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Operations Management, 6e

O P E R A T I O N S M A N A G E M E N T

A N I N T E G R AT E D A P P R O A C H

R . D A N R E I D • N A D A R . S A N D E R S

6th EDITION

Operations Management An Integrated Approach

6th EDITION R. DAN REID • NADA R. SANDERS

VICE PRESIDENT & DIRECTOR George Hoff man

EXECUTIVE EDITOR Lisé Johnson

EXECUTIVE MARKETING MANAGER Christopher DeJohn

SPONSORING EDITOR Jennifer Manias

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PRODUCT DESIGN MANAGER Allison Morris

DESIGN DIRECTOR Harry Nolan

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v

Preface

Today, companies are competing in a very different environment than they were only a few

years ago. Rapid changes such as global competition, e-business, the Internet, and advances

in technology have required businesses to adapt their standard practices. Operations

management (OM) is the critical function through which companies can succeed in this

competitive landscape.

Operations management concepts are not confined to one department. Rather, they

are far-reaching, affecting every functional aspect of the organization. Whether studying

accounting, finance, human resources, information technology, management, marketing, or

purchasing, students need to understand the critical impact operations management has

on any business.

We each have more than 25 years of teaching experience and understand the challenges

inherent in teaching and taking the introductory OM course. The vast majority of students

taking this course are not majoring in operations management. Rather, classes are typically

composed of students from various business disciplines or students who are undecided

about their major and have little knowledge of operations management. The challenge

is not only to teach the foundation of the field, but also to help students understand the

impact operations management has on the business as a whole and the close relationship of

operations management with other business functions.

We were motivated to write this book to help students understand operations manage-

ment and to make it easier for faculty to teach the introductory operations management

course. We continue to have three major goals for this book.

Goals of the Book 1. Provide a Solid Foundation of Operations

Management Our book provides a solid foundation of OM concepts and techniques, but also covers the

latest on emerging topics such as e-business, supply chain management, enterprise resource

planning (ERP), and information technology. We give equal time to strategic and tactical

decisions and provide coverage of both service and manufacturing organizations. We look

closely at some of the unique challenges faced by service operations.

2. Provide an Integrated Approach to Operations Management

While several excellent textbooks provide appropriate foundation coverage, we believe that

few provide sufficient motivation for students. We are aware that a major teaching chal-

lenge in OM is that students aren’t motivated to study OM because they don’t understand

its relevance to their majors. We think the course textbook can greatly support the pro-

fessor in this area; therefore, a chief goal of this book is to integrate coverage of why and

vi • Preface

how OM is integral to all organizations. Interfunctional coordination and decision mak-

ing have become the norm in today’s business environment. Throughout each chapter we

discuss information flow between business functions and the role of each function in the

organization.

The text also illustrates the linkages and integration between the various OM topics. Our

end-of-chapter feature entitled “Within OM: How It All Fits Together” describes how the

chapter topic is related to other OM decisions. It addresses the issue that OM topics are

linked and interdependent, not independent of one another.

As supply chain management (SCM) has taken on an increasingly important role, the

end-of-chapter section titled “The Supply Chain Link” explains the relationships between

the specific chapter topic covered and supply chain management.

3. Help Students to Understand the Concepts This course remains challenging for students to take and professors to teach. Students

often have no prior exposure to operations concepts and little real business experience.

They have a broad spectrum of quantitative sophistication and often find the math in the

course extremely challenging. Therefore, a chief goal of the text and supplement package is

to help students with these concepts. We begin each chapter with an example from every-

day life, often a consumer or personal example, to help students intuitively understand what

the chapter will be about. Then we explain each concept clearly and carefully, with enough

depth for non-majors. Sustainability in operations is highlighted at the end of each chapter.

The new edition is focused on helping students by offering problem-solving hints and

tips as part of the solution to most examples and solved problems throughout the entire

text. Two unique supplements support student comprehension. A “Quantitative Survival

Guide,” available as an optional supplement packaged with the text, provides “help with

the math” for all chapters. WileyPLUS Learning Space (available on-line via a password in an

optional package with the book) provides plenty of homework practice, feedback for stu-

dents, an e-book, and much more. In addition, algorithmic homework problems have been

designed for each chapter in order to provide unlimited practice opportunity.

Organization and Content of the Book We have arranged the topics in the book in progressive order from strategic to tactical. Early in

the book we cover operations topics that require a strategic perspective and a cultural change

within the organization, such as supply chain management, total quality management, and

just-in-time systems. Progressively we move to more tactical issues, such as work management,

inventory management, and scheduling concerns. We recognize that most faculty will select the

chapters relevant to their needs. To make it easier for students and faculty, each chapter can

stand alone. Any specific knowledge needed for a chapter is summarized at the beginning of

each chapter, with specific topic and page references for easy review.

Balanced Coverage of Quantitative and Qualitative Topics We have tried to find a balance between the quantitative and qualitative treatment and

coverage of OM topics. To meet students’ needs, this text presents the application of OM con-

cepts through the extensive use of practical and relevant business examples. We eliminated

from the printed book coverage of topics less frequently covered at the introductory level.

Preface • vii

However, complete supplementary chapters on spreadsheet modeling, optimization, mas-

ter production scheduling, rough-cut capacity planning, and waiting line models are avail-

able on the book’s Web site (www.wiley.com/college/reid).

Integrated Technology Perspective Advances in e-commerce and the Internet are transforming the business environment, and

we integrate these concepts in every chapter. We discuss a range of topics from enterprise

resource planning (ERP) and electronic data interchange (EDI) to quality issues of buying

goods on-line.

Changes to this Edition We have made a number of changes to this edition in order to make the text as current,

user-friendly, and relevant as possible. In particular we have updated company examples,

technology, big data analytics, and added some supply chain management issues.

Company Examples: Since our last edition we have observed many changes in organi- zations that we had used as examples. Some companies have gone out of business while

others, such as Amazon.com and Dell Computer Corporation, have changed their strate-

gies. In order to offer the most current text we have made updates in company examples

across all chapters.

Technology: One of the biggest changes we are witnessing relates to changes in technology. We have updated discussions with regard to the latest technologies that impact operations man-

agement. This includes discussions of 3D Printing, new generation robotics and automation,

and advancements in radio frequency identification (RFID) in Chapter 3.

Big Data Analytics: Big data analytics is having a tremendous impact on digitizing oper- ations. We have incorporated the latest on big data analytics in Chapters 1 and 3. In Chapter

8 we have added an entire section on predictive analytics and forecasting.

Supply Chain Management Issues: Since our last edition the proposed new shipping facil- ity in Mexico has been canceled, while the Panama Canal is currently being widened. We discuss

the ramifications on materials being shipped from Asia to the United States in Chapter 4.

In addition, several chapters have been reorganized to facilitate a better flow. During the

past five editions, we have added many new topics. This sixth edition better integrates

those topics into the chapters. We continue to emphasize inter-functional coordination and

decision making, and have updated a number of features as shown below.

Before You Begin. In order to help students when solving quantitative problems, the fea- ture called “Before You Begin,” placed immediately prior to the solution of most in-chapter

example problems and end-of-chapter solved problems. Emphasizing our focus on strong

pedagogy, this feature provides problem-solving tips and hints that the student should

consider before proceeding to solve the problem.

Supply Chain Link. To emphasize the increasingly important role of supply chain man- agement, there is a section on supply chain management and expanded coverage of supply

chain and services in every chapter.

Sustainability Link. In order to address the latest challenges facing business, we have included “The Sustainability Link” feature. This feature discusses how the subject of the

chapter directly ties to today’s sustainability concerns and challenges, providing specific

business examples that illustrate the issues.

viii • Preface

Problem Solving. While our goal is to provide balanced coverage of quantitative and qualitative topics, the new edition further emphasizes and integrates problem solving to

help students experience the course more successfully. We provide algorithmic homework

problems for every chapter of the text (via WileyPLUS Learning Space) for unlimited practice

opportunities, include problem-solving help in the book (“Before You Begin”) and on-line

via WileyPLUS Learning Space, and provide step-by-step solved problems in the book and

on-line. We also provide “help with math” as needed via WileyPLUS Learning Space. We

believe that these changes to the new edition greatly enhance student learning.

Features of the Book We have developed our pedagogical features to implement and reinforce the goals discussed

previously and address the many challenges in this course.

Pedagogy that Provides an Integrated Approach Chapter Opening Vignettes and Within OM: How It All Fits Together To help students intuitively under- stand the topic, each chapter begins with a description of

a personal problem that can be solved using the concepts

discussed in the chapter. Our objective is to attract the

attention of students by starting with a personal example

to which they can relate. We demonstrate that OM is not

just about operating a plant or a business, but that it is

relevant in everything that we do. An end-of-chapter sec-

tion titled “Within OM: How It All Fits Together” describes

how the chapter topic is related to other OM decisions.

It emphasizes the point that OM decisions are not made

independently of one another, but that they are linked

together and are dependent on one another.

Links to Practice Other OM texts have many boxes and sidebars, which make it difficult for students to

understand what they need to know. Furthermore, the

many examples frequently interrupt the flow of the text

and make a chapter difficult to read and assimilate.

We recognize the importance of including “real-world”

examples, but believe they should be integrated into

the stream of the text instead of interrupting the text.

Therefore, we have developed embedded boxes titled

“Links to Practice,” which provide brief examples from actual companies in every chapter.

Embedded by both content and design into the general text discussion, each provides a

concise and relevant example without interrupting the flow of the text.

Current textbooks typically do not use business examples to which students can relate.

The typical examples provided are from large corporations such as General Motors, IBM,

or Xerox. Primarily using these types of examples creates the impression for students that

this is a field that is either beyond their reach or irrelevant to their needs. We have found

that students understand the concepts better when these concepts are also presented in a

context that is smaller in scale. The examples chosen range from large multinational organi-

zations to small local businesses.

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E veryone has had experiences of poor quality when dealing with business organizations. These experiences might involve an airline that has lost a passenger’s luggage, a dry cleaner that has left clothes wrinkled or stained, poor course offerings and scheduling at your college, a purchased product

that is damaged or broken, or a pizza delivery service that is often late or delivers

the wrong order. The experience of poor quality is exacerbated when employees of

the company either are not empowered to correct quality inadequacies or do not

seem willing to do so. We have all encountered service employees who do not seem

to care. The consequences of such an attitude are lost customers and opportunities

for competitors to take advantage of the market need.

Successful companies understand the powerful impact customer-defined

quality can have on business. For this reason, many competitive firms continually

increase their quality standards. For example, Ford Motor Company’s focus on qual-

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quality problems. Open discussion is promoted, and criticism is not allowed. Although the functioning of quality circles is friendly and casual, it is serious business. Quality circles are not mere “gab sessions.” Rather, they do important work for the company and have been very successful in many firms.

The importance of excep- tional quality is demonstrated by The Walt Disney Company in the operation of its theme parks. The focus of the parks is customer satisfaction. This is accomplished through metic- ulous attention to every detail, with particular focus on the role of employees in service delivery. Employees are viewed as the most important orga- nizational resource, and great

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Preface • ix

OM across the Organization and Cross-Func- tional Icons Unique to this book is an end-of-chap- ter summary titled “OM across the Organization” that

highlights the relationship between OM and key busi-

ness functions, such as accounting, finance, human

resources, information technology, management, mar-

keting, and purchasing. This section is designed to help

students understand the close relationship of opera-

tions management with other business functions and appreciate the critical impact OM has

on other business functions. In addition, a cross-functional icon is used throughout the text

to highlight sections in the text where the relationships between OM and other key business

functions are discussed.

Cases Each chapter ends with four cases that reinforce the issues and topics discussed in the chapter. The first two cases are within the text, while the other two are on-line cases.

The cases can provide the basis for group discussion or can be assigned as individual exer-

cises for students. Many cases conclude with a list of questions for students to answer.

In addition, each chapter offers a unique interactive learning exercise titled “Internet

Challenge” where students are provided with a short case and given specific Internet assignments.

Interactive Cases There are two Web-based cases for this edition. The first case features an Internet site

for a simulated cruise company that has hired a student

intern to help solve operations problems. The second

case features an Internet site for a simulated consult-

ing company that works in the medical industry that

has hired a student to help solve operations problems.

In both cases, the students are given assignments that

require them to use information provided at the book

Web site to develop solutions. These exercises offer students hands-on experience in the

areas of supply chain management, statistical quality control, forecasting, just-in-time,

aggregate planning, inventory management, scheduling, and project management, and help

tie all the topics in the book together in a service environment.

Pedagogy to Help Students Master the Course Learning Objectives At the beginning of each chapter, students are provided with a short statement of

what they need to either know or review from previous

chapters, referring students to specific topic information.

This enables students to review previous material neces-

sary to understand the topic being covered.

Before You Go On Sections strategically placed within every chapter summarize key material the stu-

dent should know before continuing. Often the material

in chapters can be overwhelming. We felt that breaking

up the chapter with a brief summary of key material is

highly beneficial in aiding learning and comprehension.

Key Terms and Definitions Key terms and concepts are highlighted in boldface when they are first explained in the text, are defined in the margin next to their discussion in the

text, and are listed at the end of the chapter with page references.

i t th iti l i t OM h

ments of the company. A company cannot achieve high quality if its accounting is inaccu rate or the marketing department is not working closely with customers. TQM requires the close cooperation of different functions in order to be successful. In this section we look at the involvement of these other functions in TQM.

Marketing plays a critical role in the TQM process by providing key inputs that make TQM a success. Recall that the goal of TQM is to satisfy customer needs by producing the exact product that customers want. Marketing’s role is to understand the changing needs and wants of customers by working closely with them. This requires a solid identification of target markets and an understanding of whom the product is intended for. Sometimes, apparently small differences in product features can result in large differences in customer appeal. Marketing needs to accurately pass customer information along to operations, and operations needs to include marketing in any planned product changes.

Finance is another major participant in the TQM process because of the great cost con- sequences of poor quality. General definitions of quality need to be translated into specific dollar terms. This serves as a baseline for monitoring the financial impact of quality efforts and can be a great motivator. Recall the four costs of quality discussed earlier. The first two costs, prevention and appraisal, are preventive costs; they are intended to prevent inter-

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Interactive Case: Virtual Company

On-line Case: Cruise International, Inc.

Assignment: Total Quality Management (TQM) at Cruis- ing International, Inc. For this assignment, you will work again with Meghan Willoughby, Chief Purser aboard the Friendly Seas I. You know the assignment has some- thing to do with quality, but you aren’t quite sure what. You meet Meghan aboard the ship. She greets you and says, “Let me tell you a bit about what you’ll be doing for us. We’ve been working on quality measures for sev- eral years, and now must focus on quality even more as our industry becomes more competitive. We need to make sure that our guests receive quality service from

beginning to end. We need your help in bringing ideas together on how to measure quality in a service organi- zation.” This assignment will enhance your knowledge of the material in Chapter 5 of your textbook while pre- paring you for your future assignments.

To access the Web site: • Go to www.wiley.com/college/reid

• Click Student Companion Site

• Click Virtual Company/Cruise International, Inc.

• Click Consulting Assignments

• Click Service Package and Processes at CII

www.wiley.com/college/reid

Learning Objectives After studying this chapter you should be able to: 1 Explain the meaning of total

quality management (TQM).

2 Identify costs of quality

Today’s concept of quality, called total quality management (TQM), focuses on building quality into the process, as op- posed to simply inspecting for poor quality after production. TQM is customer driven and encompasses the entire compa- ny. Before you go on, you should know the four categories of quality costs. These are prevention and appraisal costs, which are costs that are incurred to prevent poor quality, and internal

and external failure costs, which are costs that the company hopes to prevent. You should understand the evolution of TQM and the notable individuals who have shaped our knowl- edge of quality. Last, you should know the seven concepts of the TQM philosophy: customer focus, continuous improve- ment, employee empowerment, use of quality tools, product design, process management, and managing supplier quality.

BEFORE YOU GO ON

x • Preface

Before You Begin Most example problems within the chapters, and end-of-chapter solved problems, have a feature called “Before You Begin.” The feature provides students

with problem-solving tips and hints they need to consider before solving the problem. The

purpose is to help students with their problem-solving ability.

Solved Problems Numerous solved problems are provided, complete with step-by-step explanations to

ensure students understand the process and why the

problem is solved in a particular way. Where appropri-

ate, we provide a series of steps for problem solving and

offer problem-solving tips.

Teaching and Learning Resources Our supporting material has been designed to make learning OM easier for students and

teaching OM easier for faculty.

Book Companion Site www.wiley.com/college/reid An extensive Web site has been developed in support of Operations Management. The site

is available at www.wiley.com/college/reid, and offers a range of information for instruc-

tors and students.

For Instructors • Instructor’s Manual: Includes a suggested course outline, teaching tips and strat-

egies, war stories, answers to all end-of-chapter material, brief description of the

additional resources referenced in the Interactive Learning box, additional in-class

exercises, and tips on integrating the theory of constraints.

• Solutions Manual: A complete set of detailed solutions is provided for all problems.

• Virtual Company Cases Instructor’s Materials: Include accompanying Instruc-

tor’s Manual with answers to exercises and Excel solutions.

· Test Bank: A comprehensive Test Bank comprised of approximately 1700 questions

that consist of multiple choice, true-false, essay questions, and open-ended problems

for each chapter. The Test Bank is also available in a computerized version that allows

instructors to customize their exams.

• PowerPoint Lecture Slides: PowerPoint Slides are available for use in class. Full-

color slides highlight key figures from the text as well as many additional lecture out-

lines, concepts, and diagrams. Together, these provide a versatile opportunity to add

high-quality visual support to lectures.

• Operations Management Video Series: The video package, including Wiley’s own

Student OM Videos, offers video selections that tie directly to the theme of operations

management and bring to life many of the examples used in the text. Videos can be

viewed within WileyPLUS Learning Space.

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PROBLEM 1

An office security system at Delco, Inc. has two compo- nent parts, both of which must work for the system to function. Part 1 has a reliability of 80 percent, and part 2 has a reliability of 98 percent. Compute the reliability of the system.

Before You Begin: Before you begin solving reliability problems, it is best to first draw a diagram of the compo-

t R b th t th t f t i d

Solution:

The reliability of the system is

Rs = R 1

X R 2

Solved Problems (See student companion site for Excel template.)

Part 1 Part 2

R1 = 0.80 R2 = 0.98

Preface • xi

For Students • Supplemental Chapters: The supplement chapters include Supplement A: Spread-