually no customer involvement, other than placing the order, picking up condiments or napkins, and possibly disposing of plates and containers when exiting. eBay accomodates customerintroduced variability, whereas McDonald’s reduces it.

Student answers will vary. One idea that they may come up with is the use of electronic files. The printing industry is undergoing a shift to pdf files. Medical imaging and electronic file sharing is on the immediate horizon. The trick would be to convince physicians that want to keep their pads and pencils, that their "blackberries" are their pads and pencils.

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 PART 1 Managing Processes

Selling financial services would involve considerable customer contact, and thus be a front office. Likely activities would be to work with the customer to undertand customer needs, make customized presentation to the customer, and maintain a continuing relationship with the customer to react to changing customer needs. Producing monthly client fund balance reports involves little customer contact, and thus be a back office. Likely activities would be to obtain data electronically, run the report using a standardized process, forward the hard copies and electtonic files to analysts, and repeat the process monthly with little variation.

The process of call center services is rated in the table below. The combined score is 5.6 if each is given a weight of 0.20. Arguments could be made to give more weight to a dimension such as contact intensity, although more would need to be known about the exact process. The process’s alignment on the customer-contact matrix seems to fit a front office, with more jumbled work flows and process divergence. To be properly aligned, there should be considerable resource flexibility in terms of both the employees and their equipment. Dimension of Customer Contact  Physical presence

Explanation



What is processed



Contact intensity Personal attention



Method of delivery



The customer is present for such steps as working to understand customer needs and answering specific questions. Other steps such as researching product information do not involve as direct contact. The customer is the focus of what is being processed in certain steps, such as the specific product explanation. However, researching product information lies more in the category of information–based service rather than people-processing services. The customer is actively involved and there is high service customization process There is considerable personal attention and confiding in working to understand customer needs and in maintaining a continuing relationship with the customer. . Much of the delivery is through phone-to-phone contact .

The answer can be debated. On one hand, relentless pressure to improve can create considerable benefits over time, and could well put a company at the top of the industry. On the other hand, small improvements do not lead to break-through solutions that might be what is needed to remain competitive, particularly in an industry marked by rapid change. However, radical change and process reengineering is strong medicine and not always needed or successful.

This question was inspired by a similar situation faced by Ontario Hydro-Electric. Today electricity is a commodity that competes on the basis of low-cost operations and reliability. If the environmental protection equipment is installed, HEC must either absorb the costs as a loss (immediate bankruptcy) or attempt to pass on the costs to customers and see further erosion of their market (eventual bankruptcy). HEC would probably decide to delay investment in environmental protection equipment Copyright © 2022 Pearson Education, Inc.

Score

7 7

Process Strategy and Analysis  CHAPTER 2  2-3

for as long as possible. Some discussion may focus on the issue of whether customers, as users of both electricity and the environment, are better served by competition (lower cost of electricity) or by regulated monopolies (better environment). 9.

For background reading, see: Paul O’Neill, “Why the U.S. Healthcare System Is So Sick and What O.R. Can Do To Cure It.” OR/MS Today (December, 2007). a. Although many ideas are possible, a typical response is some kind of computer order-entry system. Although we asked for blue sky ideas, these systems do cost a medium-sized hospital about $10 million, They also solve only half of the problems, but the remaining half can become complicated and less tractable than the ones you started with. b. Same set of ideas possible here as well. c. Fill carts on a daily basis, more computerized information system, and so forth. d. Ideas could include more nurses, or one of several ways to remind nurses when a drug is to be administered. e. Many ideas are possible, ranging from mattresses on the floor to more nurse check-ins during the night. f. Better sterilization procedures, better training on patient care, research on the causes of the infections, and more thorough house cleaning are just a few ideas. Students will come up with more.

PROBLEMS

Process Strategy Decisions 1.

Dr. Gulakowicz Fixed cost, F = $150,000 Revenue per patient, p = $3,000 Variable cost per unit, c = $1000 F $150, 000 = Q = = 75 patients Break-even volume, p − c $3, 000 − $1000

Two manufacturing processes a. F1 + c1Q =F2 + c2Q $50,000 + $700Q = $400,000 + $200Q ( $700 − $200 ) Q= ( $400, 000 − $50, 000 )

$350, 000 = 700 units $500 b. Choose the second process, because 800 exceeds the break-even volume.

= Q

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 PART 1 Managing Processes

X = 18,750 components per year Proposal 2 and 3: 150,000 +14x = 450,000 + 12.50x X = 200,000 components per year Proposal 1 and 3: 0.00 + 22x = 450,000 +12.50x X = 47,368.4 components per year Proposal 1 will provide the lowest annual cost if between 0 and 18,750 components are required annually, proposal 2 will provide the lowest annual cost if between 18,750 and 200,000 components are required annually, and Proposal 3 will provide the lowest annual cost if greater than 200,000 components are required annually.

Defining, Measuring and Analyzing the Process 4.

Custom Molds

Process chart for Custom Molds with metrics

Process Strategy and Analysis  CHAPTER 2  2-5

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 PART 1 Managing Processes

ABC Insurance Company

ABC Process Chart

DEF Flowchart

Process Strategy and Analysis  CHAPTER 2  2-7

Big Bob’s Service Blueprint

Order Food

Pay for Food

$ Ask for Payment

Take Order

Fry Grill Employee Employee

Counter Employee

Customer

Service Blueprint for Big Bob’s Burger Barn

Transmit Order

Receive Order

$ Make Change

Line of Visibility

Retrieve Raw Food

Receive Order

Receive Food

Grill Food

Retrieve Raw Food

Complete Packaging Retrieve Drink

Build Sandwich

Fry Food

10. Referendum 13 Flowchart for yard sign assembly:

Wrap Food

Deliver Sandwich

Wrap Food

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 PART 1 Managing Processes

One of many possible arrangements is to create several cells with four workers in each cell. Worker 1 is a materials handler, bringing printed cards and stakes (say in stacks or bundles of 25) to the gluing table and taking completed signs (again in bundles of 25) to the shipping area. Worker 2 glues printed cards to the stakes. Worker 2 is also responsible for keeping the area supplied with glue, staples, pizza, and soft drinks. Worker 3 is also a materials handler, transferring glued signs in small quantities (a transfer batch) to the stapling table. While worker 3 holds the material in place, Worker 4 staples the card to the stake to hold it while the glue dries. Worker 4 also inspects the staples, drives loose ones home with a hammer, and stacks completed signs in bundles of 25 for Worker 1 to take away. Accounting for interruptions, material shortages, and chaos, each cell will complete about eight signs per minute, or about two signs per worker-minute. 10,000 signs would require about 5,000 worker-minutes, or 83.33 worker-hours. In order to accomplish this work within three hours (maximum attention span of college students) 83.33/3 = 27.78 or about 28 student volunteers are required to staff 7 cells. Material requirements (for 7 cells of 4 workers each): 10,000 printed cards 10,000 stakes 32,000 staples (16 boxes of 2,000 each) 28 12-ounce bottles of wood glue 4 cases 10 pizzas Equipment requirements: 14 7 7

tables staple guns hammers (to set staples)

Process chart (using Process Chart Solver of OM Explorer):

Process Strategy and Analysis  CHAPTER 2  2-9

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 PART 1 Managing Processes

11. Mailing to the alumni of your college a. A sample process chart for 2000 letters follows.

b. Total time for 2000 letters = [(0.57 min) / 60 min per hour] x 2000 letters = 19 hours. The cost to process 2000 letters = ($8/hr)(19 hr) = $152. c. Changes that would reduce the time and cost of the process:  A letterhead with “Dear Alumnus” will make step 1 (process letter) not necessary, saving 400 minutes and $53.33 [$8(400/60)].  With mailing labels, step 1 involves matching the letters with labels rather than with addressed envelopes, but now we must stick the label to the envelope. We do everything we did before plus the extra step. The time would increase by 200 minutes and cost $26.66 [$8(200/60)] more.  Prestamped envelopes will eliminate step 5 and save 200 minutes and $26.67 [$8(200/60)].  If envelopes are to be stamped by a postage meter, it will take, 10 minutes [2000/200]. This results in a savings of 190 minutes and $25.33 [$8(190/60)].  Window envelopes eliminate the need to match envelopes to letters, resulting in a savings of $53.33. d. Using the letter with “Dear Alumnus” may reduce the effectiveness of the project because it would be less personal. This concern goes also for the use of mailing labels.

Process Strategy and Analysis  CHAPTER 2 2-11

e. Although including a preaddressed envelope will increase time and cost of the process, alumni may be more likely to contribute if they have an envelope available to them. 12. Gasoline Stations a. The gas station in part (b) has a more efficient flow from the perspective of the customer because traffic moves in only one direction through the system. b. The gas station in part (a) creates the possibility for a random direction of flow, thereby causing occasional conflicts at the gas pumps. c. At the gas station in part (b) a customer could pay from the car. However, this practice could be a source of congestion at peak periods. 13. Just Like Home Restaurant a. The summary of the process chart should appear as follows:

b. Each cycle of making a single-scoop ice cream cone takes 1.70 + 0.80 + 0.25 + 0.50 = 3.25 minutes. The total labor cost is ($10/hr)[(3.25 min/cone)/60 min](10 cones/hr)(10 hr/day)(363 day/yr) = $19,662.50. c. To make this operation more efficient, we can eliminate delay and reduce traveling by having precleaned scoops available. The improved process chart follows.

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 PART 1 Managing Processes

The cycle time is reduced to 1.65 + 0.45 + 0.25, or 2.35 minutes. The total labor cost is ($ 10/hr)[(2.35 min/cone)/60 min](10 cones/hr)(10 hr/day)(363 day/yr) = $14,217.50. Therefore, the annual labor saving is $19,662.50 – $14,217.50 = $5,445.00. 14. Grading Homework Steps: 1. Check each paper to identify the author of the homework, then mark each paper with section number and graduate status. 2. Sort by section and graduate status. 3. Correct and grade papers. 4. Alphabetize by section. 5. Record grades. 6. Return homework to appropriate instructor.

Process Strategy and Analysis  CHAPTER 2 2-13

15. DMV The process chart is as follows.

The tax assessment clerks’ time is being wasted by an inefficient waiting line process. Whenever the customer arrival rate approaches the service rate, a waiting line will form. While the clerk is waiting for phantom customers, service rate declines, and waiting lines become even longer. More disgusted customers leave the waiting area (renege). This process can be improved by arranging the waiting area to work like the “batter’s circle and batter’s box” in baseball. Customers who have reneged would be replaced before the clerks’ time is wasted. Service rates would increase and waiting lines would decrease. Typical of many service situations, the customer’s anger is misguided. It is directed at the last person in the process (the license clerk), who has done nothing wrong. The customer pays for this misguided anger. While taking the one minute to abuse the license clerk, a bus approaches. Blinded by rage, the taxpayer drives his new car into the path of the oncoming bus, and the car is totaled. Now the customer will have to start the process again! Copyright © 2022 Pearson Education, Inc.

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 PART 1 Managing Processes

Epilogue. It is almost sad how little exaggeration was used in creating this problem. When this location of the DMV closed, the local news announcer referred to it as “the city’s most popular place to wait in line.” This DMV process has since been replaced by an automated one-stop, one-transaction process. Just today I visited the new DMV and completed the entire process in five minutes. 16. Oil Change a. Each oil changing cycle takes 16.5 + 5.5 + 5.0 + 0.7 + 0.3 = 28 minutes. The total labor cost is ($40/hr)[(28 min/service)/(60 min/hr)](2 services/hr × 10 hrs/day × 300 days/yr) = $112,000 b. ($40/hr) × (2.7 minutes saved per service/60 min/hr) (2 services/hr × 10 hrs/day × 300 days/yr) = $10,800 saved per year 17. Time Study of Assembling Peanut Valves Average Time = [14(15)+12(20)+15(25)] / (14+12+15) = 20.12 seconds Normal Time = 20.12 × 0.95 = 19.11 seconds Standard Time = 19.11 × 1.20 = 22.93 seconds 18. Time Study of Process Element

Performance Rating

Obs 1

Obs 2

Obs 3

Obs 4 Obs 5 Average Normal Time Time

Element 1

3.8

2.66

Element 2

110

9.6

10.56

Element 3

6.8

6.12

Total =

19.34

Standard Time = 19.34 × 1.20 = 23.21 minutes

Process Strategy and Analysis  CHAPTER 2 2-15

19. Work Sampling on Idle Time a. Idle Time = (17+18+14+16) / (44+56+48+60) ×100 = 31.25 percent. Working Time = 100 – 31.25 = 68.75 percent. b. Different root causes can be explored in an expanded work sampling study, with new categories replacing idle, such as: waiting for materials, waiting for instructions, equipment failures, breaks, or conversations with coworkers. 20. Bid on Swimming Pools a. 2nd Pool Time = 35 × 0.85 = 29.75 hours b. 4th Pool Time = 29.75 × 0.85 = 25.29 hours 21. Bid Using OM Explorer

The 5th pool should take just over 24 hours, with the cumulative average time for all five pools being 28.2 hours. Total Time = (28.2)(5) = 141 hours. The learning curve follows.

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 PART 1 Managing Processes

22. Rain Tite a. Production time on the manual line 1st window = 30 minutes 2nd window = 30 x .90 = 27.00 minutes 4th window = 27 x .90 = 24.30 minutes 8th window = 24.3 x .90 = 21.87 minutes 16th window = 21.87 x .90 = 19.68 minutes b. Production time on the semi-automated line 1st window = 45 minutes 2nd window = 45 x .75 = 33.75 minutes 4th window = 33.75 x .75 = 25.31 minutes 8th window = 25.31 x .75 = 18.98 minutes 16th window = 18.98 x .75 = 14.24 minutes As displayed in the graph below, after 4 windows produced, the employee on the semi-automated line will be able to build a window more quickly than an employee on the manual line.

23. Perrotti’s Pizza Pareto chart a. Although the frequency of partly eaten pizza is low, it is a serious quality problem because it is deliberate rather than accidental. It is likely to cause extreme loss of goodwill. A common root cause of many of these problems could be miscommunication between the customer and the order taker, between the order taker and production and between production and distribution. This chart was created using the Bar, Pareto, and Line Charts Solver of OM Explorer.

Process Strategy and Analysis  CHAPTER 2 2-17

b. Cause-and-effect diagram Machines Car trouble

Materials Late production Lost invoice

Not familiar with service area Service area too large Misunderstood address Scheduling too many deliveries on one trip Person Methods

Late Delivery

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 PART 1 Managing Processes

24. Smith, Schroeder, and Torn (short moves) a. The tally sheet given in the problem is essentially a horizontal bar chart. To create a Pareto diagram, the categories are arranged in order of decreasing frequency. This diagram was created using the Bar, Pareto, and Line Charts Solver of OM Explorer.

b. Cause-and-effect diagram Machines

Materials

Truck Trouble Defective ramp into truck Moving dolly broken

No furniture pads No Packing Material Ran out of boxes Poor training/packing Too many deliveries scheduled on one day

Not familiar with service area Frequently drops items Frequently late to work Person

Complaints

Methods

25. Golden Valley Bank a. Bar chart, from the Bar, Pareto, and Line Charts Solver of OM Explorer. average =

(8 × 8) + (19 × 11) + ( 28 × 14 ) + (10 × 17 ) + ( 25 × 20 ) + ( 4 × 23) + (10 × 26 ) 104

= 16.2 hours

Process Strategy and Analysis  CHAPTER 2 2-19

b. Golden Valley’s average time is 16.2 hours or about two business days. However, 39 of 104 customers waited longer than 18 “business hours.” DeNeefe should first investigate the 14 applications that required more than 22 hours to find causes of long delays. 26. East Woods Ford a. Bar chart, from the Bar, Pareto, and Line Charts Solver of OM Explorer.

Pareto chart, from the Bar, Pareto, and Line Charts Solver of OM Explorer..